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In response to the recent financial crisis, the $700 Billion
Emergency Economic Stabilization Act of 2008 (the “Act”)
was signed into Law by President Bush October 3, 2008, which
established the Troubled Asset Relief Program (“TARP”)
authorizing the Secretary of the Treasury to purchase “troubled
assets” from participating financial institutions.
The stated purposes of the Act are to immediately give the
Secretary of the Treasury funds he can use to restore liquidity
and stability to the economy; and to insure that funds are
used to protect home values, savings accounts, retirement
accounts, college funds, and to promote jobs and economic
growth.
The Act includes additional measures intended to act as
economic stimuli and boost investor and consumer confidence,
including increases in FDIC deposit insurance from $100,000.00
to $250,000.00; tax incentives for sale of certain preferred
stock (to be treated as ordinary income or loss, not capital
gain); and tax disincentives for financial institutions
participating in TARP regarding “excessive”
executive compensation or retirement benefits.
In practical terms, Congress gave the Secretary of the Treasury,
Henry Paulson, one-half of the fund, $350 Billion, to purchase
“troubled assets” (non performing mortgage loans),
from participating financial institutions. The theory was
to buy nonperforming loans, mostly from banks, thereby providing
banks with cash that they could put into circulation in
the form of business and consumer loans, thereby restoring
liquidity to our financial system and re-casting mortgage
terms to more manageable payments for distressed homeowners.
However, the original strategy behind the rescue has been
scuttled. Secretary Paulson announced in October that the
program will instead focus on infusing capital into banks
by buying bank stock. Critics fear the original strategy
of foreclosure mitigation has been lost, including FDIC
chairman Sheila Blair, who continues to press for using
$24 Billion of the TARP money to help American households
avoid foreclosure.
Alternatively, supporters, including economist Nobel Laureate
Paul Krugman, endorse Paulson's new strategy, comparing
it to the 1990's Swedish banking rescue. Paulson also has
the support of the Chairman of the Federal Reserve, Ben
Bernanke, who has appeared before the Congressional Oversight
Committee to present the plan for the new strategy.
In connection with the stock purchase program, the Treasury
Department required nine of the nation's largest financial
services companies to sell a total of $125 billion in preferred
stock to the Government. Presently, there are 64 firms participating
in TARP. A.I.G, Wells Fargo & Co., JPMorgan Chase &
Co, Citigroup Inc. and Bank Of America Corp are among the
top five companies participating, receiving between $15
and $40 Billion each. It should be emphasized that not all
banks participating in the TARP program are suffering from
liquidity problems and they should not be lumped in or characterized
as troubled companies like A.I.G.
Nearly ninety percent of institutions surveyed said that
lack of clarity concerning the way TARP works is making
them less willing to participate. There is also apprehension
among nonparticipating financial institutions regarding
ramifications of issuing preferred stock to the Department
of Treasury. Under TARP, applicants are required to meet
standards established by the Treasury for executive compensation
for senior officers. The applicants also cannot increase
common share dividend payments, or repurchase or redeem
any junior preferred shares without permission from the
Treasury for the first three years the Treasury owns stock.
Another criticism of the Act is that the Secretary has too
much of a free hand in distributing TARP funds, without
enough accountability. The Act does have a component of
congressional oversight, consisting of a panel of five members
appointed by the majority and minority leaders of the House
and Senate. They report to Congress on the activity and
performance of the Secretary relating to foreclosure mitigation
and TARP'S impact on financial markets. In reality, the
Act only gives Congress authority to review Secretary Paulson's
actions, without having authority to suspend funds or take
corrective action. Representative Brad Sherman (D. Calif.)
stated “This is a critique board, not a control board.
This board can issue press releases and write op-eds. It
can't delay, halt or reverse any action taken by Paulson.”
Thus far the Treasury Department has pledged $250 billion
for banks and has agreed to devote $40 billion to A.I.G.
(the first funds going to a company other than a bank).
That leaves $60 billion available as a first bailout installment
of the initial $350 billion. Secretary Paulson said he is
not planning to initiate another capital injection program
beyond those already announced. It is therefore unlikely
that the remaining $350 billion will be advanced during
the Bush administration, leaving office January 20, 2009.
The incoming administration of President-elect Barack Obama
will have to decide whether and how the money in TARP will
be spent.
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