Troubled Asset Relief Program (TARP)

The TARP – or Troubled Asset Relief Program – was a government action in 2008 aimed at stabilizing the financial markets and US banks. The program was pioneered by Treasury Secretary Henry Paulson after the collapse of Lehman Brothers and AIG and the near collapse of other investment banks such as Morgan Stanley, Merrill Lynch and Goldman Sachs.

The TARP program was an injected of $700 billion into the financial markets. Initially it was meant for buying poor quality subprime mortgage assets from banks, allowed them to strengthen balance sheets and to restore calm and trust to the credit markets (as all banks would effectively be backed by the US government). However, it was modified slightly to allow the government to buy equity stakes in banks and other financial institutions, as there were many problems with buying assets such as:

• Pricing of the assets in an illiquid market
• Banks which had been overly risky possibly profiting at the taxpayers expense
• Managing the assets once the government had bought them

Almost all US financial institutions received some money from the TARP program, even those such as Citigroup and JPMorgan which did not really need it. This was to restore calm to the markets and to avoid the stigma associated with taking TARP funds which could have further damaged the credit-worthiness of a participating bank.

In 2011 it was estimated that the TARP program would actually cost the taxpayer far less than initially thought.

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