Troubled Asset Relief Program TARP What It Was How It Worked
Troubled Asset Relief Program (TARP), What It Was, How It Worked
What Was TARP?
The Troubled Asset Relief Program (TARP) was created by the U.S. Treasury to stabilize the financial system, restore economic growth, and mitigate foreclosures after the 2008 financial crisis. TARP achieved this by purchasing troubled companies’ assets and stock.
Key Takeaways
– TARP was instituted by the U.S. Treasury in response to the 2008 financial crisis.
– TARP stabilized the financial system by purchasing mortgage-backed securities and bank stocks.
– From 2008 to 2010, TARP invested $426.4 billion and recouped $441.7 billion.
– TARP was controversial and its effectiveness continues to be debated.
How TARP Worked
Global credit markets came to a near standstill in September 2008 due to severe financial problems at major institutions. To prevent further escalation, Treasury Secretary Henry Paulson initiated TARP, which was signed into law by President George W. Bush. TARP’s original purpose was to increase liquidity by purchasing mortgage-backed securities (MBS) to reduce potential losses. It was later modified to allow the government to buy equity in banks and other financial institutions. TARP initially had purchasing power of $700 billion and authorized funds were reduced to $475 billion.
TARP funds were used to purchase stock in banks, insurance companies, and auto-makers, as well as for lending to financial institutions and homeowners. The U.S. government bought preferred stock in eight banks and imposed dividend requirements. The program also allocated funds to stabilize banks, increase credit availability, support the auto industry, stabilize AIG, and prevent foreclosures.
TARP’s provisions included tax benefit reductions, limits on executive compensation, and restrictions on bonuses. However, bailed-out firms still paid substantial bonuses to top executives.
The Legacy of TARP
TARP’s investments generated over $11 billion for taxpayers by 2010, recovering more funds than were invested. The program prevented the collapse of the auto industry, saved jobs, stabilized banks, and restored credit availability. However, TARP remains controversial, with proponents and critics disagreeing on its impact. Critics argue that it did not sufficiently help the housing market or impose strong measures on bailed-out firms to control their future practices. They argue that TARP’s loans rewarded bad behavior and created dependency.
TARP also eroded public trust as Wall Street thrived while individuals faced financial difficulties.
