TARP Bailout Program
Did TARP Help You or the Banks?
The Troubled Asset Relief Program was a $700 billion government bailout. On October 3, 2008, Congress authorized it through the Emergency Economic Stabilization Act of 2008. It was designed to keep the nation's banks operating during the 2008 financial crisis. To pay for it, Congress raised the debt ceiling to $11.3 trillion.
The U.S. Department of the Treasury used the funds to inject capital into banks and other businesses that had been spiraling toward failure since the 2007 banking liquidity crisis. The Treasury did this by purchasing shares and bonds from failing banks and companies.
The Federal Reserve—whose job is to ensure the U.S. financial system, and thus the economy, does not fail—had done all it could with its expansionary monetary policies. Congress approved TARP to assist the Federal Reserve as an expansive fiscal policy response. TARP expired on October 3, 2010.
TARP's Five Bailout Programs
TARP's initial purpose was to bail out banks. By the time the program was completed, it had been used in five areas. The areas were the automotive, banking, credit, housing, and insurance industries.
The Capital Purchase Program (Banks)
On October 14, 2008, the Treasury Department used $250 billion in TARP funds to launch the Capital Purchase Program (CPP). The U.S. government then purchased preferred stock in eight banks:
- Bank of America/Merrill Lynch
- Bank of New York Mellon
- Goldman Sachs
- J.P. Morgan
- Morgan Stanley
- State Street
- Wells Fargo
The program required banks to give the government a 5% dividend that would increase to 9% in 2013. That encouraged banks to buy back the stock within five years. Hank Paulson, then Secretary of the Treasury, knew the government would make a profit when the economy began to grow again.
On November 23, 2008, the Treasury invested an additional $20 billion in TARP funds in Citigroup (Citi). In return, the Treasury received preferred stock (generally stock that doesn't include ownership or voting rights) with an 8% dividend. Citigroup restricted executive compensation and implemented the Federal Deposit Insurance Corporation's (FDIC) mortgage modification program.
The Treasury, the Federal Reserve, and the FDIC also agreed to insure a pool of $306 billion in Citi's assets. The bank would pay for the first $29 billion in losses. After that, the government would pay 90% and Citigroup, 10%. Only $5 billion of TARP would be used. The FDIC would guarantee up to $10 billion and the Fed would lend the rest. On January 27, 2009, TARP used $386 million in CPP funds to help 23 community banks.
American International Group (Insurance)
On November 10, 2008, Treasury used TARP to rescue insurance giant American International Group (AIG). The Fed had already loaned $112 billion across the system—it raised the total to $152 billion by purchasing $40 billion in AIG preferred shares. This allowed AIG to retire its credit default swaps and avoid bankruptcy. On March 2, 2009, the Treasury committed another $29.84 billion in AIG. These changes made the total AIG financial bailout $182 billion.
Credit and Housing
On November 23, 2008, Treasury loaned the Federal Reserve $20 billion in TARP funds. The Fed created the Term Asset-Backed Securities Loan Facility (TALF). The Fed lent TALF money to its member banks so they could continue offering credit to homeowners and businesses. By April 2013, the money had all been paid back with $3.6 billion in interest.
On February 18, 2009, Treasury launched the Homeowner Affordability and Stability Plan. It set aside $75 billion in TARP funds to help homeowners refinance or restructure their mortgages.
It also created the Home Affordable Modification Program (HAMP) and encouraged banks to lower monthly mortgage payments for those in imminent danger of foreclosure. The program had incentives for homeowners, servicers, and investors.
HAMP closed in 2016. As of September 2018, it had helped 5 million homeowners avoid foreclosure.
The Treasury then created the Home Affordable Refinance Program. This program allowed creditworthy homeowners, who were upside down in their homes, to refinance with lower mortgage rates—this helped homeowners reduce their risk of foreclosure. The program expired on December 31, 2018.
