TARP (The Troubled Asset Relief Programme)
What is it?
The Troubled Asset Relief Programme (TARP) is the US government's answer to the credit crunch and an attempt to get banks lending again. It is the mother of all bailouts and involves an enormous $700bn government fund.
$700bn is no small amount - if taxes were raised to pay for TARP, it would cost America's 138m taxpayers $5k each in additional taxes. Federal Reserve chairman Ben Bernanke, Treasury Secretary Hank Paulson, and even President George Bush pleaded for it to happen, warning of meltdown if not.
The initial purpose of the fund was to buy toxic assets from banks and (hopefully) to allow them to start afresh.
It also included provisions for:
· Staggered spending: $250bn would be issued when the legislation was enacted; another $100bn could be spent if the President decided it was necessary; the remaining $350bn would be subject to Congressional Review.
· Government ownership: Companies benefiting from the bailout plan were to be obliged to issue stock warrants giving taxpayers an ownership stake. As partial owners, the government should also benefit from any profits made by the company after the toxic assets have been removed.
· Limits on executive pay: Executives at the companies benefiting from the bailout would be forbidden to leave with 'golden parachutes' (ie, big payouts despite their failure to perform) and will have their pay curtailed if it's seen to encourage excessive risk taking.
What's it got to do with the financial crisis?
With banks both unwilling and unable to lend because of all the toxic assets like mortgage backed securities and CDOs which are stuck on their balance sheets and can't be sold (unless at a huge loss), it was hoped that if the US government bought these assets at a fair price, banks would feel a bit more enthusiastic about lending money to households and companies in future.
The big queries about the bailout were: Is it enough? Will it work? Will it make things worse? And is it the best way to encourage banks to start lending again?
Some economists argued that $700bn was only a start and that a lot more would be necessary. Others argued that the TARP wouldn't work: the banking system was fundamentally short of capital and the bailout would merely bring it to a neutral position rather than one in which banks would start lending again.
Others argued for an approach similar to that used in Sweden and the UK (ie, the government buys equity in the collapsing banks and therefore benefits if when their share price rises).
Some have even argued that TARP could actually make things worse: by buying up toxic assets at low prices, the government would set a market price and oblige all banks to mark their assets to market at that price, causing yet more writedowns.
Many of these criticisms turned out to be true, and in November 2008 the US government decided to shift the focus of the TARP programme away from buying up toxic assets, in favour of investing in banks directly. As we explain in our bailout entry, this is a much better way of getting liquidity back into the system.
In 2009 the US government doubled back to its original vision of TARP -- buying up toxic assets -- and formulated the Public-Private Investment Programme, or PPIP. (Pronounced PEE-pip). The idea was to provide federal subsidies to private equity firms and other private investors to buy toxic assets from banks. This program soon stumbled, however, for several reasons. One was that wary private equity firms shied away from getting into bed with angry politicians who would be as likely to criticize them as befriend them. Another was that banks were reluctant to sell toxic assets that could regain their values some day.
The gift of TARP funds quickly became a valuable tool of political leverage and lawmakers soon called Wall Street chief executives to the carpet for taking taxpayer funds while paying out big bonuses and reducing lending. The apotheosis of this tension was an unsuccessful legislative effort to tax Wall Street bonuses by as much as 90%, which spurred talk of a "civil war" between Wall Street and the government. As a result, those banks that had the funds rushed to pay back the government's TARP investments and free themselves from political meddling. J.P. Morgan and Goldman Sachs were the first big US banks to pay back TARP.
In July 2009 the government-appointed TARP inspector criticized US officials for not being forthcoming enough on the use and deployment of TARP funds, and estimated that the government's total bailout exposure could rise as high as $24 trillion.
Last updated on 7 September 2009.
