TARP Bailout Program
Did TARP Help You or the Banks?
The Troubled Asset Relief Program was a $700 billion bank bailout. On October 3, 2008, Congress authorized it through the Emergency Economic Stabilization Act of 2008. It allowed the U.S. Department of the Treasury to infuse cash into the nation's banks to keep them operating. Congress approved $350 billion for use in 2008. President Obama chose to not use the remaining $350 billion. TARP expired on October 3, 2010.
The Treasury Department used TARP funds to invest, make loans, and guarantee assets. In exchange, it bought shares or bonds from failing banks and other companies. That kept the financial system operating. A look into the 2007 financial crisis reveals how the industry created this liquidity crisis.
On October 14, 2008, the Treasury Department used $105 billion in TARP funds to launch the Capital Repurchase Program. The U.S. government bought preferred stock in eight banks. They were Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo.
The program required banks to give the government a 5 percent dividend that would increase to 9 percent in 2013. That encouraged banks to buy back the stock within five years. Treasury Secretary Hank Paulson knew the government would make a profit because bank share prices would rise by 2013.
The Treasury Department also used TARP funds to either buy preferred stock in or make loans to four other groups.
President Obama wanted to tax the banks to repay taxpayers for $120 billion to $141 billion he thought they would lose from TARP. Obama planned to levy the tax over 10 years on the banks' riskiest activities, such as trading. He didn't want to tax banks' retail operations because it would get passed on to customers as higher prices. His proposal didn't pass. Instead, the Dodd-Frank Wall Street Reform Act limited the amount of money authorized under TARP to $475 billion.
How Much TARP Cost Taxpayers
In May 2009, Bernanke said that the results of the banking system's "stress tests" were encouraging. The tests found that nine of the country's 19 largest banks did not need to raise additional capital. They no longer needed to offset future write-downs of toxic mortgage-backed securities. Some banks were willing to repay the government funds they borrowed through TARP the prior year. The stress test confirmed that Capital One, U.S. Bancorp, and BB&T were healthy enough to sell shares to repay TARP funds.
Goldman Sachs had already offered to pay back the $5 billion it borrowed.
Two banks, Bank of America and Wells Fargo, were responsible for one-third of the $75 billion that needed to be raised. In the May 11, 2009 Bloomberg article, "Bernanke Encouraged by Banks' Plans," Bernanke was optimistic. Wells Fargo had quickly raised $8.6 of the $13.7 billion it needed.
In FY 2012, $35 billion of TARP funds went to programs to help homeowners modify mortgages and avoid foreclosure. This was part of the Home Affordable Modification Program. In FY 2013, TARP budgeted $12 billion for HAMP.
As of May 2016, the banks had paid the government back with interest. In total, $250.46 billion in TARP funds had been committed to assisting 700 banks. Of that, $165.33 billion went to the big banks, with assets of $10 billion or greater. Another $14.57 billion went toward the smaller banks. The remainder went to prop up Citigroup and Bank of America.
The big banks paid back $179.51 billion in principal and interest. The small banks only returned $13.94 billion, since more of them went bankrupt despite assistance. Citigroup and Bank of America returned $81.59 billion. All told, the banks repaid $275.04 billion, creating a $25 billion profit.
Why the First TARP Plan Failed
Secretary Paulson's original idea was to set TARP up as a reverse auction. Banks would submit bid prices on their bad loans to the Treasury Department. Treasury administrators would select the lowest price offered.
The problem was that the banks didn't want to take a loss, so they wanted the Treasury Department to pay full price for these assets. The government knew they were worth far less. They were so far apart on prices that the auction wouldn't work. Paulson shelved the plan.
European and Japanese central banks were directly infusing cash into their companies. Paulson launched the Capital Repurchase Program, using TARP funds, to align with their plan.
Banks Blocked the TARP Program for Homeowners
The Home Affordable Refinance Program should have helped stimulate the housing market. It allowed credit-worthy homeowners who were upside down in their homes to refinance with lower mortgage rates. It would have pumped billions into the economy and helped 2 million homeowners. If expanded, it could have helped all 25 million homeowners who are upside down with their mortgages. Why didn't it work? Banks were just too averse to risk.
The Obama administration introduced HARP in April 2009, but only 810,000 homeowners were helped. Of those, only 57,171 were more than 5 percent upside down. The rest had higher equity. Banks cherry-picked applicants and refused to consider those with lower equity. These were the same banks that gave loans to anyone a few years earlier.
There was no risk to the banks, as all these loans were guaranteed by Fannie Mae or Freddie Mac. Banks didn't want to be bothered with the paperwork involved with homeowners who have mortgage insurance. That, of course, applied to everyone with less than 20 percent equity.
The white paper, “A Retrospective of the Troubled Asset Relief Program,” by Katalina Bianco provides more depth on TARP.