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115-569: The TARP originally authorized expenditures of $ 700 billion. The Emergency Economic Stabilization Act of 2008 created the TARP. The Dodd–Frank Wall Street Reform and Consumer Protection Act , signed into law in 2010, reduced the amount authorized to $ 475 billion (approximately $ 648 billion in 2023). By October 11, 2012, the Congressional Budget Office (CBO) stated that total disbursements would be $ 431 billion, and estimated

230-482: A Wall Street Journal opinion piece, Senator Hillary Clinton advocated addressing the rate of mortgage defaults and foreclosures that ignited this crisis, not just bailing out Wall Street firms: "If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders." She proposed a new Home Owners' Loan Corporation (HOLC), similar to that used after the Depression and which

345-524: A $ 15.3 billion profit (an annualized rate of return of 0.6%), which may have been a loss when adjusted for inflation. After the freeing up of world capital markets in the 1970s and the repeal of the Glass–Steagall Act in 1999, banking practices (mostly Greenspan -inspired "self-regulation") and monetized subprime mortgages sold as low risk investments reached a critical stage during September 2008, characterized by severely contracted liquidity in

460-496: A 38 percent (or $ 9.5 billion) subsidy. As of June 30, 2012, $ 467 billion had been allotted, and $ 416 billion spent, according to a literature review on the TARP. Among the money committed, includes: The Congressional Budget Office released a report in January 2009, reviewing the transactions enacted through the TARP. The CBO found that through December 31, 2008, transactions under the TARP totaled $ 247 billion. According to

575-625: A January 2012, review, it was reported that AIG still owed around $ 50 billion, GM about $ 25 billion and Ally about $ 12 billion. Break even on the first two companies would be at $ 28.73 a share versus then-current share price of $ 25.31 and $ 53.98 versus then-current share price of $ 24.92, respectively. Ally was not publicly traded. The 371 banks that still owed money include Regions ($ 3.5 billion), Zions Bancorporation ($ 1.4 billion), Synovus Financial Corp. ($ 967.9 million), Popular, Inc. ($ 935 million), First BanCorp of San Juan, Puerto Rico ($ 400 million) and M&T Bank Corp. ($ 381.5 million). Some in

690-576: A Senate debate on Wednesday. In an early morning news conference, on Monday September 29, President George W. Bush expressed confidence that the bill would pass Congress, and that it would provide relief to the U.S. economy. A number of House Republicans remained opposed to the deal and intended to vote against it. That same day, the legislation for the bailout was put before the United States House of Representatives and failed 205–228, with one not voting. Democrats voted 140–95 in favor of

805-404: A block of further coupons. Not all bonds have coupons. Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0%. Such bonds make only one payment: the payment of the face value on the maturity date. Normally, to compensate the bondholder for the time value of money , the price of a zero-coupon bond will always be less than its face value on any date of purchase before

920-574: A booming market until 2007, when they were hit by widespread foreclosures on the underlying loans. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses. TARP does not allow banks to recoup losses already incurred on troubled assets, but officials expect that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and

1035-471: A crisis from happening again. Former Federal Reserve Chairman Alan Greenspan supported the Paulson plan. Investor Warren Buffett says he could put in $ 10B plus $ 90B nonrecourse debt ; that is, without having to repay beyond $ 10B if mortgages did not repay. (This is 10 to 1 leverage , 10 times upside with 1 times downside.) He also said that the government should pay market price, which may be below

1150-525: A foreign bank, U.S. savings banks or credit unions, U.S. broker-dealers, U.S. insurance companies, U.S. mutual funds or other U.S. registered investment companies, tax-qualified U.S. employee retirement plans, and bank holding companies. The President was to submit a law to cover government losses on the fund, using "a small, broad-based fee on all financial institutions". To participate in the bailout program, "...companies will lose certain tax benefits and, in some cases, must limit executive pay . In addition,

1265-489: A fraction of such funds to recapitalize their bank subsidiaries. Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 , also known as the " bank bailout of 2008 " or the " Wall Street bailout ", was a United States federal law enacted during the Great Recession , which created federal programs to "bail out" failing financial institutions and banks . The bill

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1380-401: A frequent commenter on TARP related issues, also pointed to excessive misinformation and erroneous analysis surrounding the U.S. toxic asset auction plan. Removing toxic assets would also reduce the volatility of banks' stock prices. This lost volatility would hurt the stock price of distressed banks. Therefore, such banks would only sell toxic assets at above market prices. On April 19, 2009,

