Troubled assets are properties or financial instruments that are depreciating and not creating wealth. In the US, they include mortgages and securities backed by them, and any other security or financial instrument deemed necessary by the Treasury Secretary and Federal Reserve Chairman. The Troubled Asset Relief Program (TARP) was created in 2008 to stabilize financial markets and allow banking institutions to borrow freely again. TARP saved businesses from insolvency, but conditions were placed on the use of funds, creating controversy.
An asset is any type of property or financial instrument that is intended to be a store of wealth for the future, as well as create wealth in the present. The fact that the assets are called troubled assets generally means that they are depreciating and not creating wealth, but diminishing it. In the language of the United States government and the Treasury Department, “troubled assets” specifically means those that fall into either of two broadly defined categories.
First, they include mortgages owed on residential or commercial properties, and any securities backed by these mortgages, the purchase of which by the government would help bring credit stability to financial markets. The second category includes any other security or financial instrument, the purchase of which by the government is deemed necessary by the Secretary of the Treasury and the Chairman of the Federal Reserve, again to stabilize the financial market in the United States. The purchase of the second category of troubled assets must be approved by the United States Congress before it can take place.
These two classes of troubled assets are in the context of a US government program, started in 2008, known as the Troubled Asset Relief Program (TARP). As a result of the economic downturn and the unprecedented number of foreclosures seen in this time period, the banks that had lent money for mortgages, and those companies that subsequently purchased the mortgages, came under great financial strain. These were the majority of the troubled assets that the US government made plans to purchase as part of the TARP program. When the government buys these assets, it allows the companies that owned them to improve their balance sheets and avoid bankruptcy or having to lay off large numbers of workers.
Businesses saved from immediate failure or insolvency by funds from the TARP legislation were able to remain in business, but were also required to abide by conditions placed on the use of those funds, such as limits on executive compensation. Effects like these and others created by the TARP legislation have been the source of much controversy since the program’s implementation. The most important goal of the government’s purchase of troubled assets was to stabilize financial markets and allow banking institutions that had been in financial trouble to be able to borrow and borrow freely again. When these types of government programs work as intended, they become a quick fix to the problems they address, as opposed to the time frame of letting the problem reverse itself naturally.
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