• TARP Changes Announced
  • December 11, 2008 | Author: Kenneth G. Lore
  • Law Firm: Bingham McCutchen LLP - Washington Office
  • On Wednesday, November 12th, the Secretary of the Treasury, Henry Paulson, announced a significant change in the Troubled Assets Relief Program (“TARP”), which was created under the recently enacted Emergency Economic Stabilization Act of 2008 (the “Act”). When first introduced and passed by Congress last month, the Act was touted by Paulson and others as a rescue plan for financial institutions under which the Department of the Treasury would purchase troubled mortgages and mortgage-backed securities from struggling financial institutions to help stabilize the financial markets.

    But less than two full weeks after the Act was passed, the Department of the Treasury announced that under a new capital purchase program it was planning to use part of the $700 billion allocated under the Act to purchase stock in troubled financial institutions instead of mortgages or mortgage-backed securities. Paulson explained this decision by saying:

    During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.

    Despite these initial efforts, Paulson indicated on Wednesday that more needs to be done, and he outlined three primary goals for the remaining funds allocated under the Act. The first goal is to continue to reinforce financial institutions and other institutions capable of helping with the economic recovery. The second goal is to help non-banking entities that provide credit for consumers so that consumers will have access to auto loans, student loans and credit cards. The third goal is to find ways to reduce foreclosures. 

    This announcement signaled a significant shift in the direction of TARP. Paulson explained this directional change by saying that the purchase of mortgage assets are “not the most effective way” to use TARP funds. Instead of purchasing troubled mortgages, Paulson indicated that the Department of the Treasury is considering expanding the Capital Purchase Program so that non-financial institutions could benefit from it. He also suggested that the Department of the Treasury might try to leverage the TARP funds by implementing a matching program under which investments of private capital would be matched with investments from TARP.

    When discussing the new plan, Paulson indicated that he believed the steps taken thus far by the Department of the Treasury and FDIC have helped to prevent a “broad systemic event” and that the financial system is stronger now than it was a few weeks ago; however, he acknowledged that the system remains fragile and that many challenges lay ahead. In light of this, Paulson promised to keep President-elect Obama’s transition team fully informed of the situation and to help make the transition between administrations as seamless as possible.