The Financial Stability Plan, initiated under the belief that "[t]here is more risk and greater cost in gradualism than in aggressive action," has several features.Troubled Asset Relief Program

Craig P. Aubuchon

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ￿ Number 20
T
he Emergency Economic Stabilization Act was
signed into law on October 3, 2008, and granted
the U.S. Treasury broad powers to ensure financial
market stability through the Troubled Asset Relief Program
(TARP). The TARP authorized the purchase and insurance
of up to $700 billion of troubled assets from banks and was
passed with three goals: to stabilize financial markets, to
support housing markets by preventing foreclosures and
supporting mortgage finance, and to minimize potential
losses to taxpayers.
The TARP was originally conceived to purchase troubled
assets directly from banks. However, as quickly became
apparent, properly valuing these assets was extremely dif-
ficult as a result of ongoing home mortgage foreclosures,
defaults, and falling house prices. The financial turmoil
intensified in the weeks following the bill’s passage, and to
move quickly, the U.S. Treasury established the Capital
Purchase Program (CPP), which became the centerpiece
of TARP. The goal of the CPP was to recapitalize healthy
banks by purchasing preferred shares of stock in banks
instead of purchasing their troubled assets.1 The Treasury
hoped to stabilize the financial markets and limit downside
financial risks to taxpayers via such recapitalization. Later,
the TARP included investments in American International
Group (under the Systemically Significantly Failing
Institutions [SSFIs] provision of TARP), the automotive
industry (General Motors, Chrysler, and their respective
financing arms), and targeted investments in Citigroup
and Bank of America. The left column of the table below
summarizes TARP distributions through April 3, 2009.
The Emergency Economic Stabilization Act also created
a Congressional Oversight Panel (COP) to evaluate the
effectiveness of the TARP. In their January 9, 2009, report,
the COP highlighted four areas that they believe warrant-
ed special attention. First, they asked the Treasury to report
how banks are using their TARP funds. Second, the panel
called for greater transparency and asset evaluation. Third,
the panel suggested greater Treasury emphasis on prevent-
ing foreclosures, and finally, they asked for better commu-
nication of the overall TARP strategy.
On February 10, 2009, Treasury Secretary Geithner
released details for the new Financial Stability Plan, which
attempts to address some of the COP concerns by reallo-
What’s Under the TARP?
Craig P. Aubuchon, Senior Research Associate
The Financial Stability Plan, 
initiated under the belief that 
“[t]here is more risk and greater cost 
in gradualism than in aggressive
action,” has several features.
TARP Allocations and Financial Stability Proposals
Troubled Asset Relief Program (allocated) Amount ($ billion) Financial Stability Plan (proposed) Amount ($ billion)
Capital Purchase Program 198.8 Capital Assistance Program Unknown
American International Group 40.0 Homeowner Affordability and Stability Plan 75.0
Citigroup Public-Private Investment Fund 100.0
Targeted investment 20.0 Term Asset-Backed Securities Lending Facility 100.0
Asset guarantee 5.0
Bank of America 20.0
Automotive industry financing* 24.8
Total 308.6 Total 275.0
NOTE: *Includes General Motors, Chrysler, and their respective financing divisions.cating the remaining TARP funds and combining the
funds with larger, more comprehensive lending facilities.
The Financial Stability Plan, initiated under the belief that
“[t]here is more risk and greater cost in gradualism than
in aggressive action,” has several features.2
First, the Financial Stability Plan established the Capital
Assistance Program (CAP). To be eligible for a CAP invest-
ment, banks must first undergo a stress test.3 This test deter-
mines whether a bank has enough money to withstand a
severe economic downturn. The stress test is required for
all bank holding companies with more than $100 billion
in assets, but smaller U.S. banking organizations seeking
funds must opt to take a stress test before receiving any
funds. The plan then requires participating firms to submit
a detailed plan for how the proposed funds will be used.
After receiving funds, firms must also provide monthly
reports on the number and type of loans issued and secu-
rities purchased; these reports will be publicly available at
