[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]


                                     


                     CONGRESSIONAL OVERSIGHT PANEL

                        APRIL OVERSIGHT REPORT *

                               ----------                              



           ASSESSING TREASURY'S STRATEGY: SIX MONTHS OF TARP

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                 April 7, 2009.--Ordered to be printed

 * Submitted under Section 125(b) of Title 1 of the Emergency Economic 
             Stabilization Act of 2008, Pub. L. No. 110-343
          CONGRESSIONAL OVERSIGHT PANEL APRIL OVERSIGHT REPORT
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                     CONGRESSIONAL OVERSIGHT PANEL

                        APRIL OVERSIGHT REPORT *

                               __________



           ASSESSING TREASURY'S STRATEGY: SIX MONTHS OF TARP


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                 April 7, 2009.--Ordered to be printed

 * Submitted under Section 125(b) of Title 1 of the Emergency Economic 
             Stabilization Act of 2008, Pub. L. No. 110-343
                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                            Sen. John Sununu
                          Rep. Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers
                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: Assessing TARP Strategy.............................     5
    A. The Federal Government's Current Strategy.................     6
    B. Historical Approaches and Lessons.........................    27
    C. Europe: Current Crises and Response.......................    49
    D. Taking Stock: Options for Moving Forward..................    57
Section Two: Additional Views....................................    74
    A. Richard H. Neiman and John E. Sununu......................    74
    B. John E. Sununu............................................    77
Section Three: Correspondence with Treasury Update...............    79
Section Four: TARP Updates Since Last Report.....................    81
Section Five: Oversight Activities...............................    83
Section Six: About the Congressional Oversight Panel.............    84
Appendices:
    APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
      WARREN, DATED APRIL 2, 2009................................    85
    APPENDIX II: LETTER FROM CHAIRMAN OF THE FEDERAL RESERVE 
      BOARD OF GOVERNORS MR. BEN BERNANKE TO CONGRESSIONAL 
      OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED APRIL 1, 2009    94
    APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
      ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED MARCH 30, 2009.............................   109
    APPENDIX IV: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
      ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED MARCH 25, 2009.............................   116
    APPENDIX V: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
      ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED MARCH 24, 2009.............................   119
    APPENDIX VI: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
      ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED MARCH 20, 2009.............................   123
    APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
      ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED MARCH 5, 2009..............................   129
    APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL 
      CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 
      GEITHNER, DATED JANUARY 28, 2009...........................   132





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                         APRIL OVERSIGHT REPORT

