Class: 10-29-08 What is TARP? A fish in Alaska or they wished

Students,

A question for the test and for the test for years to come in business schools.

1. What is TARP? [You may choose more than one answer below.]
a) tarpaulin
b) waterproofed canvas
c) a fish in Alaska
d) Troubled Assets Relief Program

There will be Harvard Business School cases, University of Virginia Darden Business School cases, and many, many other cases written for years to come on TARP so you need to understand the term.

If you haven’t answered the question correctly, you need to be reading another blog. The TARP was established in October 2008 on the passage of the Emergency Economic Stabilization Act of 2008. (EESA)

TARP stands for Trouble Assets Relief Program and will be implemented by the newly established Office of Financial Stability (OFS – might as well create the new world acronyms).

Hey can I get a job at OFS! Who says the financial crisis is causing job losses. We will now have job gains at the OFS! Back to serious matters.

According to Neel Kashkari – a US Treasury Department Assistant – Secretary for Financial Stability  in a speech which can be found here, the OFS will be split into the following administrative units/programs:

1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.

2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy objectives.

3) Insurance program: We are establishing a program to insure troubled assets. We have several innovative ideas on how to structure this program, including how to insure mortgage-backed securities as well as whole loans. At the same time, we recognize that there are likely other good ideas out there that we could benefit from. Accordingly, on Friday we submitted to the Federal Register a public Request for Comment to solicit the best ideas on structuring options. We are requiring responses within fourteen days so we can consider them quickly, and begin designing the program.

4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.

5) Homeownership preservation: When we purchase mortgages and mortgage-backed securities, we will look for every opportunity possible to help homeowners. This goal is consistent with other programs – such as HOPE NOW – aimed at working with borrowers, counselors and servicers to keep people in their homes. In this case, we are working with the Department of Housing and Urban Development to maximize these opportunities to help as many homeowners as possible, while also protecting taxpayers.

6) Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP. This team is working hard to define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.

7) Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements. We welcome this oversight and have a team focused on making sure we get it right.

Over the coming weeks and months I will be looking at each of these items in details. I believe much to early to say TARP will solve many problems, but TARP is a fact of life now whether we like it or not. I am sure some would have wished to never hear the word.

There are TARP participation requirements though I don’t know yet how these requirements will actually benefit anyone. For example, firms that sell their bad assets to the government must provide warrants so that taxpayers will benefit from their future growth. There are other requirements as well such as

The President must submit a law to cover taxpayer losses on the fund, using “a small, broad-based fee on all financial institutions.”

To participate in the bailout program,firms will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits ‘golden parachutes’ and requires that unearned bonuses be returned. [All of this is being worked on now]

The following requirement is not clear to me. But the Bailout Fund has an Oversight Board so that the US Treasury cannot act in an arbitrary manner. [I am not clear if the Oversight Board is independent of OFS or is over the OFS but I suspect we will find out soon.]

There is an inspector general (again, I am assuming in the OFS).

The TARP program has already started and I will much more to write about it.