Troubled Asset Relief Program - Eligible Assets and Asset Valuation

Eligible Assets and Asset Valuation

TARP allows the Treasury to purchase both "troubled assets" and any other asset the purchase of which the Treasury determines is "necessary" to further economic stability. Troubled assets include real estate and mortgage-related assets and securities based on those assets. This includes both the mortgages themselves and the various financial instruments created by pooling groups of mortgages into one security to be bought on the market. This category probably includes foreclosed properties as well.

Real estate and mortgage-related assets (and securities based on those kinds of assets) are eligible if they originated (that is, were created) or were issued on or before March 14, 2008, the date of the Bear Stearns bailout.

One of the most difficult issues facing the Treasury in managing TARP is the pricing of the troubled assets. The Treasury must find a way to price extremely complex and sometimes unwieldy instruments for which a market does not exist. In addition, the pricing must strike a balance between efficiently using public funds provided by the taxpayer and providing adequate assistance to the financial institutions that need it.

The Act encourages the Treasury to design a program using market mechanisms to the extent possible. This has led to the expectation that the Treasury will use a "reverse auction" mechanism to price assets. A reverse auction means that bidders (that is, the potential sellers of the troubled assets) will place bids with the Treasury for the right to sell a specified type of assets. The sale price will be the lowest price at which the bid will provide the required quantity of the item. Theoretically, the system creates a market price because the bidders will want to sell at the highest price they can get, but they also want to be able to make a sale, so they must set a low enough price to be competitive. The Treasury is required to publish its methods for pricing, purchasing, and valuing troubled assets no later than two days after the purchase of their first asset.

The Congressional Budget Office (CBO) uses procedures similar to those specified in the Federal Credit Reform Act (FCRA) to value assets purchased under the TARP.

In a report dated February 6, 2009, the Congressional Oversight Panel concluded that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The COP found the Treasury paid $254 billion, for which it received assets worth approximately $176 billion, for a shortfall of $78 billion. The COP's valuation analysis assumed that "securities similar to those issued under the TARP were trading in the capital markets at fair values" and employed multiple approaches to cross-check and validate the results. The value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. For example, the COP found that the Treasury bought $25 billion of assets from Citigroup on October 14, 2008, however, the actual value was estimated to be $15.5, creating a 38 percent (or $9.5 billion) subsidy.