                                _______
                                

                 April 7, 2009.--Ordered to be printed

                                _______
                                

                          +EXECUTIVE SUMMARY * 

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    * The Panel adopted this report with a 3-2 vote. Senator John E. 
Sununu and Rep. Jeb Hensarling voted against the report. Additional 
views are available in Section 2.
---------------------------------------------------------------------------
    With this report, the Congressional Oversight Panel 
examines Treasury's current strategy and evaluates the progress 
it has achieved thus far. This report returns the Panel's 
inquiry to a central question raised in its first report: What 
is Treasury's strategy? While there is disagreement among Panel 
members about whether it is appropriate to present alternatives 
to Treasury's strategy at this time, this report also examines 
potential policy alternatives available to Treasury, in the 
event such alternatives become necessary.
    This report comes on the six month anniversary of the 
passage of the Emergency Economic Stabilization Act of 2008 
(EESA). In a letter received by the Panel on April 2, 2009, 
Treasury Secretary Timothy Geithner described four major 
challenges that Treasury's strategy seeks to address: (1) the 
collapse of the housing market; (2) frozen secondary markets 
that ``have constrained the ability of even creditworthy small 
businesses and families'' to get credit; (3) uncertainty about 
the health of financial institutions and the valuation of 
assets on their balance sheets; and (4) the existence of 
``troubled legacy assets'' on the balance sheets of financial 
institutions that affect their capitalization and limit their 
ability to make loans. The Panel appreciates Treasury's 
explanation of its goals, and it hopes this report inspires a 
more informed conversation over the fundamental questions 
raised by Treasury's strategy.
    In addition to drawing on the $700 billion allocated to 
Treasury under the EESA, economic stabilization efforts have 
depended heavily on the use of the Federal Reserve Board's 
balance sheet. This approach has permitted Treasury to leverage 
TARP funds well beyond the funds appropriated by Congress. 
Thus, while Treasury has spent or committed $590.4 billion of 
TARP funds, according to Panel estimates, the Federal Reserve 
Board has expanded its balance sheet by more than $1.5 trillion 
in loans and purchases of government-sponsored enterprise (GSE) 
securities. The total value of all direct spending, loans and 
guarantees provided to date in conjunction with the federal 
government's financial stability efforts (including those of 
the Federal Deposit Insurance Corporation (FDIC) as well as 
Treasury and the Federal Reserve Board) now exceeds $4 
trillion. This report reviews in considerable detail specific 
criteria for evaluating the impact of these programs on 
financial markets. Six months into the existence of TARP, 
evidence of success or failure is mixed.
    Evaluating the wisdom and success of these efforts requires 
a broader understanding of the basic choices available to 
policymakers during this crisis. To deal with a troubled 
financial system, three fundamentally different policy 
alternatives are possible: liquidation, receivership, or 
subsidization. To place these alternatives in context, the 
report evaluates historical and contemporary efforts to 
confront financial crises and their relative success. The Panel 
focused on six historical experiences: (1) the U.S. Depression 
of the 1930s; (2) the bank run on and subsequent government 
seizure of Continental Illinois in 1984; (3) the savings and 
loan crisis of the late 1980s and establishment of the 
Resolution Trust Corporation; (4) the recapitalization of the 
FDIC bank insurance fund in 1991; (5) Sweden's financial crisis 
of the early 1990s; and (6) what has become known as Japan's 
``Lost Decade'' of the 1990s. The report also surveys the 
approaches currently employed by Iceland, Ireland, the United 
Kingdom, and other European countries.
    Experiences from other times and other countries illustrate 
the benefits and problems these basic approaches present to 
dealing with failing banks. In the 1980s savings and loan 
crisis, for example, the U.S. government liquidated unhealthy 
financial institutions by transferring depositors to another 
bank, selling off assets, writing down some debt and wiping out 
investors. There can be considerable political barriers to this 
approach, and a surprise or poorly-explained liquidation can 
reduce market confidence and heighten uncertainty about future 
government interventions in financial markets. But liquidation 
also avoids the uncertainty and open-ended commitment that 
accompany subsidization. It can restore market confidence in 
the surviving banks, and it can potentially accelerate recovery 
by offering decisive and clear statements about the 
government's evaluation of financial conditions and 
institutions.
    Another option is government reorganization of troubled 
financial institutions using conservatorships, as in the case 
of Continental Illinois in the U.S. and the financial crisis in 
Sweden in the 1990s. This approach entails an in-place 
reorganization in which bad assets are removed, failed managers 
are replaced, and parts of the business are spun off. 
Depositors and some bondholders are protected, and institutions 
can emerge from government control with the same corporate 
identity but healthier balance sheets. This option also offers 
clarity to markets about the balance sheets of the reorganized 
financial institutions and encourages capital investment in the 
newly-reorganized entity. But reorganization can also tax 
government capacity and resources. If they are not quickly 
returned to private hands, government-run financial 
institutions also pose a risk that political pressure will 
press the institutions to lend to favored interests and support 
public policy at the expense of the bank's health, although 
there is no evidence that this has occurred in recent banking 
crises.
    The third option is government subsidization of troubled 
institutions. Japan's approach was characterized by a series of 
direct and indirect subsidizations. Subsidies may be direct, by 
providing banks with capital infusions, or indirect, by 
purchasing troubled assets at inflated prices or reducing 
prudential standards. Cash assistance can provide banks with 
bridge capital necessary to survive in tough economic times 
until growth begins again. But subsidies carry a risk of 
obscuring true valuations. They involve the added danger of 
distorting both specific markets and the larger economy. 
Subsidization also carries a risk that it will be open-ended, 
propping up insolvent banks for an extended period and delaying 
economic recovery.
    A review of these historical precedents reveals that each 
successful resolution of a financial crisis involved four 
critical elements:

     Transparency. Swift action to ensure the integrity 
of bank accounting, particularly with respect to the ability of 
regulators and investors to ascertain the value of bank assets 
and hence assess bank solvency.
     Assertiveness. Willingness to take aggressive 
action to address failing financial institutions by (1) taking 
early aggressive action to improve capital ratios of banks that 
can be rescued, and (2) shutting down those banks that are 
irreparably insolvent.
     Accountability. Willingness to hold management 
accountable by replacing--and, in cases of criminal conduct, 
prosecuting--failed managers.
     Clarity. Transparency in the government response 
with forthright measurement and reporting of all forms of 
assistance being provided and clearly explained criteria for 
the use of public sector funds.

Historical precedents always involve some differences from the 
current crises. Nonetheless, experience can provide an 
important comparison against which current approaches can be 
tested.
    One key assumption that underlies Treasury's approach is 
its belief that the system-wide deleveraging resulting from the 
decline in asset values, leading to an accompanying drop in net 
wealth across the country, is in large part the product of 
temporary liquidity constraints resulting from nonfunctioning 
markets for troubled assets. The debate turns on whether 
current prices, particularly for mortgage-related assets, 
reflect fundamental values or whether prices are artificially 
depressed by a liquidity discount due to frozen markets--or 
some combination of the two.
    If its assumptions are correct, Treasury's current approach 
may prove a reasonable response to the current crisis. Current 
prices may, in fact, prove not to be explainable without the 
liquidity factor. Even in areas of the country where home 
prices have declined precipitously, the collateral behind 
mortgage-related assets still retains substantial value. In a 
liquid market, even under-collateralized assets should not be 
trading at pennies on the dollar. Prices are being partially 
subjected to a downward self-reinforcing cycle. It is this 
notion of a liquidity discount that supports the potential of 
future gain for taxpayers and makes transactions under the CAP 
and the PPIP viable mechanisms for recovery of asset values 
while recouping a gain for taxpayers.
    On the other hand, it is possible that Treasury's approach 
fails to acknowledge the depth of the current downturn and the 
degree to which the low valuation of troubled assets accurately 
reflects their worth. The actions undertaken by Treasury, the 
Federal Reserve Board and the FDIC are unprecedented. But if 
the economic crisis is deeper than anticipated, it is possible 
that Treasury will need to take very different actions in order 
to restore financial stability.
    By offering this assessment of Treasury's current approach 
and identifying alternative strategies taken in the past, the 
Panel hopes to assist Congress and Treasury officials in 
weighing the available options as the nation grapples with the 
worst financial crisis it has faced since the Great Depression.
                  SECTION ONE: ASSESSING TARP STRATEGY

    This is the fifth TARP oversight report of the 
Congressional Oversight Panel. In our first and second reports, 
we asked the question, ``What is Treasury's strategy?'' In the 
absence of a clear answer to that question, in our third 
report, we looked at whether Treasury's programs produced a 
clear value for the taxpayer by valuing the preferred stock 
that Treasury had purchased using TARP funds. In our fourth 
report, we looked in detail at the mortgage crisis, a key 
component of the financial crisis that gave rise to the TARP. 
Now we return to the issue of strategy as a new Administration 
begins to announce its intentions in detail for the TARP.
    This report takes up four related topics: (1) an analysis 
of Treasury's strategy, (2) a preliminary assessment of the 
direction of key financial and economic indicators since the 
inception of the TARP, (3) a detailed analysis, comprising the 
majority of this report, of approaches to bank crises 
historically, and (4) an analysis of the alternatives facing 
Treasury. The Panel strongly believes that Treasury should 
continue to explain its strategy to Congress and the public. 
Financial institutions, businesses, and consumers are more 
likely to return to healthy investment in the economy if they 
believe that the federal government is following an 
intelligible road map. Articulating a clear strategy for 
financial stabilization would have the following benefits:

         Public Confidence. If Treasury is frank in its 
        explanation of its strategy and transparent in its 
        execution, Congress and the public will have greater 
        confidence that taxpayer dollars are being used 
        appropriately or, conversely, will be able to engage 
        with the Administration in an informed manner to 
        advocate change.
         Expectations. A clear strategy that sets forth 
        the guiding principles for future actions by the 
        Administration, including the FDIC and the Federal 
        Reserve Board, would provide the public with a basis 
        for planning future investment and consumption.
         Metrics and Accountability. A clear strategy 
        will also provide Congress and the public with 
        standards and metrics by which to measure its progress 
        and judge its success.

