The Troubled Asset Relief Program

 

Summary and analysis of the troubled asset relief program

This introductory article starts off by looking at the way the Troubled Asset Relief Program (TARP) came about in a rushed panic during the peak of the financial crisis. It then looks at the roots of the crisis, and why TARP made sense as the best way to stabilize the system and prevent a total meltdown. It goes on to look at the actual text of the Bailout Bill itself, and the fact that TARP seems to be rapidly becoming redundant as banks rush to exit from it so that they are free from constraints on executive pay and making new hires.

The rest of the site listed in the Contents links to the right looks at specific parts of TARP in more detail. Trends in Las Vegas Real Estate has been one of the prime examples of the impact of TARP.

The origins of TARP
The TARP Troubled Asset Relief Program was first presented by then Treasury Secretary Henry Paulson back on Friday 19 September 2008.

The troubled assets relief program was designed to take bad mortgages off the books of financial institutions in America, and onto the books of the federal government. Some refer to it as the troubled asset relief program 2008 or mortgage bailout bill.

On 3 October 2008 the troubled asset relief program bill was approved by the House, thus reversing its Sept. 29 rejection of the bailout. This represented the government’s largest step into the financial markets since Franklin Roosevelt’s New Deal.

Back in 2008 there was a lot of confusion around why we needed TARP:

Roots of the Crisis
The cause of this crisis is the overly relaxed lending from 2000 onwards. Bankers driven by bonus targets lent to families who could not afford the mortgages: today there are five million American homeowners delinquent or in foreclosure. This is no longer a sub-prime lending problem, but a lending problem as excess home inventories push down all home prices.

The lenders who issued the mortgages, and the securitization industry that bought and resold them, have left the investors who bought them a hot potato - mortgage assets of uncertain value. Through the troubled asset relief program the government will take these assets on and enable the financial institutions to function. The US taxpayer will catch the hot potato. Sometime it feels like we are the victims of an MBA culture where an MBA specialization in finance gives you carte blanche to manage money as you see fit.

Asset liquidation is set to replace asset acquisition as the availability of bad credit refinance dries up.

 

The reasons for TARP
In his Sept.19 statement at the Treasury headquarters Paulson explained that the troubled asset relief program addresses the root cause of the financial system’s weakness by taking the illiquid mortgage assets (those that have lost value as house prices have decreased) out of the financial system. These toxic assets are currently blocking the system and preventing the credit needed to fuel the economy from being issued.

The problem is that there is a lack of certainty about the value of mortgage assets, and trading in them has virtually ceased. Because these toxic loans are stuck on the balance sheets of banks, and other financial institutions, they are unable to issue new productive loans.

Text of troubled asset relief program
Troubled asset relief program law has its origins in a rushed legislative proposal that was sent by the White House overnight to lawmakers on 19 September 2009. Hank Paulson presented a three page plan to save America from financial meltdown and a new depression. It is presented in full below, and at the time it was presented the lack of detail under whelmed the financial community.

Subsequently this note written on a piece of toilet paper evolved into the more detailed text that was rejected by the House on 28 September 2009. By this point people were rapidly losing confidence in the administrations ability to contain a looming financial meltdown on a global, and unprecedented, scale. Finally on 3 October 2009 the troubled asset relief program application passed, and was entitled the “Emergency Economic Stabilization Act of 2008, H.R. 3997.” The difference between this final TARP Bailout Bill text and what was submitted 28 September 2009. The treasury troubled asset relief program finally made it into law.

 

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.–The term “mortgage-related assets” means 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 September 17, 2008.

(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

TARP Becomes Redundant
On 9 June 2009 it was announced that ten of the troubled asset relief program banks are set to leave the $700 billion troubled asset relief program. The banks, including Goldman Sachs, JP Morgan Chase, American Express, and Morgan Stanley, were granted permission to repay a total of $68bn and free themselves on the restrictions in place under the troubled asset relief program act. The troubled asset relief program senate had previously estimated that $25bn of reserves would be repaid this year. Despite the early repayment the government still has outstanding warrants that give it the right to buy shares in the banks that were granted funds under the treasury’s troubled asset relief program. The warrants are, however, extremely controversial since they are convertible at fair market value, which is extremely difficult to determine.

