Troubled Asset Relief Program Issues - Term Paper Example

?The Troubled Asset Relief Program, or T.A.R.P., was created in 2008 by the passage of the Emergency Economic Stabilization Act. It was introduced toCongress in the midst of the 2008 financial crisis in the United States, which left large banks on Wall Street either declaring bankruptcy or on the verge of it, while around these banks the financial system of the United States stood unmoving, choked and crippled, brought to its knees and unable to function. In only the second time in history, by the creation of T.A.R.P., the government stepped in to provide assistance in the form of capital funding to not only banks but the automotive industry and other areas, without which the financial system of the country quite possibly could not have survived. The Need for Relief: Why T.A.R.P. was Created The housing market is generally cited as one of the biggest factors behind the financial crisis that resulted in the need for T.A.R.P. to be created. After a short recession in 2001, housing sales rose, peaking in September of 2005 before dropping by as much as 52% by November 2007 (DiMartino, and Duca 1). In 2001, to counteract a recession, the Federal Reserve proceeded by lowering the interest rate alongside the push from both the Clinton and the Bush administrations for the American public to buy houses (Gjerstad, and Vernon L. Smith). This resulted in the lowering of credit standards, which in turn granted a flood of events such as subprime mortgages, or the lending of money to people generally considered a credit risk, going from 9% in 2001 to 40% in 2006 (DiMartino, and Duca 2). By 2007, the housing market was deteriorating, and delinquency rates on subprime mortgages and the interest-only adjustable rate mortgages were soaring; the big businesses with investors in those subprime mortgages were going under quickly (DiMartino, and Duca 5). The Federal Reserve responded by cutting the interest rate aggressively, from 5.25% to 2%, but the crisis continued (Bernanke). By September 15, 2008, the Treasury Secretary was forced to pay a visit to the White House and tell then-President George W. Bush an awful truth: the financial market was imploding, and unless something was done quickly, the worst economic crisis since the Great Depression would result (Halm-Addo 1). Thus emergency measures were taken, and on October 3, 2008 the government was forced to step in and lend assistance, by means of creating the Troubled Asset Relief Program. The Purpose of The Troubled Asset Relief Program (T.A.R.P.) The purpose of the Troubled Asset Relief Program (T.A.R.P.) was, originally, quite simple. The Emergency Economic Stabilization Act created T.A.R.P. as well as giving the power to the United States Government to both buy and insure certain types of assets, mainly to protect the average taxpayer (“The Emergency Economic Stabilization Act of 2008”). Specifically, T.A.R.P. meant that the Secretary of the Treasury, with the backing and support of the Federal Government, could then purchase defaulted mortgages or other assets that were weighing on the balance sheets of the subprime lenders (“The Emergency Economic Stabilization Act of 2008”). At the time of being enacted into law on October 3, 2008, no lending between banks was taking place, and in turn, no lending to the consumer was taking place (Massad 1). No lending to consumers meant that no money was flowing into the economy of the country, thus creating a nightmare for all businesses and consumers. Allowing the Federal Government to purchase the debt in exchange for repayment terms would wipe the bad debt from the balance sheets of the banks and allow them to begin functioning once more. T.A.R.P. created several programs which were able to kick-start the American economy. Money was invested in banks through several programs, including one known as the Capital Purchase Program (CPP), which aided banks across the nation (United States Department of Treasury). Through the Capital Purchase Program, the United States Treasury, working with the Federal Reserve and other organizations, provided $205 billion in capital to 707 lending institutions throughout the country (United States Department of Treasury). This was done mainly through the purchase of stock shares in the financial institutions, with the banks paying a 5% dividend on the shares for the first five years and 9% thereafter (United States Department of Treasury). This program aided the economy through T.A.R.P. by injecting much-needed capital into banks, which were then able to lend out the money to other banks and consumers, allowing the economy to start flowing again. Other programs went into effect as well, not only helping banks but other areas of the economy such as credit markets and housing. During the financial crisis, credit offerings were at a standstill, meaning that businesses could not receive financing, nor could bonds be issued at a reasonable rate at any level, whether it was municipality or state (United States Department of Treasury). Housing markets, as stated before, were glutted with foreclosures. Credit market programs provided infusions of capital to necessary lines of credit for households and businesses, such as the Public-Private Investment Program, in which investors in the private sector actually partnered with the United