THE TROUBLED ASSET RELIEF PROGRAM

(TARP)

Nathan KintzBA 543 Noon

5/4/2011

Agenda

How did TARP come to be? (problem) What were TARP’s original objectives? How was TARP actually used? Recipients –

GM example How much has been paid back?

The Take-Away

The Subprime Mortgage Crisis

Varying interest rates of subprime mortgages Start with attractive low fixed rate (for 2-5

yrs.) Adjust annually to prime rates plus ~5% Nonrecourse loans

House values peaked than fell rapidly (2006) Interest rates shot up

MORTGAGE EXAMPLE

Housing Prices…

TARP Defined

Allowed US Department of Treasury to purchase/insure up to $700B of “troubled assets”, 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

TARP Original Goals

Improve the liquidity of these assets Financial market stability/relief to struggling

home owners Defines “financial institutions” eligible for

the bailout as: Any bank, savings association, credit union,

security broker or dealer, or insurance company. Encourage banks to resume lending again

at levels seen before the crisis: To each other and to consumers and businesses

What happens eventually?

http://nation.foxnews.com/business/2010/02/24/obamas-tarp-slush-fund

TARP’s Many Modifications

Beginning of Oct. 2008. TARP PASSED Revised on October 14, 2008 Revised on November 12, 2008 Revised on December 19, 2008 Revised on December 31, 2008 Revised on January 15, 2009 Revised on January 21, 2009 Revised on February 5, 2009 Revised on February 10, 2009 Revised on March 23, 2009 Revised on April 19, 2009

General Motors Example

Government has given GM $52B (6.7 loan) 61% equity

Nov. 2010 IPO, sold $13.5B worth of GM shares 33% equity left

Government has recovered $23B Taxpayer break even?

Not likely: stock price ~$30 Shares need to sell at $53 to break even ~$11B loss if sold right now

Paid back $6.7B loan? Sort of…

The Take-Away

TARP was designed to stabilize the financial markets Would’ve been more successful if

implemented as intended and monitored/enforced

It has become essentially a slush fund Commingled with stimulus spending

Start saving up…

Because we will be paying for this large error throughout our lifetime in the form of future taxes…

Citations

http://blog.mortgagereclaims.com/mortgagereclaims/sub-prime-mortgage-interest-rates-explained/

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://www.visualeconomics.com/a-detailed-look-at-tarp/

http://nation.foxnews.com/business/2010/02/24/obamas-tarp-slush-fund

http://online.wsj.com/article/SB126021634147080567.html

http://online.wsj.com/article/SB10001424052748703916004576271382418887092.html?mod=WSJ_hp_mostpop_read

http://abcnews.go.com/Business/Economy/story?id=5932586&page=1

http://www.npr.org/blogs/money/2009/11/the_morning_report_gm_will_pay_back_loan_early_tarp_likely_to_remain_through_2011.html

http://online.wsj.com/article/SB122969367595121563.html

http://www.forbes.com/2009/02/04/tarp-treasury-congress-business-beltway_0205_tarp.html

QUESTIONS?