Troubled Asset Relief Program (TARP)

The Troubled Asset Relief Program (TARP) was a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector. It was a component of the government’s measures in 2008 to address the subprime mortgage crisis and the corresponding financial turmoil. The TARP was created by the Emergency Economic Stabilization Act, which was passed by Congress and signed into law by President George W. Bush in October 2008.

Background and Context

The late 2000s financial crisis, also known as the global financial crisis (GFC), was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression (1929). It began in 2007 with a crisis in the subprime mortgage market in the United States, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers in September 2008. The crisis was triggered by a dramatic rise in mortgage delinquencies and home foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe.

Objectives of TARP

The main objectives of the Troubled Asset Relief Program were:

  1. Stabilizing the financial system: By purchasing volatile and risky assets (troubled assets), the government aimed to reduce uncertainty and stabilize the financial system.
  2. Restoring liquidity: By providing capital to banks, TARP aimed to restore liquidity to the financial markets to ensure that credit continued to flow to businesses and consumers.
  3. Protecting taxpayers: Although it involved large initial outlays, the program was structured in a way to help protect taxpayers by giving the government preferred shares in banks, warrants, or options to buy stock.
  4. Promoting financial recovery: By propping up banks and other institutions, TARP aimed to support broader economic recovery and prevent further financial damage.

Key Components of TARP

TARP had several key programs under its umbrella, each designed to address different aspects of the financial crisis:

Capital Purchase Program (CPP)

The CPP was the cornerstone of TARP. It aimed to stabilize the financial system by providing capital to viable banks of all sizes throughout the nation. Under CPP, the Treasury purchased preferred stock in financial institutions. The objective was to inject capital into the banks to encourage them to build their capital reserves and increase lending.

Public-Private Investment Program (PPIP)

This program aimed to draw private capital from investors to purchase distressed real estate-related assets. PPIP was designed to leverage TARP funds with capital from private investors and debt guarantees from the FDIC and the Federal Reserve. The program was intended to remove troubled assets from banks’ balance sheets, thus enabling them to increase lending.

Term Asset-Backed Securities Loan Facility (TALF)

TALF was designed to help market participants meet the credit needs of households and small businesses by facilitating the issuance of asset-backed securities (ABS). The program aimed at providing loans to investors to buy securities backed by consumer loans, such as auto loans, student loans, and credit card debt.

Automotive Industry Financing Program (AIFP)

This program was created to prevent the systematic failure of the U.S. automotive industry, which was at the brink of collapse. Through AIFP, TARP funds were used to support General Motors, Chrysler, and their suppliers. The help included bridge loans and debtor-in-possession financing.

Home Affordable Modification Program (HAMP)

HAMP was introduced to help homeowners avoid foreclosure by encouraging loan modifications to reduce monthly payments to affordable levels. By offering financial incentives to mortgage lenders and servicers, the program aimed to mitigate the effects of the housing crisis on both borrowers and the broader economy.

Impact and Controversy

Successes of TARP

  1. Stabilization of the Financial System: TARP played a significant role in stabilizing the financial system. By providing liquidity to the banks, it helped restore confidence in the financial markets.
  2. Recovery of Major Institutions: Many financial institutions that were recipients of TARP funds were able to recover, repay the funds, and return to profitability. Companies like Bank of America and Citigroup were able to stabilize their operations due to the capital injection from TARP.
  3. Profit for Taxpayers: While initially controversial, TARP ultimately resulted in a profit for taxpayers. As of the time when most TARP programs were concluded, the Treasury had recovered most of the funds disbursed through dividends, sales of stock, repayments, and other income.

Criticisms and Controversies

  1. Bailouts vs Moral Hazard: One significant criticism of TARP was that it effectively bailed out banks and financial institutions that had engaged in reckless or irresponsible behavior. Critics argued that this could create moral hazard by encouraging other institutions to take similar risks, knowing they might receive government support in the future.
  2. Insufficient Support for Homeowners: Another criticism was that not enough TARP funds were allocated for direct assistance to homeowners facing foreclosure. While programs like HAMP were intended to provide such support, many felt these initiatives were inadequately funded and complicated in execution.
  3. Lack of Transparency: Some critics pointed to a lack of transparency in how TARP funds were distributed and used. There were concerns regarding the oversight and potential misuse of the funds by financial institutions.

Conclusion

The Troubled Asset Relief Program was a key component of the U.S. government’s response to the financial crisis of 2007-2008. While it involved a substantial initial financial outlay and was a subject of considerable debate and criticism, its role in stabilizing the financial system and aiding in economic recovery is widely acknowledged. The eventual repayment and profit generated from TARP funds further complicates its full evaluation but highlights the program’s complexities and the unpredictable nature of financial crisis management.

For more detailed information about the specific programs and reports related to TARP, you can refer to the U.S. Department of the Treasury’s archived page on TARP: TARP Programs.