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WHAT IS TARP?
Emergency stabilization act , 3rd Oct 2008To bail out the economy from the financial crisis
Gave the US treasury USD 700 Billion purchasing power
USD 250+USD100 Bn immediately released totreasury
Next USD 350 Bn - Congress approval neededTo buy Mortgage Backed SecuritiesTo un seize the money marketTo create liquidity
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SUBPRIME CRISIS
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OBJECTIVE & OUTCOME
Purchase assets and equity from financialinstitutions to strengthen its financial sector
To address the instability caused by subprimemortgage crisis.
Allows the Treasury to purchase illiquid assetsfrom banks and other financial institutions
To purchase CDS, which were sold in a boomingmarket until 2007
Finance main street- Making Home affordableProgram- Help families stay in their homes
=TARP was eventually getting Wall Street back on itsfeet; it is not meeting its goal of getting Main Street
back on its feet
Result: 'Too-big-to-fail' banks grow even bigger
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TARP RECIPIENTS
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TARP FUNDS
TARP funds were issued through:
Purchase of preferred stock in banks which is redeemablePurchase of Warrants
Issue of guarantees
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TARP AND GOVERNMENT
TARP became an act under president G.W. BushPresident Barack Obama (Jan 09) said that heintended to "fundamentally change some of the
practices" in the bailout programHe said, "Many of us have been disappointed with
the absence of clarity, the failure to track how themoney's been spent.
In Feb 2010 he planned Congress to transfer TARPfunds 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 moreclosely with the small businesses
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HENRY HANK PAULSON Served as the74th United States Treasury Secretary,
previously the Chairman and Chief ExecutiveOfficer 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 bailoutwas recently estimated as USD 12.9 billion andGoldman Sachs was the largest recipient of the
public funds from AIG
TARP- US TREASURY SECTRTARIES - GOLDMANSACHS
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TARP- US TREASURY SECTRTARIES -GOLDMAN SACHS
TIMOTHY GEITHNER
75th and current US TreasurySecretary
Directed the FederalGovernment's spending on
the financial crisis of 07 10,allocation of $350 billion TARPfunds
In Mar08,supporting roleto Henry Paulson, in decision to
bail out AIG2 days after deciding not to
rescue LehmanBrothers from bankruptcy.
contributed to worsening theglobal financial crisis
TARP- US TREASURY SECTRTARIES - GOLDMAN SACHSTARP- US TREASURY SECTRTARIES -GOLDMAN SACHS
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TROUBLED ASSETS RELIEF
PROGRAM
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TARP & AIG & GOLDMAN SACHS
AIG : USs largest insurance company and theworlds leading issuer of credit default swaps
Collapsed in September 2008-high leverage,high exposure to CDS
Received-USD 180 bn under TARP ininstallmentsGoldman got $4.8 billion from AIG's securities
lending unitAnd AIG posted $2.5 billion in collateral to
Goldman , which came directly from TARPaccording to AIG's own list of what it did with its bailout money
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TARP & AIG & GOLDMAN SACHS
It got twice as much as any other American bank, the Fed's "special purposevehicle" that it created to unwind AIG'scredit default swaps
AIG bailout turned out to be a scam.AIG executives - ($165 million) in
bonusesBillions of taxpayer dollars paid to the
counter- parties of AIGs financial deals It still owes a combined total of $62 billion to the Fed and the Treasury
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WHAT REALLY HAPPENED
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IS TARP ONLY A FAILURE? MAY BE NOT!
Failure to the purpose it was set for
Success: managed to lift the face of the economyTARP repayments had reached a total of $240 billion,
Net outstanding $110 billionTaxpayers have also received a further return on TARPinvestments of $23 billion through dividends, interest, andother 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.
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BANKS PAYING UP
Tarp was suppose tostrengthen the balance sheet of the banks for long run stability
Banks paid up to get free fromrestrictions by fed govt on tarprecipientsTo free themselves of salarycaps
Paid by offering loans which beats the objective
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TARP PAYMENTS
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PROS CONSSignals strength andavoids competitivedisadvantages
Its relatively cheap capital
Reduces governmentinfluence on governance
and management
Replacement capital maybe more expensive and
dilutiveEliminates TARP-relatedcompensation restrictions
Continued economicweakness could result inunanticipated need toraise capital after TARPrepayment
It might be advisable to doit now before conditions torepayment are changed
Compensation practiceswill continue to bescrutinized and perhapsregulated even after TARPrepayment
TARP REPAYMENT SELECTED PROSAND CONSTARP REPAYMENS BY BANKS
PROS CONS
Signals strength and avoidscompetitive disadvantages
Its relatively cheap capital
Reduces government influenceon governance and management Replacement capital may bemore expensive and dilutive
Eliminates TARP-relatedcompensation restrictions
Continued economic weaknesscould result in unanticipatedneed to raise capital after TARPrepayment
It might be advisable to do itnow before conditions torepayment are changed
Compensation practices willcontinue to be scrutinized and
perhaps regulated even after TARP repayment
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PRESENTED BY:
Amol KulkarniAnupam ChauhanAmit AnandNikhil KhedkarSubodh DangeVivek Raju