Definition
The Troubled Asset Relief Program (TARP) was established in October 2008 in response to the subprime mortgage crisis and ensuing financial turmoil. TARP empowered the U.S. Department of the Treasury to purchase or insure up to $700 billion in troubled assets, including mortgage-backed securities and other related financial instruments, to restore market stability and encourage bank lending.
Examples
- Bank Bailouts: Under TARP, the U.S. government purchased preferred shares and subordinated debt from struggling banks such as Citigroup and Bank of America to improve their capital bases and restore confidence in the financial system.
- Auto Industry Support: TARP funds were also used to support American auto manufacturers such as General Motors and Chrysler, providing bridge loans and equity infusions to prevent their collapse and salvage jobs.
- AIG Bailout: The insurance giant American International Group (AIG) received significant TARP funds to fulfill its financial obligations and avoid bankruptcy, thereby preventing further systemic risks.
Frequently Asked Questions
Q: What was the goal of TARP? A: The primary goal of TARP was to stabilize the financial system by purchasing troubled assets from banks and other financial institutions, thereby restoring confidence and improving liquidity in the market.
Q: How much money did the government allocate for TARP? A: TARP was authorized to use up to $700 billion, but not all of that amount was ultimately spent.
Q: Did TARP only help banks? A: No, while a significant portion of TARP funds went to banks, it also provided financial support to the auto industry and insurers like AIG, as well as other financial instruments.
Q: Was TARP considered successful? A: Opinions vary, but many experts believe TARP was successful in stabilizing the financial system. The majority of the injected funds were eventually repaid with interest, resulting in minimal loss to taxpayers.
Q: What were the major criticisms of TARP? A: Criticisms include the perception of “bailing out” failing institutions with taxpayer money, lack of transparency, and inadequate reforms to prevent a future crisis.
Related Terms with Definitions
- Subprime Lending: A type of lending practice that involves offering loans to individuals with poor credit histories, which carry a higher risk of default.
- Toxic Assets: Financial assets that have lost significant value and cannot be sold without incurring substantial losses, often associated with mortgage-backed securities during the financial crisis.
- Securitization: The process of pooling various types of debt (such as mortgages) and selling the consolidated debt as bonds or other securities to investors.
Online References
- U.S. Department of the Treasury: TARP
- Federal Reserve: TARP Overview
- Investopedia: Troubled Asset Relief Program (TARP)
Suggested Books for Further Studies
- “Too Big to Fail” by Andrew Ross Sorkin
- “Financial Shock: Global Panic and Government Bailouts” by Mark Zandi
- “The Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street” by Neil Barofsky
- “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It” by Robert J. Shiller
- “Stress Test: Reflections on Financial Crises” by Timothy F. Geithner
Accounting Basics: TARP Fundamentals Quiz
Thank you for learning about the Troubled Asset Relief Program (TARP) and exploring our detailed explanations through these quiz questions. Continue building your financial acumen!
