TARP Program

Definition: The Troubled Asset Recovery Program (TARP) was created in October 2008 as part of the $700 billion Bank Bailout bill. TARP was originally supposed to give banks the right to submit a bid price to sell their toxic mortgage-backed securities to the Treasury Dept. as part of a reverse auction. Banks would offer to sell each MBS package, and TARP administrators would select the lowest price offered. However, Treasury could wind up paying too much, and banks were afraid they wouldn't get enough, so the plan was shelved.

Instead, Treasury used $105 billion of TARP funds to buy preferred stock in eight banks: Bank of New York Mellon, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America/Merrill Lynch, Citigroup, Wells Fargo, and State Street. The Capital Repurchase Program required banks to give the government a 5% dividend that would increase to 9%, encouraging banks to buy the government out. The government would make a profit, as bank share prices should be higher later.

TARP funds were used to buy preferred stock in, or loans to:

• AIG ($40 billion).
• Community banks ($92 billion).
• Big 3 auto companies ($24.8 billion).
• Citigroup and Bank of America ($45 billion).

An additional $20 billion of TARP was loaned to the Federal Reserve TALF program. Only half of the $700 billion TARP bill was approved by Congress in 2008. The rest remained unused. (Source: Treasury Dept.)

President Obama wanted to tax banks to repay taxpayers for $120-$141 billion it is estimated they will lose from TARP. Obama planned to levy the tax over 10 years on the banks' riskiest activities, such as trading, and not on their retail operations, which would get passed on as higher prices to customers.(Source: HuffPo, Obama to Push Tax on Too Big to Fail Banks)

How Was TARP Paid For?

In FY 2009,the government spent $150 billion to rescue troubled banks. In FY 2010, banks paid back $110 billion and another $38 billion in FY 2011. In other words, TARP actually provided a surplus to the budget as banks paid back the bailout.

TARP spent $35 billion in FY 2012 for programs to help homeowners modify mortgages and avoid foreclosure. This was part of the Homeowner Affordable Modification Program, or HAMP. In FY 2013, TARP budgeted at $12 billion for HAMP.

Also Known As: Bailout bill, Capital Repurchase Program