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What is the Troubled Asset Relief Program (TARP)

Troubled Asset Relief Program (TARP) is a formulation of relief for lending institutions who are suffering due to the mortgage crisis because of the economic meltdown. Originally when this program was formulated in 2008 it was meant to enable banks and lending institutions to submit a price for bidding, so that they could sell to TARP in reverse bidding, assets which were mortgage-based and facing foreclosure with no means of recovering the lent amount. TARP would take the lowest bid in each asset class ensuring that the government did not overpay for these problematic assets. However this auction was taking very long to develop and so the Treasury is proposing to purchase or insure the troubled assets up to $700 billion, by purchasing certain stock in the form of equity warrants from banks.

Troubled assets can be classified as assets which are difficult to value and are mortgages or related to such, and were issued before 15th March 2008. These assets are basically the collateralized debt obligations, which were affected badly due to the widespread foreclosures. The Treasury can only buy such assets which will promote the financial stability of the country and promote liquidity in the markets.

The Troubled Assets Relief Program is targeted to first stabilize the banking and lending institutions by removing these assets from their balance sheets and avoid any losses in future. TARP does not aim to recover the losses which the banks have already suffered on the troubled assets, but wants to stabilize the value of these falling assets and ultimately to revive the market so that the prices increase on these assets.

TARP needs the banks and financial institutions who sell these troubled assets, to give in return equity warrants to the treasury. These warrants will enable the treasury to purchase non-voting shares in these institutions at a specific price. This will enable the treasury to profit from this ownership so that the taxpayer is protected. This will also have a two way effect as the institution will recover from the assistance and recover their former financial strength which in turn will revive the market with increased liquidity and the government will profit from this as the assets will also increase in value.

Once these problematic assets are taken care of by TARP, the banks will gain confidence to start lending to each other and also to business establishments and other consumers. This will in turn increase the funding of the markets and raise the circulation of money in the economy. There will no longer be any hoarding due to panic and investor’s confidence will be restored. This renewed confidence will cause the lending rates among the banks to fall and relatively the rates on credit card interest and flexible mortgage rates will come down.

Troubled Assets Relief Program will initially buy $250 billion worth of such assets and then try to sell them. The money collected from such sales will be used to buy further assets and so on, making it into a revolving purchase program.

Tags: bank, collateral, credit, government, liquidity, market, money, mortgage, price, tax

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