States Treasury department to back mortgages (United States Department of Treasury). Any capital raised by investments was backed by the Treasury department, and this helped to stabilize both the housing market and, in turn, the economy (United States Department of Treasury). The housing market, it is important to note, did not attempt to return all homeowners that had been foreclosed on to their homes (United States Department of Treasury). Instead, it focused on helping those considered responsible and making timely payments to stay in their current homes by investing $50 billion in T.A.R.P. funding through programs such as Making Home Affordable (MHA), which provided mortgage modifications for those unable to meet their payments (United States Department of Treasury). This, and other programs, alongside the credit market funding from T.A.R.P., enabled the American economy to be restarted and begin functioning once more. Since the housing market had been seen as one of the main catalysts, the mortgage modifications especially helped the struggling homeowners not only keep their houses, but enabled them to have money left over to spend outside of the home, therefore helping the economy in one more way. The automotive industry and American International Group (AIG) are two other areas that benefitted from T.A.R.P. funding. Through the Automotive Industry Financing Program, launched in December 2008 under T.A.R.P., the auto industry avoided liquidation by the United States Treasury department investing $80 billion into it (United States Department of Treasury). This was mainly done since it was recognized that a large portion of the American economy does depend on the auto industry, and losing such an industry would only compound the financial crisis through job and economic losses (United States Department of Treasury). Through this program, GM, Chrysler, and Ford not only had to restructure their entire operations and way of doing business, but also make heavy sacrifices in order to receive T.A.R.P. funding (United States Department of Treasury). It was also recognized that the failure of AIG, American International Group, which is the largest provider of commercial insurance in the country, would have catastrophic effects as well, and thus the Federal Reserve and the Treasury department both stepped in through T.A.R.P. (United States Department of Treasury). In exchange for T.A.R.P. funding, at least $47 billion of which came from the Federal Reserve, AIG was required to not only restructure the company, but to replace the senior management and board of directors (United States Department of Treasury). The programs enacted through T.A.R.P. funding benefitted not only banks but the entire financial sector of the United States, thus rejuvenating and restarting the overall economy. Through cooperation with the Federal Reserve and the United States Treasury, large companies whose failure would have meant drastic consequences for the economy were restarted and were able to resume business. The conditions placed on those companies were not only to ensure that T.A.R.P. funding was repaid, but to ensure that the financial devastation that gripped the country would not occur again. T.A.R.P. Repayment Terms and Conditions The most important part in understanding T.A.R.P. is to understand that, first and foremost, it was a loan, a temporary measure, and something that had to be repaid, even if it was to the Federal Government. Though the programs were often referred to as bailouts by those in the financial system of the United States, T.A.R.P. was a loan, and just like any other loan, T.A.R.P. came with repayment terms (Romero 2). Unlike any other loan, however, there were terms that had to be met before repayment could even begin, including passing government tests to show that they were ready to make the repayment of funds (Romero 2). The most important T.A.R.P. repayment term under the test criteria was that banks must raise and maintain minimum capital levels, in addition to showing that they could lend to creditworthy borrowers and could meet funding obligations to businesses, while at the same time relying less and less on the T.A.R.P. funds received (Wagner). These guidelines together ensured the Federal Reserve and the United States Treasury that banks given T.A.R.P. funding would not repay those funds only to collapse again, thereby causing the very problem that T.A.R.P. hoped to avoid: complete economic meltdown and failure. Beginning in May 2009, banks began to repay T.A.R.P. funding. Nine of the largest banks in the United States were the first to pass the criteria and return funds, including such banks as JPMorgan Chase, American Express, and Capital One Financial Group (Romero 2). As of August 31, 2011, out of a total of $413 billion dispersed to various corporations and banks through the T.A.R.P. program, $314 billion had been repaid (Massad 3). This included $256 billion from banks, a positive net worth for taxpayers of the United States, as the original investment was only $245 billion from the United States Treasury (Massad 3). Though the Treasury department still held funding in about 460 banks throughout the nation, this was mostly due to the inability of these banks to meet the criteria of raising capital (Massad 4). In addition, the auto companies that received T.A.R.P. funds were