Document Type

Case Study


During the fall of 2008, the US government was faced with a financial crisis of unprecedented scope. Having already exercised the authority to put Fannie Mae and Freddie Mac into conservatorship in September, the stage was set for the US government to intervene more broadly in strained financial markets. This intervention would ultimately come in the form of the Emergency Economic Stabilization Act of 2008 (EESA), which was passed on October 3, 2008. The main provision of EESA was the Troubled Asset Relief Program, or TARP, a $700 billion program initially designed to purchase troubled assets off the balance sheets of struggling financial institutions. Despite initially campaigning that the program would be used to purchase troubled mortgage-related assets, the worsening stress on the financial system, complexity of creating an asset purchase program, and size of the mortgage market caused the Treasury to announce the Capital Purchase Program (CPP), a program of broad-based capital injections, on October 14, 2008. Initially, the CPP was available to publicly traded US banks, but was expanded shortly after to include privately owned banks, S-corporations, and mutual banks, so long as they were based in the US At its launch, Treasury also solicited nine of the largest commercial and investment banks to enroll in the program to encourage broad adoption for banks across the country. These institutions would issue either preferred stock (public and private banks) or subordinated debt (S-corps and mutual banks) to the Treasury at rates of five percent, which would then increase to nine percent after five years. As subsequent programs to provide credit to low-income areas and small business, such as the Community Development Capital Initiative (CDCI) and Small Business Lending Fund (SBLF) developed, CPP institutions were also able to refinance CPP investments into lower-cost CDCI and SBLF ones. A total of 707 institutions issued $204.9 billion in CPP capital to the Treasury, which has recovered $226.8 billion through repayments; auctions; and income related to dividends, interest, and warrants.