What is the Troubled Asset Relief Program - TARP
The Troubled Asset Relief Program (TARP) was a group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth, and mitigate foreclosures in the wake of the 2008 financial crisis. TARP sought to achieve these targets by purchasing troubled companies’ assets and equity.
BREAKING DOWN 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 (AIG), 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. To prevent further fail in the economy, the Troubled Asset Relief Program (TARP) was initiated.
TARP was signed into law by President George W. Bush on October 3, 2008 with the passage of the Emergency Economic Stabilization Act. The program was pioneered by Treasury Secretary Henry Paulson in a bid to address the subprime mortgage crisis which was spiraling out of control. It was initially created 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. Later, it was modified slightly to allow the government to buy equity stakes in banks and other financial institutions. TARP initially gave the Treasury purchasing power of $700 billion to buy illiquid mortgage-backed securities (MBS) and other assets from key institutions in an attempt to restore liquidity to the money markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act (simply referred to as Dodd-Frank) later reduced the $700 billion authorization to $475 billion.
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. The U.S. government bought preferred stock in eight banks: Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo. The banks were required to give the government a 5 percent dividend that would increase to 9 percent in 2013, encouraging banks to buy back the stock within five years. 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 wrapped up TARP and the government concluded that its investments had earned more than $11 billion for taxpayers. To be more specific, TARP recovered funds totaling $441.7 billion from $426.4 billion invested. The government also claimed that 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.