TARP - Troubled Assets Relief Program

TARP allows the United States Department of the Treasury to purchase or insure up to $700 billion of "troubled" assets. "Troubled assets" are defined as "(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

In short, this allows the Treasury to purchase nonliquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations, which were sold in a booming market until 2007 when they were hit by widespread foreclosures on the underlying loans. TARP is intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.

TARP does not allow banks to recoup losses already incurred on troubled assets, but officials hope that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from opinion in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate.

Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future, unforeseen losses from troubled assets. Increased lending equates to 'loosening' of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short term basis) should decrease, further facilitating lending.

The TARP will operate as a “revolving purchase facility.” The Treasury will have a set spending limit, $250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the 'coupons'. The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets. The initial $250 billion can be increased to $350 billion upon the President’s certification to Congress that such an increase is necessary. The remaining $350 billion may be released to the Treasury upon a written report to Congress from the Treasury with details of its plan for the money. Congress then has 15 days to vote to disapprove the increase before the money will be automatically released.

The authority of the United States Department of the Treasury to establish and manage TARP under a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency Economic Stabilization Act of 2008 and several other acts.

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630 B bailout instead of 700 B

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

How large is 700 B?

Big numbers are hard for people to process. 700 billion can start to sound like 300 billion, or 900 million for that matter. It becomes like sand grains or moon strands, magically big, past the point of counting; an amount you sit with a nephew and contemplate in wonder. Or, if you're rushing through the paper, "a whole lot." But since Congress is seriously considering giving 700 billion to be spent at the discretion of the Secretary of the Treasury, I thought I'd ask for some distributed help on describing this number to other people. Here's what I've come up with so far:

It is one third of the total amount of money received by the federal government in 2007, including social security, income tax, corporate tax, and all other receipts.

It is $140 billion more than has been spent on the Iraq war since the invasion.

It is $120 billion more than that spent on social security benefits.

It is almost 3 billion nonrefundable bus fares from Durham to San Francisco, leaving tomorrow.

It is nine times the amount spent on education in 2007.

It could pay for 2,000 McDonalds apple pies for every single American.

It is 35 times the amount spent on all foreign aid in most years.

It is more zeros than the calculator that comes with my computer allows.

It is 7,000 times bigger than the Sierra club’s yearly budget.

According to some estimates, it is three times what it would cost, over 10 years, to reduce oil dependency by 20%.

Its over twice the amount of all money given to all charitalbe organizations in the United States in any given year.

It is more than $100 for every person in the world.

What is 700 B bailout plan in simple language?

The context of bailout
Consider the spree of actions that have the potential—directly and indirectly—to cost taxpayers money: the government accepting $30 billion of Bear Stearns drecky collateral for a $29 billion loan to JPMorgan; giving investment banks access to the Fed's discount window; assuming responsibility for Fannie Mae and Freddie Mac, guaranteeing money-market funds (up to $50 billion); making a big loan to AIG (up to $85 billion); and now proposing the mother of all bailouts—up to $700 billion.


Who will pay for bailout?
So anybody who pops up on television, or in a congressional hearing, to talk about the vital necessity of this regrettable bailout, should be asked to give a sense of how much it might cost and then to come up with a way to pay for it. Two hundred billion dollars? Fine, please delineate $200 billion in spending cuts over the next two years or $200 billion in tax increases to pay to clean up your mess.


How often bailout is used?
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?

Who is eligible for bailout?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).

Lobbyism and Bailout
Lehman Brothers gave much of their money to fund the Obama campaign - now we the taxpayers are asked to bail out Lehman Brothers. Also Fannie and Freddie gave much of their money to fund the Obama campaign - we are now seeing foreclosures at a record rate.

Are there any alternatives to bailout?
The government response to the housing mess took two main forms. The Federal Reserve slashed interest rates repeatedly, hoping to make life easier for borrowers and lenders. And under Paulson's direction, the Treasury Department put together the Hope Now coalition, an industry-led group that would modify mortgages before foreclosure. But by the time such efforts got started, too many dominoes had fallen.

Bush team, Congress haggle over $700 bn bailout

Strapped American homeowners could get government help renegotiating their mortgages as part of the $700 billion financial bailout legislation taking shape in Congress.

Congressional leaders and the Bush administration are haggling over details of the massive rescue plan, including Democrats' demand that executives at failing financial firms that receive the government's help can't get "golden parachutes" - referring to the large sums of money and other compensation they receive on their way out the door.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, the architects of the bailout, were expected to face tough questions at a hearing Tuesday from lawmakers in both parties about the eye-popping cost, how the rescue would work and how taxpayers would be affected.

Paulson was in talks with Democrats about their proposal that the government be able to purchase equity in faltering companies as part of the plan, so taxpayers could benefit from future profits.

The administration is balking at another key Democratic demand: allowing judges to rewrite bankrupt homeowners' mortgages so they could avoid foreclosure.

Congressional aides said the House could act on a bill Wednesday or Thursday, with the Senate following soon thereafter.

"We have gotten closer," Rep. Barney Frank of Massachusetts, the House Financial Services Committee chairman, said late Monday.

"We're not there yet."

Still, lawmakers on both the right and left already were assailing the deal-in-progress.

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, blasted the emerging plan as "neither workable nor comprehensive."

"In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts," Shelby said.

Lawmakers on both extremes of the political spectrum assailed the plan as a massive, poorly conceived bailout. Conservative House Republicans and liberal House Democrats both huddled privately Monday to express their concerns, and they were drafting their own legislative alternatives.

The emergency legislation would give the government broad power to buy up devalued assets from troubled financial firms in a bid to unlock the flow of credit and stabilize badly shaken markets in the United States and around the globe.

In an expansion of its original proposal, the Bush administration is asking for broad power to buy up virtually any kind of bad asset - including credit card debt or car loans - from any financial institution in the U.S. or abroad in order to stabilize markets.

Frank said he and Paulson had agreed to create a congressional oversight board as part of the bailout and to require that the government come up with a plan to avoid foreclosures on any mortgages it acquires in the rescue. A government official with knowledge of the talks confirmed the administration backs those provisions.

There still were divisions on which tottering financial firms would be helped and what kind of assets the government could buy as part of the bailout.

Lawmakers in both parties appeared to be coalescing around the idea that executive compensation limits should be part of the bailout, although Paulson says he is concerned that such curbs would discourage companies from participating.

Investors were uncertain just how successful the administration's plan would be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market.

On Monday, the Dow Jones industrials lost 372 points, wiping out the gains the index made Friday after administration officials and congressional leaders promised swift action to get bad debt off the books of banks and end the financial crisis.

Oil prices briefly spiked more than $25 a barrel before falling back to settle at $120.92, up $16.37, on the New York Mercantile Exchange. That shattered the previous record for a one-day jump in crude oil, $10.75.