Troubled Asset Relief Program (TARP) was created by the Emergency Economic Stabilization
Act (EESA; P.L. 110-343) in October 2008. EESA was enacted to address an ongoing
financial crisis that reached near-panic proportions in September 2008. The act
granted the Secretary of the Treasury authority to either purchase or
insure up to $700 billion in troubled assets owned by financial
institutions. This authority was granted for up to two years from the date
of enactment and was very broad. In particular, the definitions of both “troubled
asset” and “financial institution” allowed the Secretary wide leeway in
deciding what assets might be purchased or guaranteed and what might
qualify as a financial firm.
The financial crisis grew out of an unprecedented housing boom that turned into
a housing bust. Much of the lending for housing during the boom was based
on asset-backed securities that used the repayment of housing loans as the
basis of these securities. As housing prices fell and mortgage defaults
increased, these securities became illiquid and fell sharply in value, causing capital
losses for firms holding them. Uncertainty about future losses reduced many
firms’ access to private liquidity, with the loss in liquidity being
catastrophic in some cases. September 2008 saw the government takeover of
Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, and the
near collapse of AIG, which was saved only by an $85 billion loan from the Federal
Reserve. There was widespread lack of trust in the financial markets as
participants were unsure which firms might be holding so-called toxic
assets that might now be worth much less than previously estimated, and
thus making these firms unreliable counterparties in financial transactions.
This prevented firms from accessing credit markets to meet their liquidity
As EESA moved through Congress, most attention was focused on the idea of the
government purchasing mortgage-related toxic assets, thus alleviating the
widespread uncertainty and suspicion by cleaning up bank balance sheets.
The initial TARP Capital Purchase Program, however, directly added capital
onto banks’ balance sheets through preferred share purchases, rather than
removing assets that had become liabilities through purchasing mortgage-related assets.
Several other TARP programs followed, including an asset guarantee program;
programs designed to spur consumer and business lending; financial support
for companies such as AIG, GM, and Chrysler; and programs to aid
homeowners at risk of foreclosure. Eventually, the Public-Private
Investment Program resulted in the purchase of some mortgage-related assets,
but this has remained a relatively small part of TARP. Most of the TARP
programs are now closed.
With the immediate crisis subsiding through 2009, congressional attention to
financial services turned largely to consider broad regulatory changes.
The resulting Dodd-Frank Act (P.L. 111-203) amended the TARP authority,
including (1) reduction of the overall amount to $475 billion; (2) removal
of the ability to reuse TARP funds that had been repaid; and (3) removal of the
authority to create new TARP programs or initiatives. The original TARP
authority to purchase new assets or enter into new contracts expired on
October 3, 2010. Outlays under the existing contracts, however, may
continue through the life of these contracts. Overall budget-cost estimates for TARP
have decreased significantly since the passage of EESA, with the latest
Congressional Budget Office estimates foreseeing $24 billion in costs and
the latest Office of Management and Budget estimates foreseeing $63
billion in costs. Most of these costs are from aid for homeowners, for the
insurer AIG, and for U.S. automakers. The assistance to banks is generally showing
a gain for the government. In the 112th Congress, several bills have been
introduced to repeal all or part of TARP, including H.R. 189, H.R. 430,
H.R. 830, H.R. 839, H.R. 1315, S. 162 and S. 527.
Date of Report: October 19, 2012
Number of Pages: 33 Order Number: R41427 Price: $29.95
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