1495-650: A plan under which the U.S. Treasury would acquire up to $ 700 billion worth of mortgage-backed securities. The plan was immediately backed by President George W. Bush and negotiations began with leaders in the U.S. Congress to draft appropriate legislation. Paulson and Chair of the Federal Reserve Ben Bernanke had a dramatic meeting on Thursday, September 18, 2008, with Congressional leaders, to whom Bernanke reportedly said: "If we don't do this, we may not have an economy on Monday". Consultations among Treasury Secretary Henry Paulson, Chairman of

1610-521: A risky investment, as opposed to an expense. The MBS within the scope of the purchase program have rights to the cash flows from the underlying mortgages. As such, the initial outflow of government funds to purchase the MBS would be offset by ongoing cash inflows represented by the monthly mortgage payments. Further, the government eventually may be able to sell the assets, though whether at a gain or loss will remain to be seen. While incremental borrowing to obtain

1725-421: A set spending limit, $ 250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the coupons . The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets. The initial $ 250 billion could be increased to $ 350 billion upon the president 's certification to Congress that such an increase

1840-404: A short list of criteria based on a secret ratings system they use to gauge this. The New York Times stated: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail . Some lawmakers are upset that

1955-503: Is an open item. On February 10, 2009, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the $ 300 billion (~$ 414 billion in 2023) or so dollars remaining in the TARP funds. He mentioned that the U.S. Treasury and Federal Reserve wanted to help fund private investors to buy toxic assets from banks, but few details have yet been released. There is still some skepticism about

2070-666: Is still outstanding, some of which has been converted to common stock, from just under $ 125 million down to $ 7,000. Sums loaned to entities that have gone into, and in some cases emerged from bankruptcy or receivership are provided. Additional sums have been written off, for example Treasury's original investment of $ 854 million in Old GM. The May 2015 report also detailed other costs of the program, including $ 1.157 billion "for financial agents and legal firms" $ 142 million for personnel services, and $ 303 million for "other services". The banks agreeing to receive preferred stock investments from

2185-470: The 2007–2008 financial crisis included: mortgage assistance proposals try to increase the value of the asset base while limiting the disruption of foreclosure; bank recapitalization through equity investment by the government; asset liquidity approaches to engage market mechanisms for valuing troubled assets; and financial market reforms promoting transparency and conservatism to restore trust by market investors. This process consisted of nationalizing most of

2300-503: The 2007–2008 financial crisis to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008. It was being used to classify the nation's 8,500 banks into five categories, where a ranking of 1 means they are most likely to be helped and a 5 most likely to not be helped. Regulators were applying

2415-555: The Dow Jones Industrial Average dropped more than 700 points and fell below 10,000 for the first time in four years. The same day, CNN reported these worldwide stock market events: Britain's FTSE 100 Index was down 7.9%; Germany's DAX down 7.1%; France's CAC 40 dropping 9%; In Russia, trading in shares was suspended after the RTS stock index fell more than 20%; Iceland halted trading in six bank stocks while

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2530-691: The Federal takeover of Fannie Mae and Freddie Mac ). The cost of the S&;L crisis amounted to 3.2 percent of GDP during the Reagan/Bush era, while the GDP percentage of the TARP cost was estimated at less than 1 percent. The primary purpose of TARP, according to the Federal Reserve, was to stabilize the financial sector by purchasing illiquid assets from banks and other financial institutions. However,

2645-749: The New York Stock Exchange along with labor union members organized by New York Central Labor Council. Other grassroots groups have planned rallies to protest against the bailout, while outraged citizens continue to express their opposition online through blogs and dedicated web sites. Supporters of the plan included presidential candidates Barack Obama and John McCain , and British Prime Minister Gordon Brown . Critics included Senator Bernie Sanders , Former Arkansas Governor Mike Huckabee , Congressman Ron Paul , Libertarian presidential candidate Bob Barr , and Senators Christopher Dodd , Richard Shelby , and Jim Bunning . In

2760-637: The Obama administration outlined the conversion of the TARP loans to common stock . The program was run by the Treasury's new Office of Financial Stability . According to a speech made by Neel Kashkari , the fund would be split into the following administrative units: Eric Thorson was the Inspector General of the US Department of the Treasury and was responsible for the oversight of

2875-502: The Resolution Trust Corporation took during the savings and loan crisis of the 1980s: "What we did, we took over the bank, nationalized it, fired the management, took out the bad assets and put a good bank back in the system." In hindsight, economists generally agree that unemployment would have been significantly higher without the program. Suggested alternative approaches to address the issues underlying

