Money & Finance › Bubbles, crashes & crises › The 2008 global financial crisis
TARP bank bailout (2008)
Oct 2008· Law or rule
Fact, law or dataA rule, statute, definition or measured number.
The 2008 law that let the Treasury spend up to $700 billion to stabilize banks, carmakers and the housing market.
See it on the Money & Finance map →How it works
Passed October 3, 2008, after the House first rejected it, the Emergency Economic Stabilization Act created the Troubled Asset Relief Program. Treasury had planned to buy toxic mortgage assets but instead bought preferred shares in banks, starting with $125 billion in nine big banks. TARP also funded AIG, GM, Chrysler and mortgage relief. Its authority was later cut to $475 billion, and about $440 billion went out. Banks repaid with a profit; losses came mainly from carmakers and housing aid.
Why it matters
It stopped the run on the biggest banks, but rescuing Wall Street while homeowners lost houses fueled lasting anger on left and right, from the Tea Party to Occupy.
Facts, rules and data
The statute, Treasury's monthly TARP reports, audits by the Special Inspector General (SIGTARP), and CBO estimates putting the final net cost at about $31 billion.
Debates and risks
Whether TARP or the Fed's emergency lending did more to end the panic, and whether banks should have faced tougher terms, are debated.
Connections (3)
▸Too big to fail: systemically important banks was the rationale for TARP bank bailout (2008)Fact, law or data
The connection
After Lehman's bankruptcy froze markets, Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke argued more big failures would wreck the economy. Congress approved $700 billion, and Treasury put $125 billion of capital into nine major banks at once so that none would be singled out as weak.
When and why
Washington, October 2008: Congress passed the law on October 3, and the nine bank chiefs were summoned to Treasury on October 13.
How we know
The statute (the Emergency Economic Stabilization Act), Treasury's TARP reports, the Special Inspector General's audits, and Paulson's and Bernanke's memoirs.
Debates and risks
Whether letting Lehman fail was a choice or legally unavoidable is disputed: Bernanke says the Fed lacked authority; economist Laurence Ball argues it had options.
▸AIG and credit default swaps was rescued with help from TARP bank bailout (2008)Fact, law or data
The connection
The Fed's September loan could not cover AIG's mounting losses, so in November Treasury used TARP to buy $40 billion of AIG preferred stock, later committing about $70 billion in all. That let AIG meet its swap obligations and avoid a failure that would have hit banks worldwide.
When and why
Washington and New York, November 10, 2008, restructured in March 2009; AIG became TARP's largest single recipient.
How we know
Treasury's TARP transaction reports and SIGTARP audits; the government sold its last AIG shares in December 2012.
Debates and risks
Critics, including the Congressional Oversight Panel, said the rescue told markets that giant firms would be saved; whether the eventual profit vindicates it is debated.
▸TARP bank bailout (2008) fueled debate over Moral hazard: insurance and bailouts encourage riskExperts disagree
The connection
TARP protected creditors and kept rescued banks' shareholders from being wiped out, which critics said taught banks that recklessness gets rewarded. Defenders point to the terms: preferred stock paying 5%, warrants, pay limits, and bank investments repaid with a profit. The anger fed both the Tea Party and Occupy Wall Street.
When and why
The House rejected TARP on September 29, 2008, then passed it on October 3; the argument ran through the 2010 elections.
How solid is the link?
Treasury reports show bank capital repaid with a profit; economists Duchin and Sosyura (2014) found aided banks shifted toward riskier assets afterward.
Debates and risks
Whether a smaller rescue, or none, would have hurt less is unknowable; how much TARP lastingly changed risk-taking is still debated.