Analysis of the Troubled Asset Relief Program - Essay Example

Analysis of the TARP Introduction During the 2008 financial crisis, the U.S Treasury created a number of programs under the TARP in the bid to prevent avoidable foreclosures, stabilize and strengthen its financial system and restore economic growth in the country. The TARP initially allocated $700 billion in October 2008 to aid some of the largest U.S firms, which were valued as critical in the economy and too big to fail, through purchasing illiquid mortgages that were backed by securities and other assets. The Consumer Protection Act (CPA) and the “Dodd Frank Wall Street Reform” later reduced this authorization to $475 billion. Even though the TARP was established with a great intention to tackle the financial crisis, it failed miserably in the sense that it stole from taxpayers dollars (Bianco, 2012). Overview of TARP The TARP was established in line with the 2008 act, of the Emergency Economic Stabilization following the policies that were proposed by the Treasury Secretary. It gave the Treasury department virtually unfettered authority, which was to end on December 31, 2009, to purchase what it termed as “troubled assets” from financial institutions. Some of the major financial institutions that were recipients of the TARP fund included Goldman Sachs, Bank of America, JP Morgan Chase, and the Citibank. In addition to these firms, the program allocated funds to some non-financial firms including the Chrysler & General Motors. The Congress had initially authorized an amount of $700 billion for the TARP, which were later reduced to $475 billion. Some of these funds were committed through the program’s five major program areas. These program areas were: Stabilization of the banking institution was allocated approximately $ 250 billion Programs to reignite the credit markets was allocated approximately $ 27 billion Stabilization of the American auto industry was allocated approximately $ 82 billion Stabilization of the American International Group was allocated approximately $ 70 billion Programs to help struggling families avoid foreclosure was allocated approximately $ 46 billion The 2008 act, Emergency Economic Stabilization provided specific provisions for the TARP funds. Under EESA Sec. 101 (c), authority was given to the Treasury Secretary to take any action that was deemed necessary to ensure the success of the TARP (Bianco, 2012). However, in exercising this authority he was required to consider the protection of the taxpayer’s interest. In addition to this, he was required to ensure that all financial institutions were eligible to participate in the program and use the funds efficiently in purchasing “troubled assets”. After acquiring a troubled asset, the Secretary had powers to have the authority to manage the troubled assets, which included revenues & portfolio risks; take any action deemed right in connection with the troubled assets; and sell any of the assets that were in trouble. The TARP was divided into many sections that were designed to help in the achievement its goals. The most prominent component of this program was the Capital Purchase Program that was developed to provide additional capital, which was meant to facilitate a smooth flow of credit to consumers and businesses. Later the SCAP and Capital Assistance Program were established. The SCAP was established with the purpose of identifying and calculating the amounts of potential capital shortfalls. On the other hand, CAP was designed to provide capital to financial institutions that were in dire need. Other programs under TARP’s umbrella included the Asset Guarantee Program, Targeted Investment Program and the facility for loans, Term Asset Backed Securities. The Asset Guarantee Program was developed to help those financial institutions that were losing market confidence because of holding distressed or illiquid assets. The Targeted Investment Program was established to allow Treasury the flexibility to provide fund to other financial institutions that were important to the financial system. The “Term Asset-Backed Securities Loan Facility” was initiated as a joint Treasury-Federal program with the aim of beginning a new the market of asset-backed securities. The History of the TARP The impacts of the financial crisis augmented when the subprime mortgage crisis that was first felt in 2007 spread into the national and global markets and further to the overall economy. This initiated the Congress to take an action that led to the enacting of the 2008 act, Emergency Economic Stabilization. Henry Paulson, the then Treasury Secretary first introduced the TARP on the year 2008 the month of September. Paulson engaged the Congress saying "until we get stability in the housing market we are not going to get stability in our financial markets." On 19 Sep, 2008, the siting president by then President Bush made history by proposing a bailout of the financial system of country. In his proposal, he requested the Treasury Department to be allocated $700 billion to buy distressed mortgage-related assets from key private institutions. Paulson later met the Senate Banking Committee to ask Congress to allow him authority under the plan to commence the nations financial system rescue mission. Several events followed this but on September 29, 2008, the House of Representatives turned down a 110-paged revised plan with 45 sections. This prompted the Senate to formulate a rescue package that was accepted by the House on the year, 3 of October 2008. Within two hours after the approval of the legislature, President Bush signed it into law saying, "it was essential to helping Americas economy weather this financial crisis." Over the years the TARP has undergone significant evolutions to date. Some of the major changes noticeable to the first program include: The 31 of December 2008: The Treasury issued reports that reviewed the Asset Guarantee Program saying that it was not “widely available” anymore The 15 of January 2009: The Treasury issued out temporary or interim rules to guide reporting requirements for the program of Capital Purchase. The 21 of January 2009: The Treasury incorporated new regulations on disclosure and mitigation requirements that solved issues in TARP contracting, especially conflicts of interest The 5 of February 2009: The Senate agreed to changes on the TARP that banning firms in the project from paying bonuses their employees The 10 of February 2009: Timothy Geithner, the then treasury Secretary, released a plan outlining the usage of the remaining TARP funds The 23 of March 2009: Establishing