    The six month anniversary of the enactment of the TARP \1\ 
presents a useful opportunity for the Panel to assess TARP 
strategy to date and review alternative courses of action for 
moving forward with this massive financial rescue program. This 
report will discuss ways to stabilize and rebuild our nation's 
banking system, based both on current expert and government 
analyses and on the experiences--good and bad--of similar 
efforts in the past and elsewhere in the world. These 
alternative approaches will provide Congress and Treasury with 
a framework for considering course changes should they become 
necessary.
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    \1\ The Emergency Economic Stabilization Act of 2008 (EESA), Pub. 
L. No. 110-343, passed on October 3, 2008.
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              A. The Federal Government's Current Strategy

    In a letter sent on April 2, 2009, Secretary Geithner 
provided the Panel with a description of Treasury's strategy 
for combating the financial crisis. Secretary Geithner 
described four major challenges that Treasury's strategy seeks 
to address: (1) the collapse of the housing market; (2) frozen 
secondary markets that ``have constrained the ability of even 
creditworthy small businesses and families'' to get credit; (3) 
uncertainty about the health of financial institutions and the 
valuation of assets on their balance sheets; and (4) the 
existence of ``troubled legacy assets'' on the balance sheets 
of financial institutions that affect their capitalization and 
limit their ability to make loans. The letter describes the 
manner in which each of Treasury's programs addresses these 
challenges. The Panel commends Treasury for this response, but 
believes that a clearer understanding of Treasury's strategy is 
discernable from statements made by senior officials and 
Treasury's latest TARP initiatives. The Panel believes that 
Treasury's strategy can be described as follows:

     Address Bank Solvency and Capitalization. This was 
accomplished first through the Capital Purchase Program (CPP) 
and the Systemically Significant Failing Institutions (SSFI) 
Program, then through the Targeted Investment Program (TIP), 
and, in the future, will be accomplished through the Capital 
Assistance Program (CAP). The PPIP will leverage public and 
private capital to create markets for troubled assets in order 
to remove them from the balance sheets of financial 
institutions.
     Increase Availability of Credit in Key Markets. 
Treasury is coordinating with the Federal Reserve Board and 
FDIC to restart key credit markets through the establishment of 
Federal Reserve Board lending facilities targeting money and 
capital markets. Another facility, the Term Asset-Backed 
Securities Lending Facility (TALF), is designed to restart 
secondary markets to increase lending for auto sales, college 
loans, credit cards and small businesses. One of the two 
components of the PPIP is designed to revive markets for 
mortgage-backed securities (MBS). This effort is also an 
element of continuity between the current and previous 
administrations.
     Assess the Health of Financial Institutions. The 
first step of the CAP is a coordinated supervisory assessment, 
the so-called ``stress test,'' that will provide regulators 
with an analysis of the ability of the 19 largest banks to 
withstand worse-than-anticipated economic conditions. In 
conformity with Treasury's assumptions, regulators will be 
relying extensively on the work of the incumbent financial 
management of the 19 firms in making these assessments.
     Directly Address the Foreclosure Crisis. The 
Administration's housing plan, examined in the Panel's March 
oversight report,\2\ seeks to help families and stabilize real 
estate values in communities with high levels of foreclosures, 
thus contributing to a revival of real estate values.
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    \2\ Congressional Oversight Panel, Foreclosure Crisis: Working 
Toward a Solution (Mar. 6, 2009) (hereinafter ``Panel March Oversight 
Report'').
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     Increase Long-Term Confidence Through Regulatory 
Reform. While regulatory reform will not be discussed at great 
length in this report, it is clear that Treasury believes that 
a comprehensive plan for reforming financial regulation will 
boost market confidence.\3\
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    \3\ House Committee on Financial Services, Testimony of Timothy F. 
Geithner, Addressing the Need for Comprehensive Regulatory Reform, 
111th Cong. (Mar. 26, 2009) (``These failures have caused a great loss 
of confidence in the basic fabric of our financial system, a system 
that over time has been a tremendous asset for the American economy. To 
address this will require comprehensive reform. Not modest repairs at 
the margin, but new rules of the game.'').

    Treasury's expectation is that these measures, in concert, 
will keep the large banks afloat until the economy revives, 
propelled by the liquidity provided by TALF and the resolution 
of housing market and household finance weakness that will come 
from addressing the foreclosure crisis. The revival of the 
economy will lead to recovery of the asset side of bank balance 
sheets and a return of the major banks to health.
    Treasury's strategy is profoundly linked to Treasury's 
assumptions about the nature of major financial institution 
weakness, about the proper role for government when it has 
invested in private financial institutions, and whether the 
value of troubled assets can be restored through programs like 
PPIP and TALF. The discussion below examines this strategy in 
greater detail and offers some initial evaluation of Treasury's 
efforts to stabilize the financial system. This section also 
examines several key metrics of economic performance.

            1. COP EFFORTS TO ASCERTAIN TREASURY'S STRATEGY

    The Panel's conclusions about Treasury's strategy laid out 
above are in part based on Secretary Geithner's April 2 letter 
explaining Treasury's understanding of the origins of the 
crisis and describing the Department's strategy, in part 
derived from public statements by senior officials, and in part 
inferred from Treasury's actions. The Panel has pressed 
Treasury for a clear statement of its strategy for stabilizing 
the financial system since it first posed the question in its 
initial oversight report in December 2008.\4\ In recognition of 
the value of a clear strategy to well-functioning markets, the 
Panel sought an answer to this question from Treasury in its 
January report and in a pair of letters sent to Secretary 
Geithner.\5\ The findings of the Panel's February Valuation 
report, which revealed that Treasury provided the top ten TARP 
recipients with a subsidy of $78 billion over the market value 
of the preferred shares purchased,\6\ despite Treasury's 
representations of these purchases as being made ``at par,'' 
\7\ reinforced the importance of a comprehensive explanation by 
Treasury of its strategy and approach. While the Panel 
understands the difficulties faced by both the Bush 
Administration and the Obama Administration in managing the 
policy response to the financial crisis while going through a 
change in administrations, the need for a clearly articulated 
strategy remains paramount. We are pleased that Secretary 
Geithner will appear before the Panel on April 21, we 
appreciate his April 2 letter to the Panel, and we look forward 
to learning more in the coming weeks about Treasury's strategy.
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    \4\ See Congressional Oversight Panel, Questions About the $700 
Billion Emergency Economic Stabilization Funds, at 4-8 (Dec. 10, 2008) 
(hereinafter ``Panel December Oversight Report'').
    \5\ See Congressional Oversight Panel, Accountability for the 
Troubled Asset Relief Program, at 5 (Jan. 9, 2009) (hereinafter ``Panel 
January Oversight Report''); Appendix VIII infra, Letter from Elizabeth 
Warren, Chairperson, Congressional Oversight Panel to Timothy Geithner, 
Secretary of the Treasury (Jan. 28, 2009) (requesting that Secretary 
Geithner respond to unanswered questions remaining from the previous 
two reports); Appendix VI infra, Letter from Elizabeth Warren, 
Chairperson, Congressional Oversight Panel to Timothy Geithner, 
Secretary of the Treasury (Mar. 5, 2009) (requesting that Treasury 
provide a detailed explanation of its strategy and respond to three 
specific questions about strategy).
    \6\ See Congressional Oversight Panel, February Oversight Report: 
Valuing Treasury's Acquisitions (Feb. 6, 2009) (hereinafter ``Panel 
February Oversight Report'').
    \7\ U.S. Department of the Treasury, Responses to Questions of the 
First Report of the Congressional Oversight Panel for Economic 
Stabilization, at 8 (Dec. 30, 2008) (hereinafter ``Treasury December 
Response to Panel'') (``When measured on an accrual basis, the value of 
the preferred stock is at or near par.'').
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                2. AN EXAMINATION OF TREASURY'S STRATEGY