2990-525: The Treasury continued to examine the usefulness of targeted asset purchases. The 2007–2008 financial crisis developed partly due to the subprime mortgage crisis , causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group . Seeking to prevent the collapse of the financial system , Secretary of the Treasury Paulson called for

3105-722: The United States Department of the Treasury to establish and manage TARP under a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424 , enacting the Emergency Economic Stabilization Act of 2008 and several other acts. On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model

3220-546: The "Asset Guarantee Program." The report indicated that the program would likely not be made "widely available." On January 15, 2009, the Treasury issued interim final rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program (CPP). Six days later, the Treasury announced new regulations regarding disclosure and mitigation of conflicts of interest in its TARP contracting. On February 5, 2009,

3335-450: The "coupon rate", which is calculated by adding the sum of coupons paid per year and dividing it by the bond's face value . For example, if a bond has a face value of $ 1,000 and a coupon rate of 5%, then it pays total coupons of $ 50 per year. Typically, this will consist of two semi-annual payments of $ 25 each. The origin of the term "coupon" is that bonds were historically issued in the form of bearer certificates . Physical possession of

3450-648: The CBO's report, the Treasury had purchased $ 178 billion in shares of preferred stock and warrants from 214 U.S. financial institutions through its Capital Purchase Program (CPP). This included the purchase of $ 40 billion of preferred stock in AIG, $ 25 billion of preferred stock in Citigroup, and $ 15 billion of preferred stock in Bank of America. The Treasury also agreed to lend $ 18.4 billion to General Motors and Chrysler. The Treasury,

3565-500: The Congressional Oversight Panel concluded that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The COP found the Treasury paid $ 254 billion, for which it received assets worth approximately $ 176 billion, for a shortfall of $ 78 billion. The COP's valuation analysis assumed that "securities similar to those issued under the TARP were trading in

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3680-508: The FDIC and the Federal Reserve have also agreed to guarantee a $ 306 billion portfolio of assets owned by Citigroup. The CBO also estimated the subsidy cost for transactions under TARP. The subsidy cost is defined as, broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions, where the assets in question were valued using procedures similar to those specified in

3795-533: The Federal Credit Reform Act (FCRA), but adjusting for market risk as specified in the EESA. The CBO estimated that the subsidy cost of the $ 247 billion in transactions before December 31, 2008, amounts to $ 64 billion. As of August 31, 2015, TARP is projected to cost approximately $ 37.3 billion total—significantly less than the $ 700 billion originally authorized by Congress. The May 2015 report of

3910-402: The Federal Reserve Ben Bernanke , U.S. Securities and Exchange Commission chairman Christopher Cox , congressional leaders, and President Bush, moved forward efforts to draft a proposal for a comprehensive solution to the problems created by illiquid assets . News of the coming plan resulted in some stock, bond, and currency markets stability on September 19, 2008. The proposal called for

4025-659: The Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). The initial size of the Public Private Investment Partnership was projected to be $ 500 billion. Economist and Nobel Prize winner Paul Krugman had been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors. Banking analyst Meredith Whitney argued that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Economist Linus Wilson,

4140-625: The House put the resulting effort, the Emergency Economic Stabilization Act of 2008, to a vote. It did not pass. US stock markets dropped 8 percent, the largest percentage drop since Black Monday in 1987 . Congressional leaders, including both presidential candidates, started working with the Bush Administration and the Treasury department on key negotiation points as they worked to finalize the plan. Key items under discussion included: Just after midnight Sunday, September 28, leaders of

4255-525: The Paulson proposal states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." This provision was not included in the final version. In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the $ 700 billion (~$ 973 billion in 2023) bailout: In his testimony before

4370-692: 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". In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations , which were sold in

4485-483: The Senate and House, along with Treasury Secretary Paulson, announced a tentative deal had been reached to permit the government purchase of up to $ 700 billion in mortgage backed securities to provide liquidity to the security holders, and to stabilize U.S. financial firms and markets. The bill was made final later that Monday morning. A debate and vote was scheduled for the House for Monday, September 29, to be followed by

4600-512: The Senate approved changes to the TARP that prohibited firms receiving TARP funds from paying bonuses to their 25 highest-paid employees. The measure was proposed by Christopher Dodd of Connecticut as an amendment to the $ 900 billion economic stimulus act then waiting to be passed. On February 10, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the remaining $ 300 billion or so in TARP funds. He intended to direct $ 50 billion towards foreclosure mitigation and use

