TALF Bailout Program

How the Government Saved Credit Cards In the Financial Crisis

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Can you imagine a world without credit cards? It almost happened. Photo: Daryl Solomon/Getty Images

In November 2008, Treasury Secretary Henry Paulson shifted the focus of the TARP program from purchasing toxic mortgage-backed securities, which would take too long, to faster ways of infusing capital into the financial system. The Capital Repurchase Program put $115 billion into the eight largest banks, which hold nearly half of the nation's financial assets. This loosened credit markets, and lowered the LIBOR rate.

Paulson announced the funds would also be used to address a freeze in the consumer credit market. The $1 trillion secondary market for credit card, auto and student debt had come to a standstill. This market normally provides the funding for 40% of these loans. The Federal Reserve would later partner with the Treasury on the credit program.

In March, 2009, the FOMC reported it would launch the Term Asset Loan Facility to eventually buy up to $1 trillion in financial assets. These assets include credit card and auto debt as well as commercial and residential mortgages.. In effect, the Federal Reserve acted as the secondary market, which evaporated in 2008. The Fed's actions was designed to allow banks to sell these assets to businesses that have borrowed money from the Fed. This frees up the banks' funds, allowing them to make new loans. However, they really didn't. Instead, they used the funds to pay down other debt and improve their capital reserves.

In May the Fed launched TALF by buying $10 billion in bank loans. The Fed had announced the TALF program in 2008, but hadn't gotten it fully functioning until 2009. The Fed basically told banks to make new loan, without requiring them to.

The FOMC also announced it would buy an additional $100 billion in credit card debt on the secondary market, and $300 billion in Treasury bonds.

The Dow rose 90 points and the dollar fell in response. Treasury yields dropped, which put downward pressure on mortgage interest rates.The Fed was committed to restoring trust in financial markets to shorten the recession. (Federal Reserve Press Release, March 18, 2009; AP, Fed launches bold $1.2 trillion effort to revive financial markets, March 18, 2009; Bloomberg, Fed's Rosengren Says TALF to Help Revive Credit , March 23, 2009) 

Paulson did not want to expend funds to help unregulated financial institutions, meaning auto companies. Only $60 billion of TARP funds were left from the $350 billion allocated for 2008. The remaining $350 billion of TARP was designed to be used by the new President in 2009. Instead, Obama launched the American Recovery and Rehabilitation Act to help small businesses and homeowners.

Here's where the rest of TARP went: 

  • $40 billion went to purchase AIG 
  • $125 billion to purchase preferred stock in the top nine banks. (Source: U.S. Treasury, Press Release, November 12, 2008; AP, Dems see auto aid as Treasury shifts focus, November 12, 2008)

Without the rescue of the consumer debt secondary market, many credit card companies and auto finance companies would experience cash flow problems, and may be forced into bankruptcy like Circuit City.

 In addition, credit card debt would be more difficult to come by, just like mortgages, severely restricting much consumer spending.