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The Troubled Asset Relief Program (TARP)

The Troubled Asset Relief Program (TARP). Nathan Kintz BA 543 Noon 5/4/2011. Agenda. How did TARP come to be? (problem) What were TARP’s original objectives? How was TARP actually used? Recipients – GM example How much has been paid back? The Take-Away. The Subprime Mortgage Crisis.

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The Troubled Asset Relief Program (TARP)

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  1. The Troubled Asset Relief Program (TARP) Nathan Kintz BA 543Noon 5/4/2011

  2. Agenda • How did TARP come to be? (problem) • What were TARP’s original objectives? • How was TARP actually used? • Recipients – • GM example • How much has been paid back? • The Take-Away

  3. The Subprime Mortgage Crisis • Varying interest rates of subprime mortgages • Start with attractive low fixed rate (for 2-5 yrs.) • Adjust annually to prime rates plus ~5% • Nonrecourse loans • House values peaked than fell rapidly (2006) • Interest rates shot up • MORTGAGE EXAMPLE

  4. Housing Prices…

  5. TARP Defined • Allowed US Department of Treasury to purchase/insure up to $700B of “troubled assets”, defined as: • (A) residential or commercial mortgages and any securities, obligations, 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

  6. TARP Original Goals • Improve the liquidity of these assets • Financial market stability/relief to struggling home owners • Defines “financial institutions” eligible for the bailout as: • Any bank, savings association, credit union, security broker or dealer, or insurance company. • Encourage banks to resume lending again at levels seen before the crisis: • To each other and to consumers and businesses

  7. What happens eventually? • http://nation.foxnews.com/business/2010/02/24/obamas-tarp-slush-fund

  8. TARP’s Many Modifications • Beginning of Oct. 2008. TARP PASSED • Revised on October 14, 2008 • Revised on November 12, 2008 • Revised on December 19, 2008 • Revised on December 31, 2008 • Revised on January 15, 2009 • Revised on January 21, 2009 • Revised on February 5, 2009 • Revised on February 10, 2009 • Revised on March 23, 2009 • Revised on April 19, 2009

  9. General Motors Example • Government has given GM $52B (6.7 loan) • 61% equity • Nov. 2010 IPO, sold $13.5B worth of GM shares • 33% equity left • Government has recovered $23B • Taxpayer break even? • Not likely: stock price ~$30 • Shares need to sell at $53 to break even • ~$11B loss if sold right now • Paid back $6.7B loan? • Sort of…

  10. The Take-Away • TARP was designed to stabilize the financial markets • Would’ve been more successful if implemented as intended and monitored/enforced • It has become essentially a slush fund • Commingled with stimulus spending • Start saving up…

  11. Because we will be paying for this large error throughout our lifetime in the form of future taxes…

  12. Citations • http://blog.mortgagereclaims.com/mortgagereclaims/sub-prime-mortgage-interest-rates-explained/ • http://en.wikipedia.org/wiki/Subprime_mortgage_crisis • http://www.visualeconomics.com/a-detailed-look-at-tarp/ • http://nation.foxnews.com/business/2010/02/24/obamas-tarp-slush-fund • http://online.wsj.com/article/SB126021634147080567.html • http://online.wsj.com/article/SB10001424052748703916004576271382418887092.html?mod=WSJ_hp_mostpop_read • http://abcnews.go.com/Business/Economy/story?id=5932586&page=1 • http://www.npr.org/blogs/money/2009/11/the_morning_report_gm_will_pay_back_loan_early_tarp_likely_to_remain_through_2011.html • http://online.wsj.com/article/SB122969367595121563.html • http://www.forbes.com/2009/02/04/tarp-treasury-congress-business-beltway_0205_tarp.html

  13. QUESTIONS?

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