4715-533: The Senate forced passage of the unpopular version through the opposing house by " sweetening " the bailout package. On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424 , which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424. The Senate accepted the amendment and passed the entire amended bill, voting 74–25. Additional unrelated provisions added an estimated $ 150 billion to

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4830-447: The TARP but expressed concerns about the difficulty of properly overseeing the complex program in addition to his regular responsibilities. Thorson called oversight of TARP a "mess" and later clarified this to say "The word 'mess' was a description of the difficulty my office would have in providing the proper level of oversight of the TARP while handling its growing workload, including conducting audits of certain failed banks and thrifts at

4945-468: The TARP to Congress stated that $ 427.1 billion had been disbursed, total proceeds by April 30, 2015, were $ 441.8 billion, exceeding disbursements by $ 14.1 billion, though this included $ 17.7 billion in non-TARP AIG shares. The report predicted a total net cash outflow of $ 37.7 billion (excluding non-TARP AIG shares), based on the assumption the TARP housing programs' ( Hardest Hit Fund , Making Home Affordable and FHA refinancing) funds are fully taken up. Debt

5060-415: The Treasury to purchase or insure up to $ 700 billion of "troubled assets," defined as "(A) residential or commercial obligations will be bought, 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

5175-547: The Treasury Secretary in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money. On November 12, 2008, Paulson indicated that reviving

5290-433: The Treasury include Goldman Sachs Group Inc. , Morgan Stanley , J.P. Morgan Chase & Co. , Bank of America Corp. (which had just agreed to purchase Merrill Lynch ), Citigroup Inc. , Wells Fargo & Co. , Bank of New York Mellon and State Street Corp. The Bank of New York Mellon is to serve as master custodian overseeing the fund. The U.S. Treasury maintains an official list of TARP recipients and proceeds to

5405-505: The Treasury itself. The concept of future gains from troubled assets comes from the hypothesis in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate. The Emergency Economic Stabilization Act of 2008 (EESA) requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in

5520-416: The Treasury to be a patsy ." Mr. Buffett's company owns financial companies which will benefit directly or indirectly. Investor George Soros opposed the original Paulson plan: "Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process

5635-417: The Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief." – but called Barack Obama 's list of conditions for the plan "the right principles". Other critics included Carl Icahn Jim Rogers , and William Seidman . Seidman compared the bailout with action he and his team at

5750-578: The U.S. Senate on September 23, 2008, Fed Chairman Ben Bernanke also summarized the rationale for the $ 700 billion (~$ 973 billion in 2023) bailout: Regarding the $ 700 billion number, Forbes.com quoted a Treasury spokeswoman: "It's not based on any particular data point. We just wanted to choose a really large number." According to CNBC commentator Jim Cramer , large corporations, institutions, and wealthy investors were pulling their money out of bank money market funds, in favor of government-backed Treasury bills . Cramer called it "an invisible run on

5865-448: The U.S. Treasury will provide the remaining assets. The second program was called the legacy securities program, which would buy residential mortgage backed securities (RMBS) that were originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which were rated AAA. The funds would come in many instances in equal parts from the U.S. Treasury's TARP monies, private investors, and from loans from

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5980-473: The U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions. His proposal was initially rejected by Congress, but the bankruptcy of Lehman Brothers and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343 . Early estimates for the bailout's risk cost were as much as $ 700 billion; however, TARP recovered $ 441.7 billion from $ 426.4 billion invested, earning

6095-420: The average rate was 6.09%, still far below the average rate during the early 1990s recession , when it topped 9.0%. There was concern that the current plan created a conflict of interest for Paulson. Paulson was a former CEO of Goldman Sachs , which stood to benefit from the bailout. Paulson had hired Goldman executives as advisors and Paulson's former advisors had joined banks that were also to benefit from

6210-400: The bailout. Furthermore, the original proposal exempted Paulson from judicial oversight . Thus, there was concern that former illegal activity by a financial institution or its executives might be hidden. The Treasury staff member responsible for administering the bailout funds was Neel Kashkari , a former vice-president at Goldman Sachs . In the Senate, Senator Judd Gregg (R-NH) was

6325-575: The bankruptcy of Lehman Brothers . The legislation had its origin in early 2008 when Secretary of the Treasury Henry Paulson directed two of his aides, Neel Kashkari and Phillip Swagel , to write a plan to recapitalize the U.S. financial system in case of total collapse. The plan, which was also presented to Federal Reserve Chairman Ben Bernanke , called for the U.S. government to purchase about $ 500 billion in distressed assets from financial institutions. The original proposal

