Troubled Asset Relief Program

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The Troubled Asset Relief Program, or TARP, was established by the Emergency Economic Stabilization Act of 2008 (EESA), to bail out financial institutions.

TARP Programs

According to the Special Inspector General for the Troubled Asset Relief Program, there are 12 announced programs that fall under the general rubric of the TARP, which are best understood in four general clusters:

  • Financial Institution Support Programs: "These programs share a common, stated goal of stabilizing the financial market to avoid disruption and provide for a healthy economy."[1]
  • Asset Support Programs: "These programs attempt to support asset values and liquidity in the market by providing funding to purchase securities."[1]
  • Automotive Industry Support Programs: "These programs all have a universal goal to stabilize the American automotive industry, promoting market stability and a vigorous economy."[1]
  • Homeowner Support Programs: "These programs encourage homeowner affordability by providing loan modification and refinancing assistance."[1]

Financial Institution Support Programs

  • Capital Purchase Program ("CPP"). Treasury created CPP to provide funds to "stabilize and strengthen the U.S. financial system by increasing the capital base of an array of healthy, viable institutions, enabling them [to] lend to consumers and business[es]. As of June 30, 2009, Treasury had invested $203.2 billion in institutions through CPP out of a maximum projected funding total of $218 billion under the program, of which $70.1 billion had been repaid.[1]
  • Capital Assistance Program ("CAP"). "Similar to CPP, the goal of CAP is to 'ensure the continued ability of U.S. financial institutions to lend to creditworthy borrowers in the face of a weaker than expected economic environment and larger than expected potential losses.' As originally envisioned by Treasury, CAP investments were to be targeted to financial institutions with more than $100 billion in assets and would be sized to provide a capital buffer to be determined by a Supervisory Capital Assessment Program ('SCAP' or 'stress test'). Treasury applied SCAP to 19 of the largest financial institutions and concluded that 10 of those institutions will be required to seek additional capital. Those failing to raise such capital in the private market will be required to take CAP funds; however, many financial institutions have raised significant funds on their own, which could seemingly limit their need for CAP. In addition to the required participants, all qualifying financial institutions may apply under CAP for additional capital without the stress-test requirement. As of June 30, 2009, no transactions had occurred under this program."[1]
  • Systemically Significant Failing Institutions Program ("SSFI"). "Under the stated terms of the SSFI program, Treasury invests in systemically significant institutions to prevent their failure and the market disruption that would follow. As of June 30, 2009, Treasury, through SSFI, had made, and is committed to make investments in, one institution -- AIG. This support was provided through two transactions -- $40 billion for the purchase of preferred stock from AIG and approximately $29.8 billion for an equity capital facility that AIG can draw on as needed. As of June 30, 2009, AIG had drawn down $1.15 billion in equity from the capital facility."[1]
  • Targeted Investment Program ("TIP"). "The stated objective of TIP is to make targeted investments in financial institutions “to avoid significant market disruptions resulting from the deterioration of one financial institution that can threaten other financial institutions and impair broader financial markets and pose a threat to the overall economy." As reported in SIGTARP’s Initial Report to Congress ("Initial Report"), dated February 6, 2009, Treasury purchased $20 billion of senior preferred stock and received warrants of common stock from both Citigroup and Bank of America, for a total expenditure of $40 billion in TARP funds. As of June 30, 2009, Treasury had made no additional funding available under this program. Subsequent to SIGTARP’s April Quarterly Report, Citigroup finalized an exchange offering that will convert preferred stock, including preferred shares acquired by Treasury through TIP/AGP and CPP, to trust preferred shares and common stock, respectively."[1]
  • Asset Guarantee Program ("AGP"). Through AGP, Treasury’s stated goal is to use insurance-like protections to help stabilize at-risk financial institutions. AGP provides certain loss protections on a select pool of mortgage-related or similar assets held by participants whose portfolios of distressed or illiquid assets pose a risk to market confidence. As discussed in SIGTARP’s Initial Report, Treasury, the Federal Deposit Insurance Corporation ("FDIC"), and the Federal Reserve agreed to provide certain loss protections with respect to $301 billion in troubled assets held by Citigroup. Treasury’s projected TARP investment through this program accounted for $5 billion in protection for Citigroup as of June 30, 2009. A similar arrangement with Bank of America was announced on January 16, 2009; Bank of America, however, recently requested not to go forward with the program. As of June 30, 2009, the matter had not yet been resolved."[1]

