What Was ‘The Troubled Asset Relief Program’?
The Troubled Asset Relief Program (TARP) was created by the U.S. Government in 2008 in response to the subprime mortgage crisis. TARP was implemented to provide funding to banks and other financial institutions to help them avoid foreclosure and bankruptcy. The purpose of TARP was to encourage banks to lend money and restart the flow of credit which had dried up due to a large number of defaults on subprime mortgages.
TARP was initially authorized by the Emergency Economic Stabilization Act of 2008, which was signed into law by President George W. Bush. TARP was later extended and expanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
TARP was a $700 billion bailout package that was created to stabilize the financial system by injecting capital into troubled banks and other financial institutions. The aim of TARP was to realize these targets by purchasing stock and assets from troubled companies. In addition, TARP provided loans to struggling firms and injected money into the economy through government spending.
While initially unpopular with the public, TARP is credited with preventing a more severe economic downturn by helping stabilize the financial system and avoiding a more severe economic downturn. It was also criticized for being too costly and not doing enough to help homeowners facing foreclosure. Its lack of transparency and use of taxpayer money to bail out large banks and other corporations was also a major concern for many.
Kay Takeaways of the Troubled Asset Relief Program
How Did TARP Work?
The TARP program was enacted in the midst of the 2008 financial crisis when the stock market plunged and Lehman Brothers filed for bankruptcy. In addition, several other financial institutions like Freddie Mac, Fannie Mae, and AIG (American International Group) were experiencing severe financial problems, while investment companies like Morgan Stanley and Goldman Sachs attempted to stabilize their capital situations by changing their charters to become commercial banks.
Enter TARP: In response to the worsening financial situation, Henry Paulson, US Treasury Secretary, developed the Troubled Asset Relief Program, which, with the passage of the Emergency Economic Stabilization Act, was signed into law by President Bush in 2008.
This program was implemented as a way of preventing a complete collapse of the financial system. Under TARP, the government purchased troubled assets like mortgage-backed securities from banks and other financial institutions. The goal was to remove these assets from the balance sheets of the institutions and provide them with capital so they could continue to lend.
The initial purpose of TARP was to improve the liquidity of both secondary mortgage markets and money markets by purchasing MBS (mortgage-backed securities), ultimately reducing the probable losses of organizations that owned them.
TARP was also designed to protect American taxpayers by providing stability to the nation’s financial system. TARP investments in struggling companies prevented them from failing and allowed them to repay TARP in full, with interest. The aim of TARP was later modified to permit the US Government to purchase equity in other financial institutions, like banks.
Initially, the Treasury was given purchasing power of $700 billion. This was later reduced to $475 billion by what’s commonly referred to as ‘Dodd-Frank’ (the Dodd-Frank Wall Street Reform and Consumer Protection Act).
What Were TARP Funds Used For?
In return, each bank was required to provide a 5% dividend, which was due to increase in 2013 to 9%, ultimately encouraging the banks to purchase the stock back within 5 years.
There’s no doubt that TARP was a controversial financial bail-out package. The aim of TARP was to protect the American economy by providing funds to struggling banks and businesses. However, TARP also resulted in a huge increase in government debt, and many people felt that it unfairly benefited large corporations while doing little to help ordinary citizens. TARP’s legacy is therefore one of mixed success. It saved the economy from a complete meltdown, but it also caused a great deal of public outcry and mistrust of the government.
TARP is often seen as a symbol of the US government’s interventionist approach to the economy and continues to be a source of debate among economists and policymakers.
TARP concluded in December 2013, revealing that the Government’s investments had earned taxpayers more than $11 billion. $426.4 billion had been invested with a return of $441.7 billion. Plus, according to the Government, TARP was directly responsible for saving the auto industry, and one million jobs. It also stabilize banks, and credit availability was restored for both businesses and individuals.
TARP – Still Controversial!
Critics believe the TARP initiative simply provided Wall Street with an unnecessary boost, while advocates believe TARP shortened the financial crisis and saved the financial system in the US.
Even today, politicians, financial professionals, and economists are still debating the merits and effectiveness of TARP. In their opinion, the program did little, if anything, to help the housing market, which ultimately remained in a depressed state for many years. Others say TARP should have gone further, saying that the Government should have demanded an equity stake in the firms it bailed out to ensure control over their future practices.
Other critics believe that the no-strings loans provided by TARP simply rewarded bad behavior, basically saying ‘If you act irresponsible, we’ll bail you out.’ Their opinion is that these loans established a risky precedent of dependency.
The American public was certainly not endeared by the Government’s introduction of TARP, which ultimately resulted in Wall Street reaping benefits and returning to profitability, not to mention the executive bonuses, while everyday individuals continued to struggle with unemployment, debt, and foreclosures.
TARP was successful in achieving its main objectives, but it’s important to remember that TARP was only one part of the government’s response to the financial crisis. TARP investments were just a small part of the overall effort to stabilize the markets and restart economic growth.
To learn more about our policies on this matter, please call
1-800-300-0715 Ext. 303. Thank you.