6440-479: The banks," one that has no lines in the lobby but pushes banks to the breaking point nonetheless. As a bank's capital reserve of deposits evaporate, so too does its ability to lend and correspondingly make money. "The lack of confidence inspired by Lehman's demise, the general poor health of many banks, this is going to turn this into an intractable moment," Cramer said, "if someone in the government doesn't start pushing for more deposit insurance." Skepticism regarding

6555-475: The bill limits ' golden parachutes ' and requires that unearned bonuses be returned." The fund had an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There was also an inspector general to protect against waste, fraud and abuse. CAMELS ratings (US supervisory ratings used to classify the nation's 8,500 banks) were being used by the United States government in response to

6670-455: The capital markets at fair values" and employed multiple approaches to cross-check and validate the results. The value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. For example, the COP found that the Treasury bought $ 25 billion of assets from Citigroup on October 14, 2008, however, the actual value was estimated to be $ 15.5, creating

6785-429: The capitalization program will end up culling banks in their districts. However, The Wall Street Journal suggested that some lawmakers are actively using TARP to funnel money to weak regional banks in their districts. Academic studies have found that banks and credit unions located in the districts of key Congress members had been more likely to win TARP money. Known aspects of the capitalization program "suggest that

6900-438: The carry value. Buffett says "I would think they might insist on the directors of the institutions that participate in this program waiving all director's fees for a couple of years. They should, maybe, eliminate bonuses." Buffett says "if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, ... . You don't want

7015-448: The certificate was (deemed) proof of ownership. Several coupons, one for each scheduled interest payment, were printed on the certificate. At the date the coupon was due, the owner would detach the coupon and present it for payment (an act called "clipping the coupon"). The certificate often also contained a document called a talon , which (when the original block of coupons had been used up) could be detached and presented in exchange for

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7130-441: The company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure was designed to protect the government by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if

7245-509: The cost of the package and increased the length of the bill to 451 pages. ( See Public Law 110-343 for details on the added provisions.) The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263–171 to enact the bill into law. President George W. Bush signed the bill into law within hours of its congressional enactment, creating the $ 700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets. On Monday, October 6,

7360-493: The date of the Bear Stearns bailout. One of the more difficult issues that the Treasury faced in managing TARP was the pricing of the troubled assets. The Treasury had to find a way to price extremely complex and sometimes unwieldy instruments for which a market did not exist. In addition, the pricing had to strike a balance between efficiently using public funds provided by the government and providing adequate assistance to

7475-412: The day of the announcement rising by over six percent with the shares of bank stocks leading the way. P-PIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from bank's balance sheets. The Federal Deposit Insurance Corporation (FDIC) will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and

7590-478: The economy had stabilized, the government sold its bank stock to private investors or the banks, and is estimated to have received approximately the same amount previously invested. In 1984, the government took an 80 percent stake in the nation's then seventh-largest bank Continental Illinois Bank and Trust. Continental Illinois made loans to oil drillers and service companies in Oklahoma and Texas. The government

7705-460: The effects of the TARP have been widely debated in large part because the purpose of the fund is not widely understood. A review of investor presentations and conference calls by executives of some two dozen US-based banks by The New York Times found that "few [banks] cited lending as a priority. Further, an overwhelming majority saw the program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for

7820-464: The end of the October contract session were forced to purchase oil in large batches to cover themselves, adding to the surge in prices. Further out, oil futures contracts rose by about $ 5 (~$ 7.00 in 2023) per barrel. Mortgage rates increased following the news of the bailout plan. The 30-year fixed-rate mortgage averaged 5.78% in the week before the plan was announced; for the week ending September 25,

7935-471: The federal government to buy up to US$ 700 billion of illiquid mortgage-backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal was received favorably by investors in the stock market, but caused the U.S. dollar to fall against gold , the Euro , and petroleum . The plan

8050-579: The financial industry have been accused of not using the loaned dollars for its intended reason. Others further abused investors after the TARP legislation was passed by telling investors their money was invested in the federal TARP financial bailout program and other securities that did not exist. Neil Barofsky , Special Inspector General for the Troubled Asset Relief Program (SIGTARP), told lawmakers, "Inadequate oversight and insufficient information about what companies are doing with

8165-573: The financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery. Another important goal of TARP was to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. Increased lending equates to "loosening" of credit, which

8280-404: The financial institutions that need it. The Act encouraged the Treasury to design a program using market mechanisms to the extent possible. This had led to the expectation that the Treasury would use a reverse auction to price assets. Theoretically, the system would create a market price from bidders that would want to sell at the highest possible price, but also be able to make a sale, therefore

