The Troubled Asset Relief Program (TARP), often referred to as the “Wall Street bailout,” was an effort to shore up major American banks and investment firms in the wake of a financial crisis caused in large part by risky bank investments in mortgage-backed securities. During the spring and summer months of the Campaign of 2008, banks of all sizes, as well as major investment firms, began to fail as overleveraged homeowners were unable to pay their mortgages. Easy credit during the housing bubble earlier in the decade had led homeowners to borrow large sums that they were unable to manage once the economy became sluggish and many lost their jobs or were earning less. Investors who owned mortgage-backed securities quickly found themselves in financial peril. The FDIC shut down many financial institutions (at great cost to both taxpayers and investors), but some institutions were deemed “too big to fail.”
When Lehman Brothers declared bankruptcy on September 15, 2008, the stock market took a nosedive, and economists feared that the bank crisis would quickly spread to other sectors of the economy as well. Advisers to President George W. Bush proposed a financial assistance program for these troubled institutions, wherein the Treasury Department would provide funds to assist eligible banks and investment firms in exchange for stock in the institution and quarterly dividend payments. However, getting Congress to approve the legislation proved problematic. Bush requested that Congress pass the bill over the course of a weekend to avoid further turmoil when the markets opened at the beginning of the week. Republican nominee John McCain famously put his campaign on hold to return to Washington to lobby his colleagues to support the bill. The Senate passed the bill on October 1, with support from both McCain and Democratic nominee Barack Obama. The House passed the bill two days later, on a mostly party-line vote (with most Democrats supporting President Bush and most Republicans in opposition).
Bush signed the Emergency Economic Stabilization Act on October 3, 2008, which provided $700 billion in federal funds to shore up failing firms. Later legislation related to TARP restricted the pay of top executives at institutions that still owed the federal government money under TARP, lowered the permissible government outlay from $700 billion to $475 billion, and required more transparency in how institutions used TARP funds. As of August 2011, the federal government disbursed a total of $579,766,309,727 to 928 entities. Major institutions (excluding subsidiaries) such as Citigroup, Bank of America, JP Morgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley are among those that quickly repaid their loans. Additionally, the loans have thus far generated approximately $67 billion of revenue to the government in the form of dividends and interest payments.
The TARP program was controversial for a time, particularly among conservative voters. The Tea Party movement that developed during the early months of Barack Obama’s presidency was a reaction, in part, to the bailout of financial firms that were viewed by many as precipitating an economic recession that continued to wreak havoc on the lives of working Americans. Tea Party critics of TARP noted that using government funds to ameliorate the consequences of risky investments seemed to advantage powerful Wall Street firms, while smaller American businesses continued to fail and average families continued to suffer. In the 2010 midterm elections, Tea Party candidates challenged Republican legislators who had voted for TARP, leading to some high-profile seat losses. TARP, the subsequent bailout of General Motors and Chrysler (government loans for which the companies were charged interest), and the bailout of Freddie Mac and Fannie Mae along with the stimulus bill served as rallying points for many conservative voters and Republican presidential candidates. In the Campaign of 2012, only one Republican presidential candidate served in Congress during the TARP vote—Michele Bachmann, who consistently lobbied against TARP and related legislation in 2008 and 2009. Other Republican candidates in the Campaign of 2012 were critical of TARP as well, although none were in a position to vote on the original legislation. Eventual 2012 Republican nominee and former Massachusetts governor Mitt Romney, however, appears to have “flip-flopped” on the issue of TARP, being critical of it on one hand, but then also accepting its role in helping to stabilize the economy on the other. As Gov. Romney wrote in No Apology, TARP “was intended to prevent a run on virtually every bank and financial institution in the country. It did in fact keep our economy from total meltdown.”
While TARP was not particularly popular among liberal voters, President Obama and the Democrats focused their criticism on the lax regulations in the banking industry. Obama argued that without better financial oversight, risky investments would continue, and the financial sector could once again precipitate a major recession. At this point, TARP has not appeared as an issue in the 2016 presidential campaign.
Cassidy, John. How Markets Fail. New York: Farrar, Straus and Giroux, 2009.
110th Congress. Public Law 110-343. http://www.gpo.gov/fdsys/pkg/PLAW-110publ343/html/PLAW-110publ343.htm. Accessed September 22, 2015.
Paulson, Henry M., Jr. On the Brink: Inside the Race to Stop the Collapse of the Global Financial System. New York: Business Plus, 2010.
ProPublica. “Bailout Recipients.” http://projects.propublica.org/bailout/list/index. Accessed September 22, 2015.
ProPublica. “Companies That Have Refunded Bailout Money.” http://projects.propublica.org/bailout/list/refunds. Accessed September 22, 2015.
Sorkin, Andrew Ross. Too Big to Fail. New York: Penguin, 2011.
Wessel, David. In Fed We Trust. New York: Crown Business, 2009.