Barack Obama on TARP

Last Updated : Aug 02, 2012

Summary

President Obama has remained a strong supporter of the TARP program throughout his time in the Senate and in the White House. His actions as President have drastically changed the program, taking it from its original form as a mechanism to purchase specific kinds of stocks and warrants and using the program funds to spur lending among small businesses, create programs to assist homeowners in refinancing their homes, rescue GM, and create programs to directly provide funds to states hardest hit by the housing crisis.

What is TARP

The Troubled Asset Relief Program (TARP) was created in October of 2008 to address the fiscal crisis by purchasing warrants and stocks from financial institutions so that those items no longer burdened the banks. The legislation outlines what items can be purchased, and defines the institutions from what institutions those items can be purchased. President Bush violated those rules prior to leaving office when he loaned money to General Motors and Chrysler. President Obama further violated those rules when he purchased stock in GM and then used the influence from those purchases to direct changes at GM.  

Record as Senator

In addition to voting for the TARP program, Senator Obama spoke on the Senate floor in support of the program. In that speech, he urged his fellow Senators to "step up to the plate" and do the right thing in passing the legislation. He noted that a similar program had failed in the House and triggered a fall in the stock market. In supporting the program, he also urged it to have a program for home owners and an oversight board for the funds.

Second Half of TARP

After Senator Obama won the 2008 Presidential election, he asked President Bush to request the second half of the TARP funds to be allocated to TARP. In making the request, he stated that the economy was still too frail and that it would be irresponsible to enter office without having all the tools he needed to address the problem.

Funds Issued and Repaid

Of the funds issued by President Bush, a vast majority went to the Capital Purchase Program and the Targeted Investment Program. A vast majority of that money has been repaid by the financial institutions that received them. The loan to GM was repaid, but some money from the GM bailout remains.

Of the funds issued by President Obama, almost none of them have been issued to the programs originally designed through TARP. Most of the funds issued by President Obama have gone to home ownership programs and the bailout of GM through stock purchases. As seem in the chart below, almost 90% of the funds issued by President Bush have been returned while less than 10% of the money issued by President Obama has been returned.

 

 

Timeline

Below is a timeline of events relating to President Obama, the Troubled Asset Relief Program, and General Motors.

  • October 3, 2008      - President Bush signs TARP into law
  • January 12, 2009   - President-Elect Obama asks President Bush to request second installment of TARP funds
  • February 2009        - President Obama announces $75 Billion program to address home ownership programs
  • December 8, 2009 - President Obama announces new jobs program with TARP funds
  • March 2009             - Programs announced to assist in mortgage modification and small business lending

 

Floor Speech - TARP

On October 1, 2008, Senator Obama spoke on the Senate floor in support of the TARP legislation. In that speech, he stated that after  the House failed to pass a bill a few days prior, the stock market fell and the same would likely happen if the Senate failed. He also urged for three principles to be included in TARP. The first was an independent board to provide oversight and accountability, the second was that the bill could not help banks on Wall Street without helping homeowners, and third, the plan could not allow the plan to become a welfare program for Wall Street executives. 

Towards the end of the speech, Senator Obama calls out the opponents of the bill by saying that they needed to step up and do what was right for the American people.

 

Emergency Economic Stabilization Act of 2008

On October 3, 2008 President Bush signed Emergency Economic Stabilization Act of 2008 into law. Otherwise known as TARP for one of it's subtitles - the Troubled Asset Relief Program, the purpose of the bill was as follows:

  • to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and
  • to ensure that such authority and such facilities are used in a manner that--
    • protects home values, college funds, retirement accounts, and life savings;
    • preserves homeownership and promotes jobs and economic growth;
    • maximizes overall returns to the taxpayers of the United States; and
    • provides public accountability for the exercise of such authority. 

The legislation laid out guidelines as to what could be purchased, from whom such items could be purchased, how much money could be committed at any given time, and reporting requirements. The legislation created an initial $350 Billion for use by the President, with another $350 Billion available if the President asked for it and Congress authorized it. Within the legislation, the following items are defined.

  • FINANCIAL INSTITUTION- 
    • The term `financial institution' means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.
  • TROUBLED ASSETS- The term `troubled assets' means--
    • residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability;
    • and any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

With those entities defined, Section 113 of the legislation dictates what the Treasury Secretary can purchase with the money by denoting what the Secretary may accept in exchange for that money. The language dictates that either preferred stock must be purchased, or common stock with no voting rights. The reasoning behind these stipulations is that preferred stock is more like debt and is paid prior to common stock. This was thought to minimize risk to the taxpayers. Common stock was allowed to be purchased only if it contained no voting rights in the company (preferred stock has no voting rights). The logic is that if the government owned a large percentage of a bank's stock and possessed voting rights through that stock, then the goverment would essentially control that bank.

