troubled assets relief program
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TROUBLED ASSETS RELIEF PROGRAM
WHAT IS TARP?
Emergency stabilization act , 3rd Oct 2008 To bail out the economy from the financial crisis Gave the US treasury USD 700 Billion purchasing power USD 250+USD100 Bn immediately released to treasury Next USD 350 Bn - Congress approval needed To buy Mortgage Backed Securities To un seize the money market To create liquidity
SUBPRIME CRISIS
OBJECTIVE & OUTCOME
Purchase assets and equity from financial institutions to strengthen its financial sector To address the instability caused by subprime mortgage crisis. Allows the Treasury to purchase illiquid assets from banks and other financial institutions To purchase CDS, which were sold in a booming market until 2007 Finance main street- Making Home affordable Program- Help families stay in their homes =TARP was eventually getting Wall Street back on its feet; it is not meeting its goal of getting Main Street back on its feet Result: 'Too-big-to-fail' banks grow even bigger
TARP RECIPIENTS
TARP FUNDS
TARP funds were issued through:Purchase of preferred stock in banks which is redeemablePurchase of equity capitalIssue of guarantees
TARP AND GOVERNMENT
TARP became an act under president G.W. Bush President Barack Obama (Jan ‘09) said that he intended to "fundamentally change some of the practices" in the bailout program He said, "Many of us have been disappointed with the absence of clarity, the failure to track how the money's been spent.“
In Feb 2010 he planned Congress to transfer TARP funds that have been paid back from the Wall Street banks to a new program "to provide capital for community banks on Main Street which deal more closely with the small businesses“
HENRY HANK PAULSON Served as the 74th United States Treasury Secretary,previously the Chairman and Chief Executive Officer of Goldman SachsInfluenced the decision to create a credit facility of US$85 billion to AIG to avoid filing bankruptcy Paulson's plan potentially had conflicts of interest The Goldman Sachs benefit from AIG bailout was recently estimated as USD 12.9 billion and Goldman Sachs was the largest recipient of the public funds from AIG
TARP- US TREASURY SECTRTARIES - GOLDMAN SACHS
TARP- US TREASURY SECTRTARIES - GOLDMAN SACHS
TIMOTHY GEITHNER 75th and current US Treasury Secretary Directed the Federal Government's spending on the financial crisis of ’07 – ’10, allocation of $350 billion TARP funds In Mar’08,supporting role to Henry Paulson, in decision to bail out AIG 2 days after deciding not to rescue Lehman Brothers from bankruptcy. contributed to worsening the global financial crisis
TARP- US TREASURY SECTRTARIES - GOLDMAN SACHSTARP- US TREASURY SECTRTARIES - GOLDMAN SACHS
TARP & AIG & GOLDMAN SACHS
AIG : US’s largest insurance company and the world’s leading issuer of credit default swaps Collapsed in September 2008-high leverage, high exposure to CDS Received-USD 180 bn under TARP in installmentsGoldman got $4.8 billion from AIG's securities lending unitAnd AIG posted $2.5 billion in collateral to Goldman , which came directly from TARP according to AIG's own list of what it did with its bailout money
TARP & AIG & GOLDMAN SACHS
It got twice as much as any other American bank, the Fed's "special purpose vehicle" that it created to unwind AIG's credit default swaps AIG bailout turned out to be a scam. AIG executives - ($165 million) in bonuses Billions of taxpayer dollars paid to the counter- parties of AIG’s financial deals It still owes a combined total of $62 billion to the Fed and the Treasury
WHAT REALLY HAPPENED …
IS TARP ONLY A FAILURE? MAY BE NOT!
Failure to the purpose it was set for
Success: managed to lift the face of the economy TARP repayments had reached a total of $240 billion,Net outstanding $110 billion Taxpayers have also received a further return on TARP investments of $23 billion through dividends, interest, and other incomeOverall combined TARP revenues totaled $217 billion through the end of May 2010The US Fed has made huge profits through purchase of equity capital 80% of AIG is owned by the US Fed.
BANKS PAYING UP
Tarp was suppose to strengthen the balance sheet of the banks for long run stability Banks paid up to get free from restrictions by fed govt on tarp recipientsTo free themselves of salary caps Paid by offering loans which beats the objective
TARP REPAYMENS
PROS CONS
Signals strength and avoids competitive disadvantages
It’s relatively cheap capital
Reduces government influence on governance and management
Replacement capital may be more expensive and dilutive
Eliminates TARP-related compensation restrictions
Continued economic weakness could result in unanticipated need to raise capital after TARP repayment
It might be advisable to do it now before conditions to repayment are changed
Compensation practices will continue to be scrutinized and perhaps regulated even after TARP repayment
TARP REPAYMENT – SELECTED PROS AND CONSTARP REPAYMENS BY BANKS
PROS CONS
Signals strength and avoids competitive disadvantages
It’s relatively cheap capital
Reduces government influence on governance and management
Replacement capital may be more expensive and dilutive
Eliminates TARP-related compensation restrictions
Continued economic weakness could result in unanticipated need to raise capital after TARP repayment
It might be advisable to do it now before conditions to repayment are changed
Compensation practices will continue to be scrutinized and perhaps regulated even after TARP repayment
IS TARP ONLY A FAILURE? MAY BE NOT!
CRITICISM
Privatization of profits and socialisation of losses
PRESENTED BY:
KARAN CHAWLAHARIT PAHWAKETAN SARAFRASHMI BHATIATARU JAINSUKRITI KUMAR