Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing financial institutions and banks. The bill was proposed by Treasury Secretary Henry Paulson, passed by the 110th United States Congress, and was signed into law by President George W. Bush. It became law as part of Public Law 110-343 on October 3, 2008. It created the $700 billion Troubled Asset Relief Program (TARP), which utilized congressionally appropriated taxpayer funds to purchase toxic assets from failing banks. The funds were mostly redirected to inject capital into banks and other financial institutions while the Treasury continued to examine the usefulness of targeted asset purchases.[1][2]
This article is about one division of an enacted statute. For the entire statute, see Public Law 110-343. For the enacted rescue program, see Troubled Asset Relief Program.
A financial crisis had developed throughout 2007 and 2008 partly due to a subprime mortgage crisis, causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group. Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase several hundred billion dollars in distressed assets from financial institutions. His proposal was initially rejected by Congress, but the ongoing financial crisis and lobbying by President Bush ultimately convinced Congress to enact the proposal as part of Public Law 110-343.
Early estimates for the bailout's risk cost were as much as $700 billion; however, TARP recovered $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit (an annualized rate of return of 0.6%), which may have been a loss when adjusted for inflation.[3]
Rationale for the bailout[edit]
Government officials[edit]
In his testimony before the U.S. Senate, Treasury Secretary Henry Paulson summarized the rationale for the $700 billion (~$973 billion in 2023) bailout:[46]
Administration of the law[edit]
CAMELS ratings are being used by the United States government to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008.[185]
The New York Times states: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail. Some lawmakers are upset that the capitalization program will end up culling banks in their districts.[185]
Known aspects of the capitalization program "suggest that the government may be loosely defining what constitutes healthy institutions. [... Banks] that have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. [...] They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets."[185] Some banks received capital with the understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital."[185]
Effects on national debt[edit]
The United States annual budget deficit for fiscal year 2009 surpassed $1 trillion. The original Paulson proposal would lift the United States federal debt ceiling by $700 billion, to $11.3 trillion from $10.6 trillion.
Other information[edit]
A review of investor presentations and conference calls by executives of some two dozen US-based banks by The New York Times found that "few [banks] cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses, or invest for the future."[186]