    Explanations by the Secretary of the Treasury and by senior 
officials suggest that the Administration views the current 
crisis as a vicious and self-reinforcing cycle that arose as a 
consequence of the financial excesses of the past decade. Rapid 
drops in asset prices and the collapse of millions of 
unsustainable subprime mortgages led to losses both in the 
loans themselves and in a myriad of financial products built on 
those loans. Falling asset values and massive losses prompted 
system-wide deleveraging by financial institutions. This led to 
additional drops in prices, which prompted investors to flee 
capital markets and secondary markets to freeze up. The end 
result of these processes is a banking system reeling from 
losses and undercapitalization. Secretary Geithner described 
these cycles of losses and withdrawal from markets as a 
``dangerous dynamic'' in which the ``financial system is 
working against recovery.'' \8\ Lawrence Summers, Director of 
the National Economic Council, described this effect as ``the 
paradox at the heart of the financial crisis,'' adding, ``In 
the past few years, we've seen too much greed and too little 
fear; too much spending and not enough saving; too much 
borrowing and not enough worrying. Today, however, our problem 
is exactly the opposite.'' \9\ This diagnosis of the financial 
crisis is driving the Administration's aggressive interagency 
effort to revive credit markets and strengthen the balance 
sheets of financial institutions through capital injections and 
the removal of toxic assets. Yet this approach assumes that the 
decline in asset values and the accompanying drop in net wealth 
across the country are in large part the products of temporary 
liquidity discounts due to nonfunctioning markets for these 
assets and, thus, are reversible once market confidence is 
restored. While critics of this approach warn against a more 
fundamental solvency problem plaguing the financial 
institutions holding onto these toxic assets,\10\ Treasury and 
key policymakers in the Administration argue that the recently-
passed fiscal stimulus passage, Treasury's foreclosure 
mitigation plan, and the public-private program to revive 
markets for toxic assets will strengthen the fundamental value 
of these assets.\11\
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    \8\ U.S. Department of the Treasury, Remarks by Treasury Secretary 
Timothy Geithner Introducing the Financial Stability Plan (Feb. 10, 
2009) (online at treas.gov/press/releases/tg18.htm) (hereinafter 
``Geithner Financial Stability Statement'').
    \9\ Brookings Institution, Lawrence Summers on the Economic Crisis 
and Recovery (Mar. 13, 2009) (online at www.brookings.edu//media/
Files/events/2009/0313_summers/0313_summers_remarks.pdf) (hereinafter 
``Summers, Economic Crisis and Recovery'').
    \10\ See, e.g., Desmond Lachman, Obama Policies Have the U.S. on 
the Road to Deflation, American Banker (Apr. 1, 2009) (``Particularly 
striking is the fact that instead of addressing the bank insolvency 
issue head on, the Administration is choosing to continue the charade 
that the banks' problems are largely those of liquidity rather than 
those of solvency.''); Ian Bremmer and Nouriel Roubini, Expect the 
World Economy to Suffer Through 2009, Wall Street Journal (Jan. 23, 
2009) (``The U.S. economy is, at best, halfway through a recession that 
began in December 2007 and will prove the longest and most severe of 
the postwar period. Credit losses of close to $3 trillion are leaving 
the U.S. banking and financial system insolvent. And the credit crunch 
will persist as households, financial firms and corporations with high 
debt ratios and solvency problems undergo a sharp deleveraging 
process.'').
    \11\ Council on Foreign Relations, A Conversation with Timothy F. 
Geithner (Mar. 25, 2009) (online at www.cfr.org/publication/18925/
conversation_with_timothy_f_geithner.html) (``So we're not treating, 
have never treated, this as a liquidity crisis. It has those two core 
dimensions. And as you can see, in the president's broad agenda * * * 
you're not going to be able to fix the financial system without very 
strong, sustained support from monetary and fiscal policy. And that 
broad package together has the best chance of getting us * * * more 
quickly to the path of recovery.''); Timothy Geithner, My Plan for Bad 
Bank Assets, Wall Street Journal (Mar. 23, 2009) (``By providing a 
market for these assets that does not now exist, this program will help 
improve asset values, increase lending capacity by banks, and reduce 
uncertainty about the scale of losses on bank balance sheets. The 
