The Troubled Asset Relief Program (TARP) And The Financial Crisis Of 2007-2008

Abstract

When the financial crisis that started in the summer of 2007 took a turn for the worse in the fall of 2008, the Fed and Treasury Department engaged in efforts to stabilize financial markets. The Fed continuously reduced the discount rate and made loans to AIG, JPMorgan Chase, Morgan Stanley and Goldman Sachs. The U.S. Treasury Department initiated the Troubled Asset Relief Program (TARP), which many felt was a waste of federal dollars. Using a GARCH(1,1) model, this paper finds evidence that volatility in stock index returns was reduced after October 14, 2008 when the TARP Capital Purchase Program was announced.