Financial Markets Rescue Package Q&A: Insurance Program (4 of 10)

The federal government's Troubled Asset Relief Program (TARP)—created by the Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008—gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions. The Faegre & Benson TARP Task Force has developed answers to some frequently asked questions about which institutions qualify to participate in the program and how the program is expected to work.

How does the Act's insurance program work?

Q: How does the guarantee of troubled assets work? How are decisions made regarding which institutions and which assets will benefit from a guarantee? How is the guarantee triggered? What happens when the guarantee is triggered?

A: The EESA contains few specifics on the insurance program. The EESA requires the Treasury Secretary to establish a program to guarantee troubled assets originated or issued before March 14, 2008. The guarantees and premiums may be determined by category or class of troubled assets, and they may cover up to 100% of the principal and interest payments. (§ 102(a).) The SEC has submitted a public request for comment on mark-to-market accounting to assist in preparing its report.

The Treasury Secretary is to collect premiums from participating financial institutions sufficient to establish a reserve sufficient to meet anticipated claims. The Secretary is authorized to provide variations in premiums based on the risk of the particular troubled assets being guaranteed. The Secretary is to publish the methodology for setting the premiums. (§ 102(b).)

The Secretary's purchase authority under the TARP is also reduced by the difference between the balance in the fund created through collected premiums and the total amount of guaranteed obligations. (§ 102(c)(4).)