Asset Support Programs

"The purpose of these programs is to support the liquidity and market value of assets owned by financial institutions. These assets may include various classes of asset-backed securities ('ABS') and several types of loans. These programs seek to bolster the balance sheets of the financial firms and help free up capital so that financial institutions can extend more credit to support the U.S. economy."[1]

  • Term Asset-Backed Securities Loan Facility ("TALF"). TALF was originally designed to increase the credit available for consumer and small-business loans through a Federal Reserve loan program backed by TARP funds. TALF provides non-recourse loans to investors secured by certain types of asset-backed securities. Treasury and the Federal Reserve expanded TALF to cover additional asset classes, including newly issued and legacy commercial mortgage-backed securities ('CMBS') with the potential to expand into residential mortgage-backed securities ('RMBS'). TALF as originally announced was to be a $200 billion program that included $20 billion of TARP funds to be used for purchasing surrendered collateral. The facility can be expanded to $1 trillion of lending; according to Treasury, it will provide up to $80 billion of TARP funds to support this program, but according to the Federal Reserve, the amount for which Treasury would be responsible would be up to $100 billion. As of June 30, 2009, the Federal Reserve Bank of New York ('FRBNY') had facilitated four TALF subscriptions of non-mortgage-related ABS, totaling approximately $28.5 billion of TALF borrowing. TALF had also launched a subscription for newly issued CMBS in June, for which no loans were issued."[1]
  • Public-Private Investment Program ('PPIP'). "As originally announced, Treasury, in coordination with FDIC and the Federal Reserve, intended PPIP to improve the health of financial institutions and restart frozen credit markets through the purchase of legacy assets (e.g., legacy loans, CMBS, RMBS). In addition to the expansion of TALF to include legacy securities, as discussed previously, PPIP was intended to involve investments made through multiple Public-Private Investment Funds ('PPIFs') in two subprograms -- one to purchase real estate-related loans ('legacy loans') and the other to purchase real estate-related securities ('legacy securities') from financial institutions. However, as of June 30, 2009, the future of the legacy loans program is in doubt because FDIC has shelved the program. The legacy securities program is under development, and Treasury announced the selection of nine PPIF managers on July 8, 2009, that will receive up to $30 billion in TARP funds. Treasury has stated that PPIP, originally intended to involve up to $1 trillion in funds, is expected to utilize up to $75 billion of TARP funds."[1]
  • Unlocking Credit for Small Businesses ('UCSB'). "Under UCSB, Treasury announced that it will begin purchasing up to $15 billion in securities backed by Small Business Administration (“SBA”) loans. As demand has diminished in the secondary market for these securities due to adverse credit conditions, there has been a reduction in the volume of new small-business loans written by banks. As of June 30, 2009, no transactions had occurred under this program."[1]

Automotive Industry Support Programs

The stated objective of TARP’s automotive industry support programs is to "prevent a significant disruption of the American automotive industry, which would pose a systemic risk to financial market stability and have a negative effect on the economy of the United States."[1]