The Automotive Industry
In December 2008, President George W. Bush agreed to use TARP funds to bail out the big three automotive companies. Automotive executives had warned that the General Motors Company and Chrysler LLC faced bankruptcy—and the loss of 1 million jobs. The $80.7 billion bailout lasted from January 2009 to December 2014. The Treasury recouped all but $10.2 billion.
Why TARP Didn't Cost Taxpayers
As of 2018, TARP didn't cost the taxpayers anything. Instead, the Treasury received $3 billion more than the $439.6 billion it disbursed. Of that, $376.4 billion was repaid by the banks, auto companies, and AIG.
The U.S. Treasury made a profit of $66.2 billion from these companies because it bought shares of the companies when prices were low and sold them when prices were high. The Treasury made $5 billion on its TARP fund investment in AIG alone.
The programs targeted to help homeowners allocated $37.4 billion. As of September 2018, they spent $27.9 billion. These funds were never meant to be repaid.
The TARP program quickly turned around the banking industry. In May 2009, Fed Chair Ben 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, nor did they need to offset future write-downs of the toxic mortgage-backed securities.
Mortgage-backed securities were one of the main culprits of the financial collapse; most of these banks were heavily invested in the housing market through sub-prime loans, which were then used to create these securities.
The stress test confirmed that Capital One, U.S. Bancorp, and Branch Banking and Trust Company were healthy enough to sell shares to repay TARP funds. Goldman Sachs had already offered to pay back the $5 billion it borrowed. The remaining banks still needed to raise $75 billion in capital before they were deemed sufficiently healthy. Bank of America and Wells Fargo were responsible for one-third of that amount.
In fiscal year 2010, the banks paid back $110 billion and another $38 billion in FY 2011. TARP provided a surplus to the budget in those two years as banks paid back the bailout.
President Obama believed at the time that taxpayers were set to lose between $120 and $141 billion from TARP. He wanted to tax the banks to repay taxpayers by levying the tax over a 10-year period on the banks' riskiest activities, such as trading. He didn't want to tax banks' retail operations, because those costs would get passed on to customers as higher prices.
Obama's proposal didn't pass Congress. Instead, the Dodd-Frank Wall Street Reform Act, among other reforms, limited the amount of money authorized under TARP to $475 billion.
Why TARP Was Needed
A poll conducted in 2010 asked voters opinions of TARP — 58% percent of respondents said TARP was not needed. But TARP's purpose was to stop the panic that consumed Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and AIG. Without government intervention, the bankruptcy of those companies would have led to many more.
Most Americans have never heard of the Reserve Primary Fund (The Reserve). They weren't aware that on September 16, 2008, they were weeks away from a total economic collapse. If that ultra-safe money market fund had gone bankrupt, trucking companies would have run out of cash to pay their employees, and grocery stores would have been empty within weeks.
As it was, The Reserve announced liquidation at the end of September 2009. Without the $700 billion government TARP guarantee, the financial system would have collapsed, taking the rest of the economy with it.
Why Paulson's First TARP Concept Failed
Secretary Paulson's original idea was to set up TARP as a reverse auction. The idea was to have banks submit bid prices on their bad loans to the Treasury Department and have Treasury administrators select the lowest price offered.
The problem with the plan was that the banks didn't want to take a loss—they wanted the Treasury Department to pay full price for these assets. Officials at the Treasury knew the bad debts were worth far less—the prices the banks wanted and the market value of the loans were so far apart that the auction wouldn't work.
European and Japanese central banks were directly infusing cash into companies affected by the crises. Paulson launched the Capital Repurchase Program, using TARP funds, to align with their plans.
The Problem With the TARP Program for Homeowners
Why didn't more people take advantage of the HAMP and HARP programs? This would have pumped billions into the economy and helped millions of homeowners avoid foreclosure.
The problem was the banks. They cherry-picked applicants and refused to consider those with lower equity. Banks were too wary of risk to allow the programs to work.
These were the same banks, who just a few years before, were giving out loans to anyone because they were making money on the investments that were created from the loans.
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 had mortgage insurance.