8395-509: The first $ 250 billion allotted to the program. The first allocation of the TARP money was primarily used to buy preferred stock, which was similar to debt in that it gets paid before common equity shareholders. This had led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently. In the original plan, the government would buy troubled (also known as 'toxic') assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan

8510-430: The funds necessary to purchase the MBS may add to the United States public debt , the net effect will be considerably less as the incremental debt will be offset to a large extent by the MBS assets. A key challenge would be valuing the purchase price of the MBS, which is a complex exercise subject to a multitude of variables related to the housing market and the credit quality of the underlying mortgages. The ability of

8625-591: The future." The article cited several bank chairmen as stating that they viewed the money as available for strategic acquisitions in the future rather than to increase lending to the private sector, whose ability to pay back the loans was suspect. PlainsCapital chairman Alan B. White saw the Bush administration's cash infusion as "opportunity capital", noting, "They didn't tell me I had to do anything particular with it." Moreover, while TARP funds have been provided to bank holding companies, those holding companies have only used

8740-427: The global credit markets and insolvency threats to investment banks and other institutions. In response, the U.S. government announced a series of comprehensive steps to address the problems, following a series of "one-off" or "case-by-case" decisions to intervene or not, such as the $ 85 billion liquidity facility for American International Group on September 16, the federal takeover of Fannie Mae and Freddie Mac , and

8855-436: The government drafted a crisis plan . On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model was closely followed by the rest of Europe, as well as the U.S Government, who on October 14 announced a $ 250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in

8970-418: The government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short-term basis) should decrease, further facilitating lending. TARP will operate as a "revolving purchase facility." The Treasury will have

9085-471: The government may be loosely defining what constitutes healthy institutions. [... Banks] that have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. [...] They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets." Some banks received capital with

9200-465: The government on a TARP website. Note that foreign-owned U.S. banks were not eligible. Beneficiaries of TARP include the following: Of these banks, JPMorgan Chase & Co., Morgan Stanley, American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., BB&T Corp, Wells Fargo & Co. and Bank of America repaid TARP money. Most banks repaid TARP funds using capital raised from

9315-467: The government to offset the purchase price (through mortgage collections over the long-run) depends on the valuation assigned to the MBS at the time of purchase. For example, Merrill Lynch wrote down the value of its MBS to approximately 22 cents on the dollar in Q2 2008. Whether the government is ultimately able to resell the assets above the purchase price or will continue to merely collect the mortgage payments

9430-565: The issuance of equity securities and debt not guaranteed by the federal government. PNC Financial Services, one of the few profitable banks without TARP money, planned on paying their share back by January 2011, by building up its cash reserves instead of issuing equity securities. However, PNC reversed course on February 2, 2010, by issuing $ 3 billion in shares and $ 1.5-2 billion in senior notes in order to pay its TARP funds back. PNC also raised funds by selling its Global Investment Services division to crosstown rival The Bank of New York Mellon . In

9545-579: The laws of the United States and if they have "significant operations" in the United States. The Treasury would need to define what institutions will be included under the term "financial institution" and what will constitute "significant operations". Companies that sell their bad assets to the government must have provided warrants so that the government would benefit from future growth of the companies. Certain institutions seemed to be guaranteed participation. These included: U.S. banks, U.S. branches of

9660-493: The leading Republican author of the TARP program while he had a multimillion-dollar investment in the Bank of America. Protests opposing the bailout occurred in over 100 cities across the United States on Thursday September 25. Grassroots group TrueMajority said its members organized over 251 events in more than 41 states. The largest gathering has been in New York City , where more than 1,000 protesters gathered near

9775-418: The legislation, while Republicans voted 133–65 against it. During the legislative session, at the conclusion of the vote, the presiding chair declared the measure, HR3997, to be unfinished business. Coupon (bond) In finance , a coupon is the interest payment received by a bondholder from the date of issuance until the date of maturity of a bond . Coupons are normally described in terms of

9890-517: The maturity date. During the European sovereign-debt crisis , some zero-coupon sovereign bonds traded above their face value as investors were willing to pay a premium for the perceived safe-haven status these investments hold. The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile. Between a bond's issue date and its maturity date (also called its redemption date),

10005-618: The money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering. In its October 2011 quarterly report to Congress, SIGTARP reported "more than 150 ongoing criminal and civil investigations". SIGTARP had already achieved criminal convictions of 28 defendants (19 had already been sentenced to prison), and civil cases naming 37 individuals and 18 corporate/legal entities as defendants. It had recovered $ 151 million, and prevented $ 553 million going to Colonial Bank , which failed. The first TARP fraud case

