Track the Stimulus

Started after the collapse of Lehman Brothers and the rescue of AIG, the $700 billion Troubled Asset Relief Program (TARP) ended on September 30, 2010 when Congress decided not to extend the 2-year authorization for the program.

The plan was designed to address the credit crisis by taking a multi-pronged approach that provided capital injections to banks that needed it, created a mechanism to purchase "toxic securities" through a public-private fund, supported business lending through the purchase of business loans in the secondary markets, and aided homeowners impacted by the steep decreases in home prices.
 
By most accounts, the TARP accomplished its main goal of providing stability to the financial markets - as measured by the credit spreads, which have returned to levels in-line with a recessionary economy and far below the credit-crunch days seen in the last quarter of 2008, and in the first quarter of 2009 and by the ability of banks to raise capital and return to profitability.  Furthermore, the finally cost of TARP once feared in the hundreds of billions is now estimated at $30 billion.

By September 30, 2010 the TARP had disbursed over $388 billion of the $475 billion finally allocated to it.  Banks have repaid $192 billion already, and the government has earned $30 billion in the form of interest and the sale of securities (warrants, preferred and common shares) that it purchased as part of the Capital Purchase Program (CPP) (see table below).  

Troubled Assets Relief Program Funds Status (9/30/10)
	Funds Committed ($ billion)	Funds Disbursed ($ billion)	Funds       Repaid  ($ billion)
Capital Purchase Program (CPP)	250	245	192
Systematically Significant Failing Institutions (AIG)	70	48
Automotive Industry Financing Program	82	80	11
Making Home Affordable Plan	45.6	0.5
Term Asset-Backed Securities Loan Facility (TALF)	4.3	0.1
Public Private Investment Program (PPIP)	22.4	14.2	0.4
SBA 7a Securities Purchase Program	0.4	0.4
Community Development Capital Initiative	0.8	0.6
TOTAL	$475	$388	$204
Source: GAO, Treasury OFS

The Capital Purchase Program (CPP)
Introduced in February 2009 (though in practice started in October 2008), it targeted the credit crunch by providing assistance to financial institutions.  It continued the process started by the Bush administration and provides a mechanism for the Treasury to inject capital in the banking system (the tables presented later in this page provide a listing of who the largest recipients of the more than $293 billion that were disbursed through the CPP and it sister programs to help financial institutions).  Unlike TARP investments made in late 2008 and early 2009, where capital was disbursed to institutions in a rather ad-hoc fashion (in large part because the liquidity crisis that ensued after the collapse of Lehman Brothers did not provide much time for careful analysis and deliberations), the Capital Purchase Program detailed the process through which banks will access the government's capital.  The program called for:

• Banks to undergo "stress tests" that will determine whether the banks are viable and whether they need additional capital. 
  
• If they do need capital, bank institutions will be given time to raise the needed capital in the private markets.
• If they are unable to raise capital in the private markets, the government will provide capital in the form of equity-like debt securities (convertible preferreds);
• Banks will have 7 years to repay the capital, or will have to convert the securities giving the government part ownership of the institution.

Most of the largest banks have already repurchased the totality of the shares sold to the Treasury; as their financial condition has improved, and as the cost of doing business under the watch of the Treasury officials (and Congress) has increased, they moved rapidly to repay the funds.

The CPP is credited by most observers with avoiding an even more serious liquidity crunch and with providing a cushion for financial institutions to remain solvent and continue providing credit to individuals and businesses (though at greatly reduced levels when compared to pre-credit crunch levels).

The CPP page provides further details on the program.

The Public-Private Investment Partnership (PPIP)
In October of 2009 the Treasury department finally announced the closing of the first few Public-Private Investment Partnership funds.  Treasury has chosen a number of large investors such as Blackrock, AllianceBernstein, Wellington Management, Invesco to raise and manage the funds.  Their  mission is to acquire the legacy assets - loans and securities  (i.e. toxic assets) that the banks now hold.  While initially targeting the use of $75-100 billion to provide matching equity capital for the funds, the PPIP market conditions (and the lack of participant interest) lowered that figure to $22.4 billion.  The Treasury expects private market participants to provide half of the capital, and thus by sharing in the risk/reward be better able to provide a fair valuation for the toxic assets.  Of course, valuation has been the crux of all the problems with "legacy assets" - the private markets have so far been unable to do this efficiently as banks believe they are worth more than potential buyers are willing to pay which in some cases is zero.  The new plan hopes to solve the problem by providing incentives to market participants to participate by providing the liquidity they need.

