how the troubled asset relief program tarp worked
global credit markets came to a near standstill in september 2008 as several major financial institutions such as fannie mae freddie mac and american international group aig experienced severe financial problems lehman brothers went bankrupt and investment companies goldman sachs and morgan stanley changed their charters to become commercial banks in an attempt to stabilize their capital situations 12to prevent the situation from completely spiraling out of control treasury secretary henry paulson pioneered the troubled asset relief program tarp it was signed into law by president george w bush on october 3 2008 with the passage of the emergency economic stabilization act 34alison czinkota investopediatarp s original purpose was to increase the liquidity of the money markets and secondary mortgage markets by purchasing the mortgage backed securities mbs and through that reduce the potential losses of the institutions that owned them later tarp s aim was modified slightly to allow the government to buy equity in banks and other financial institutions tarp initially gave the treasury purchasing power of 700 billion the dodd frank wall street reform and consumer protection act simply referred to as dodd frank later reduced the 700 billion authorization to 475 billion 5tarp funds were used to purchase stock in banks insurance companies and auto makers and to loan funds to financial institutions and homeowners 6the u s government bought preferred stock in eight banks bank of america merrill lynch bank of new york mellon citigroup goldman sachs j p morgan morgan stanley state street and wells fargo the banks were required to give the government a 5 dividend that would increase to 9 in 2013 encouraging banks to buy back the stock within five years 7from the program s inception until october 3 2010 the deadline for extending funds 245 billion was used to stabilize banks 27 billion went to programs to increase credit availability 80 billion went to the u s auto industry specifically gm and chrysler 68 billion was used to stabilize aig and 46 billion went to foreclosure prevention programs such as making home affordable 58the provisions of tarp demanded that companies involved lose certain tax benefits and in many cases placed limits on executive compensation and forbade fund recipients from awarding bonuses to their top 25 highest paid executives 9 even so by 2009 bailed out firms paid some 20 billion to key personnel sardonically referred to as tarp bonuses 10