TARP Program

Definition: The Troubled Asset Recovery Program (TARP) was created in October 2008 as part of the $700 billion Bank Bailout bill. The program originally gave 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 requires banks give the government a 5% dividend that will increase to 9%, encouraging banks to buy the government out. Thus, the government will make a profit, as bank share prices should be higher then.

Since the original disbursement, TARP funds have been 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 funds have been loaned to the Federal Reserve TALF program. Only half of the $700 billion TARP bill has been approved by Congress. Other companies are applying for the remaining $24 billion in authorized funds. President Obama must request the remaining $350 billion before it can be disbursed. (Source: Treasury Dept.)

Also Known As: Bailout bill, Capital Repurchase Program