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Definition: Troubled Asset Relief Program (TARP)
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector. It was one of the measures to address the subprime mortgage crisis during 2007-2008.
The purpose of the TARP was to take bad mortgages off the books of financial institutions in America, and onto the books of the federal government. Some refer to it as the troubled asset relief program 2008 or mortgage bailout bill. On 3 October 2008 the troubled asset relief program bill was approved by the House. Originally, the TARP gave the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities from financial institutions across the country. However, it was reduced to $475 billion.
How it works?
In a statement issued by the Paulson, he explained that the troubled asset relief program addresses the root cause of the financial system’s weakness by taking the illiquid mortgage assets (those that have lost value as house prices have decreased) out of the financial system. These toxic assets are currently blocking the system and preventing the credit needed to fuel the economy from being issued. The problem is that there is an uncertainty about the value of mortgage assets, and trading in them has virtually stopped. Because these toxic loans are stuck on the balance sheets of banks, and other financial institutions, they are unable to issue new productive loans. At that point, the government would hold onto the assets and the lenders would eventually pay them back with interest. This would be a long-term investment approach for the federal government and would help provide them with a profit. It would also help the lenders by providing them with financial help when they are on the verge of going bankrupt.