  • IN GENERAL- The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased--
    • in the case of a financial institution, the securities of which are traded on a national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate; or
    • in the case of any financial institution other than one described in subparagraph (A), a warrant for common or preferred stock, or a senior debt instrument from such financial institution, as described in paragraph (2)(C).

 

Request for Second Half of TARP

On January 12, 2009 President Bush stated that if President Obama desired the second installment of TARP funds, then he would move forward with the request. President-elect Obama immediately asked President Bush to request the funds.

 

TARP Subprograms

The Emergency Economic Stabilization Act of 2008 (otherwise known as "the bailout") created the Troubled Asset Relief Program (TARP). Some of the 9 subprograms initiated under TARP were in place prior to President Obama assuming office. Other programs were initiated during his administration. The programs initiated by President Bush include:

  • American International Group
  • Automotive Industry Financing Program (AIFP)
  • Capital Purchase Program
  • Targeted Investment Program
  • Asset Guarantee Program

President Obama has initiated numerous programs using the TARP funds. These purposes of these programs range from helping people refinance their homes to spurring lending for small businesses to welfare funds as shown below:

  • Small Business and Community Lending Initiative
  • Home Affordable Modification Program
  • Consumer and Business Lending Initiative
  • Community Development Capital Initiative
  • Public-Private Investment Program
  • Hardest Hit Funds Program
  • FHA Short Refinance Program

 

TARP and GM

The use of TARP funds to bail out General Motors is addressed in a separate item. The purchase of stock and warrants from GM was not valid through TARP as the GM and Chrysler are not financial institutions as defined by the TARP legislation. The use of that stock holding as leverage to force the CEO of GM out and to allow the US government to appoint chairs to the board at GM is counter to guidelines of TARP which expressly forbid purchasing stock with voting rights so that the government could not assert influence over companies it had purchased shares of through the program.

 

Funds Committed to TARP

The TARP program initially consisted of programs to deal with toxic assets. Those programs were extended by President Bush when he initiated loans to President Obama. President Obama further extended those programs to purchase stock in auto companies and then invest in local communities. Over 87% of the money issued by President Bush has been returned while roughly 9% of the money issued by President Obama has been returned. This data is current as of mid-March 2011 and taken from the TARP disclosure statements.

 

Changes to TARP Program

On January 15, 2009 President-Elect Obama's Economic Advisor Larry Summers wrote a letter to leaders in Congress and outlined changes that the Obama administration would like to make to the TARP program.

 

Use of TARP Funds for Job Creation

On December 7, 2009 the President stated that some of the remaining TARP funds may be used for programs to create jobs and help lending for small businesses.

On December 8, 2009 the White House officially announced that it would be taking the remaining TARP funds and using it for programs to stimulate job growth. The President made the announcement at the Brookings Institution in Washington, DC.

 

Release of Plan

In March of 2009, President Obama used his weekly address to talk about the programs created through TARP to assist the economy. He states that the programs will assist home owners and their lenders rework loans, and will assist in starting credit for people to purchase cars and get loans for college.

 

Housing Programs

In February of 2009, President Obama announced his initiative to assist home ownership. He committed $75 Billion to the program.

Among the programs created by President Obama, Housing programs called the Making Home Affordable and the Hardest Hit Funds were created. The Hardest Hit funds went directly to states to assist with preventing foreclosures to those states that demonstrated a high rate of unemployment and foreclosures. The official description of the Making Home Affordable program is shown below from the Treasury Department's website.

In total, $7.6 Billion has been committed to the Hardest Hit Funds project and has been divided among 18 states plus Washington DC. California and Florida make up 40% of the contributed funds. However, this program is small compared to the almost $30 Billion Home Affordability Modification Program (HAMP).

 

Voting Record

Emergency Economic Stabilization Act

In October of 2008, the Senate passed the Emergency Economic Stabilization Act, which created the TARP program. The legislation passed 74-25. Barack Obama voted in favor of the Emergency Economic Stabilization Act.

Barack Obama voted in favor of the Emergency Economic Stabilization Act.

 

Sponsored and Cosponsored Legislation

This representative has not been identified as sponsoring or cosponsoring significant legislation related to this title.

References

[1] Website: US Treasury Article: Making Home Affordable Program Author: US Treasury Accessed on: 03/21/2011

[2] Website: US Treasury Article: TARP Disclosure Author: US Treasury Accessed on: 03/21/2011

User Comments