TARP funds were used during the 2008 financial crisis to bail out “too big to fail” financial institutions and stabilize the US economy. The funds were part of the Emergency Economic Stabilization Act and were used to purchase bad assets from major banks. TARP funds were controversial due to concerns about their use and executive bonuses paid by banks.
TARP funds are money used by the US Treasury during the 2008 financial crisis in an effort to stabilize the US economy. These funds were used to bail out financial institutions deemed “too big to fail,” out of concern that the failure of major financial institutions could plunge the US economy into a depression. The TARP funds were only one aspect of the government’s financial bailout, but they were the most significant in a monetary sense, with US$700 billion (USD) dedicated to TARP.
These funds were part of a larger bill known as the Emergency Economic Stabilization Act (EESA), passed in October 2008 and signed by President George Bush. The law created the Troubled Asset Relief Program (TARP), a program designed to purge so-called bad assets from the books of major banks. These assets included things like mortgage-backed securities and were thought to be impossible to value due to market fluctuations. As banks could not buy and sell these securities, they were becoming increasingly illiquid and a credit crunch was beginning to emerge as lending between banks stalled. TARP funds were designed to address this problem by purchasing these assets, injecting liquidity into banks so they could start lending again.
President Bush and Treasury Secretary Henry Paulson announced a series of programs involving TARP funds after Congress rushed EESA, and the program’s direction dramatically changed course several times as 2008 drew to a close. In 2009, President Barack Obama took office, appointing Timothy Geithner as Secretary of the Treasury and implementing new programs for TARP funds. Some of the programs that TARP funds were used for included foreclosure relief initiatives designed to keep people in their homes, loans to the American auto industry, and assistance to insurance giant American International Group (AIG).
The use of TARP funds has been highly controversial at times. Taxpayers worried their money wouldn’t be used wisely, even though the Treasury suggested that once the economy stabilized, it could sell the toxic assets it held at a profit. Many taxpayers also angered the hefty executive bonuses paid by banks that received TARP funds, forcing the government to rush through a program that would monitor and cap salaries and bonuses for institutions receiving TARP funds. While several institutions repaid the funds they received in a timely manner, many others backed off and economists suggested that the government was subsidizing the US economy at taxpayer expense.
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