10120-400: The month. The value of the U.S. dollar dropped compared to other world currencies after the plan was announced. The front end oil futures contract spiked more than $ 25 a barrel during the day Monday September 22, ending the day up over $ 16. This was a record for the biggest one-day gain. However, there are other factors that caused the massive spike in oil prices. Traders who got "caught" at

10235-401: The mortgages themselves and the various financial instruments created by pooling groups of mortgages into one security to be bought on the market. This category probably included foreclosed properties as well. Real estate and mortgage-related assets (and securities based on those kinds of assets) were eligible if they originated (that is, were created) or were issued on or before March 14, 2008,

10350-448: The plan argued that the market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression . Opponents objected to the plan's cost and rapidity, pointing to polls that showed little support among the public for "bailing out" Wall Street investment banks, claimed that better alternatives were not considered, and claimed that

10465-521: The plan occurred early on in the House. Many members of Congress , including the House of Representatives, did not support the plan initially, mainly conservative free-market Republicans and liberal anti-corporate Democrats. Alabama Republican Spencer Bachus has called the proposal "a gun to our head." On September 19, 2008, when news of the bailout proposal emerged, the U.S. stock market rose by 3%. Foreign stock markets also surged, and foreign currencies corrected slightly, after having dropped earlier in

10580-565: The post on March 30, 2011. The Treasury retained the law firms of Squire, Sanders & Dempsey and Hughes, Hubbard & Reed to assist in the administration of the program. Accounting and internal controls support services have been contracted from PricewaterhouseCoopers and Ernst and Young under the Federal Supply Schedule. The Act's criterion for participation stated that "financial institutions" will be included in TARP if they are "established and regulated" under

10695-413: The premise that taxpayers can buy troubled assets without having to overpay. Oppenheimer & Company analyst Meridith Whitney argues that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Removing toxic assets would also reduce the volatility of banks' stock prices. Because stock is a call option on a firm's assets, this lost volatility will hurt

10810-423: The price must set a low enough price to be competitive. The Treasury was required to publish its methods for pricing, purchasing, and valuing troubled assets no later than two days after the purchase of their first asset. The Congressional Budget Office (CBO) used procedures similar to those specified in the Federal Credit Reform Act (FCRA) to value assets purchased under the TARP. In a report dated February 6, 2009,

10925-413: The private industries. The short-term effects were evidently costly, but the beneficiary repercussions were vastly favorable to a sustainable economic future. According to Jon Daemon, the proposal was dismissed by bureaucrats and lobbyist in accordance to the private banks and federal reserve dispatchers. Over the weekend (September 27–28), Congress continued to develop the proposal. That next Monday,

11040-407: The proposal is the federal government's plan to buy up to $ 700 billion of illiquid mortgage-backed securities (MBS) with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market. This plan can be described as

11155-413: The rest to help fund private investors to buy toxic assets from banks. Nevertheless, this highly anticipated speech coincided with a nearly 5 percent drop in the S&P 500 and was criticized for lacking details. Geithner announced on March 23, 2009, a Public-Private Investment Program (P-PIP) to buy toxic assets from banks' balance sheets. The major stock market indexes in the United States rallied on

11270-470: The same time that efforts are underway to nominate a special inspector general." Neil Barofsky , an Assistant United States Attorney for the Southern District of New York , was nominated to be the first Special Inspector General for the Troubled Asset Relief Program (SIGTARP). He was confirmed by the Senate on December 8, 2008, and was sworn into office on December 15, 2008. He stepped down from

11385-509: The sector. The money came from the $ 700bn Troubled Asset Relief Program. Over the next six months, TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $ 7.77 trillion (~$ 10.7 trillion in 2023) to rescuing the financial system, more than half the value of everything produced in the U.S. that year. U.S. Treasury Secretary Henry Paulson proposed

11500-530: The securitization market for consumer credit would be a new priority in the second allotment. On December 19, 2008, President Bush used his executive authority to declare that TARP funds could be spent on any program that Paulson, deemed necessary to alleviate the 2007–2008 financial crisis . On December 31, 2008, the Treasury issued a report reviewing Section 102, the Troubled Assets Insurance Financing Fund, also known as

11615-676: The stock price of distressed banks. Therefore, such banks will only sell toxic assets at above market prices. On April 6, 2008, the State Foreclosure Prevention Working Group reported that the pace of foreclosures exceeded the capacity of homeowner rescue programs, such as the Hope Now Alliance , in the first quarter of 2008. The original plan would have granted the Secretary of the Treasury unlimited power to spend, proofing their actions against congressional or judicial review. Section 8 of

