The current credit crisis began in August of 2007, as the
markets began to perceive the extent to which residential real
property and mortgage-related assets were over-valued during the
housing boom of 2002-2006. Acting under existing statutory
authority, the Federal Reserve, the Treasury and various other
federal agencies began to take ad hoc steps to contain the crisis.
These steps included reducing interest rates, expanding Federal
Reserve credit facilities, and providing credit support for J. P.
Morgan's acquisition of Bear, Stearns in March 2008. In
addition, Congress created a new, stronger regulator for the
housing-related government-sponsored enterprises, the FHFA.
In September 2008, a series of events led policy makers to conclude
that the previous steps and existing legal authorities were not
sufficient to contain the crisis. These events included the
conservatorships of Fannie Mae and Freddie Mac, the bankruptcy of
Lehman Brothers, the emergency sale of Merrill Lynch to Bank of
America, and a run on insurance giant AIG that was halted only by a
massive loan from the Federal Reserve. As a result of these events,
and the related further disruptions in the credit markets, the
Treasury requested that Congress appropriate $700 Billion to
"clear the credit markets" of distressed real estate
assets.
On October 3, 2008, after a week of political wrangling, President
Bush signed the EESA, authorizing the United States Treasury to
purchase up to $700 Billion of "troubled assets" from the
nation's financial institutions. Before TARP could be
implemented, however, it became apparent that the asset purchase
program contemplated by the EESA was not going to resolve the
crisis. Market turmoil continued, in part as a result of
uncertainty about the workings of TARP. In addition, Great Britain
introduced a package of aid that included direct investments in the
equity of banks rather than asset purchases. Most observers argued
that the British approach was superior.
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