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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Read more about the 2008 Financial Crisis.
The Troubled Assets Relief Program (TARP) is a facility created by the US Government to buy distressed assets from financial institutions in response to the 2008 Financial Crisis. The program was created through the Emergency Economic Stabilization Act of 2008 and is managed by the Office of Financial Stability at the US Treasury. The TARP was initially designed to buy distressed mortgage-backed securities from financial institutions but evolved to encompass corporate debt and equity injections into banks.
The Emergency Economic Stabilization Act of 2008, enacted on October 3, 2008, allows the Treasury to spend up to $700 billion on this program. The Treasury is allowed to draw up to $250 billion immediately after the enactment, then requires the President to certify an additional $100 billion; another $350 billion are subject to further Congressional approval.[1]
The original idea behind TARP was to create liquidity in the credit markets by buying (and freeing up) assets tied to mortgages from banks -- hence allowing them to continue lending. However, on October 13, 2008, the Treasury announced that it was going to take equity stakes in nine major banks and encouraged smaller banks to apply for equity injections.
Institutions which participate in this program will be subject to more oversight from the government and would have to limit executive compensation.
On November 12, 2008, Treasury Secretary Henry Paulson announced that no TARP funds would be used to purchase troubled assets.
How the TARP was created?
A more detailed history of the events leading up to the creation of TARP and its impact so far follows:
On Sept. 19, 2008, Treasury Secretary Henry M. Paulson Jr. proposed a sweeping bailout of financial institutions battered by bad mortgages and a loss of investor confidence. In Mr. Paulson's original proposal -- called the Troubled Asset Relief Program -- he asked Congress for $700 billion to use to buy up mortgage-backed securities whose value had dropped sharply or had become impossible to sell. While Congress eventually gave him most of the authority he sought, Mr. Paulson ended up switching gears and using the money to make direct investments in troubled financial institutions instead..
As originally outlined, the government would have bought up toxic mortgage-backed securities at a premium over their current deflated values. By paying "hold to maturity" prices, Mr. Paulson said, the government would provide troubled firms with an infusion of capital, reducing doubts about their viability and thereby restoring investor confidence.
The plan in its original form was quickly rejected by both Democrats and Republicans in Congress and was criticized by many economists across the political spectrum. Congress insisted on adding provisions for oversight, limits on executive pay for participating companies and an ownership stake for the government in return for its investments.
Even so, the plan proved to be strikingly unpopular with an outraged public, and on Sept. 29 it failed in the House of Representatives, primarily from a lack of Republican support.
But as the markets continued to plunge, a slightly altered version won the support first of the Senate, on Oct. 1, and of the House, on Oct. 3. President Bush quickly signed the bill, called the Emergency Economic Stabilization Act.
Shortly afterward, Mr. Paulson reversed course, and decided to use the $250 billion in the first round of funds allocated by Congress not to buy toxic assets, but to inject cash directly into banks by purchasing shares, an approach that many Congressional Democrats had pushed for earlier. In an initial round of financing, nine of the largest banks were given $25 billion apiece.
The Treasury also used the bailout also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh. To the dismay of many economists, no strings were attached to the Treasury infusions, and many of the banks appeared to be using the funds to bolster their balance sheets rather than to make new loans.
On Nov. 12, Mr. Paulson announced that he was abandoning the idea of asset purchases, and said the bailout money would be used instead for a broader campaign to bolster the financial markets and, in turn, make loans more accessible for creditworthy borrowers seeking car loans, student loans and other kinds of borrowing.
Related: Credit Crisis
References
- ↑ Economic rescue swiftly signed into law. AFP (2008-10-03).
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