What is TARP?
TARP funds refer to the $700 billion set aside in the Emergency Economic Stabilization Act of 2008 to address the problem of frozen credit markets which caused the market crash of 2008. TARP is an acronym for the Troubled Asset Relief Program contained in the aforementioned Act. A detailed explanation of the program can be found here.
TARP funds, and how they have been spent, have been a matter of controversy since the day the program was first proposed. Estimates that as many as 90% of Americans were against the bank bailout had little effect on Congress, and the legislation was eventually passed.
TARP funds were supposed to be used to purchase the toxic assets that were clogging the global credit market. Global lending had come to a grinding halt, and banks weren’t even willing to lend money to other banks, much less consumers and businesses.
These toxic assets were primarily comprised of sub-prime mortgages packaged into Collateralized Debt Obligations (CDO), and sold to investors and institutions. When the real estate bubble burst, these sub-prime CDOs began to plummet in value and investors refused to buy them, choking off the supply of capital to the market. An excellent video explaining the causes can be found here.
Soon after TARP was approved, the strategy was changed from using TARP funds to buy toxic assets to using TARP funds to inject capital directly into the banks most effected by the crisis. In order for this strategy to succeed, it was important that banks receiving TARP funds were not made to look weak or troubled. To that end, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke called a meeting with the CEOs of the nine largest banks in the U.S., and forced them all to take TARP funds whether they needed the money or not.
Ostensibly, TARP funds were meant to be used to increase consumer and business lending and to thaw the frozen credit market. As far as those goals are concerned, TARP has been a success. The rate at which banks lend money to one another (LIBOR) was at almost five percent at the height of the crisis. Since TARP funds flooded the market, LIBOR has consistently hovered around .25%, or one quarter of one percent.
TARP funds have also been used to lower interest rates on mortgages, enabling many homeowners to refinance their homes at lower rates. TARP funds have gone out to over 500 banks, and have effetively stabilized the credit market for the time being.
Many of the banks that received TARP funds are hoping to repay their TARP funds quickly. An unintended consequence of accepting TARP funds was that the government was able to dictate executive compensation limits at those banks that received the TARP funds. The banks want to repay the TARP funds to be free from government regulation as it relates to their executive compensation.