Overview of the TARP Program (Troubled Asset Relief Program)

The TARP program, or Troubled Asset Relief Program, is a government program that was designed to help after the subprime mortgage crisis of 2008. This program is designed to allow the government to purchase troubled assets from lenders. Here are a few things to consider about the TARP program and how it works.

How it Works

During the subprime mortgage crisis, many lenders were in financial trouble because they offered loans without using prudent underwriting methods. As a result, many of these loans were going into default and costing the lenders a great deal of money. In order to prevent a financial collapse, the federal government stepped in and decided to offer help. With this program, the United States government can help the lenders out by purchasing troubled mortgages.

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. If several financial institutions went bankrupt at the same time, it could be devastating to the economy as a whole. The Troubled Asset Relief Program was designed to prevent this from happening.

Aspects of the Program

The Troubled Asset Relief Program provides help in a number of ways. One of the biggest components of the program is the mortgage-backed securities program. Another division is in charge of identifying whole mortgage loans to purchase from regional banks. Another part of the program also deals with insuring these mortgage backed securities. The program also purchases equity in certain financial institutions in order to help out. 

Another very important part of this program deals with executive compensation. Companies that are involved with the Troubled Asset Relief Program are forced to establish maximums for the salaries of executives in the company. One of the biggest problems of the financial problems of this era were that executives were earning salaries that were not in line with the services that they were providing. By lowering the amount of executive compensation, these companies can be more profitable and stay in business.

Another section of the program deals with compliance. They make sure that the companies that are getting help obey the rules that are set forth for them through the program.

Size of the Program

Initially, the program was thought to be a very large financial outlay by the federal government. The original estimates had to cost of the program pegged at $356 billion. This would have been massive and could have potentially been a big risk for the government. However, after the program got started, it was discovered that it would only take about $89 billion in order to remove the problems that were caused by this financial mess.

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