What Was the Troubled Asset Relief Program (TARP)?

What Was the Troubled Asset Relief Program (TARP)?

Let me explain what the Troubled Asset Relief Program, or TARP, really was. It was an initiative set up and managed by the U.S. Treasury to steady the nation's financial system, get the economy growing again, and cut down on foreclosures right after the 2008 financial crisis hit hard. The way TARP went about this was by buying up assets and stocks from companies that were in deep trouble.

How the Troubled Asset Relief Program (TARP) Worked

You need to know the background: in September 2008, global credit markets basically froze up as big players like Fannie Mae, Freddie Mac, and AIG ran into massive financial issues. Lehman Brothers flat-out went bankrupt, and firms like Goldman Sachs and Morgan Stanley switched their charters to commercial banks to shore up their capital.

To stop everything from collapsing, Treasury Secretary Henry Paulson pushed for TARP. President George W. Bush signed it into law on October 3, 2008, via the Emergency Economic Stabilization Act.

Originally, TARP was meant to boost liquidity in the money and secondary mortgage markets by snapping up mortgage-backed securities (MBS), which would help limit losses for the institutions holding them.

Later, they tweaked it to let the government buy equity in banks and other financial outfits. TARP started with $700 billion in purchasing power from the Treasury, but the Dodd-Frank Act cut that down to $475 billion.

TARP funds went into buying stock in banks, insurance companies, and automakers, plus loans to financial institutions and homeowners. Specifically, the U.S. government picked up preferred stock in eight banks: Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo. These banks had to pay a 5% dividend to the government, bumping up to 9% in 2013, which pushed them to repurchase the stock within five years.

From the start until October 3, 2010, when fund extensions ended, $245 billion stabilized banks, $27 billion boosted credit availability, $80 billion supported the U.S. auto industry (mainly GM and Chrysler), $68 billion steadied AIG, and $46 billion went to foreclosure prevention like Making Home Affordable.

The rules of TARP meant companies lost some tax benefits, and often there were caps on executive pay, including no bonuses for the top 25 highest-paid execs. Still, by 2009, these firms handed out about $20 billion in what people called 'TARP bonuses' to key staff.

The Legacy of TARP

When the Treasury closed out TARP, the government reported that investments had netted over $11 billion for taxpayers by 2010. More precisely, they got back $441.7 billion from the $426.4 billion invested. Officials said TARP saved the American auto industry from collapse, preserved over a million jobs, stabilized banks, and got credit flowing again for people and businesses.

That said, TARP is still a hot topic. Supporters claim it rescued the U.S. financial system and cut the crisis short, but critics say it just propped up Wall Street without real need.

Economists, politicians, and finance pros keep arguing if TARP was truly necessary. Some critics point out it didn't do much for housing markets, which stayed weak for years. Others think it fell short by not taking equity stakes to control future bank behavior.

Instead, they argue, the no-strings loans basically rewarded recklessness, signaling that if you mess up, the government will bail you out—and that sets a bad precedent for dependency.

TARP didn't win over the public either. People watched Wall Street get benefits, including those bonuses, and bounce back to profits, while everyday folks dealt with debt, job loss, and home foreclosures during the Great Recession.