Leroy Shepherd Jr.
Basic Finance for Managers
Instructor, David Fish Ed.D
March 21, 2012
Troubled Asset Relief Program
The Troubled Asset Relief Program as part of the Emergency Economic Stabilization Act was an initiative signed into law on October 3, 2008 by then President George W. Bush. TARP authorized the U. S Treasury to purchase up to $700 billion in assets and securities from financial institutions in a response to a potential financial crisis and to stabilize the U.S financial markets. The big picture financial system of the nation is configured in such a way that it acts as the channel between corporations and individuals. Essentially the financial system is the system that enables lenders and borrowers to exchange funds. This is a process that takes place at all levels. Individuals, banks, insurance companies, and all manner of financial companies are borrowers and lenders to some degree. The ability of money to generate money is accomplished by taking deposits from other sources and lending them out at higher rates than the borrowing rates. This has become the basics of the U S economy. If for any reason the ability to continuously conduct these types of transaction were to be threatened, slowed or stopped the economy itself would suffer significantly and possibly halt as a result. This paper purposes to explore the circumstances within the U.S financial market that led to the apparent need for this initiative, it also purposes to examine the intent of this bill, and additionally what impact has it had on the financial system and economy to date.
The Need for Troubled Asset Relief
The need for such a massive imitative on behalf of the nation may have roots to some degree in the deregulation of the financial services industry. “Congress passed the Financial Services Modernization Act of 1999, also known as the Graham-Leach-Bliley Act. This act brought sweeping deregulation to the financial services industry. For the financial services industry, the Gramm-Leach-Bliley Act marked the end of regulation that addressed the perceived defects in the banking system thought to have caused the Great Depression” (Grant, 2010 p. 374). This initiative was enacted to repeal the Glass Steagall act that was purposed to keep a single financial institution from operating as an amalgamation of an investment bank, commercial bank or insurance company. The financial crisis could also be seen as a crisis that was the result of poor financial practices that fostered mistrust and caused a major disruption in the credit markets. Possibly the biggest contributor was the mortgage industry. The mortgage industry developed what came to be known as subprime mortgages. These mortgages were offered and lent to customers without adequate income, assets or credit worthiness. These sub-prime mortgages begin to cycle as collateralized debt obligations that were sold to investors. These investments made up large portions of business and individual investment portfolios. “Some of the mortgage borrowers were investors anticipating quick resale of the properties they purchased —the flipper. Nevertheless, the market was so hungry for yield that investment banks found that they could easily package subprime mortgages into CDOs and peddle them to investors. Too many investors, unfortunately, took the triple-A ratings at face value and loaded their portfolios with the CDOs” (Poole, 2010, p. 424). The housing market would eventually begin to level subprime mortgage loans begin to default as adjustable rate mortgages begin to reach their increased rates and housing prices would begin to decrease. The fact that so much of the banks and financial institutions wealth was based on mortgages and mortgage backed securities of which their value had become ambiguous, in addition to other creative financial record keeping practices across the financial...