TARP Funds

Tarp stands for “troubled asset relief program” and they are funds that are purchased by the U.S. government. They were heavily used during the financial crisis of 2008. TARP funds were designed to create financial stability in the markets in order to avoid a complete financial system failure. The term “too big to fail” was commonly used in 2008 and in some cases it is still being used today. Big financial institutions that were considered too big to fail used TARP funds to stay afloat. It is widely debated whether or not TARP funds helped the economy avoid the next depression. The current economic crisis is still on everyone’s mind even well after TARP funds were used to bail out big financial institutions.

TARP funds are associated with a larger scale financial relief program known as the EESA. EESA stands for emergency economic stabilization act. In October of 2008, the EESA was signed by President Bush for economic stability. Without the EESA, TARP funds could not be issued. These bills were enacted by the President in order for financial institutions to clear their books of toxic assets. One of the biggest factors that contributed to the economic crisis of 2008 was all the toxic assets that major financial institutions had in their books.

Among these troubled assets were unstable loans and mortgage backed securities. The credit crunch caused many problems for new investors who were looking to purchase new homes or property. However, the credit crunch was a result of a bigger problem and it wasn’t the cause of the economic crisis of 2008. Many new homeowners were defaulting on their loans that caused a credit crunch on new prospecting home buyers. The result caused a significant slow down in the economy that caused many other aspects of the financial center to suffer.

At that point, banks were unable to buy or sell securities which in turn caused a credit crunch. TARP funds were created to address these complex problems that markets are known to experience from time to time. TARP funds allowed the government to buy these securities that banks were unable to purchase. After purchasing these toxic assets, the government then injected the value of those assets back into the financial center in order to create an environment that banks could function in. Once this was done, banks were then able to start lending to new investors once again.

After rushing the EESA through congress, many problems about how TARP funds worked began to come to the surface. However, without regarding these complex problems, in 2009 President Obama signed new TARP funds into action. The government then bought toxic assets and injected more cash into the financial institution in order to avoid a possible depression. The newer TARP funds allowed existing homeowners to stay in their homes where they would otherwise lose their homes. These were known as foreclosure abatement initiates. The debate on whether or not TARP funds would even work is still heavily debated today. Taxpayers flip the bill for TARP funds and most taxpayers are worried if their tax dollars are being spent wisely.

TARP funds created some interesting dynamic opportunities that very few investors are aware of. Once the economy starts to pick back up, the Treasury will sell off the toxic assets they bought and generate a profit. This fact is also debated and many investors want to know how toxic assets can generate profit. It is a complex issue that many people find trouble understanding. TARP funds may or may not have been a good idea but in the long run the results of these funds will be clear for everyone to see.

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