11730-483: The total cost, including grants for mortgage programs that have not yet been made, would be $ 24 billion. On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial , essentially ending the program. Through the Treasury, the US Government actually booked $ 15.3 billion in profit, as it earned $ 441.7 billion on the $ 426.4 billion invested. TARP allowed the United States Department of

11845-541: The understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital". TARP allowed the Treasury to purchase both "troubled assets" and any other asset the purchase of which the Treasury determined was "necessary" to further economic stability. Troubled assets included real estate and mortgage-related assets and securities based on those assets. This included both

11960-680: The value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $ 500,000 for each senior executive". The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using

12075-628: Was brought by the SEC on January 19, 2009, against Nashville-based Gordon Grigg and his firm ProTrust Management. The latest occurred in March 2010, with the FBI claiming Charles Antonucci, the former president and chief executive of the Park Avenue Bank, made false statements to regulators in an effort to obtain about $ 11 million from the fund. The nearest parallel action the federal government has taken

12190-550: Was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $ 250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $ 700bn Troubled Asset Relief Program. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: "(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten

12305-411: Was estimated to have lost $ 1 billion because of Continental Illinois, which ultimately became part of Bank of America . The $ 24 billion for the estimated subsidy cost of TARP was less than the government's cost for the savings and loan crisis of the late 1980s, although the subsidy cost does not include the cost of other "bailout" programs (such as the Federal Reserve 's Maiden Lane Transactions and

12420-586: Was in investments made by the Reconstruction Finance Corporation (RFC) in the 1930s. The RFC, an agency chartered during the Herbert Hoover administration in 1932, made loans to distressed banks and bought stock in 6,000 banks, totalling $ 1.3 billion. The New York Times, citing finance experts on October 13, 2008, noted that, "A similar effort these days, in proportion to today's economy, would be about $ 200 billion." When

12535-559: Was introduced on September 20, by Paulson. Named the Troubled Asset Relief Program, but also known as the Paulson Proposal or Paulson Plan, it should not be confused with Paulson's earlier 212-page plan, the Blueprint for a Modernized Financial Regulatory Reform , that was released on March 31, 2008. The proposal was only three pages long, intentionally short on details to facilitate quick passage by Congress. A key part of

12650-493: Was launched in 1933. The new HOLC was to administer a national program to help homeowners refinance their mortgages. She also called for a moratorium on foreclosures and freezing of rate hikes in adjustable-rate mortgages. Barack Obama , the Democratic presidential candidate, said that any bailout had to include plans to recover the money, protect working families and big financial institutions, and be crafted to prevent such

12765-415: Was necessary. The remaining $ 350 billion may be released to the Treasury upon a written report to Congress from the Treasury with details of its plan for the money. Congress then had 15 days to vote to disapprove the increase before the money will be automatically released. Privately held mortgages would be eligible for other incentives, including a favorable loan modification for five years. The authority of

12880-417: Was not immediately approved by Congress; debate and amendments were seen as likely before the plan was to receive legislative enactment. Throughout the week of September 20, 2008, there was contentious wrangling among members of Congress over the terms and scope of the bailout, amplified by continued failures of institutions like Washington Mutual , and the upcoming November 4 national election. The plan

12995-497: Was proposed by Treasury Secretary Henry Paulson , passed by the 110th United States Congress , and was signed into law by President George W. Bush . It became law as part of Public Law 110-343 on October 3, 2008. It created the $ 700 billion Troubled Asset Relief Program (TARP), which utilized congressionally appropriated taxpayer funds to purchase toxic assets from failing banks. The funds were mostly redirected to inject capital into banks and other financial institutions while

13110-635: Was scratched when United Kingdom's Prime Minister Gordon Brown came to the White House for an international summit on the global credit crisis. Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, planned a package of three measures consisting of funding, debt guarantees and infusing capital into banks via preferred stock. The objective was to directly support banks' solvency and funding; in some economists' view, effectively nationalizing many banks. This plan seemed attractive to

13225-426: Was submitted to the United States House of Representatives , with the purpose of purchasing bad assets, reducing uncertainty regarding the worth of the remaining assets, and restoring confidence in the credit markets . The bill was then expanded and put forth as an amendment to H.R. 3997 . The amendment was rejected via a vote of the House of Representatives on September 29, 2008, voting 205–228. Supporters of

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