www.financialstability.gov. Any institution that accepts
funds must commit to a series of restrictions, such as limits
to executive pay, and participate in mortgage foreclosure
mitigation programs.
The Financial Stability Plan increases Treasury participa-
tion in the Term Asset-Backed Securities Lending Facility
(TALF); at the same time, the Federal Reserve Board has
expanded the TALF to lend up to $1 trillion.4 The TALF is
designed to lend money and accept assets backed by student
loans, small business loans, and credit card payments,
thereby increasing the availability of loans to consumers
and small businesses.5 The TALF will use approximately
$100 billion of the remaining TARP funds.
A new feature of the Financial Stability Plan is the
Public-Private Investment Program, which contains two
Public-Private Investment Funds (PPIF) designed to com-
bine government and private equity to purchase troubled
or illiquid assets from banks. This should in turn allow
banks to then resume normal banking operations. The
program contains two components. The Legacy Loans
Program will target “legacy loans”6 currently on banks’
balance sheets and the Federal Deposit Insurance Corpor  -
ation (FDIC) will provide financing through a debt guar-
antee of up to 85 percent of the PPIF investment; the U.S.
Treasury and private investors will split the remaining
equity investment dollar for dollar. The second component,
the Legacy Securities Program, will provide debt financing
through the TALF (instead of the FDIC) and include up to
a one-for-one dollar match of private equity by the U.S.
Treasury to invest in any legacy security backed by com-
mercial or residential mortgages issued before 2009. Inclu  -
sion of the private sector is designed to avoid overpricing
assets and creating taxpayer losses. However, initial support
and reception for the plan has been mixed.
The Financial Stability Plan also includes language
directed solely at stemming home foreclosures. The new
Homeowner Affordability and Stability Plan will use up to
$75 billion of the $700 billion TARP allocation to refi-
nance or modify qualifying mortgages so that monthly
payments are never more than 38 percent of a borrower’s
gross income. The plan also includes financial incentives
for lenders that would lower the borrower’s monthly pay-
ments to 31 percent of gross income. These modified pay-
ments will be in force for a minimum of five years, after
which they can gradually be increased to the conforming
loan rate.
The Financial Stability Plan is just one piece of a com-
prehensive government response to the current financial
market turmoil. It is meant to complement the fiscal stim-
ulus legislation signed into law in February and build on
ongoing actions by the Federal Reserve. The plan also
attempts to address some of the concerns of the COP. Time
will tell whether these actions will produce their intended
effects. ￿
1 Holders of preferred shares are paid before common stockholders. Preferred
shares pay a cumulative dividend at a rate of 5 percent per year for 5 years and
9 percent thereafter. These dividends are established by the terms of the CPP and
are greater than dividends paid to common shareholders.
2 Remarks by Treasury Secretary Timothy Geithner on February 10, 2009.
3 A chart of economic scenarios can be found in the FAQs section of the
February 25, 2009, press release by the Federal Deposit Insurance Corporation
(FDIC). Under the baseline case, for 2009 the FDIC assumes a decline in gross
domestic product (GDP) of 2.0 percent (average annual change), an unemploy-
ment rate of 8.4 percent, and a 14 percent decline in the S&P/Case-Shiller 10-City
Composite Home Price Index.
4 See Aubuchon, Craig P. “The Fed’s Response to the Credit Crunch,” Economic
Synopses No. 6, 2009.
5 On March 19, 2009, the Federal Reserve expanded TALF to also include asset-
backed securities backed by mortgage servicing advances, loans/leases relating
to business equipment, leases of vehicle fleets, and floor plan loans. 
6 Legacy loans are defined as real estate loans still held by banks, which create
uncertainty about a bank’s balance sheet and thereby compromise their ability to
raise additional capital.
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on April 15, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

What's under the TARP?

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What's under the TARP?

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