Vol 6 (2009) - Issue 1

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The Troubled Asset Relief Program: An Overview

Introduction

Intended to invigorate frozen credit markets, the Troubled Asset Relief Program (‘TARP’) enacted under the Emergency Economic Stabilization Act in October 2008 has been controversial from its inception. With the last of the initially authorised USD 350 billion now earmarked for the struggling auto makers, the TARP administrators at the Department of the Treasury have been criticised for failing to adequately address home foreclosures and to monitor the recipients’ use of TARP funds. Initially conceived as a potent instrument authorising up to USD 700 billion for the purchase of troubled mortgage-related assets held by financial institutions, the TARP has been reconfigured as a government investment vehicle, injecting capital into a variety of entities (both struggling and otherwise) as the credit crisis progressed. The below summary outlines the principal provisions of TARP as well as the other Treasury programs utilising TARP funds to date.

Principal TARP provisions

The Emergency Economic Stabilization Act of 2008 (‘EESA’) containing the TARP provisions was enacted on 3 October 2008, after much legislative brinksmanship. The original three-page bill forwarded to Congress by US Secretary of the Treasury Henry M. Paulson, Jr in mid-September had grown to 450 pages and was larded with extensions of certain tax benefits, energy tax credits and initiatives and sundry other items (including tax relief for wooden arrow manufacturers) unrelated to the financial bailout terms. The key TARP provisions are:

Troubled asset acquisition

The US Secretary of the Treasury (the ‘Secretary’) is authorised under TARP to purchase ‘troubled assets’ from any ‘financial institution’. ‘Troubled assets’ include residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages (originated or issued on or before 14 March 2008) and ‘any other financial instrument’ as determined by the Secretary, upon consultation with the Federal Reserve, to help financial market stability.

‘Financial institution’ is broadly defined as any institution, including but not limited to banks, savings associations, credit unions, securities brokers and dealers, or insurance companies established and regulated under the laws of the United States and having significant operations in the United States. 'Financial institution' includes US branches of foreign banks but specifically excludes any central bank of, or institution owned by, a foreign government.

Market Mechanisms: In making purchases, the Secretary will use market mechanisms as appropriate, such as auctions or reverse auctions.

Purchase Price: The Secretary will purchase assets at the ‘lowest’ price deemed to be consistent with the purposes of EESA. In order to prevent unjust enrichment, the Secretary cannot pay more for a troubled asset than the amount paid by the seller (except for certain assets acquired through mergers or acquisitions).

Pricing and Management of Assets: The Secretary will establish guidelines which include pricing and valuation methods, as well as selection procedures for the assets and the asset managers.

Equity Sharing: The Secretary will receive warrants for nonvoting common or preferred stock or senior debt instruments in a selling financial institution, in each case where purchases are greater than USD 100,000,000. The Secretary is authorised to sell, exercise or surrender such warrants, equity or debt instruments in its discretion.