Troubled Asset Relief Program
Troubled Asset Relief Program
1. Stated Purpose, objectives or goals
The Troubled Asset Relief Program (TARP) was originally proposed by Treasury Secretary Henry Paulson in September of 2008 in an effort to allow the federal government to buy “troubled assets” like failed mortgages from private banks. The program would buy “bad” mortgages from banks in hopes that banks bottom line and solvency would improve. This goal was ultimately modified and essentially created a blank check for the Treasury Secretary to bail out industries as he saw fit. Paulson’s plan was a no-strings-attached request to shovel funds as the Secretary saw fit.
2. Enabling legislation
TARP was created during a time when people started to fail making payments on their mortgages. The blame for these failing mortgages was plentiful and there was plenty to spread around. Banks were highly culpable in that they started lending to people who traditionally could not qualify for a mortgage. Advertisements for “no money down”, “borrow up to 110% of your home’s value” were common place. Brokers received their bonuses based on closure of the loan so the temptation for lending to borrowers they knew could not afford the mortgage was great. As a result of this practice, mortgages started to become delinquent. In the face of failing mortgages and the uncertainty of their value, banks reduced the amount of loans they were making. As a response, Secretary Paulson decided that the best way to address this “crisis” was to have the federal government (with taxpayer dollars) buy up these bad loans so the banks would be free, in theory, to once again start making good loans.
Unfortunately, Secretary Paulson’s plan was not very specific and was summarily shot down by the House of Representatives. After some re-work and a new name the bill was passed on October 3, 2008. What originally started as the Troubled Asset Relief Program turned into the Emergency Economic Stabilization Act signed into law by President George W. Bush. The programs original intent to buy troubled assets eventually turned into a method to pump money into banks and financial institutions while providing little or no real oversight.
3. What was the precedent
Unfortunately for us, there was a precedent that may have encouraged Congress to act to “save” financial institutions in 2008. During the early 1980s the U.S. was rocked by what became known as the Savings and Loan Crisis. The downfall of the S&Ls was the result of several years of bad policy. S&L structure was such that they used interest gathered from short term savings to fund long term mortgages. This left them vulnerable to fluctuations in short term interest rates. When short term rates increased, it caused the S&L to have larger expenses which reduced the money available to pay their long term debt. This issue was exacerbated when Paul Volcker, Chairman of the Federal Reserve restricted the supply of money in the market in 1979. This caused a natural surge in short term interest rates which put the S&Ls further behind the 8-ball. The issue was compounded by Federal deregulation in the early 80s that allowed the S&Ls to make riskier investments. The Federal Government was on the hook for S&L loans by virtue of the Federal Savings and Loan Insurance Company. The FSLIC was created in 1934 to give people some security and confidence in putting their money back into S&Ls after the Great Depression. The S&L crisis drained the life blood out of the FSLIC to point where it eventually became insolvent and ceased to exist in 1989. Cost estimates are around $500 Billion for assets of failed S&Ls and $153 Billion in taxpayer bailout funds. Very close to the $700 Billion asked for in the original TARP bill.
4. Ethics of helping some and not others.
There are very few ethical questions with black and white, yes or no answers. Ethics dwells in the gray...
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