US Government Bailout (Update)


The lending capacity of the United States financial system has declined significantly over the last eighteen months as huge losses on loans and toxic securities have smashed capital in the financial sector. Hence, in a attempt to inject additional liquidity into the financial system, the U.S. Treasury along with the Federal Reserve has set out a series of programs to clean up the balance sheet of distressed financial institutions.

So far, seven assistance programs were introduced: the Troubled Asset Relief Program (TARP), the Term Asset-Backed Securities Loan Facility (TALF), the Capital Assistance Program (CAP), the Commercial Paper Funding Facility (CPFF), the Temporary Liquidity Guarantee Program (TLGP) and the Public-Private Investment Program (PPIP).

The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions. TARP allows the Treasury to purchase both "troubled assets" and any other asset the purchase of which the Treasury determines is "necessary" in order to further economic stability. Troubled assets include real estate and mortgage-related assets and securities based on those assets. This takes into account both the mortgages themselves and the various financial instruments created by pooling groups of mortgages into one security to be bought on

the marketThe goal of TARP is to encourage banks to resume lending again at levels seen before the crisis. TARP should theoretically allow banks to increase lending instead of hoarding cash to cushion against future, unforeseen losses from troubled assets. Increased lending equates to 'loosening' of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short term basis) should decrease, further facilitating lending.

On June 9, the U.S. Treasury approved 10 banks to buy back $68 billion of government shares, reducing officials authority to intervene in everything from lending and hiring strategies to compensation policies. Although the Treasury did not identify the banks, people briefed on the situation said they include American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, Goldman Sachs, JPMorgan Chase, the State Street Corporation and US Bancorp. All passed the stress test and applied to return their TARP funds. Another bank, Morgan Stanley, which needed to raise $1.8 billion after the stress test, was also said to have received permission, as was Northern Trust, a large custodial bank that did not undergo the stress test. The $68.3 billion represents about a quarter of the TARP money given to banks. So far, 22 small community banks have been allowed to return $1.9 billion in government money.

On June 17, the government received $68B from 10 financial firms that paid back TARP funds, with some of the firms promising to immediately start negotiating the repurchase of government warrants. TARP funds were repaid by JPMorgan Chase, Morgan Stanley, Goldman Sachs, American Express, Capital One Financial, BB&T, U.S. Bancorp, Bank of New York Mellon, Northern Trust and State Street.

As of July 9,  $598 billion had been allotted, and $367 billion spent, according to the Committee for a Responsible Federal Budget. In June, 35 small banks received $390 million of TARP money. Moreover, from $22 billion the Treasury had planned to inject into six insurers which might have problems with paying claims and retirement stipends only $4.35 billion was distributed. Hartford Financial Services Group Inc has taken $3.4 billion, the maximum it was allowed. Four of the other five insurers decided not to take bailout funds. The sixth, Lincoln Financial Group accepted up to $950 million.

 

Anna Fedec, contact@tradingeconomics.com
7/9/2009 8:07:30 PM








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