[2][3] TARP allowed the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled assets," defined as "(A) residential or commercial obligations will be bought, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress".
TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.
If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets.
[7] The authority of the United States Department of the Treasury to establish and manage TARP under a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R.
This model was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector.
[13] The first allocation of the TARP money was primarily used to buy preferred stock, which was similar to debt in that it gets paid before common equity shareholders.
[14][15] In the original plan, the government would buy troubled (also known as 'toxic') assets in insolvent banks and then sell them at auction to private investor and/or companies.
This plan was scratched when United Kingdom's Prime Minister Gordon Brown came to the White House for an international summit on the global credit crisis.
[16] Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, planned a package of three measures consisting of funding, debt guarantees and infusing capital into banks via preferred stock.
[18][19] On December 19, 2008, President Bush used his executive authority to declare that TARP funds could be spent on any program that Paulson,[20] deemed necessary to alleviate the 2008 financial crisis.
"[21] On January 15, 2009, the Treasury issued interim final rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program (CPP).
He intended to direct $50 billion towards foreclosure mitigation and use the rest to help fund private investors to buy toxic assets from banks.
[27] Economist and Nobel Prize winner Paul Krugman had been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors.
[29] Economist Linus Wilson,[30] a frequent commenter on TARP related issues, also pointed to excessive misinformation and erroneous analysis surrounding the U.S. toxic asset auction plan.
"[35] Neil Barofsky, an Assistant United States Attorney for the Southern District of New York, was nominated to be the first Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
[39] However, The Wall Street Journal suggested that some lawmakers are actively using TARP to funnel money to weak regional banks in their districts.
[40] Academic studies have found that banks and credit unions located in the districts of key Congress members had been more likely to win TARP money.
[5] The Congressional Budget Office (CBO) used procedures similar to those specified in the Federal Credit Reform Act (FCRA) to value assets purchased under the TARP.
[4] In a report dated February 6, 2009, the Congressional Oversight Panel concluded that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value.
The COP's valuation analysis assumed that "securities similar to those issued under the TARP were trading in the capital markets at fair values" and employed multiple approaches to cross-check and validate the results.
Most banks repaid TARP funds using capital raised from the issuance of equity securities and debt not guaranteed by the federal government.
PNC Financial Services, one of the few profitable banks without TARP money, planned on paying their share back by January 2011, by building up its cash reserves instead of issuing equity securities.
[citation needed] Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP), told lawmakers, "Inadequate oversight and insufficient information about what companies are doing with the money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering.
[71] The latest occurred in March 2010, with the FBI claiming Charles Antonucci, the former president and chief executive of the Park Avenue Bank, made false statements to regulators in an effort to obtain about $11 million from the fund.
Additionally, it plays a key role in ensuring that TARP's goals of stabilizing the financial system and stimulating economic recovery are achieved without compromising public trust.
The New York Times, citing finance experts on October 13, 2008, noted that, "A similar effort these days, in proportion to today's economy, would be about $200 billion."
"[77] The article cited several bank chairmen as stating that they viewed the money as available for strategic acquisitions in the future rather than to increase lending to the private sector, whose ability to pay back the loans was suspect.
The panel also concluded that "Although half the money has not yet been received by the banks, hundreds of billions of dollars have been injected into the marketplace with no demonstrable effects on lending.
The American Bankers Association (ABA) has lobbied Congress to cancel the warrants owned by the government, calling them an "onerous exit fee".
[94] A 2019 study by economist Deborah Lucas published in the Annual Review of Financial Economics estimated "that the total direct cost of the 2008 crisis-related bailouts in the United States" (including TARP and other programs) was about $500 billion, or 3.5% of the United States's GDP in 2009, and that "the largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions.