Banks Cling to TARP Five Years After Crisis

NEW YORK (TheStreet) -- Small banks around the country continue to cling to billions of dollars in government assistance five years after Congress signed the Treasury's Troubled Asset Relief Program -- or TARP -- into law.

TARP, like the direct injections the government made into faltering lenders like Bank of America (BAC) and Citigroup (C), was a deeply unpopular measure instituted by then Treasury Secretary Henry Paulson to pull the banking industry through what was the worst financial panic since at least the Great Depression. The bailout program also carries a name that doesn't reflect its eventual mechanics and goals when put into practice.

Paulson initially conceived TARP as a means to buy the soured mortgage and commercial real estate securities that plagued Wall Street in the fall of 2008. It was believed that taking impaired assets off of banks' books would help to shore up their balance sheets and restore confidence in the financial system. As the crisis worsened, Paulson altered TARP from an asset buying program into a direct injection of non-voting preferred capital into more than 700 banks across the country.

Effectively, the program acted as a recapitalization of the U.S. banking industry. And yet, even as banks like Lehman Brothers, Washington Mutual and Wachovia failed and lenders as large as Citigroup teetered on the brink of collapse, TARP was received skeptically by Congress, particularly the Republican party.

In fact, the first conception of the program was rejected by Congress in September 2008, forcing Paulson and Federal Reserve Chairman Ben Bernanke to go to Washington and warn of a looming economic collapse worse than the Great Depression. The bailout measure was only signed into law in early October under the Emergency Economic Stabilization Act, in a delay Paulson has said added a significant financial toll to the crisis.

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