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TARP Bailout Program


tim geithner

Former Treasury Secretary Tim Geithner was responsible for TARP's success.

Credit: Treasury Dept
Definition: The Troubled Asset Recovery Program (TARP) had its roots in the October 2008 bank bailout bill. Then Treasury Secretary Hank Paulson's original idea was to set it up as a reverse auction. Banks would submit bid prices on their toxic mortgage-backed securities to the Treasury Department. Treasury administrators would select the lowest price offered. The banks didn't want to take a loss, so they wanted Treasury to pay full price for these assets. The government knew they were worth far less. Ultimately, this reverse auction was unworkable, so the plan was shelved.

That's when the bailout bill became TARP. Treasury initially used $105 billion of the $700 billion authorized by Congress. It bought 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. This Capital Repurchase Program required banks to give the government a 5% dividend that would increase to 9% in 2013. This encouraged banks to buy back the stock within five years. Paulson knew the government would make a profit, as bank share prices would be higher by then.

In addition to the eight banks, TARP funds were used to either buy preferred stock in, or make loans to:

An additional $20 billion of TARP was loaned to the Federal Reserve TALF program. Congress only approved half of the $700 billion bill to be used in 2008. The remaining $350 billion was never used. (Source: Treasury Dept.)

President Obama wanted to tax banks to repay taxpayers for $120-$141 billion he thought they would 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 used $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 $12 billion for HAMP.

TARP Update

Five years later, all the big banks had paid the government back with interest. In total, $204.9 billion in TARP funds were used to help 700 banks. Of those, 226 banks repaid the funds, Treasury sold its stake in 177 banks, 26 banks failed anyway, and 165 were transferred to other government programs. As a result, Treasury has recouped $207.1 billion in principal and interest, so far creating a $2.2 billion profit for taxpayers. However, Treasury expects to lose an additional $4.5 billion thanks to write-offs.

In addition, about $2.75 billion is still owed by 113 smaller banks that are still struggling. This is becoming a crisis for many of them, since the interest payments are now set to nearly double to 9%. The banks are in trouble because they a lot of local commercial real estate loans. These loans to strip malls, apartment complexes and office buildings defaulted after the first wave of subprime mortgages. Retailers especially had trouble when people moved out or went bankrupt. The smaller, local banks were left holding the bag long after the bigger banks had recovered.

It's possible that 79 of these banks won't pay the government back at all, since they are behind on their payments. If that happens, taxpayers will be out $217 million. That's in addition to the $585 million in losses incurred already. Treasury sold its holdings in 151 banks at a discount to private investors, such as hedge funds and private-equity firms. (Source: WSJ, Some Smaller Banks Still Owe TARP Money, September 2,3 2013)Article updated September 24, 2013

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