Troubled Asset Relief Program

Introduction

The Troubled Asset Relief Program (TARP) set up under the Emergency Economic Stabilization Act, 2008, authorized the US Treasury Secretary a total of $700 billion to establish the TARP. TARP was originally intended to be a lending programme and one that would increase liquidity by encouraging the flow of credit between the banks and from banks to customers (US Treasury, 2008a, b). The idea was to enable the federal government to buy up to US$700 billion of illiquid mortgage-backed securities (MBS) and asset-backed securities (ABS) and thereby lubricate secondary mortgage markets (US Treasury, 2008a, c). It was also aimed at minimizing losses of the financial institutions owning the toxic assets and, thereby, inducing credit growth. The legislative intent is evident where the Economic Stabilization Act, 2008, states that the broader objectives of TARP are to provide stability to the US financial system, prevent disruption in the economy at large and financial system and protect the US taxpayer. However, in just about five weeks or so of the new enactment, the Treasury made a complete U-turn from buying toxic assets off the balance sheets of banks and financial institutions to purchasing non-voting preferred stock from the banks and institutions by directly investing TARP funds in them (US Treasury, 2008d). Despite doing so, not only has TARP failed to ensure liquidity, repair confidence and build trust in the banking system, but has also failed to redress the issues of encouraging lending to homeowners, counter massive foreclosures and contractions in the housing market and stop house prices from spiraling downwards (Congress Oversight Panel Report, 2009c; Barr, 2008; McIntyre, 2009).

Discussion

The first tranche of $250 billion of TARP money was used to pump in $167 billion in 87 banks in exchange for preferred stock and warrants (US Treasury, 2008e). The lion's share went to AIG, the failing insurance company, which received $40 billion (US Treasury, 2008f) and Citibank which received $45 billion of TARP funds in exchange for preferred stocks and warrants (Ericson, 2009). The Treasury also guaranteed $306 billion of troubled assets lying on Citibank's balance sheets in exchange for $4 billion of preferred stock and warrants. Eight other banks were deemed qualified to access about half the funds earmarked in the first tranche of TARP. An arguable issue is that TARP, till now, has neither managed to revive lending to homeowners nor mitigate foreclosures, but it has implicitly been used to support a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions (Congress Oversight Panel Report, 2009a; Hosking and Lewis, 2008).

It is estimated that in the ten transactions that were made under TARP upto mid-February 2008, Treasury received assets worth about $78 for each $100 spent on relatively healthy banks (eight transactions), and, about $41 for each $100 spent on riskier banks (two transactions) (Congress Oversight Panel Report, 2009a). It is also estimated that, on an average, in the ten transactions, the Treasury received assets worth only about $66 for each $100 spent (Congress Oversight ...