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The Troubled Asset Relief Program (TARP) and Why It Ceased

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.

Important Points: 

  • TARP was initially authorized for $700 billion, but only $426 billion was actually used. 
  • The program was eventually wound down and ended in December 2014. 
  • TARP has been criticized for being too expensive and for bailouts that benefited large banks rather than average taxpayers. However, it’s generally credited with helping to stabilize the financial system and avoid a more severe economic downturn.
  • TARP program ended in 2009, and the last of the TARP funds were repaid in 2015.

Kay Takeaways of the Troubled Asset Relief Program

  • Following the financial crisis in 2008, the US Treasury instituted the Troubled Asset Relief Program (TARP)
  • Through TARP, the US Government purchased bank stocks and mortgage-backed securities, thus providing stability to the financial system.
  • Between the years 2008 and 2010, $426.4 billion was invested in firms by TARP. In return, $441.7 was recouped.
  • TARP was a controversial topic when it was signed into law. To this day, the effectiveness of TARP is still being debated.

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?

  • TARP funds were utilized for purchasing stock in insurance companies, banks, and auto-makers; they were also used to fund loans to homeowners and financial institutions. 
  • Eight banks were on the receiving end of US Government funding, namely –
  • Bank of New York Mellon,
  • Bank of America/Merrill Lynch, 
  • Goldman Sachs, Citigroup, 
  • Morgan Stanley, 
  • State Street, 
  • JP Morgan, and 
  • Wells Fargo. 

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.

  • From the inception of the program through to the deadline for extending funds – October 3rd, 2010 – 
  • $245 billion was used to prop up the banks, 
  • $80 billion went to the auto industry (Chrysler and GM specifically) 
  • $68 billion was spent stabilizing AIG, 
  • $46 billion went to Making Homes Affordable and other foreclosure-prevention programs, and
  • $27 billion was used for programs for increasing the availability of credit. 
  • As per TARP provisions, companies involved lost specific tax benefits and limits were often placed on executive compensation. In addition, compensation limitations were placed on executives of these companies which forbade them from offering bonuses to their top executives. However, by 2009, ‘TARP Bonuses’ were discovered, which was $20 billion paid to key personnel.

TARP’s Legacy

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.

In Conclusion

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.

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