TARP: A Look at What Happened

Last session, described by the moderator as the first “definitive public account of how TARP came into being”:

TARP: A Look at What Happened From Inside the Treasury Department


  • Kevin Fromer, Former Assistant Secretary for Legislative Affairs, U.S. Department of the Treasury
  • David Nason, Former Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
  • Phillip Swagel, Former Assistant Secretary for Economic Policy, U.S. Department of the Treasury


  • Rick Newman, Chief Business Correspondent, U.S. News & World Report

The U.S. government has launched a number of bailout plans to fix the financial system, but perhaps none has proven to be as controversial as the Troubled Assets Relief Program, or TARP, which allows Treasury to purchase banks’ preferred shares and distressed assets. This panel, which includes former officials from the U.S. Treasury Department, will reveal the inside story of how this program was designed. What was debated most fiercely, and what factors drove the decision-making process? What other options were considered? What is their current reaction to the aftermath and its unintended consequences? This panel will discuss the details, effectiveness, transparency and accountability of one of the largest financial rescues in history. Bank nationalization, regulatory reform and other possible solutions to restore public confidence and market stability will also be highlighted.

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Notes: Lots of interesting detail, e.g. duties at the Treasury were divided among a capital team, a liquidity team, and a legislative team. The problems of getting the legislation passed are described in detail, and why they put forth a three page bill is explained (expediency). The communications problem of explaining why Main Street should care about Wall Street were very large (to both the public and congress), and having an election within a few weeks did not help at all. Treasury actions driven by the fear of a complete collapse of the global financial system. Congress did not understand how credit was provided in this country, and that led to resistance to the policies they wanted to put into place. What helped to get the legislation passed is the crash of the money market, which most people understood, and the message from big firms that layoffs were around the corner. Reason for TARP was to avoid a total breakdown, and they believe they did that. The second reason was to increase credit flows. Thus, the focus on whether banks are lending the TARP money, or not, is misdirected. Much of the money was intended to be a buffer against losses, not to provide new loans.

Was it a mistake to let Lehman fail? One problem is that no buyer materialized, but that may have been due to the terms. But without a buyer, saving them was not a choice they had. It had a 600 billion dollar balance sheet, and was enormously leveraged. The only way to stabilize an institution with liabilities that large stretched across the world is to stop a run on the institution. That was manageable in Bear Stearns’ case since someone was willing to step forward and provide the guarantee. However, government support was not available for Lehman due to legal issues. They tried and tried to find a buyer to guarantee the balance sheet, couldn’t, so Treasury/Fed had no choice but to let Lehman fail.They didn’t think they could get the authority from congress to act in Lehman’s case, so they didn’t try. Did not expect the commercial paper market to shut-down, and that turned out to be a be a big problem.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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