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This article is about the Treasury fund. For the legislative bill and subsequent law, see Public Law 110-343. For the legislative history and the events leading to the law, see Emergency Economic Stabilization Act of 2008.
The authority of the United States Department of the Treasury to establish and manage a Troubled Assets Relief Program (TARP) managed by a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.[1][2] The law which created the fund authorized the Treasury to draw up to $250 billion for immediate use, then requires the President to certify that an additional $100 billion in funds are needed; a final $350 billion are subject to Congressional approval.[3]
Contents [hide]
1 TARP administrative structure
2 TARP participation restrictions
3 Reorientation of TARP to bank equity investments
3.1 Similar historical federal banking investments
4 References
5 External links
6 See also
[edit] TARP administrative structure
The program is run by the Treasury's new Office of Financial Stability. According to a speech made by Neel Kashkari[4], the fund will be split into the following administrative units:
"1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.
2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives.
3) Insurance program: We are establishing a program to insure troubled assets. We have several innovative ideas on how to structure this program, including how to insure mortgage-backed securities as well as whole loans. At the same time, we recognize that there are likely other good ideas out there that we could benefit from. Accordingly, on Friday we submitted to the Federal Register a public Request for Comment to solicit the best ideas on structuring options. We are requiring responses within fourteen days so we can consider them quickly, and begin designing the program.
4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.
5) Homeownership preservation: When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners. This goal is consistent with other programs - such as HOPE NOW - aimed at working with borrowers, counselors and servicers to keep people in their homes. In this case, we are working with the Department of Housing and Urban Development to maximize these opportunities to help as many homeowners as possible, while also protecting taxpayers.
6) Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP. This team is working hard to define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.
7) Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements. We welcome this oversight and have a team focused on making sure we get it right."
[edit] TARP participation restrictions
Companies that sell their bad assets to the government must provide warrants so that taxpayers will benefit from future growth of the companies.[3] The President is to submit a law to cover taxpayer losses on the fund, using "a small, broad-based fee on all financial institutions."[3] In order to participate in the bailout program, "companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits 'golden parachutes' and requires that unearned bonuses be returned."[3] The fund has an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There is also an inspector general to protect against waste, fraud and abuse.[3]
Reorientation of TARP to bank equity investments
On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury will buy equity stakes in nine American Banks, and potentially thousands of smaller banks, using the first $250 billion dollars allotted to the program.[5]
The banks agreeing to receive equity investments from the Treasury include Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. (including Merrill Lynch), Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.[6][7][8] The Bank of New York Mellon is to serve as master custodian overseeing the fund.[9]
Similar historical federal banking investments
The nearest parallel action the federal government has taken in the was in investments made by the Reconstruction Finance Corporation (RFC) in the 1930s. The RFC, agency, chartered during the Herbert Hoover adminisistration in 1932, made loans to distressed banks and bought stock in 6,000 banks, totalling $1.3 billion. In 2008 dollars, that would amount to $200 billion. When the economy had stabilized, the government sold its bank stock to private investors or the banks, and is estimated to have received approximately the same amount previously invested.[10]
In 1984, the government took an 80 percent stake in nation’s then seventh-largest bank Continental Illinois Bank and Trust. Continental Illinois made loans to oil drillers and service companies in Oklahoma and Texas. The government was estimated to have lost $1 billion because of bad loans purchased as part of the bank Continental Illinois, which ultimately became part of Bank of America.[10]
References
^ "Economic rescue swiftly signed into law". AFP (2008-10-03).
^ Gross, Daniel (2008-10-01). "How the Bailout Is Like a Hedge Fund. It's massively leveraged. It's buying distressed assets. It's taking equity stakes…". Slate.
^ a b c d e Summary of the Emergency Economic Stabilization Act of 2008 United States Senate Committee on Banking, Housing and Urban Affairs. (Retrieved October 2, 2008)
^ http://www.accountability-central.com/single-view-default/article/treasury-update-on-implementation-of-troubled-asset-relief-program-tarp-before-institute-of-intern/?tx_ttnews[backPid]=1&cHash=8702938e7e
^ Landler, Mark; Eric Dash (2008-10-14). "Paulson Says Banks Must Deploy New Capital: Drama Behind a $250 Billion Banking Deal", New York Times. Retrieved on 2008-10-14.
^ Solomon, Deborah; Damian Paletta, Jon Hilsenrath and Aaron Lucchetti (2008-10-14). "U.S. to Buy Stakes in Nation's Largest Banks: Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort". Wall Street Journal. Retrieved on 2008-10-14.
^ "Bailout: The Rescue Plan & The Largest Recipients", New York times (2008-10-14). Retrieved on 2008-10-14. (Graphic of proposed bank equity investments)
^ "Beneficiary Banks", New York Times (2008-10-14). Retrieved on 2008-10-14.
^ Dash, Eric (2008-10-14). "Bank of New York Will Oversee Bailout Fund", New York Times. Retrieved on 2008-10-14.
^ a b Lohr, Steve (2008-10-13). "Intervention Is Bold, but Has a Basis in History". Retrieved on 2008-10-15. The article relies on the work of New York University Historian and Economist Richard Sylla for historical estimates.
External links
Zumbrun, Josh et al. (October 14, 2008). "The Ownership Society", Forbes. Analysis of the injection of Government equity capital into banks.
See also
H.R. 1424
Emergency Economic Stabilization Act of 2008
Liquidity crisis of September 2008
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eFinancial crisis of 2007–2008
Main issues Economic crisis of 2008 · Financial crisis of 2007–2008
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