ability to sell assets to this fund will make it easier for banks to 
raise private capital, which will accelerate their ability to replace 
the capital investments provided by the Treasury.'').
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    The Panel has held two field hearings examining the impact 
of the financial crisis on America's communities, one in Clark 
County, Nevada, the other in Prince Georges County, 
Maryland.\12\ The hearings portray home mortgage-related losses 
on a large scale. Assessing the extent and persistence of these 
losses is key to understanding the plausibility of Treasury's 
assumptions. This is a matter of underlying housing values, the 
durability of the new housing stock, and the ability of 
borrowers to make mortgage payments in the future.
---------------------------------------------------------------------------
    \12\ These hearings can be viewed in their entirety at the Panel 
website: www.COP.Senate.gov.
---------------------------------------------------------------------------
    Since Treasury has not provided the baseline economic 
projections behind its stabilization efforts, this report 
assumes that consensus growth estimates and the Economic Report 
of the President are the foundation for Treasury's efforts. The 
Administration is in line with most forecasts by predicting 
economic contraction continuing into mid-2009 with recovery 
commencing in the second half of the year.\13\ This projection 
is consistent with forecasts issued by the Congressional Budget 
Office (CBO) and Blue Chip Economic Indicators, though the 
latter has been steadily downgrading its forecasts each month. 
As of late February, the Obama Administration projected an 
annual decline in real Gross Domestic Product (GDP) of 1.2 
percent, a slightly more optimistic forecast than the 1.5 
percent contraction recently projected by the CBO.\14\ The Blue 
Chip Economic Indicators survey, which offered a projection of 
a 1.9 percent contraction in its January report, recently 
downgraded this projection to a 2.6 percent contraction in 
March.\15\ Another economic projection that may be guiding 
Treasury policy is predicted losses from U.S. toxic assets. 
Goldman Sachs issued a projection of losses from U.S.-
originated credit assets of $2.1 trillion.\16\ Another 
projection comes from the International Monetary Fund, which 
expects U.S. credit losses of $2.2 trillion.\17\ For both of 
these projections, half or less of these losses will take place 
in the U.S. because a portion of the risks was transferred to 
foreign investors. While these losses will likely require 
additional capital infusions from public and private sources, 
the road to recovery for the banking system will be shorter 
based on these projections than it would be if the projections 
of some of the leading pessimists (see below) are borne 
out.\18\ Even if U.S. financial institution losses are ``only'' 
$1 trillion, however, they will nonetheless be approximately 
twice the entire amount of money allocated by Treasury under 
the TARP, including money allocated to programs like PPIP that 
has not been expended yet.
---------------------------------------------------------------------------
    \13\ White House Council of Economic Advisors, Economic Report of 
the President, at 53 (Jan. 2009) (``The contraction is projected to 
continue into the first half of 2009, followed by a recovery in the 
second half of 2009 that is expected to be led by the interest-
sensitive sectors of the economy. The overall decline, from the second-
quarter level of GDP to the quarter with the lowest real GDP, is 
projected to slightly exceed the depth of the average post-World War II 
recession. This pattern translates into a small decline during the four 
quarters of 2008, followed by a small increase during 2009.'').
    \14\ Congressional Budget Office, A Preliminary Analysis of the 
President's Budget and an Update of CBO's Budget and Economic Outlook, 
at 19 (Mar. 2009) (``In CBO's forecast, on a fourth-quarter-to-fourth-
quarter basis, real (inflation-adjusted) gross domestic product falls 
by 1.5 percent in 2009 before growing by 4.1 percent in both 2010 and 
2011.''); Office of Management and Budget, A New Era of Responsibility: 
Renewing America's Promise, at 132 (Feb. 26, 2009).
    \15\ Sickly U.S. Economy Set for 2nd Half Rebound: Survey, Reuters 
(Mar. 10, 2009) (citing Randell E. Moore, Blue Chip Economic 
Indicators: Top Analysts' Forecasts of the U.S. Economic Outlook for 
the Year Ahead (Mar. 10, 2009)).
    \16\ Jan Hatzius and Michael A. Marschoum, Home Prices and Credit 
