Troubled Asset Relief Program (TARP)

What is TARP and how will it save our economy?

The Troubled Asset Relief Program (TARP) is a funding program established by the US government, which primarily functions to relieve the sub-prime mortgage crisis. It was revised in October of 2008, by then Treasury Secretary Henry Paulson. Through this program, the US Treasury is given the ability to purchase up to $700 billion in mortgages that were issued before March 14, 2008, and any other factors that the Finance Secretary and the Chairman of the Fed find necessary to ensure market stability. In essence, it is part of the billion dollar bailouts that our government has been issuing to banks, car companies, and other financial institutions.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans’ personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.- Treasury Secretary Henry Paulson

The Program aims at purchasing those assets that are either illiquid or difficult to value. (These are assets which can cannot be turned into cash quickly, or are difficult to estimate an appropriate fair market value for various reasons.) In this approach, the program will theoretically remove troubled assets from balance sheets so that the  companies can continue operations without having to deal with these unremitting costs. The hope is that, by removing these troubled assets, companies will be able to recoup and stabilize their operations to a profitable level. Once a relatively stable level of operations is realized, the prices of the troubled assets will once again rise to healthy levels. Thus there is benefit for both parties. The Treasury profits off of its initial investment of troubled assets now turned profitable, and the companies have a large “debt” taken off their hands.
(These troubled assets are not really debt, but are assets that the company has no way of selling and thus are a sort of liability. An example could be Enron’s Dabhol plant. While it was market on the financials as an asset, the plant was actually causing losses. On top of that, there were no bidders who wanted to buy Dabhol because of its unprofitability.)

Another aim of the program is to raise confidence in our financial system. By removing some of the liability of the bank’s hands, there will be more liquid capital for the banks to loan. With more lending, there will be more spending, and with more spending people will be more confident in taking more loans, thus strengthening and revitalizing the system.

In the following clip, Treasury Secretary Timothy Geithner talks on our financial crisis, and the  financial plan (TARP II) that is needed to help the economy recover. He discusses where our economy is right now, the key reasons for its fall, and lists the two key areas where a solution can be found. One of these solutions is the credit market. Among other things, he argues that a nations ability to issue credit is essential to growth. Right now credit markets are in shambles because there are insufficient funds to issue out, and eligible people are scared to take out loans. TARP II will insert large amounts of capital to help day-to-day operations, and build investor confidence.

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5 Responses

  1. What was your initial question?

  2. Will it save or economy! That is a great but big question. Very amusing. I thought your questions might be a bit easier to answer, like, what is TARP.

    But bravo, ambition, bravo.

  3. Overall, I think you captured the gist of TARP- but back illiquid assets so as to improve the financial crisis which is not not enough credit for businesses and consumers to expand the economy.

    A couple of important points.
    TARP was initially thought of as buying troubled or “toxic” assets from banks and financial firms.

    It is more about securtized loans than individual loans.

    These are NOT liabilities. They are assets. Your comparison to Dahbol is correct.

    But for the bank, if its cash + assets (like these securitized loans) is LESS than the nominal or book value of all the DEPOSITORS’ accounts, it is insolvent.

    Further questions:
    1) What happened to the TARP money?
    2) What is the point of buying toxic assets? If you bought a house that you thought was worth $100, but it turn out to be worth $10, you would like someone to come and give you your $90 (or$80) back, wouldn’t you? if that is what we are doing for TARP recipients, why should we (or shouldn’t we?)

  4. Recently, it seems like a lot of focus has been placed on why should recipients of TARP money be rewarded to the recipients themselves. We saw with AIG, the public got fired up over the $165 M in bonuses. Even more recently, the question gets raised about whether it is right for the banks who received TARP money to reap the benefits of their increased stock prices. Obviously this growth is needed for these companies to rebound, but I think the bigger question is how will these companies be indebted to the rest of the public after it makes its rebound. If Citi is able to rebound their stock from near $1 to say $40 (hypothetically speaking), how is this company going to say thank you? Undoubtedly we all know large bonuses will end up going to executives. But is that right of them?

    As for what happened with TARP money, to be honest I am not 100% sure. Millions went here and there are it seems like the only information we can see are the various instances in how this money may be misused. Just by taking the AIG bonuses as a prime example, even our government doesn’t quite know how the money is being spent.

  5. If Citi’s stock goes form $1 to $40, and the US government bought its equity at say, $10/share, than that is plenty of thank you.

    Which is not to say that better oversight or information transparency is off the table. But there may be rela questions about whether the taxpayer ever sees par for what we paid let alone a gain.

    Here is official oversight panel:
    http://cop.senate.gov/about/

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