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Troubled Asset Relief Program
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President George W. Bush. It was a component of the government's measures in 2009 to address the subprime mortgage crisis.
The TARP originally authorized expenditures of $700 billion. The Emergency Economic Stabilization Act of 2008 created the TARP. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, reduced the amount authorized to $475 billion (approximately $665 billion in 2024). By October 11, 2012, the Congressional Budget Office (CBO) stated that total disbursements would be $431 billion, and estimated the total cost, including grants for mortgage programs that have not yet been made, would be $24 billion.
On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program. Through the Treasury, the U.S. government actually booked $15.3 billion in profit, as it earned $441.7 billion on the $426.4 billion invested.
TARP allowed the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled assets," defined as "(A) residential or commercial obligations will be bought, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress".
In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007, when they were hit by widespread foreclosures on the underlying loans. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.
TARP does not allow banks to recoup losses already incurred on troubled assets, but officials expect that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from the hypothesis in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate.
The Emergency Economic Stabilization Act of 2008 (EESA) requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure was designed to protect the government by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if the financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery.
Another important goal of TARP was to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. Increased lending equates to "loosening" of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short-term basis) should decrease, further facilitating lending.
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Troubled Asset Relief Program
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President George W. Bush. It was a component of the government's measures in 2009 to address the subprime mortgage crisis.
The TARP originally authorized expenditures of $700 billion. The Emergency Economic Stabilization Act of 2008 created the TARP. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, reduced the amount authorized to $475 billion (approximately $665 billion in 2024). By October 11, 2012, the Congressional Budget Office (CBO) stated that total disbursements would be $431 billion, and estimated the total cost, including grants for mortgage programs that have not yet been made, would be $24 billion.
On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program. Through the Treasury, the U.S. government actually booked $15.3 billion in profit, as it earned $441.7 billion on the $426.4 billion invested.
TARP allowed the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled assets," defined as "(A) residential or commercial obligations will be bought, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress".
In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007, when they were hit by widespread foreclosures on the underlying loans. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.
TARP does not allow banks to recoup losses already incurred on troubled assets, but officials expect that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from the hypothesis in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate.
The Emergency Economic Stabilization Act of 2008 (EESA) requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in the company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure was designed to protect the government by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if the financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery.
Another important goal of TARP was to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. Increased lending equates to "loosening" of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short-term basis) should decrease, further facilitating lending.