U.S. Taxpayer as Lender of Last Resort – TARP Program

This Frontline documentary entitled Breaking the Bank 

takes the viewer into more details surrounding the bailout of the banks. The purchase of Merrill Lynch by Bank of America, the fallout of Lehman’s bankruptcy, the credit market freeze-up and banks not lending money. The creation of TARP, TARP is an acronym for Troubled Asset Relief Program.  The TARP program was created under the Emergency Economic Stabilization Act.

The Emergency Economic Stabilization Act was signed into law on October 3, 2008. The Act is 169 pages long. The white paper from CCH (an explanation of the ACT) is only 22 pages in length.

The TARP programs as outlined by the U.S. Department of the Treasury are listed below:

  • Auto industry  TARP helped prevent the collapse of the American auto industry, saving more than a million American jobs.
  • Credit market programs  TARP helped restart the secondary credit markets which are essential to keeping credit flowing to households and businesses.
  • Investment in AIG   The Federal Reserve and Treasury took action to stabilize AIG because its failure during the financial crisis would have had a devastating impact on our financial system and the economy.
  • Bank investment programs
  • TARP helped stabilize America’s banking system during the financial crisis.
  • Housing  TARP helped prevent avoidable foreclosures and keeps families in their homes.
  • Executive compensation  Treasury issued standards governing executive compensation at financial institutions that received assistance under TARP. These standards are implemented and are overseen by the Office of the Special Master.

Let’s take a closer look at each of the six (6)  TARP programs in more detail. Referring back to my previous link on the  U.S. Treasury site, here it goes:

  1. Auto Industry
    1. Program created to prevent collapse of U.S. auto industry
    2. Chrysler repaid its loans six (6) years ahead of schedule
    3. On December 9, 2013 the U.S. Treasury fully exited investment in General Motors Company. The U.S. Treasury recovered $39.7 billion from its original investment of $51.0 billion in GM.
    4. On December 18, 2014 the U.S. Treasury sold its remaining stake in Ally Financial. This was the “credit arm” of General Motors (formerly GMAC General Motors Acceptance Corporation). Taxpayers recovered $19.6 billion which was roughly $2.4 billion more than original $17.2 billion investment in Ally.
    5. $80 billion more was invested in the auto industry. Following sale of remaining Ally stock on December 18,2014, the program is now closed.
  2. Bank Investment Programs – There were five (5) banking progams created:
  • Asset Guarantee Program – This was the “Too Big to Fail” banks bailout.
  • Supervisory Capital Assessment Program – You may have heard about the “Stress Tests” that banks were put through. This program required the 19 (nineteen) largest bank holding companies to access their financial stability.
  • Capital Purchase Program – this program required institutions of ALL (my emphasis) sizes to accept capital to aid in stabilizing their viability during the crisis.
  • Community Development Capital Initiative – this program was created to help Community Development Financial Institutions and the communities they served to cope with the effects of the financial crisis.
  • Targeted Investment Program –  This program provided for extra funding to financial institutions if needed and necessary.

3. Credit Market Programs

    • Public-private investment program – this program brought private capital back into the market for legacy securities which were defined as “non-agency residential mortgage-backed securities and commercial mortgage-backed securities. These were central to the problems facing U.S. financial system.
    • SBA 7 (a) Securities Purchase program – this program was designed to help the Small business community and provide liquidity to the market in order to increase overall small business lending.
    • Term Asset Backed Loan Facility – a joint program with the Federal Service. Its aim to help restart the asset-backed securitization markets that provide credit to consumer and small businesses.

4. Executive Compensation – basically a monitor was established called the Office of the Special Master. There were compensation restrictions enacted that had to be adhered to by the TARP recipients. This monitor covered the 5 (five) senior executive officers and 20 next most ighly paid employees at the companies receiving “exceptional assistance” from the U.S. Treasury.

5. Housing – Two (2) programs were created:

    1. Making Home Affordable® (MHA) –  program provides mortgage relief to prevent avoidable foreclosures.
    2. Hardest Hit Fund (HHF) – program provided targeted aid to families in states hit hard by the economic and housing market downturn.

6. Investment in AIG – U.S. government acted to prevent the disorderly failure of AIG, after concluding that such a failure would have caused catastrophic damage to the financial system and the economy. AIG was the largest provider of conventional insurance in the world. Millions depended on AIG for their life savings and it had a huge presence in many critical financial markets, including municipal bonds.

Basically, TARP was enacted to save the American economy through lending money to a lot of financial institutions and other entities. As of 2015, I believe the banks have all paid back the U.S. Treasury. The U.S. government owned stock in General Motors and that stock was eventually sold at a profit for the U.S. government. The insurance company AIG is “back in business” and doing well. The foreclosure fiasco is on-going. I understand that there are many homes where the “holder of title” is not known. These home are in foreclosure perhaps, more likely a never-never land of “who’s got the potato!” If my facts are wrong, hopefully a reader will correct me.

Next stop: Where the Bailout Went Wrong (New York Times opinion, Year 2011)

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Mistake

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