The Implementation of TARP in Purchasing Toxic Assets during the Great Recession
The Great Recession resulted from the bursting of the real estate bubble created by the decrease in interest rates, hence encouraging more consumers to purchase houses on debt. Financial institutions saw the increased demand for debt as an opportunity to bundle the debts into securities and sell to investors. The house owners defaulted on their payments, leading to the bursting of the bubble. In response, the Fed implemented both monetary and fiscal policies to address the situation. Notably, the Troubled Asset Relief Program (TARP) program was designed aimed at salvaging the financial and auto industry. George Bush signed the Emergency Economic Stabilization Act (EESA) on 3rd October 2008, which was dedicated to the fiscal policies implemented in resolving the Great Recession (Berger, Makaew, & Roman, 2015). This event occurred after Treasury Secretary Henry Paulson asked Congress to endorse a bailout used in purchasing mortgage-backed securities that faced the risk of default. In doing so, the administrator intended to free the banks’ books, hedge funds, and pension funds of their high liabilities. Paulson intended to renew the public’s confidence in the functioning of the international global system. This bill created the Troubled Assets Relief Program (TARP) injected with $700 billion, which was reduced to $475 billion after implementing the Dodd-Frank Wall Street Reform Consumer Protection. Hire our assignment writing services in case your assignment is devastating you.
The Treasury Department used the TARP funds to establish the Capital Purchase Program, which was valued at $105 billion and was employed in purchasing preferred stocks from 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. These financial institutions were required to issue 5% dividends to the government, whereby the rate increased by 4% in 2013 (Black & Hazelwood, 2013). The treasury used $67.8 to finance the American International Group’s $182 bailout (AIG). It also issued $20 billion for the Term Asset-Backed securities to be purchased by the Federal Reserve. A total of $245 billion was utilized in stabilizing the banking sector. Notably, the TARP provisions required the involved institutions to lose tax benefits and, at the same time, executed limits on executive compensation and prohibited these banks from awarding bonuses and rewards to the top management. Despite this provision, some banks awarded $20 billion of the TARP program fund to the top management which were referred to as the TARP bonuses. Even though some of the TARP’s funds were misused by issuing bonuses to the top executives, the program was quite effective in that it restored the finance industry. The purchase of the toxic assets prevented the financial institutions from succumbing to debt. Notably, the Great Recession brought the banking sector to its knees, seeing that even the most stable banks were negatively affected by this economic downturn. Some of the banks were restructured, while others were acquired. For example, Meryl Lynch was purchased by Bank of America. According to the Fed, the TARP program has earned taxpayers $11 billion through the financial institutions’ profits that benefited from the program (Berger et al., 2015). Importantly, the prominent banks resumed their operations and even expanded their activities after injecting the funding. Lastly, the TARP program was effective in that it compensated for the inefficiencies brought about by the monetary policies. At the onset of this economic downturn, the Fed executed monetary policies by lowering the interest rates. The extent of the damage could not be tackled through these policies alone, hence the need for fiscal policy, specifically the TARP program.
This program was regulated by Dodd-Frank, which not only reduced the allocated funds from $700 billion to $475 billion but also laid new stipulations for the credit rating agencies. These firms misled investors through imprecisely ranking the TARP mortgage-backed securities issued by the banks, hence misleading the investors. It required the banking sector to practice financial ethics in mitigating another recession in the future.
References
Berger, A. N., Makaew, T., & Roman, R. A. (2015). Did bank borrowers benefit from the TARP program? The effects of TARP on loan contract terms. Journal of Financial and Quantitative Analysis.
Black, L. K., & Hazelwood, L. N. (2013). The effect of TARP on bank risk-taking. Journal of Financial Stability, 9(4), 790-803.
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Question 
The Implementation of TARP in Purchasing Toxic
Choose 1 of the following topics related to the Great Recession:
The housing price bubble, collapse, foreclosures, bailout of underwater mortgages
Subprime mortgages and derivatives, the bailout of FNMA, Freddie Mac and AIG
The banking industry crisis, the bailout of commercial and investment banks
Write a 350- to 700-word analysis of 1 of the following corrective actions taken by the Federal Reserve as a result of the crisis:
Quantitative easing
Purchase of toxic assets from financial institutions
Paying interest on reserve balances
Address the following in your analysis:
Actions taken by the Federal Reserve to mitigate the crisis
How the corrective action helped to restore stability to the financial system
How the corrective action should prevent the recurrence of a similar crisis
Note: Use of charts and graphs is encouraged with appropriate citations. Any charts or graphs retrieved from the Federal Reserve Bank of St. Louis FRED website may only be included when the data sources used by FRED are US government sources such as the Bureau of Economic Analysis or the Bureau of Labor Statistics.
Cite at least 2 academically credible sources.