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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

In October 2008, the U.S. Congress authorized the Troubled Asset Relief Program (TARP). Which description best captures the program's original stated purpose and its subsequent evolution during the crisis?

TARP was authorized in October 2008 to buy troubled mortgage-related assets from banks. Because valuing those assets was difficult and recapitalization was urgent, the Treasury shifted most of the money to direct capital injections, mainly preferred equity, into banks.

  1. AIt was created to purchase troubled mortgage assets from banks, but the Treasury soon shifted most of the funds toward direct capital injections into banksCorrect
  2. BIt was created to guarantee all bank deposits without limit, and it later became a program for lending to money market funds
  3. CIt was created to fund the nationalization of failing insurers, and it was later redirected to purchase Treasury bonds
  4. DIt was created to provide discount window loans to banks, and it later became a fund for foreign central banks

Explanation

TARP was authorized to buy troubled assets, mainly mortgage-related securities. Pricing and valuation problems made asset purchases hard, so the Treasury used the Capital Purchase Program to inject preferred equity into banks. The other options describe functions that were not TARP's purpose.

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