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What does the Troubled Asset Relief Program (TARP) mean?
The U.S. Treasury initiated, created, and rolled the Troubled Asset Relief Program (TARP), which was created to stabilize the country’s financial system, restore economic growth, and reduce foreclosures after the 2008 financial crisis.
By purchasing troubled companies’ assets and stock TARP sought to achieve the targets of stabilizing the US economy.
The working of Troubled Asset Relief Program (TARP)
In September 2008 major financial institutions, like Fannie Mae, Freddie Mac, and American International Group (AIG), experienced severe money troubles because of which the global credit markets came to a near standstill.
The global financial services firm, Lehman Brothers went bankrupt, and investment companies Goldman Sachs and Morgan Stanley changed their prerogatives to become commercial banks with the intention of stabilizing their capital situations.
Treasury Secretary Henry Paulson introduced the Troubled Asset Relief Program (TARP) to prevent the situation from becoming completely unmanageable and caught up.
Along with the passage of the Emergency Economic Stabilization Act also called as “bank bailout of 2008”, President George W. Bush signed the Troubled Asset Relief Program, on October 3, 2008.
By purchasing the mortgage-backed securities (MBS) the original purpose of TARP’s was to increase the liquidity of the money markets and secondary mortgage markets, and through that, reduce the potential losses of the institutions that owned them.
Then the aim of TARP’s was slightly altered to allow the government to buy equity in banks and other financial institutions.
Initially, the Treasury purchasing power of $700 billion was given by TARP, later the $700 billion authorization was reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act (also referred to as Dodd-Frank).
Preferred stocks from banks like – Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo was bought by the U.S. government.
A 5% dividend that would increase to 9% in 2013 is what the banks were required to give the government which encouraged the banks to buy back the stock within five years.
$245 billion was used to stabilize banks from October 3, 2008, when the programs began till October 3, 2010 (the deadline for extending funds), out of which $27 billion went to programs to increase credit availability, the U.S. auto industry received $80 billion (specifically, GM and Chrysler), to stabilize AIG $68 billion was used, and foreclosure-prevention programs, such as Making Home Affordable used up $46 billion.
The provisions of TARP demanded that companies involved were to forget certain tax benefits and, in many cases, limits were placed on executive compensation and disallowed fund recipients from awarding bonuses to their top 25 highest-paid executives.
After all that, by 2009, the bailed-out firms paid close to $20 billion to head honcho, mockingly referred to as TARP bonuses.
The Legacy of TARP
The Treasury on December 2013, TARP terminated TARP, and the government reasoned that its investments had earned more than $11 billion for taxpayers.
From the investment of $426.4 billion, TARP recovered funds equal to $441.7 billion.
TARP prevented the failure of the American auto industry and saved more than one million jobs, and also helped stabilize banks, and restored credit availability for individuals and businesses claimed by the U.S. government.
But, economists, politicians, and financial professionals debate on the worthiness of TARP and wonder if it had been necessary.
The housing markets, which remained depressed for years hardly benefitted from the program claimed the critics.
Some feel it lacked enough, and suggest the government should have insisted on an equity stake in the financial firms it was bailing out to control their future practices.
Because of its no-strings loans, the TARP acted as a reward for bad behavior, sending a message to wrongdoers that even if someone acted irresponsibly they would be helped out and establishing a dangerous precedent of dependency opinionated some critics about Trouble Asset Relief Program.
While ordinary people struggling with debt, unemployment, and foreclosures in the wake of the Great Recession TARP did not bind the government to the American public, who were not blind to miss Wall Street reap benefits, and those notorious bonuses and return to profitability.
Conclusion
Following the 2008 financial crisis, the Troubled Asset Relief Program (TARP) was instituted by the U.S. Treasury.
The financial system was stabilized when TARP got the government to buy mortgage-backed securities and bank stocks.
TARP invested $426.4 billion in firms from the year 2008 to 2010 and recovered $441.7 billion in return.
The effectiveness of TARP was debated at the time. There are still controversies about the Troubled Asset Relief Program.
While one group feels it saved the U.S. financial system and shortened the financial crisis the other say Wall Street was given an unnecessary boost by TARP.
