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Troubled asset relief program - Term Paper Example

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The United States implemented the Troubled Asset Relief Program as a policy solution for recapitalizing banks and restoring liquidity in the financial system. This program was executed at the onset of the 2008 global economic crisis. TARP is considered to be the largest…
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Download file to see previous pages espread opposition from the public and was quickly billed as ‘the Wall Street bailout.’ There was greater possibility that the implementation of the policy was largely influenced by the US financial sector.
Beginning 2005, the housing prices in the US peaked and began to decline. The same trend happened in the value of mortgage-backed securities (MBS). This trend is known as ‘collateralized debt obligation (CDO). The CDO compromised a greater portion of many financial institutions’ asset portfolios. The situation worsened and this lead to the collapse of Lehman Brothers on September 2008. The proximal event led to the introduction of TARP. The Treasury injected approximately $250 billion in TARP program (Cornett, Li and Tehranian 731). The Treasury injected these funds directly into the US banking system through purchasing senior preferred stock and warrants in qualifying financial institutions. In the end, the total available funds were estimated to have amounted to $700 billion. This amount makes TARP the largest program ever promoted by the government of the United States (Garrica, Puddu and Walchli 7).
The situation worsened such that on September 2008; Dow Jones Industrial lost 4.4 percent or 504 points. The crisis escalated resulting in more bankruptcies including AIG’s. Hank Paulson, who was the then Treasury Secretary, proposed that TARP be implemented. The objective of the implementation of TARP was to recapitalize the financial institutions with liquidity problems using federal funds. In general, the US Treasury intention was to use TARP in helping banks to improve their balance sheets and increase the robustness of the financial system (Garrica, Puddu and Walchli 1). Paulson introduced legislation to the Congress known as EESA. This legislation was an authorization of $700 billion for the purchase of troubled assets including MBSs from banks through TARP.
The announcement of TARP by Paulson on September 19 resulted in many large financial ...Download file to see next pagesRead More
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