able to contribute to the positive milestones of achievement; General Motors had a successful Initial Public Offering of stock, and Chrysler was able to divest itself of T.A.R.P. funding entirely (Massad 1). All of these factors state that, overall, T.A.R.P. funding was repaid, and it has been repaid over the last three years, sometimes quickly. This not only gives conclusive evidence that T.A.R.P. was, in fact, a temporary measure and would end at some time, but speaks volumes towards the stabilization of the economic climate. The Success of the Troubled Asset Relief Program There was no doubt that something such as the Troubled Asset Relief Program was necessary. Lehman Brothers, a company that had been just years before at the top of its game, had already filed for bankruptcy, with its stock losing 94% of its face value by September 15, 2008 (Halm-Addo 1). Overall, the nation was at a standstill financially. A second Great Depression would have resulted, had something not been done. But, in reality, did it help? Was T.A.R.P. successful? Did T.A.R.P. do what it set out to do? There is no short and easy answer to that question. Without a doubt T.A.R.P. provided something that was needed. In effect, it propped up the banks in the nation by offering needed capital, and in doing so, defrosted the credit markets enough for them to begin operating again as well (Kurtzleben). T.A.R.P. gave funding to the auto companies, and allowed them not only to remain in business but gave them the initiative to grow once more (Kurtzleben). T.A.R.P. also saved jobs; without the funding by the government, the unemployment index, it is speculated, would have been greater than 8.9% in early 2011, though exact figures are hard to estimate, since the situation did not occur (Samuelson). Looking at it from those points of view, T.A.R.P. was most certainly a success, made all the more so by the fact that the funding has been repaid and continues to be repaid. However, there were things that T.A.R.P. set out to do, that it did not accomplish. Originally, the plan for T.A.R.P. was to buy mortgages that were in default or unpaid and thus relieve the banks that held those mortgages. It is therefore ironic that the least successful area of T.A.R.P. has been its housing initiatives (Kurtzleben). The Mortgage Loan Modification Program, possibly the closest program to the original T.A.R.P. scheme, only disbursed $1 billion of its intended $30 billion, and the program was never used in the way it was conceived to be (Kurtzleben). In addition, the stigma of receiving funds from the government left a mark on banks and the banking industry; most banks wished to pay things off early simply to avoid being seen as an institution that took, and was dependent on, the government (Romero 2). Also, the public opinion of the program has been largely negative, again with T.A.R.P. being seen as a stigma of government interference in an otherwise free-market economy (Kurtzleben). Overall, in looking at T.A.R.P., though the program was in and of itself a success, it may make more sense to call T.A.R.P. a “successful failure”, in that it propped up the banks and restarted the financial aspects of the country, but did not do what it originally set out to do. The Good, the Bad, and the POssible changes It is my belief that many people in the general public have asked themselves what they would have done differently had they been on one side or the other of the Troubled Asset Relief Program (T.A.R.P.). As Robert J. Samuelson said in his article in the Washington Post, “Almost everyone loves to hate T.A.R.P.” Overall, it is easy to understand why. The government through the use of taxpayer money gave away billions to banks and the auto company, while not entirely promising to relieve the burden of mortgages that had become cumbersome for the average American person. Even though the funds were eventually repaid, and began to show a positive return, the government has not responded by cutting taxes or offering the American people a cut of the money. I feel that T.A.R.P., while unfair to the average American, was necessary for the big picture of the American financial sector to begin operations again. It is not an exaggeration that a second Great Depression could have occurred had something not been done, and in that, I agree completely with the government stepping in. After doing research for this paper, I realize also that they were possibly the only institution bigger than the financial sector, and thus the only one able to give help that would have done any good at all. So, I agree that help had to be given, but I disagree with the method in which it was handed out. As stated, T.A.R.P. was originally designed to assist banks with mortgages. That is how it was originally proposed, and I believe that alone what would have stabilized the economy. Instead of giving money to the banks, I would have proposed a sliding scale of forgiving mortgages, possibly up to a reasonable amount such as $200,000 or $300,000. In this way, those who had just bought a house within their means and were simply taking advantage of a booming market would not have been penalized, but those that went overboard and purchased something far more than they could have safely paid for in the first place would not have seen a free handout or forgiveness entirely. I believe that this