The plan calls for the government and private inspectors to co-invest in the purchase of legacy assets.  As of September 30, 2010 the public-private funds have raised $7.4 billion, which are matched by the Treasury ($1 invested by the government for every $1 invested by the private investor), giving total equity capital of $14.7 billion.  The government also provides up to 100% debt match resulting in a total purchasing power of $29.4 billion.  So far investments have been made for a total of $18.6 billion. 

The Public-Private Investment Partnership (PPIP) page, contains further details on the program.

Capital Assistance to Businesses
The Treasury, financed by one of the Fed Initiatives, the Term Asset-Backed Security Loan Facility (TALF), provided support to Consumer and Business Lending Initiatives.  This initiative allowed the government to purchase small business loans, student loans, consumer and auto financing securities and commercial mortgages in the secondary market.  The purpose was to provide liquidity in the market and to lower the interest rates charged to the end users.  For small businesses, the Small Business Administration was given the mandate to increase and expedite loans through its network of community and large banks.  This element of the TARP was modeled after the successful effort by the Fed and the government to lower mortgage rates by buying consumer mortgages in the secondary market through Fannie Mae and Freddie Mac. Investors, including mutual funds, hedge funds, and others had access to these facilities at very low rates.  While the TALF was probably the riskiest of all the facilities that the Fed implemented, its reach was the largest as it revitalized the consumer market directly by providing liquidity to those facilities most associated with consumer spending.  The importance of these markets is very large; the Fed estimates that securitized markets provided approximately 25% of all the lending for many of these consumer and small business loans prior to the start of the crisis - while not yet at that level, the securitization markets are clearly back to life after their near death experience. 

The Homeowner Affordability and Stability Plan
The HASP provides assistance to homeowners by providing lower rates to individuals that can not refinance their homes because of the reduction in home prices; help for homeowners facing foreclosure and capital injections to Fannie Mae and Freddie Mac to keep mortgage rates low.

 

The Treasury has set-up a site http://financialstability.gov/ to provide the public with information on the evolution and success of the plan, including providing online access to all the contracts with recipients of aid.

A brief history of the TARP (it's already two years, and fortunately the environment is quite different now...)
The by now famous (or infamous depending on your point of view) TARP came into existence on October 3, 2008. The plan was first introduced by then Treasury Secretary John Paulson as a mechanism to assist struggling financial institutions re-capitalize themselves and re-start lending by purchasing their toxic assets, so that they could take them off their balance sheets.  The TARP was the Treasury's and Fed's response to the havoc that broke through the market in the aftermath of Lehman Brothers' bankruptcy and the "bailout" of the insurance giant AIG, which received a gigantic $85 billion loan in exchange for an 80% ownership stake in the company.  A few days after these events, the credit markets which had been under severe strain, seized with the announcement that a money market fund heavily invested in Lehman's debt could not return 100% of the assets to its investors.  This caused a run on money market funds and inter-bank lending went to a standstill. By the evening of Thursday September 18, Paulson and Federal Reserve Chairman Ben Bernanke announced plans to put together a facility to buy the troubled assets of financial institutions so that they could stop the string of continuous losses in their portfolios caused by bad mortgage and derivative bets and thus have a hope of recapitalizing themselves and start lending.

Of the large financial institutions almost all of them have repaid the government.  Of those where the government is still an investor, AIG and Citigroup are the largest.  The Treasury department expects to sell its remaining stake in Citigroup, which initially amounted to 36% of the company, by early 2011.  Treasury and AIG, where the TARP investment represents an 80% stake in the company, also announced their plan to repay the government in full over the next few years.  For comparison sake, the smallest TARP bank recipient obtained $300,000.

Worth noting, in exchange for the capital provided by the TARP, Congress and the Executive branch are demanding that in addition to the interest, and ownership option, banks adjust their compensation schemes placing significant restrictions on executive pay.  For the largest recipients, this limits the size of bonuses to employees earning more than $250,000 per year.  In addition, there has been very strong pressure to curb non-essential spending at those institutions.  These moves were one of the more powerful catalysts for those institutions that had the ability to raise capital to rapidly repay the government.

 

The distribution of banks by state receiving funds non-surprisingly sees New York on top as home of most of the investment banks and many a commercial bank.  North Carolina, home of Bank of America comes a distant second.  California, one of the epicenters of the mortgage crisis, comes in first with the "distinction" of having the most banks receiving funds from the TARP; North Carolina and New York are second and third.  The following table provides a snapshot of the states whose banks have received the most aid.  The full list is available here.

 

	Total TARP Funds Disbursed ($ million)	Number of Institutions Receiving Funds
New York	175,026	23
Michigan	82,061	12
North Carolina	48,636	32
California	27,640	72
Pennsylvania	9,832	29
Ohio	7,840	17
Minnesota	7,084	16
Georgia	6,277	27
Illinois	4561	44
Virginia	4,174	26

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