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 $11.315 trillion. TARP expired on October 3, 2010.
The U.S. Department of the Treasury used the funds to inject capital into banks and other businesses. It did this by buying shares or bonds from the failing companies. The weakness had been brewing since the 2007 banking liquidity crisis. The Federal Reserve had done all it could with expansionary monetary policy. Congress used TARP as an expansive fiscal policy response.
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.
On October 14, 2008, the Treasury Department used $105 billion in TARP funds to launch the Capital Purchase 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.
On November 23, 2008, Treasury invested an addition $20 billion in TARP funds in Citigroup. In return, Treasury received preferred stock with an 8 percent dividend. Citigroup restricted executive compensation and implemented the Federal Deposit Insurance Corporation's mortgage modification program. 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 percent and Citigroup, 10 percent. 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.
On November 10, 2008, Treasury used TARP to rescue insurance giant American International Group. It purchased $40 billion in AIG preferred shares. The funds allowed AIG to retire its credit default swaps and stave off bankruptcy. The Fed had already loaned $112 billion. On March 2, 2009, the Treasury committed another $29.84 billion in AIG. These changes made the total bailout $182 billion.
In December 2018, President George W. Bush agreed to use TARP funds to bail out the Big Three auto companies. Auto execs 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. Treasury recouped all but $10.2 billion.
On November 23, 2008, Treasury loaned the Federal Reserve $20 billion in TARP funds. The Fed created the Term Asset-Backed Securities Loan Facility. The Fed lent TALF money to its member banks so they could continue offering credit to homeowners and businesses. By April 2013, all the money had 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 created the Home Affordable Modification Program. It encouraged banks to lower monthly mortgage payments for those in imminent danger of foreclosure. It had incentives for homeowners, servicers, and investors. The program closed in 2016. As of September 2018, it helped 5 million homeowners avoid foreclosure.
It also created the Home Affordable Refinance Program. It allowed credit-worthy homeowners who were upside down in their homes to refinance with lower mortgage rates. They didn't have to be facing foreclosure. It expired on December 31, 2018.
Why TARP Didn't Cost Taxpayers
As of 2018, TARP didn't cost the taxpayers anything. Instead, 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 on those because it bought shares of the banks when prices were low and sold them when prices were high. Treasury made $5 billion on its TARP fund investment in AIG. The programs targeted to help homeowners allocated $37.4 billion. As of September 2018, they spent $27.9 billion. Those funds were never meant to be repaid.
The TARP program quickly turned around the banking industry. 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.
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.
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.
Obama's proposal didn't pass Congress. Instead, the Dodd-Frank Wall Street Reform Act limited the amount of money authorized under TARP to $475 billion.
Why TARP Was Needed
Fifty-eight percent of Americans 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. 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 run out of cash to pay their employees. Grocery stores would have gone empty within weeks. Without a $700 billion government guarantee, the financial system would have collapsed. The rest of the economy would have gone with it.
Why Paulson's First TARP Concept 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 plans.
The Problem With the TARP Program for Homeowners
Why didn't more people take advantage of the HAMP and HARP programs? They 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 averse to risk to allow the programs to work. 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 had mortgage insurance. That, of course, applied to everyone with less than 20 percent equity.