What Are TARP Bonuses?

A TARP bonus refers to (in a pejorative way) the bonuses paid out to executives and traders in investment banks involved in the financial crisis of 2008. The Troubled Asset Relief Program (TARP) used tax money, which was designed to purchase troubled assets on the balance sheets of banks and financial companies.

The TARP funds were used to support or bail out some of the largest U.S. financial institutions in an effort to prevent the U.S. financial system from collapsing and sending the country into a depression. More than $442 billion was paid out under the TARP program to banks and investment firms. TARP bonuses were the bonuses paid out to traders, executives, and employees within the financial sector despite their firms receiving TARP funds. More than 4,500 employees were paid at least $1million in bonuses by TARP recipients.

Key Takeaways

  • TARP bonuses were bonuses paid to bank employees from money given to bail out the banks during the 2008 financial crisis.
  • The TARP funds were used to bail out some of the largest U.S. financial institutions to stave off a depression and financial collapse.
  • Of the nine early recipients of TARP money, more than 4,500 employees were paid at least $1million in bonuses by their employer.

Understanding TARP Bonuses

TARP bonuses were bonuses given out by banks to their employees despite receiving government financial aid from TARP. Some of the banks had made billions of dollars in bad loans, some of which were unethical subprime mortgages. When the housing and stock markets crashed in 2008, some of the largest banks in the U.S. were in danger of failing.

In October 2008, then-President George W. Bush signed the Emergency Economic Stabilization Act (EESA), which created the Troubled Asset Relief Program (TARP). Under the program, the U.S. Treasury Department was authorized to use taxpayer money to purchase and guarantee troubled assets within the financial sector. The overall goal was to provide financial stability and help prevent major banks and investment firms from failing.

The TARP program was extremely controversial at the time. However, doing nothing could have led to the failure of several major banks, which would have likely plunged the U.S. into a depression. TARP was originally authorized to spend $700 billion, but instead, $442 billion was spent. 

Nine of the TARP recipients from the financial sector were:

  • Bank of America Corporation
  • Bank of New York Mellon
  • Citigroup, Inc.
  • Goldman Sachs Group 
  • J.P. Morgan Chase & Co. 
  • Merrill Lynch—later acquired by Bank of America
  • Morgan Stanley 
  • State Street Corp.
  • Wells Fargo & Co.

More than 800 employees from the nine recipients of TARP money listed above received a bonus in excess of $3 million for their performance in 2008. Three of the financial institutions—Wells Fargo, Merrill Lynch, and Citigroup—were losing money, meaning they had negative earnings.

Criticisms of TARP Bonuses

The American public reacted poorly to the news that the TARP bonuses had been paid. Public opinion about TARP was divided, and many held the banks responsible for the financial crisis and their need to be bailed out. The notion that bank employees, who earned far more income than the average American family, were getting paid bonuses in a period in which their institutions were being bailed out by the American taxpayer added salt to the wound.

The counter-argument from the banks was that they needed to pay competitive bonuses to retain talent and that the bankers had earned their bonuses. However, critics asserted that the bailout itself was evidence that these employees did not qualify as "talent" and had not earned bonuses.

Then-President Barack Obama and then-New York State Attorney General Andrew Cuomo also disapproved of the bonuses and said so publicly. Congress made moves to pass legislation taxing these bonuses heavily, but as the banks paid the bailout loans back, attention turned away from the bonuses.

In an interview with the New York Times in 2013, Henry M. Paulson Jr., who had been Secretary of the Treasury during the bailouts and the person in charge of administering TARP, said that in hindsight, the banks should have understood that the bonuses would be unpopular and that he was disappointed with the way the banks had given them to employees.