of the Public & Private Investment Program to buy what Geithner called “toxic assets” from major banks The 19 of April 2009: With a new president in office, the Obama administration initiated a program to convert Banks Bailouts into shares of equity. Some of these changes to the initial program were a success while also some failed to achieve their purpose. The TARP was initially planned to wind up on October 2009 but when Treasury Secretary Timothy Geithner came into office, he extended the program period by one year. However, the process of winding up was started on September 2009. In a meeting with the Congressional Oversight Panel, Geithner said that the Federal government had begun the process of winding up the TARP in a strategy that was aimed at evolving to recovery from crisis response. During this winding up period, the government hired assets managers who had the sole purpose of managing portfolio assets of the Treasury through valuing of debt and equity securities that were issued to firms in the TARP program. At the start of the year 2009 December, the program of Capital Purchase was only available to small banks & was set to close before the start of another year. As the year came to close, Treasury had received a sum of $ 45 billion repayments on its TARP investments from Citigroup and Wells Fargo. This meant that the by the end of 2009, a total of $ 164 billion of TARP funds had already been paid. In addition, Citigroup terminated its operation with this program and agreed on a deal to share losses the original $300 billion of Citigroup assets. In December 2010, after selling its share, Treasury announced proceeds of $ 10.5 billion making a profit of a minimum of $ 12 billion from its total investments in Citigroup. The Targeted Investment Program, which was part the TARP, ended their operation by the end of the year 2009 (Wilson, 2013). As the TARP continue to wind up, the FSOB reported that other additional financial institutions had repaid the capital they had been awarded under the program (Wilson, 2013). As at the end of March 2010, Treasury had received approximately 65% of their total investments under CPP amounting to $ 135.83 billion. In a report by the Financial Stability office of the Treasury of released in July 2010, Treasury indicated that it had recovered more than 75% of TARP funds under the CPP program. It further indicated that out of the authorized $475 billion issued, the treasury had been able to recover approximately $ 200 billion. Many more reports were issued after this outlining the progress of the winding up process and the amounts that Treasury had recovered over the periods including the 2010 TARP report published in December 2010 to the Congress. It summarized the progress indicating that out of the initial $ 475 billion outlined for the program: $230 billion had been repaid $389 billion had been disbursed TARP investments cumulative income had reached $35 billion. Under the Asset Guarantee Program, $5 billion of commitments had been cancelled Eventually, the TARP ended on October 2010 exactly two years after President George W. Bush had signed the Emergency Economic Stabilization into law. Current events discussion on the TARP The TARP led to several oversight committees being set up to facilitates its activities. Most of these oversight committees are still in action up to date. This is because even after the program was wind up officially in October 2010, still most firms that had been given funds by the program had not yet finished paying. Some of this oversight committee include the Congressional Oversight Panel, Special Inspector General controlling TARP (SIGTARP), and the FSOB (Ghosh & Mohamed, 2010). In addition to this oversight committee, other panels were set up after the closure of this program, which include Congressional Budget Office-CBO and the Government Accountability Office (GAO). Recently in April 2014, the Report on the TARP published by the Congressional Budget Office summarized the information and valuation methods used to calculate those costs, the costs of purchases and guarantees of troubled assets, and the impact of TARP on the federal budget deficit and debt. It indicated that that the TARP would cost $27 billion over its lifetime. Currently, the Treasury is removing its remaining investments and has completed exited from several of the bank investments it made. However, the TARP housing program is still active and actions have not yet been taken to leave its “Community Development Capital Initiative”. The table below (Appendix) outlines the current standings of the TARP. Conclusion The plan by the government to bailout banks did not accomplish most of its aims that it was set up to relieve the financial crisis for most companies. Bloomberg BusinessWeek indicated that “In fact, banks that took taxpayer money during the 2008-2009 financial crisis cut their lending to small businesses more than other banks did.” My opinion is that the government should have left the situation as it was and let the laws of economics work and the financial system will eventually heal itself instead filling what they termed as a “pretend bankruptcy” when implementing this program. A lot of people and research that has been carried out will agree with me that the TARP has not been of much benefit to the U.s economy. This program was established to act as a means to calm the public and give confidence to the financial systems while costing the taxpayer several billions of dollars. The TARP is really one of those few examples of wasteful government spending. The American people cannot work so hard only for their money to be stolen by the government through taxes. The U.S is a great nation and is supposed to be a role model to other countries and as such programs like this should never be passed as law, leave alone being implemented. References Bianco, K. (2012). A retrospective of the troubled asset relief program. Ghosh, S., & Mohamed, S. (2010). The Troubled Asset Relief Program (TARP) and its limitations: an analysis. International Journal of Law and Management, 52(2), 124-143. Wilson, L. (2013). Troubled Asset Relief Program (TARP). The New Palgrave Dictionary of Economics, 7. Appendix Financial Status of TARP Initiatives TARP initiatives Treasury obligation (billions) Disbursed Outstanding investment balance (billions) Estimated lifetime gain (loss) (billions) Banking programs $250.46 $245.46 $2.84 $23.93 Credit market programs 20.08 19.09 0.00 3.36 Automotive programs 79.69 79.69 19.87 (14.98) AIG 67.84 67.84 0.00 (15.18) Housing programs 38.49 9.48 — (37.67) Read More