The Troubled Asset Relief Program (TARP) was created by the
Emergency Economic Stabilization Act (EESA; P.L. 110-343) in
October 2008. EESA was enacted to address an ongoing financial
crisis that reached near-panic proportions in September 2008. The
act granted the Secretary of the Treasury authority to either
purchase or insure up to $700 billion in troubled assets owned by
financial institutions. This authority was granted for up to two
years from the date of enactment and was very broad. In particular,
the definitions of both "troubled asset" and "financial
institution" allowed the Secretary wide leeway in deciding what
assets might be purchased or guaranteed and what might qualify as a
financial firm. The financial crisis grew out of an unprecedented
housing boom that turned into a housing bust. Much of the lending
for housing during the boom was based on asset-backed securities
that used the repayment of housing loans as the basis of these
securities. As housing prices fell and mortgage defaults increased,
these securities became illiquid and fell sharply in value, causing
capital losses for firms holding them. Uncertainty about future
losses reduced many firms' access to private liquidity, with the
loss in liquidity being catastrophic in some cases. September 2008
saw the government takeover of Fannie Mae and Freddie Mac, the
bankruptcy of Lehman Brothers, and the near collapse of AIG, which
was saved only by an $85 billion loan from the Federal Reserve.
There was widespread lack of trust in the financial markets as
participants were unsure which firms might be holding so-called
toxic assets that might now be worth much less than previously
estimated, and thus might be unreliable counterparties in financial
transactions. This prevented firms from accessing credit markets to
meet their liquidity needs. As EESA moved through Congress, most
attention was focused on the idea of the government purchasing
mortgage-related toxic assets, thus alleviating the widespread
uncertainty and suspicion by cleaning up bank balance sheets. The
initial TARP Capital Purchase Program, however, directly added
capital onto banks' balance sheets through preferred share
purchases, rather than removing assets that had become liabilities
through purchasing mortgage-related assets. Several other TARP
programs followed, including an asset guarantee program; programs
designed to spur consumer and business lending; financial support
for companies such as AIG, GM, and Chrysler; and programs to aid
homeowners at risk of foreclosure. Eventually, the Public-Private
Investment Program resulted in the purchase of some
mortgage-related assets, but this has remained a relatively small
part of TARP. Most of the TARP programs are now closed. With the
immediate crisis subsiding through 2009, congressional attention to
financial services turned largely to consider broad regulatory
changes. The resulting Dodd-Frank Act (P.L. 111-203) amended the
TARP authority, including (1) reduction of the overall amount to
$475 billion; (2) removal of the ability to reuse TARP funds that
had been repaid; and (3) removal of the authority to create new
TARP programs or initiatives. The original TARP authority to
purchase new assets or enter into new contracts expired on October
3, 2010. Outlays under the existing contracts, however, may
continue through the life of these contracts. Overall budget-cost
estimates for TARP have decreased significantly since the passage
of EESA, with the latest Congressional Budget Office estimates
foreseeing $32 billion in costs and the latest Treasury estimates
foreseeing $60 billion in costs. Most of these costs are from aid
for homeowners, for the insurer AIG, and for U.S. automakers. The
assistance to banks is generally showing a gain for the government.
In the 112th Congress, several bills have been introduced to repeal
all or part of TARP, including H.R. 189, H.R. 430, H.R. 830, H.R.
839, H.R. 1315, S. 162 and S. 527.
General
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