Eric Revell BA 543 Financial Markets & Institutions 5/7/2013 Troubled Asset Relief Program (TARP)

Crisis in the Finance World Subprime mortgages cause a wave of defaults among over- leveraged homeowners. Home values plummet as the defaults lower property values. Banks suffer massive losses on Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), and Credit Default Swaps (CDS). The US economy drags the global economy into a recession.

Insolvent Investment Banks Bear Stearns had collapsed in March 2008, was sold to JPMorgan Chase with the help of the government. Bank of America purchases the failing Merrill Lynch on 9/14/2008. The next day, Lehman Brothers files for bankruptcy after a buyout by Barclays is delayed. AIG’s liquidity problem becomes apparent to the market, government begins trying to find a solution on 9/16/2008. DateDow Jones CloseNet Change% Change 9/15/ , % 9/17/ , %

Government Contemplates Action News of a potential bailout of the financial sector emerges from Washington on September 18, markets react positively. The first vote on the Emergency Economic Stabilization Act that would create TARP fails in the House of Representatives on September 29. The Dow Jones Industrial Average suffers its largest point drop in history, erasing $1.2 trillion of investor wealth. DateDow Jones CloseNet Change% Change 9/18/ , % 9/29/ , %

Congress Passes TARP Legislation On October 3, the Emergency Economic Stabilization Act is passed by Congress and signed into law within hours by President Bush. Allows the US Treasury to purchase or insure up to $700 billion of troubled assets, including: Residential/Commercial mortgages & their derivatives. Any other financial instrument deemed by Treasury Secretary & Federal Reserve Board of Governors to promote financial market stability. DateDow Jones CloseNet Change% Change 10/3/ , %

Key Figures Involved Ben Bernanke Chairman of the Federal Reserve Hank Paulson Secretary of the Treasury Timothy Geithner President of the Federal Reserve Bank of New York

Financial Markets Still Troubled The original TARP strategy hasn’t solved the problems in the world of finance. Markets are uncertain about how the program will be implemented, what institutions are the targets, and how quickly the purchases can take place. The Dow Jones continues to plummet. What to do next? DateDow Jones CloseNet Change% Change 10/7/2008 9, % 10/9/2008 8, %

Same Goal  New Strategy Secretary Paulson met with British Prime Minister Gordon Brown on October 11, who had used this strategy on his country’s financial sector. Because of the issues with using troubled asset purchases, the Fed and Treasury switch to equity injections. Adding equity allowed banks a cushion to insulate from losses on their troubled assets. DateDow Jones CloseNet Change% Change 10/13/ % 10/15/2008 8, % 10/16/2008 8, % 10/20/2008 9, % 10/22/2008 8, % 10/28/ %

Distribution of TARP Funds On October 11, the Congressional Budget Office estimated that disbursements would only be about $475 billion of the $700 billion allotted.

Did the Bailouts Work? Between the TARP bailout of the financial sector, and the government takeover of Fannie Mae & Freddie Mac, the government spent $606 billion. Of these funds, $480 billion has been returned, nearly all of it from TARP recipients in the form of refunds, dividends, interest, and stock warrants. The Dow Jones bottomed out at 6626 points on March 6, The Financial Stability Board, an international monitoring body, has declared 8 American banks as being “systemically important financial institutions” that are “too big to fail.” All of these banks received TARP funds.

References purchase-program purchase-program emergency-economic-stabilization-act emergency-economic-stabilization-act 104bb.pdf 104bb.pdf