How do government programs affect bonds?
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Government programs can significantly impact the bond market, particularly through initiatives designed to support or stabilize the economy. One such example is the Troubled Asset Relief Program (TARP) discussed by , former Special Inspector General for TARP, on .
Barofsky explains how a specific bond program under TARP involved the Federal Reserve providing substantial non-recourse loans, which meant private investors could walk away if bond values decreased more than a small percentage, leaving taxpayers to cover the losses. This structure risked encouraging collusion between bond buyers and sellers, and possibly resulted in sloppy underwriting due to the limited downside for investors. Despite these risks, pressure from Congress led to modifications, resulting in a safer program where taxpayers ultimately did not lose money and might even profit slightly from the interest charged 1.
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