Troubled Asset Relief Program (TARP)

Programs enacted by the United States government to stabilize the country’s economy in the wake of the 2008 financial crisis.

The 2008 financial crisis officially began when the Dow Jones Industrial Average peaked in October 2007 due to a historic, yet unheeded, asset bubble, which deflated throughout 2008. The programs under the Troubled Asset Relief Program, or TARP, were enacted to stop the damage caused by the collapse of the credit default swap market. Essentially, banks had given out mortgages to people who could not pay them back. Through the complicated infrastructure of the financial industry, almost every company owned a piece of these mortgages. Thus, a mass default on them precipitated a global crisis.

Three men played important roles in the lead up to TARP in September 2008: Henry Paulson, a former chairman of Goldman Sachs and secretary of the Treasury under President George W. Bush; Ben Bernanke, chairman of the Federal Reserve; and Timothy Geithner, president of the New York Federal Reserve, who would later serve as secretary of the Treasury under President Barack Obama. The rationale for government intervention in the crisis was historical, at least from Bernanke’s point of view. Bernanke, an expert on the Great Depression, argued that lawmakers in the 1930s had allowed banks to collapse, which in turn constricted credit and made the depression worse.

Problems had arisen early in 2008, months before the stock market plummeted in September. In March, Paulson and Bernanke oversaw a merger between the failing investment bank Bear Stearns and JPMorgan Chase; to facilitate the deal, the government invested $29 billion in Bear Stearns’s troubled assets. In early September, the Treasury pledged $200 billion to rescue the government-backed private mortgage agencies Fannie Mae and Freddie Mac. It was only after the collapse of the investment bank Lehman Brothers—which caused extensive and unprecedented damages—that Congress was jarred to action. The Treasury turned its attention to the American International Group (AIG), an American multinational insurance corporation. The Federal Reserve Bank of New York provided some assistance based on Section 13 of the Federal Reserve Act, which allowed the lending as an “unusual and exigent” circumstance, but the Federal Reserve alone could not tackle the extensive financial problems at AIG; it was clear that the government needed to step in to prevent a larger meltdown.

Enacting TARP

When Paulson and Bernanke originally proposed TARP to Congress, they asked for $700 billion to buy back the troubled assets, or the mortgage-backed securities that had become nearly worthless, at a premium. The idea was that the infusion of capital would boost investor confidence. The plan was rejected by the House of Representatives. Detractors in Congress, both Democrat and Republican, argued that TARP amounted to a “blank check” for Paulson, who would have ultimate authority over the fund. The legislation was slightly altered—including provisions addressing executive compensation and oversight—and passed the Senate as the markets continued their downward spiral. The still largely unpopular bill passed the House days later and then was hastily signed into law by President Bush on October 3, 2008.

TARP was authorized by the Emergency Economic Stabilization Act of 2008 (EESA), which allotted $700 billion to the program to be administered in three installments. The figure that was actually spent was closer to $431 billion at a $32 billion cost to the government, according to the Congressional Budget Office. The third installment was released in February 2009—under the Obama administration—along with the passage of the American Recovery and Reinvestment Act (ARRA), a stimulus package. ARRA extended TARP funds to the automotive industry and placed other restrictions on the institutions receiving TARP funds.

The Bank Bailout

The bank bailout, initiated to stabilize the banking system, was a five-part bank investment program that totaled $245 billion. The program included the Capital Purchase Program (CPP); the Supervisory Capital Assessment Program (SCAP); the Capital Assistance Program (CAP); the Community Development Capital Initiative (CDCI); Targeted Investment Program (TIP); and the Asset Guarantee Program (AGP).

The Capital Purchase Program was perhaps the most significant program under TARP. CPP allowed the Treasury to inject troubled financial institutions with capital through the purchase of their preferred stock instead of through the purchase of their so-called toxic assets, as TARP was originally designed to do. Paulson announced this change in November 2008. The US Treasury provided capital to 707 financial institutions in forty-eight states. In the first round of funding, nine of the largest banks each received $25 billion.

The Supervisory Capital Assessment Program (SCAP) and Capital Assistance Program (CAP) aimed to restart lending by ensuring that banks had adequate capital buffers to withstand losses and meet credit needs. The successful measure bolstered investor confidence. SCAP was a public stress test designed to measure the financial health of the nineteen largest bank holding companies. According to the US Treasury, eighteen of the nineteen institutions were found to have adequate buffers. CAP closed in November 2009 without making any investments.

