The Troubled Asset Relief Program is also known by its clever acronym the TARP. This represented a series of national relief programs which the United States Treasury Department developed and administered. They did this to attempt to restore stability to the American financial system, to rebuild economic stability and growth, and to forestall housing foreclosures after the 2008 Global Financial Crisis and Great Recession wrecked the national and Western portion of the global economy. The idea was to buy up threatened firms’ equity and toxic assets so that they could continue to operate and make loans.
In the first round, the Troubled Asset Relief Program provided Treasury with an mind boggling $700 billion of purchasing ability with which to purchase the dubious and at that point entirely illiquid MBS mortgage-backed securities as well as additional assets. They were to buy these from systemically important banks and financial institutions with an eye on rebuilding the shattered liquidity of the stricken money markets. It was the congressionally approved Emergency Economic Stabilization Act they passed on October 3rd in 2008 which allowed them to develop the program. With the Dodd-Frank Act for banking reforms, the Congress reduced their $700 billion amount of authorization down to a still-impressive $475 billion.
The series of events that led to this de facto bank bailout originated from the freeze up of the worldwide credit markets that ground to a screeching halt in September of 2008. This became worse as a few of the systemically important financial institutions like American International Group, and the GSE government sponsored enterprises Freddie Mac and Fannie Mae became victims of intense financial trouble. Lehman Brothers’ went bankrupt which nearly overthrew the global financial system. At the same time Goldman Sachs and Morgan Stanley altered their charters to evolve into commercial banks which provided them with the backing of the FDIC Federal Deposit Insurance Corporation. This did stabilize the attacks on their two market capitalizations and shore up their capital positions, though it required some time to have effect.
It was with the Troubled Asset Relief Program that the government through the U.S. Treasury was finally able to buy up the root of the crisis, the Mortgage-backed securities. In decreasing the possible unknown toxic asset losses from the financial institutions which held them, they saved the banking system in not only the United States but likely the entire Western world.
Critics of the Troubled Asset Relief Program called it the largest bank bailout scheme in the history of the world. Without these cash infusions into the important national banks throughout the U.S. though, they would have been unable to continue operating at all. When the program had successfully stabilized the banking system and the too big too fail, systemically all-important banks, and the market had sufficiently calmed down, TARP was allowed to expire on October 3rd of 2010.
Treasury utilized the TARP funds wisely and well. They deployed some of them to make loans, others to invest in companies in need of cash infusions, and still more to guarantee toxic assets like the MBS. They received bonds or shares off of the collapsing financial companies and banks in consideration for this accommodation. The first program was known as the Capital Repurchase Program. In this initiative, Treasury purchased preferred shares of stock in eight major banks. These included Citigroup, Bank of America/Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, Wells Fargo, J.P. Morgan Chase, and State Street Bank.
The banks had to provide the government with a full five percent dividend return which had to increase to nine percent in 2013. This gave the banks huge incentive to purchase back their own stock from Treasury before the conclusion of the five year windows. Then-Treasury Secretary Hank Paulson understood the government would make money off of the program in the end as he believed the stock prices of the banks would rebound at least somewhat by or before 2013.
Four other groups and entities would have collapsed without additional help from the Troubled Asset Relief Program and Treasury. Each of these received either direct cash infusions via preferred stock purchases or loans. AIG (the largest insurance company in the world) received $40 billion. Various community banks obtained a collective $92 billion. A number of these did fail in spite of this help. The American Big Three car makers got $80.7 billion collectively. Bank of America and Citigroup also received an additional $45 billion between them. TARP also loaned out $20 billion to the sister TALF program which the Federal Reserve managed.
Though critics heavily maligned the government for saving the banking system and national banks, the bailout did not cost the government anything by the time it had been concluded. In fact, by May of 2016, the banks had paid the government back all of their principal (collectively, despite some failing anyway) plus $25 billion in profits for a total repayment of $275.04 billion.