Troubled Asset Relief Program (TARP): Its Concept and Effects

The U.S. Treasury Department recently announced that the Troubled Asset Relief Program (TARP) for banks and the Detroit bailouts yielded $15.35 billion in profits. For those who don’t remember much about TARP and how it all started, here is a quick recap!

Owing to the 2007-2008 subprime crisis, global credit markets came to a near standstill. In September 2008, Lehman Brothers, a large investment bank and a major player in the global economy, went bankrupt and several major financial institutions, such as Fannie Mae, Freddie Mac and American International Group (AIG), experienced major financial problems due to large amounts of toxic assets on their balance sheets. During this time, in order to stabilize the Country’s financial system, restore economic growth and prevent foreclosures, the U.S. Treasury created and ran a series of programs called the Troubled Asset Relief Program.

The TARP fund was created on October 3, 2008 with the passage of the Emergency Economic Stabilization Act and initially gave the Treasury purchasing power of $700 million to buy illiquid mortgage-backed securities and other assets from key institutions in an attempt to restore liquidity to the money markets. That authority was eventually reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The following amounts were committed through TARP’s five program areas:

1) About $250 billion was committed to stabilize banking institutions ($5 billion of this amount was ultimately cancelled).

2) Around $27 billion was marked through programs to restart credit markets.

3) Approximately $82 billion was committed to stabilize the U.S. auto industry, specifically GM and Chrysler ($2 billion of this amount was eventually cancelled).

4) $70 billion was earmarked to stabilize American International Group (AIG) ($2 billion of this amount was ultimately cancelled).

5) $46 billion was committed to programs to help struggling families avoid foreclosure (such as Making Home Affordable), with these expenditures being made over time.

Naturally, those companies that received assistance via TARP had to make a few sacrifices as well. The implementation of this program required that the organizations involved lose certain tax benefits and in a lot of cases, limits were also placed on executive compensation. Many fund recipients were restricted from awarding bonuses to their top 25 highest paid executives.

Ultimately, through TARP, $426.35 billion in government money was injected into the financial and auto sectors during the subprime crisis which allowed major financial institutions to stay afloat long enough to get their balance sheets back in order. It also saved about 2.6 million jobs in 2009 and 1.5 million jobs in 2010.

What is unique about TARP is that it changed the way investors need to look at systemic and government intervention in relation to private enterprise. In 2008, the U.S. government had to reach a decision whether to let private investors absorb billions of losses from the breakdown of the global financial system, or whether to step in to prevent a catastrophe that would wreak economic havoc across the globe. In the end, the U.S. government, as well as that of the European Union, Japan, and others, chose to step in to stabilize the financial system. Though highly controversial, it cannot be denied that TARP and other government interventions across the world staved off what could have been the greatest economic disaster since the Great Depression.