Troubled Asset Relief Program

On Sept. 19, 2008, Treasury Secretary Henry M. Paulson Jr. proposed a sweeping bailout of financial institutions battered by bad mortgages and a loss of investor confidence. In Mr. Paulson's original proposal -- called the Troubled Asset Relief Program -- he asked Congress for $700 billion to use to buy up mortgage-backed securities whose value had dropped sharply or had become impossible to sell. While Congress eventually gave him most of the authority he sought, Mr. Paulson ended up switching gears and using the money to make direct investments in troubled financial institutions instead.

As originally outlined, the government would have bought up toxic mortgage-backed securities at a premium over their current deflated values. By paying "hold to maturity'' prices, Mr. Paulson said, the government would provide troubled firms with an infusion of capital, reducing doubts about their viability and thereby restoring investor confidence.

The plan in its original form was quickly rejected by both Democrats and Republicans in Congress and was criticized by many economists across the political spectrum. Congress insisted on adding provisions for oversight, limits on executive pay for participating companies and an ownership stake for the government in return for its investments.

Even so, the plan proved to be strikingly unpopular with an outraged public, and on Sept. 29 it failed in the House of Representatives, primarily from a lack of Republican support. But as the markets continued to plunge, a slightly altered version won the support first of the Senate, on Oct. 1, and of the House, on Oct. 3. President Bush quickly signed the bill.

Shortly afterward, Mr. Paulson reversed course, and decided to use the $350 billion in the first round of funds allocated by Congress not to buy toxic assets, but to inject cash directly into banks by purchasing shares, an approach that many Congressional Democrats had pushed for earlier. In an initial round of financing, nine of the largest banks were given $25 billion apiece.

The Treasury also used the bailout to steer funds to stronger banks to purchase weaker ones. To the dismay of many economists, no strings were attached to the Treasury infusions, and many of the banks appeared to be using the funds to bolster their balance sheets rather than to make new loans.

On Nov. 12, Mr. Paulson announced that he was abandoning the idea of asset purchases, and said the bailout money would be used instead for a broader campaign to bolster the financial markets and help consumers seeking loans for cars or tuition and other kinds of borrowing.

To the anger of many Democratic members, none of the first round was used to prevent further increases in foreclosures. An oversight panel created by the original bailout bill also delivered a round of stinging criticisms in its first report, delivered Dec. 10. The report said that the Treasury had failed to create a system to track how bailout funds were being used or to require that banks use them to increase lending and unfreeze credit markets.

The last big chunk of the first round funds ended up going to Detroit, in $17.4 billion in emergency loans to keep General Motors and Chrysler afloat. President Bush had initially rebuffed Democratic efforts to use the financial bailout for that purpose, preferring to redirect loan guarantees meant to help factories switch to building more fuel-efficient cars. But after Senate Republicans blocked a bill that would have done that, Mr. Bush agreed to use TARP funds, while adding tough condtions for the car makers, their creditors and unions that mirrored much of what Senate Republicans had sought.

On Jan. 12, 2009, the White House said that President Bush, at President-elect Barack Obama’s urging, would ask Congress to release the $350 billion remaining in the bailout fund.

The decision to request the money before taking office reflected a calculation by Mr. Obama and his aides that it would be better to have both the incoming and outgoing presidents urging lawmakers to release the money, given the high level of anger and frustration on Capitol Hill over how the Bush administration has managed the bailout program.

In addition, Lawrence H. Summers, who will be Mr. Obama’s top economic adviser at the White House, wrote to promising a five-point plan ensuring the money would be used for lending or preventing further crises and not for “enriching shareholders and executives.” To that end, the Treasury Department would limit executive compensation for institutions receiving “exceptional assistance.”

The next day, Ben S. Bernanke, the Federal Reserve chairman, warned in a speech that more capital injections might be needed to further stabilize the financial system. The day after that, government officials confirmed that they were preparing to send a multibillion lifeline from the bailout fund's second round to the Bank of America, which received $25 billion in the first round as it struggled to absorb losses from assets it aquired in its purchase of Merrill Lynch.

On Jan. 16, the Senate voted 52-42 to release the second round of funds.