The Community Development Capital Initiative (CDCI) was created in 2010 to help community development financial institutions (CDFIs) provide financial services to underserved communities. Under CDCI, CDFI banks, thrifts, and credit unions—eighty-four institutions in total—received $570 million in investments from the Treasury.

In December 2008, the Targeted Investment Program gave the Treasury flexibility to provide additional or new funding to financial institutions. Through the program, the Treasury purchased $20 billion of preferred stock from Citigroup and Bank of America. The program ended in December 2009 when the institutions paid back those investments in full.

A joint program of the US Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), the Asset Guarantee Program (AGP) provided Bank of America and Citigroup with funds to support the value of their assets.

Additional TARP Programs

The Automotive Industry Financing Program (AIFP) was enacted in December 2008. Under this program, the Treasury invested $80 billion to prevent the “uncontrolled liquidation” of General Motors (GM) and Chrysler. A potential collapse of the two industry giants would threaten the collapse of the American automobile industry.

The Term Asset-Backed Securities Loan Facility (TALF) facilitated the extension of credit to consumers and small businesses. TALF was carried out by the Federal Reserve Bank of New York, though Congress passed an act to force the Federal Reserve to reveal where and to whom the money went.

Other programs included the Public Private Investment Program (PPIP), a plan that facilitated a relationship with private investors to purchase toxic assets, and the American International Group (AIG) Investment Program, in which the Treasury provided funding for AIG. TARP’s authority officially expired on October 3, 2010.

Oversight

Several organizations were created under EESA to oversee the implementation of TARP, including the Congressional Oversight Panel (COP), the Office of the Special Inspector General for TARP (SIGTARP), and the Financial Stability Oversight Board (FSOB). Along with the Government Accountability Office (GAO), these organizations acted as TARP watchdogs, though with varying degrees of success. Oversight proved to be as complicated—if not more so—than the legislation itself. Conflicting reports, a profound lack of transparency, and an incoherent plan made implementation a public mess. Two leaders of the effort were candid about their frustration: Elizabeth Warren, a Harvard professor, bankruptcy expert, and chair of COP, to whom many executives and lawmakers were openly hostile; and Neil Barofsky, TARP’s special inspector general, who wrote a scathing book about the mismanagement of TARP after he stepped down in 2011 (Bailout: An Inside Account of How Washington Abandoned Main Street while Rescuing Wall Street, 2012).

Impact

Economists have widely agreed that the bailout was a necessary evil. Without the government’s intervention, the results of the financial crisis would have been catastrophic. However, the subsequent behavior of financial executives riled both Democrats and Republicans. The bailout resulted in a backlash from conservative Republicans, who would have let the banks collapse in accordance with their free-market ideology; liberal Democrats, who were enraged at the idea of using taxpayer money to rescue overpaid executives from a disaster they themselves had created; and the Tea Party, whose antigovernment members would be elected to Congress in 2010. The bailout also spurred the Occupy Wall Street movement.

Many complained that the bailout favored Wall Street companies. Others pointed to the lack of accountability among the executives who supported the reckless investments that began the crisis. Without an adequate punishment, went the argument, the government was perpetuating the dangerous culture of (too much) risk.

Many hoped that TARP would allow for a major restructuring of Wall Street’s operations, but as companies resisted any disclosure of how they were spending bailout money and executives put enormous pressure on government officials to subvert TARP dictates—like the $500,000 cap on executive compensation—it became clear that those changes would not happen under the program. However, the crisis led to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed into law by President Obama in 2010, it was widely touted as the most comprehensive financial regulatory reform since the Great Depression. The act led to the establishment of the Consumer Financial Protection Bureau. The brainchild of Elizabeth Warren, the bureau is comparable to the Consumer Protection Agency, though it deals exclusively with financial products.

Bibliography

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Kashkari, Neel. “Troubled Asset Relief Program: Many Challenges Lie Ahead.” Vital Speeches of the Day 75.2 (2009): 64–68. Academic Search Complete. Web. 26 Dec. 2012.

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Perdue, William. “Administering crisis: The Success of Alternative Accountability Mechanisms in the Capital Purchase Program.” Yale Law & Policy Review 29.1 (2010): 295–336. Academic Search Complete. Web. 26 Dec. 2012.

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