US Treasury Secretary Tim Geithner was critical of those that created the current crisis when he stated, “I think boards of directors did not do a good job. I think shareholders did not do a good job.” This was followed up by concerns from the Congressional Oversight Panel, set up to monitor Tarp spending, stating that a new round of stress tests on banks was required in the face of an ongoing economic downturn. The chairman of the panel stated, “We have not actually broken through the worst-case scenario, but let’s face it the numbers are bad, and they’re heading in the wrong direction.”

 

TARP to Drive Economy Collapse?



economy collapse

As Wall Street is bailed out, Main Street could be set to suffer the consequences of inflation and an economy collapse.

Soon after the troubled asset relief program was announced the dollar declined, and commodity prices revived. These two changes were driven by investor fear of inflation.

It is odd because failing banks, falling house prices, and tightening credit would usually lead to falling prices, or even deflation. But what we are seeing here is fear that the Fed will mismanage the situation, keep interest rates too low for too long, and thus create an inflationary problem that will arise in the future. The Fed mismanage? Never! Avoiding an economy collapse as a result of the troubled asset relief program is a genuine concern. Looking at indicators such as the Las Vegas real estate market, with its mass of foreclosures it is clear TARP has work to do.

 

Seeking Recession Proof Businesses

The outlook for equities is far from rosy in a post-TARP world. Historical indicators suggest that investors wanting to buy at the bottom of the market have some time to wait before yet. The game is trying to identify recession proof businesses with strong balance sheets.

Back when the Resolution Trust Corporation was established in 1989 it took more than 12 months for the stock market to bottom, and it took three years for the housing market to bottom.

The downwards spiral may just have begun, with the decline likely to be punctuated with false dawns.

Another example would be the crisis of Sweden in the 1990s where a bear market persisted for over two years, the market lost 45%, and domestic demand shrank. And consider that the Swedish example is much cited as the best-handled case.

recession proof businesses

Shadow of Economic Slump Looms

In 1997 Japan unveiled its Financial Supervisory Agency to great fanfare, but it wasn’t until 2002 that the stock market recovered, and as for the housing market it is still lower than 15 years ago in most of the country. The 100 yen stores (one dollar stores) were good examples of recession proof businesses.

The recession is just beginning, and even with the Troubled Assets Relief Program the road ahead is bleak for the next few years.

 

 

Bailout Bill Text

The troubled asset relief program, AKA TARP or the “Bailout Bill” started with a rushed legislative proposal that was sent by the White House overnight to lawmakers on 19.Sept. Paulson’s three page plan to save America from financial meltdown and a new depression is in full (!!) below. This bailout bill text is lacking in detail to say the least.

This evolved into the more detailed text that was rejected by the House. The text which finally passed on 3 October is entitled the “Emergency Economic Stabilization Act of 2008, H.R. 3997,” and the difference between this final TARP Bailout Bill text and what was submitted 28.Sept. You can see all the bailout pork in painful detail.

 

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.–The term “mortgage-related assets” means 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 September 17, 2008.

(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

 

Troubled Assets Relief Program

The $700 billion bailout that is the Troubled Assets Relief Program is the result of unintended consequences of decisions by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke since March.

First they orchestrated the purchase of Bear Stearns by JPMorgan Chase, and that did create a temporary lull in the instability that has plagued markets since the credit crisis begun.

However, each decision after that led to runs on securities firms, banks and insurers, and created turmoil in the markets. It was all done in a desperate attempt to halt the momentum of recession 2008.

And the Troubled Assets Relief Program itself also risks making matters worse. A government pool of distressed real-estate and bad debt could serve to depress the housing market further.

The initial reaction to TARP was declines in financial stocks, total paralysis in the trillion dollar inter-bank loan market, and a run on money market mutual funds. It might just have been the right read on the Troubled Assets Relief Program.

 

 

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