Troubled Asset Relief Program

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  • Topic: Financial services, Troubled Asset Relief Program, Timothy Geithner
  • Pages : 10 (3094 words )
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  • Published : October 25, 2012
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Troubled Asset Relief Program (TARP)

Erick Jones

11/10/11

The Troubled Asset Relief Program, also known as TARP, was implemented in 2008 as a reaction to the unprecedented financial crisis that was troubling several Wall Street firms. In order to “relieve” the government-sponsored enterprises Fannie Mae and Freddie Mac, in addition to these firms, the bailout was to purchase assets and equity from financial institutions in order to strengthen their financial sector. The bailout was later extended to include the automotive industry. The vast majority of the bailout funds were received by two companies, American International Group (AIG) and Citigroup respectively. AIG was one of the largest insurance companies in the United States and Citigroup was the largest bank in the US. There were many other banks which received funds from TARP in exchange for equity shares (Verret, 2011). TARP authorized expenditures of $700 billion to bailout the financial industry. In order to make this program successful under EESA, the Emergency Economic Stabilization Act, the department of the treasury purchased enough interest in AIG, General Motors (GM), Chrysler, GMAC, as well as hundreds of national banks, to claim control (Verret, 2011).

Even though EESA authorized the government to use $700 billion to enforce the purpose and objectives of the TARP program, that plan was quickly reconstituted into a number of different programs (Verret, 2011) . “As part of that bailout, the Treasury took preferred equity in TARP recipients and subsequently initiated a plan to convert those non-voting preferred shares into shares convertible into voting common equity. The Treasury’s initial experiment in holding common equity took place at Citigroup, in which it took a controlling thirty-four percent voting stake” (Verret, 2011).

The Auto Industry Finance Program (AIFP) was introduced in late 2008 to help bailout the automotive industry with TARP support. Originally $17 billion were going to be used in exchange for restructuring plans in offers to GM and Chrysler. The purpose of this bailout offer was to stabilize the automotive industry. This idea was quickly denied by the Obama Administration and replaces by the Automotive Task Force in hopes to negotiate a new plan (Verret, 2011).

The TARP investment is concentrated: for example the federal government committed to AIG 120.7 billion of which 69.8 billion was TARP funds. The net investment in GM and Chrysler was $76.9 billion and Citigroup received $50 billion in TARP funds. These four companies received close to $200 billion under EESA authority as of September 30, 2009 (Verret, 2009).

When assessing the values of the proposed legislation, lawmakers knew that the bill was going to be very complex in that it is dealing with very difficult issues. The public was assured that much time and effort had gone into assessing these issues such as: “…fairness and equity, banking regulation, executive pay, job losses…moral hazard, 401(k) values, and the proper role of the state (Couch, Foster, Malone, Black, 2011).”After all things considered, it was realized that the motivation behind most cast votes was hardly as complicated as expected. In actuality, it was quite simple (Couch, Foster, Malone, Black, 2011).

In November 2008, Secretary of the Treasury Henry Paulson indicated that stimulating the market for consumer credit would be a major priority in the second allocation. December 2008, President Bush used executive authority to declare that funds from the TARP program be spent any way Secretary of Treasury Henry Paulson deemed necessary to ease the financial burden.

Mid January 2009, Paulson issued temporary rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program. Paulson also announced a new set of guidelines disclosing conflicts of interest with TARP contracts. The Senate accepted the changes to TARP that...
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