In September 2008 our nation was on the edge of falling into a second Great Depression.  Several major financial institutions had already failed – including Bear Stearns, Indy Mac, and Washington Mutual bank and Lehman Brothers filed for bankruptcy.  A money market fund broke the buck, which meant that one of the safest kinds of investments was no longer safe.  This triggered the start of a run on money market funds. And, AIG, one of the largest and most complex financial firms in the world, was on the verge of failure.

 

Confidence in the financial system was vanishing. Panic was spreading. The stock market dropped by more than 770 points in a single day. Every major financial institution was vulnerable. And the financial wildfire was quickly spreading far beyond Wall Street.

 

The credit markets that provide financing for credit cards, student loans, mortgage loans, auto loans, small business loans and other types of financing stopped functioning. 

 

For the first time in generations, Americans were questioning the safety of their money in banks. For the first time in more than 80 years, a generalized run on the nation’s banking system was a real possibility.  

 

The crisis was causing our economy to collapse.  We were losing almost 800,000 jobs a month and household wealth had fallen by 17 percent – more than five times the decline in 1929.

 

The Federal Reserve and Treasury were taking what actions they could under existing law, but they could not get ahead of the crisis nor contain the damage.  

 

It was out of these extraordinary circumstances that TARP was born.

 

 

The purpose of the actions taken and programs created under TARP was to make sure our financial system did not collapse. The financial system is the circulatory system for our nation’s financial and economic health. The financial system enables people to have a checking account, get a credit card, receive their payroll deposits, buy a home, finance a college education, and save for retirement. It enables businesses to get financing so that they can grow and expand and hire more people. And without TARP and the government’s other emergency measures, the pain experienced by Americans would have been far greater, recovery would have been far slower, and the ultimate cost to repair the damage would have been far higher.  

 

Here are some of the ways that TARP helped to restore the nation’s financial stability.  

 

TARP it stabilized the banking system so money could start moving again throughout the economy.  Treasury launched five programs under TARP to provide capital to banks of all sizes, including more than 650 small and community banks across the nation. The purpose was not to save any individual bank but to protect the economy and the financial system.

 

The government did not give grants; it made investments, structured so that taxpayers would receive a return as the banks recovered.   

 

 

 

The second way that TARP helped to restore America’s financial stability was through three programs designed to restart our nation’s secondary credit markets. These markets, which provide financing for credit cards, auto loans, student loans, mortgage loans, small business loans, and other types of financing, had essentially frozen.

 

Therefore, the government under TARP launched a series of programs to restart the flow of credit.  Soon after these programs began, the volume of activity in these markets increased, and spreads – which affect the borrowing costs for individuals and businesses – began to decline. That recovery continues today.   

 

And all the credit market programs under TARP have been wound down with taxpayers earning more than $4 billion in positive returns from them.

 

 

Another way that TARP helped to restore the nation’s financial stability was through the TARP and Federal Reserve investments in AIG.

 

Supporting AIG was one of the most difficult decisions made by the government. The outrage that it caused is understandable. AIG had grown to become the largest insurance company in the world. At its peak, it had more than $1 trillion in assets and provided insurance to 75 million individual and corporate customers in more than 130 countries. It also had a substantial presence in many critical financial markets, including municipal bonds. 

 

But the simple fact is that in that atmosphere of fear and panic in mid-September of 2008, the sudden collapse of AIG could have dramatically accelerated the speed and intensified the severity of the financial crisis.

 

That is why the government acted.  It did not act simply to save AIG, or help financial institutions that dealt with AIG.  It was because AIG’s sudden collapse – at that time and in those circumstances – would have had catastrophic consequences for the nation.

 

Some of the support for AIG came from TARP. The rest came from the Federal Reserve. And of the total provided – a staggering $182 billion – all of it has been recovered, plus nearly $23 billion in positive returns for the taxpayer.

   

 

TARP also helped protect the broader economy by stabilizing the American auto industry.

 

In 2008, the auto industry shed more than 400,000 jobs.  By December, the situation was dire.  With a deepening recession, credit markets frozen, and Americans unable to get car loans, auto sales were evaporating.  GM and Chrysler were quickly running out of cash.

 

The actions not only saved GM and Chrysler.  They saved businesses up and down the auto industry supply chain, and even helped Ford. Some experts have estimated that as many as one million American jobs were saved as a result of the government’s auto investments. Today the auto industry has come roaring back.  GM, Chrysler, and Ford are all profitable.  They are adding thousands of jobs, and selling more cars. Treasury has exited it's investments in auto companies under TARP. 

 

 

 

TARP directly impacts middle class Americans by helping people keep their homes.  Not since the 1930s have we seen a housing crisis on this scale. 

  

Treasury designed these programs to help homeowners with a verifiable financial hardship remain in their homes. In cases where that wasn't possible, we attempted to help homeowners find a solution that would still help them avoid the substantial cost of foreclosure through other means.

 

As a result of TARP’s housing programs, millions of families have avoided foreclosure and many more families are spending less each month on their mortgage payments. Some were helped directly by TARP's housing programs and other government initiatives. Others have been helped through private sector efforts, spurred on by the new standards TARP has set for mortgage servicers, which have now become standard industry practice. Today the housing market is continuing to recover.

 

 

 

The true cost of the financial crisis is not the fiscal cost of the programs. 

 

The true cost is measured in the human suffering and economic damage it caused, which is huge.  It is the jobs lost, the foreclosed homes, the college educations that cannot be financed, the retirements that must be postponed. 

 

And the most important measure of success of programs like TARP is whether it was successful in stopping the crisis and containing this damage.  However, the fiscal cost of TARP is nevertheless something all taxpayers are entitled to know.

 

Congress authorized up to $700 billion for TARP. That is still the number that most people associate with it. And there were many predictions that most or all of the TARP funds would not be recovered, and the final cost of all the government interventions would run into the trillions of dollars. 

 

In reality, as of 10/31/2016 about $434 billion has been disbursed. We have already recovered more from TARP for the taxpayers than has been disbursed if we include all of Treasury’s profits from its investment in AIG. (See the TARP Tracker.)

 

Moreover, when you look at the all of the government’s financial stability programs as whole, taxpayers are likely to realize a significant gain. 

 

 

  

When we think of the Great Depression images of bread lines, of tent cities for the homeless, come to mind.  We are fortunate that as bad as this crisis was, the worst did not happen.  But that is all the more reason to remember how close we came, and how government’s actions prevented disaster.

 

Yet the great paradox of TARP is that while it was so unpopular, the program is perhaps the best recent example of effective, bipartisan government.   The law was passed with bipartisan support, and the program was carried out quickly, boldly, and wisely, across both a Republican and Democratic Administration.