Definition
The Troubled Asset Relief Program (TARP) was initiated by the U.S. government in October 2008 as a response to the financial crisis that saw many major financial institutions on the brink of collapse. Enacted under the Emergency Economic Stabilization Act of 2008, TARP aimed to stabilize the country’s economy, restore confidence in the banking system and avoid a complete financial meltdown.
Key Components of TARP
- Capital Purchase Program (CPP): Infused capital into banks by purchasing equity shares.
- Targeted Investment Program (TIP): Targeted investments in financial institutions critical to financial stability.
- Asset Guarantees: Provided protection against potential losses on certain troubled assets.
- Consumer and Business Lending Initiative (CBLI): Enhanced credit availability to households and businesses.
- Auto Industry Financing Program (AIFP): Offered funding to support the American automotive industry.
TARP officially ended on October 3, 2014, with many of the investments resulting in profits rather than losses for the federal government.
Examples
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Capital Injection into Banks:
- The U.S. Treasury used TARP to purchase $245 billion in preferred stock to shore up the capital positions of banks like Citigroup and Bank of America.
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Automotive Industry Bailout:
- TARP provided $80 billion to General Motors and Chrysler to prevent their collapse, saving thousands of jobs and helping stabilize the automotive industry.
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Mortgage-Backed Securities:
- TARP purchased millions of dollars’ worth of mortgage-backed securities to improve liquidity in mortgage markets and support housing finance.
Frequently Asked Questions (FAQs)
What was the total cost of TARP to taxpayers?
While an initial allocation of up to $700 billion was authorized for TARP, the actual amount disbursed was approximately $426.4 billion. When accounting for repayments, dividends, interest, and other income, TARP ultimately resulted in a net cost of about $21 billion to taxpayers.
Which entities received funds under TARP?
TARP funds were distributed to banks, insurance companies, and automobile manufacturers. Prominent recipients included Citigroup, Bank of America, AIG, General Motors, and Chrysler.
Did TARP achieve its goals?
TARP is generally considered successful in stabilizing the financial system and preventing a deeper economic downturn. Many institutions that received TARP funds repaid them with interest, and the banking sector showed significant signs of recovery.
Related Terms
- Emergency Economic Stabilization Act of 2008: Legislation aimed at addressing the financial crisis by authorizing TARP and other measures.
- Capital Purchase Program (CPP): A TARP component that involved buying equity in banks to bolster their capital.
- Mortgage-Backed Securities (MBS): Financial securities backed by a pool of mortgages, which were key assets targeted by TARP.
- Systemically Important Financial Institutions (SIFIs): Large financial institutions whose failure could trigger a financial crisis, many of which benefited from TARP.
Online References
- U.S. Department of the Treasury – TARP Programs
- Congressional Budget Office – Report on the Troubled Asset Relief Program
- Federal Reserve – Policy Tools: TARP
Suggested Books for Further Studies
- “Too Big to Fail” by Andrew Ross Sorkin
- “The Financial Crisis Inquiry Report” by Financial Crisis Inquiry Commission
- “Brave New World Economy: Global Finance Threatens Our Future” by Wilhelm Hankel and Robert Isaak
- “After the Music Stopped” by Alan S. Blinder
Accounting Basics: Troubled Asset Relief Program (TARP) Fundamentals Quiz
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