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Troubled Asset Relief Program (TARP)

Troubled Asset Relief Program (TARP). Eric Revell BA 543 Financial Markets & Institutions 5/7/2013. Crisis in the Finance World. Subprime mortgages cause a wave of defaults among over-leveraged homeowners. Home values plummet as the defaults lower property values.

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Troubled Asset Relief Program (TARP)

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  1. Troubled Asset Relief Program(TARP) Eric Revell BA 543 Financial Markets & Institutions 5/7/2013

  2. Crisis in the Finance World • Subprime mortgages cause a wave of defaults among over-leveraged homeowners. • Home values plummet as the defaults lower property values. • Banks suffer massive losses on Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), and Credit Default Swaps (CDS). • The US economy drags the global economy into a recession.

  3. Insolvent Investment Banks • Bear Stearns had collapsed in March 2008, was sold to JPMorgan Chase with the help of the government. • Bank of America purchases the failing Merrill Lynch on 9/14/2008. • The next day, Lehman Brothers files for bankruptcy after a buyout by Barclays is delayed. • AIG’s liquidity problem becomes apparent to the market, government begins trying to find a solution on 9/16/2008.

  4. Government Contemplates Action • News of a potential bailout of the financial sector emerges from Washington on September 18, markets react positively. • The first vote on the Emergency Economic Stabilization Act that would create TARP fails in the House of Representatives on September 29. • The Dow Jones Industrial Average suffers its largest point drop in history, erasing $1.2 trillion of investor wealth.

  5. Congress Passes TARP Legislation • On October 3, the Emergency Economic Stabilization Act is passed by Congress and signed into law within hours by President Bush. • Allows the US Treasury to purchase or insure up to $700 billion of troubled assets, including: • Residential/Commercial mortgages & their derivatives. • Any other financial instrument deemed by Treasury Secretary & Federal Reserve Board of Governors to promote financial market stability.

  6. Key Figures Involved Ben Bernanke • Chairman of the Federal Reserve Hank Paulson • Secretary of the Treasury Timothy Geithner • President of the Federal Reserve Bank of New York

  7. Financial Markets Still Troubled • The original TARP strategy hasn’t solved the problems in the world of finance. • Markets are uncertain about how the program will be implemented, what institutions are the targets, and how quickly the purchases can take place. • The Dow Jones continues to plummet. • What to do next?

  8. Same Goal  New Strategy • Secretary Paulson met with British Prime Minister Gordon Brown on October 11, who had used this strategy on his country’s financial sector. • Because of the issues with using troubled asset purchases, the Fed and Treasury switch to equity injections. • Adding equity allowed banks a cushion to insulate from losses on their troubled assets.

  9. Distribution of TARP Funds • On October 11, the Congressional Budget Office estimated that disbursements would only be about $475 billion of the $700 billion allotted.

  10. Did the Bailouts Work? • Between the TARP bailout of the financial sector, and the government takeover of Fannie Mae & Freddie Mac, the government spent $606 billion. • Of these funds, $480 billion has been returned, nearly all of it from TARP recipients in the form of refunds, dividends, interest, and stock warrants. • The Dow Jones bottomed out at 6626 points on March 6, 2009. • The Financial Stability Board, an international monitoring body, has declared 8 American banks as being “systemically important financial institutions” that are “too big to fail.” • All of these banks received TARP funds.

  11. References • http://projects.propublica.org/bailout/ • http://projects.propublica.org/bailout/programs/1-capital-purchase-program • http://projects.propublica.org/bailout/initiatives/2-emergency-economic-stabilization-act • http://www.financialstabilityboard.org/publications/r_111104bb.pdf • https://www.youtube.com/watch?v=2DgpdrespVE

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