Troubled Asset Relief Program - TARP

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DEFINITION of 'Troubled Asset Relief Program - TARP'

A group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth and prevent foreclosures in the wake of the 2008 financial crisis through purchasing troubled companies’ assets and equity. The Troubled Asset Relief Program initially gave the Treasury purchasing power of $700 billion to buy illiquid mortgage-backed securities and other assets from key institutions in an attempt to restore liquidity to the money markets. The fund was created on October 3, 2008 with the passage of the Emergency Economic Stabilization Act. The Dodd-Frank Act later reduced the $700 billion authorization to $475 billion.

INVESTOPEDIA EXPLAINS 'Troubled Asset Relief Program - TARP'

Global credit markets came to a near standstill in September 2008, as several major financial institutions, such as Fannie Mae, Freddie Mac and American International Group, experienced severe financial problems, and as Lehman Brothers went bankrupt. Goldman Sachs and Morgan Stanley changed their charters to become commercial banks, in an attempt to stabilize their capital situations. TARP was intended to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses of the institutions that owned them.

The rules of TARP demanded that companies involved lose certain tax benefits and in many cases placed limits on executive compensation and forbade fund recipients from awarding bonuses to their top 25 highest-paid executives. From the program’s inception until the final date when funds could be extended on October 3, 2010, $245 billion went to stabilize banks, $27 billion went to programs to increase credit availability, $80 billion went to the U.S. auto industry (specifically, to GM and Chrysler), $68 billion went to stabilize AIG, and $46 billion went to foreclosure prevention programs (such as Making Home Affordable). As of December 2013, the Treasury was wrapping up TARP and said the government’s investments had earned more than $11 billion for taxpayers. The government says TARP prevented the American auto industry from failing and saved more than 1 million jobs, helped stabilize banks and restore credit availability for individuals and businesses, and prevented foreclosures.

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