  • Automotive Industry Financing Program ('AIFP'). "Under this program, Treasury made emergency loans to Chrysler Holding LLC ('Chrysler'), Chrysler Financial Services Americas LLC ('Chrysler Financial'), and General Motors Corporation ('GM'). In addition to these investments, Treasury purchased senior preferred stock from GMAC LLC ('GMAC'). Subsequent to SIGTARP’s April Quarterly Report, the manufacturers (Chrysler and GM) were unable to obtain necessary concessions from key stakeholders and, therefore, filed for bankruptcy on April 30, 2009, and June 1, 2009, respectively. These bankruptcies involved infusion of additional TARP funds. As of June 30, 2009, Treasury had expended or committed $79.3 billion in AIFP investments, of which $130.8 million had been repaid."[1]
  • Auto Supplier Support Program ('ASSP'). "The stated purpose of ASSP is to provide Government-backed financing to break the adverse credit cycle affecting the auto suppliers and the manufacturers by providing suppliers with the confidence they need to continue shipping their parts and the support they need to help access loans to pay their employees and continue their operations.' Treasury’s commitment under this program was $5 billion as of June 30, 2009 -- $3.5 billion for GM and $1.5 billion for Chrysler."[1]
  • Auto Warranty Commitment Program ('AWCP'). "The Auto Warranty Commitment Program was designed by the Administration with the intention of bolstering consumer confidence in automobile warranties on GM- and Chrysler-built vehicles. Under this program, Government-backed financing was to be provided for the warranties of cars sold during the GM and Chrysler restructuring periods. As of June 30, 2009, Treasury funded $640.7 million toward this program -- $360.6 million was made available to GM and $280.1 million was made available to Chrysler. However, Treasury has stated that the funds are not expected to be used by the manufacturers. Treasury expects that after GM and Chrysler fully emerge from bankruptcy, the committed funds will be refunded to Treasury."[1]

Homeowner Support Programs

Making Home Affordable Program ('MHA')." According to Treasury, MHA is a foreclosure mitigation plan intended to help bring relief to responsible homeowners struggling to make their mortgage payments while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure, such as lower housing prices, increased crime, and higher taxes.” Treasury, along with other Federal agencies, will undertake a comprehensive multiple-part strategy, which will provide for (i) a $75 billion loan modification program for homeowners in default on their payments or facing imminent default, (ii) a streamlined refinancing process for homeowners whose loans are serviced by Fannie Mae or Freddie Mac, and (iii) approximately $200 billion to support Fannie Mae and Freddie Mac. The funds for this effort will be provided from both TARP- and non-TARP-related sources. Treasury announced that up to $50 billion of TARP funds could be expended for this program. As of June 30, 2009, $18 billion had been allocated to the program."[1]

Outstanding Debt

In April, 2012 the U.S. Department of the Treasury claimed that the government is expected to realize a positive return for taxpayers. "Overall, the government is now expected to at least break even on its financial stability programs and may realize a positive return. Treasury’s TARP investments and overall stake in AIG, purchase of mortgage-backed securities, and Money Market Fund guarantee program are each currently expected to realize an overall positive return for taxpayers," said the report. [2]

A week later SIGTARP (The Office of the Special Inspector General for the TARP) released their own report that poured ice water on the seemingly overly optimistic Treasury. ""It is a widely held misconception that TARP will make a profit...... As of March 31, 2012, $470.1 billion is obligated to TARP programs.6 Of that amount, $414.6 billion had been spent and $50.2 billion remained obligated and available to be spent. Taxpayers are owed $118.5 billion as of March 31, 2012. The table below from SIGTARP report lists the most recent TARP program estimates from three agencies," said the report. [3]

According to SIGTARP's report, the difference in the TARP cost estimates from the three agencies are mainly in the assumptions regarding the value for AIG, GM, Ally, etc. stocks, future funds spent/received, and inclusion/exclusion of certain write-offs. So essentially, it is difficult to come up with a good estimate as there's not a clear guideline for "assumptions."

SIGTARP report indicated $50.2 billion of TARP funds remain available as of March 31, 2012 to be drawn down by TARP recipients under three of TARP’s 13 announced programs mainly supporting banking, housing and auto sectors. That means the $118.5 billion TARP loss concluded by SIGTARP could get even worse as more fund is still to be disbursed. [4]

Articles and resources

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References

  1. 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 Special Inspector General for the Troubled Asset Relief Program, "Quarterly Report to Congress", Office of the Special Inspector General for the Troubled Asset Relief Program, July 21, 2009. (Pdf)
  2. Tim Massad, The Response to the Financial Crisis – In Charts, U.S. Department of Treasury, April 13, 2012
  3. EconMatters, Myth Buster: U.S. Treasury Says TARP Bailout May Realize A Positive Return for Taxpayers?, Business Insider, April 28, 2012
  4. EconMatters, Myth Buster: U.S. Treasury Says TARP Bailout May Realize A Positive Return for Taxpayers?, Business Insider, April 28, 2012

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