would have benefitted the economy more than giving a handout to a Wall Street bank, because the average American family would have seen relief, and the banks would have been able to clear most if not all of the debts that were choking the balance sheets without an additional burden to the taxpayers. I would also have worked more diligently to support the homeowners that were in crisis, those who had been given a subprime loan and those who had found themselves on the receiving end of an interest-only adjustable mortgage rate that suddenly rose beyond belief. While, again, forgiveness could not be assured entirely, as a subprime loan holder is, in general, considered a credit risk, I would have at least taken more aggressive measures to refinance the adjustable rate mortgages to fixed-rate mortgages, in order to stabilize payments for homeowners. It angers me that, though the original purpose of T.A.R.P. was to alleviate mortgage stress on both banks and the people of the country, it was hardly accomplished in the overall interests of the programs and funding. It seems that, after all the proposals, big businesses and banks once more received the money, while the average American was left to suffer and lose their home. I do not believe it was necessary to hand out money to any other businesses, and would not have given any to the auto industry, despite the fact that they are a large part of the American economy. Big business has a way of recouping its own losses, and always finds a way to exist no matter how low their stock drops on the market; people will still buy cars, and drive from point A to point B. If mortgages had been forgiven or cleared entirely from balance sheets, homeowners would have had a reduced or eliminated house payment, therefore more money would have been available to benefit businesses such as the auto companies. It would not have been necessary to give them money, had this happened. With all of the above being said, it is hard to fully hate a government program that cost less than it intended to in the first place. Originally, T.A.R.P. estimates were at $700 billion dollars (Samuelson). The program itself, dispersing funds to various industries, only cost about $410 billion, and estimates have lowered it to $19 billion, according to the Congressional Budget Office (Samuelson). It is not often (hardly ever) that a government program costs less than it was supposed to, and that makes T.A.R.P. easy to like, even if I do disagree fundamentally with who the money was dispersed to. CONCLUSION T.A.R.P. offered needed relief at a time when the United States was on the verge of collapsing financially and economically. Though it did so in a way differing from its original purpose, it managed to stabilize and restart economic and financial functions by helping banks to become solvent once again, as well as giving needed capital to industries that were on the verge of shutting down. If anything should have been changed about T.A.R.P., then it would have to be the mortgage assistance that was planned from the beginning, but never honestly carried out with any effort. Perhaps, had this area of the disbursement been looked at from a different angle, giving funds to various businesses such as AIG and the auto companies would not have been necessary, since in relieving mortgage payments, the average American would have had more money to spend, and thus could have put that money into the economy, thereby helping to restart and continue the economic cycle to which Americans have contributed for over 200 years. Works Cited Bernanke, Ben. “Four Questions About the Financial Crisis.” Morehouse College. Atlanta, Georgia. 14 April 2009. Speech. DiMartino, Danielle, and John V. Duca. “The Rise and Fall of Subprime Mortgages.” Economic Letter: Insights from the Federal Reserve Bank of Dallas. 2.11 (2007): 1-8. Web. 18 Dec. 2011. Gjerstad, Steven, and Vernon L. Smith. "From Bubble to Depression?." Wall Street Journal 06 April 2009, n. pag. Web. 18 Dec. 2011. Halm-Addo, Albert. The 2008 Financial Crisis:Death of an Ideology. Pittsburgh, Pennsylvania: Dorrence Publishing Co., Inc., 2010. Print. Kurtzleben, Danielle. “The Case For and Against T.A.R.P.: Five Reasons the Controversial Bailout Program Worked - and Five Reasons That It did Not.” U.S. News and World Report 24 May 2011, n. pag. Web. 15 Dec. 2011. Massad, Timothy G. United States. Office of Financial Stability. Troubled Asset Relief Program: Three Year Anniversary Report. Washington, D.C.: Government Printing Office, 2011. Web. 16 Dec 2011 Romero, Christy L. United States. Office of Special Inspector General for the Troubled Asset Relief Program. Exiting T.A.R.P.: Repayments by the Largest Financial Institutions. Washington, D.C.: Government Printing Office, 2011. Web. 16 Dec 2011 Samuelson, Robert J. “Why T.A.R.P. Has Been A Success Story.” Washington Post 27 March 2011, n. pag. Web. 16 Dec. 2011. United States. Senate and House of Representatives. The Emergency Economic Stabilization Act of 2008. Washington, D.C.: Government Printing Office, 2008. Web. United States. Department of Treasury. “Financial Stability: T.A.R.P.” U.S. Department of Treasury. United States Department of Treasury, 14 July 2011. Web. 17 Dec 2011. Wagner, Daniel. "Fed Outlines T.A.R.P. Repayment Rules." Huffington Post 01 June 2009, n. pag. Web. 17 Dec. 2011. Read More