What Was the Bank Bailout Bill?

Cost, Impact, How It Passed

Paulson and Bernanke
U.S. Treasury Secretary Henry Paulson (L) speaks as Federal Reserve Board Chairman Ben Bernanke (R) listens during a hearing before the House Financial Services Committee on Capitol Hill September 24, 2008 in Washington, DC. Photo: Photo: Alex Wong/Getty Images

On October 3, 2008, President George W. Bush signed the $700 billion Emergency Economic Stabilization Act (EESA) of 2008 after Treasury Secretary Henry Paulson asked Congress to approve a bailout to buy mortgage-backed securities that were in danger of defaulting. By doing so, Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. His goal was to renew confidence in the functioning of the global banking system and end the financial crisis.

Troubled Assets Relief Program

The bill established the Troubled Assets Relief Program (TARP), which was originally designed around a reverse auction. Troubled banks would submit a bid price to sell their assets to TARP, and each auction was to be for a particular asset class. TARP administrators would select the lowest price for each asset class to ensure that the government didn't pay too much for distressed assets. However, this didn't happen because it took too long to develop the auction program.

On October 14, 2008, the Treasury Department used $105 billion in TARP funds to launch the Capital Purchase Program, which purchased preferred stock in the eight leading banks. By the time TARP expired on October 3, 2010, Treasury had used the funds in four other areas:

  • $67.8 billion to the $182 billion bailout of insurance giant American International Group (AIG)
  • $80.7 billion to bail out the Big Three auto companies
  • $20 billion to the Federal Reserve for the Term Asset-Backed Securities Loan Facility, which lent money to its member banks so they could continue offering credit to homeowners and businesses
  • $75 billion to help homeowners refinance or restructure their mortgages with the Homeowner Affordability and Stability Plan

The Treasury disbursed $440 billion of TARP funds in total and, by 2018, it had put $442.6 billion back. It did this by nationalizing companies when prices were low and selling them when prices were high. President Barack Obama could have used more of the $700 billion, but he didn't want to bail out more banks. Instead, he launched the $787 billion Economic Stimulus Package. The bill required the president to develop a plan to recoup losses from the financial industry if needed.​ As a result, the taxpayer was never at risk of losing $700 billion.

More Than Just TARP

On September 20, 2008, Secretary Paulson submitted a three-page proposal to the House of Representatives, but many in the House felt it was forcing taxpayers to reward bad banking decisions. Supporters added many safeguards to try and get the bill to pass, but the House voted against it on September 29, 2008. As a result, global markets plummeted.


The Dow fell 777.68 points during intraday trading—the most significant single-day point drop ever at the time.

The Senate reintroduced the proposal by attaching it to a bill that was already under consideration, and the House also approved that version on October 3, 2008. The final act included other much-needed oversights, but the most important was help for homeowners facing foreclosure. It required the Treasury to both guarantee home loans and assist homeowners in adjusting mortgage terms through HOPE NOW. It also increased the Federal Deposit Insurance Corporation limit for bank deposits to $250,000 per account and allowed them to tap federal funds as needed through 2009. That allayed any fears that the agency itself might go bankrupt.

The bill allowed the Securities and Exchange Commission (SEC) to suspend the mark-to-market rule, which forced banks to keep their mortgages valued at present-day levels. This meant that bad loans had to be valued at less than their probable true worth and could not have been resold in the panic-stricken climate of 2008. EESA included an extension of the Alternative Minimum Tax patch, tax credits for research and development, and relief for hurricane survivors. The Senate vote gave the bailout plan new life with these tax breaks and kept six other provisions added by the House:

  • An oversight committee to review the Treasury's purchase and sale of mortgages—comprised of Federal Reserve Chair Ben Bernanke, and the leaders of the SEC, Federal Home Finance Agency, and Department of Housing and Urban Development
  • Bailout installments, starting with $250 billion
  • The ability for the Treasury to negotiate a government equity stake in companies that received bailout assistance
  • Limits on executive compensation of rescued firms
  • Government-sponsored insurance of assets in troubled firms
  • A requirement that the president proposes legislation to recoup losses from the financial industry if any still existed after five years

Why the Bailout Bill Was Necessary

On September 16, 2008, the $62.6 billion Reserve Primary Fund was under attack as investors were taking out money too fast. They worried that the Fund would go bankrupt due to its investments in Lehman Brothers. The next day, businesses pulled a record $140 billion out of money market accounts and moved the funds to Treasury bills, causing yields to drop to zero. Money market accounts had been considered one of the safest investments. To stem the panic, the U.S. Treasury Department agreed to insure money market funds for a year. The SEC banned short-selling financial stocks until October 2 to reduce volatility in the stock market.

The U.S. government bought these bad mortgages because banks were afraid to lend to each other. This fear caused Libor rates to be much higher than the fed funds rate and sent stock prices plummeting. Financial firms were unable to sell their debt, and without the ability to raise capital, these firms were in danger of going bankrupt, which is what happened to Lehman Brothers. It would have happened to the AIG and Bear Stearns without federal intervention.

Congress debated the pros and cons of such a massive intervention. Political leaders wanted to protect the taxpayer, but they also didn't want to let businesses off the hook for making bad decisions. However, most in Congress recognized the need to act swiftly to avoid a further financial meltdown. With banks afraid to disclose their bad debt, it became a case of fear feeding on fear—which would have led to a downgrade in their debt rating, a decline in their stock price, and an inability to raise capital. The rumors and resulting panic locked up the credit markets.

Alternative Options

When the bill was introduced, many legislators were against it and proposed other ideas. Here are some and their probable impacts:

Buy Mortgages

John McCain proposed having the government buy $300 billion in mortgages from homeowners who were in danger of foreclosing, which would have reduced the number of toxic mortgages on banks' balance sheets. It could have even helped stop falling housing prices by reducing foreclosures, but it didn't address the credit crisis, which was caused by banks being afraid to lend to each other and their consequent hoarding of cash.

Cut Taxes for Banks

The Republican Study Committee (RSC) proposed suspending the capital gains tax for two years, allowing banks to sell assets without being taxed. Unfortunately, it was losses on assets that were the issue, not gains. The RSC proposed transitioning Fannie Mae and Freddie Mac to private companies and stabilizing the dollar, but neither of those addressed the credit crisis. On the other hand, the RSC's proposal to suspend mark-to-market accounting would have alleviated bank write-down of assets sooner. The U.S. Financial Accounting Standards Board eased the rule in 2009.

Do Nothing

Some suggested just letting the markets run their course. In that scenario, many businesses around the world would have likely shut down due to a lack of credit—creating a global depression. The large-scale unemployment could have led to riots or another Great Depression.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. House of Representatives. "12 USC Ch. 52: Emergency Economic Stabilization."

  2. U.S. Department of the Treasury. "Capital Purchase Program."

  3. U.S. Department of the Treasury. "Monthly Report to Congress," Page 5.

  4. HOPE NOW. "About Us."

  5. Congress. "Division A—Emergency Economic Stabilization," Page 122 STAT. 3765. Accessed April 19, 2020.

  6. U.S. Department of the Treasury. "Treasury Announces Guaranty Program for Money Market Funds."

  7. NPR. "McCain Proposes $300 Billion Mortgage Buyout Plan."

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