Losses: Projections and Policy Options, Goldman Sachs Global ECS 
Research, at 14 (Jan. 13, 2009) (Global Economics Paper No. 177) 
(online at garygreene.mediaroom.com/file.php/216/
Global+Paper+No++177.pdf).
    \17\ International Monetary Fund, Global Financial Stability Report 
Market Update, at 2 (Jan. 28, 2009) (``The worsening credit conditions 
affecting a broader range of markets have raised our estimate of the 
potential deterioration in U.S.-originated credit assets held by banks 
and others from $1.4 trillion in the October 2008 GFSR to $2.2 
trillion.'').
    \18\ See Douglas J. Elliott, Bank Nationalization: What is it? 
Should we do it?, at 10 (Feb. 25, 2009) (``In sum, the banking system 
can be restored to the capital levels that held prior to this 
recession, which were considered more than adequate at the time, if the 
economy and credit losses perform as the IMF or Goldman Sachs expects. 
These forecasts are roughly in line with the consensus economic 
view.'').
---------------------------------------------------------------------------
    While these estimates represent a consensus view of 
expected economic contraction and credit losses for 2009, 
critics of Treasury's actions can point to prominent, and 
significantly more pessimistic, economic projections by 
economist Nouriel Roubini. Roubini, whose warnings of the 
collapse of the housing bubble proved prescient, forecasts an 
economic contraction of 3.4 percent \19\ and total credit 
losses of $3.6 trillion, half of which would be borne by U.S. 
banks, in 2009.\20\
---------------------------------------------------------------------------
    \19\ Roubini Global Economics, RGE Monitor 2009 Global Economic 
Outlook, at 1-2 (Jan. 2009) (online at www.rgemonitor.com/
redir.php?cid=316328&sid=1&tgid=10000).
    \20\ Nouriel Roubini and Elisa Parisi-Capone, Total $3.6T Projected 
Loans and Securities Losses, $1.8T of Which at U.S. Banks/Brokers: The 
Specter of Technical Insolvency, RGE Analysts' EconoMonitor (Jan. 21, 
2009) (online at www.rgemonitor.com/blog/economonitor/255236/total_ 
36t_projected_loans_and_securities_losses_18t_of_which_at_us_ 
banksbrokers_the_specter_of_technical_insolvency).
---------------------------------------------------------------------------
    Furthermore, declines in housing prices as shown by the 
latest data from the Case-Shiller index could indicate that the 
housing market has yet to hit bottom. The numbers from January 
2009 revealed a continued decline in home prices, with the 20-
city index showing a 2.8 percent decline from the previous 
month \21\ and a 19 percent annual decline from January 
2008.\22\ Overall, the 20-city index shows a 29.1 percent 
decrease from the housing market's peak in the second quarter 
of 2006.\23\
---------------------------------------------------------------------------
    \21\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (online 
at www2.standardandpoors.com/spf/pdf/index/
CSHomePrice_History_033114.xls) (accessed Apr. 3, 2009) (hereinafter 
``Case-Shiller Indices'').
    \22\ Standard & Poor's, The New Year Didn't Change the Downward 
Spiral of Residential Real Estate Prices According to the S&P/Case-
Shiller Home Prices Indices (Mar. 31, 2009) (online at 
www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_033114.pdf) 
(hereinafter ``Case-Shiller Press Release'').
    \23\ Id.
---------------------------------------------------------------------------
    The debate over the use of Treasury's Public-Private 
Investment Partnerships to purchase troubled assets and achieve 
price discovery turns significantly on questions surrounding 
the health and trajectory of the economy as a whole, as well as 
the relationship the economy as a whole will have to portfolios 
of bad assets held by banks and other financial institutions. 
Economic forecasters have predicted that a recovery in GDP will 
commence in the fall. However, the trend line in adjustments to 
those predictions has been consistently downward, with the 
projected beginning of the recovery receding into the future 
and its scale diminishing. Secondly, it is unclear what the 
relationship between economic recovery, when it comes, and bank 
assets will be. Unemployment, a key driver of consumer defaults 
in areas like mortgages and credit cards, is a lagging 
indicator, with joblessness typically increasing significantly 
after GDP turns around. More profoundly, recovery in real 
estate markets following an asset bubble can be very slow in 
coming. In many parts of the United States, real estate prices 
did not recover from the real estate bust of the late 1980s 
until ten years later.
    Finally and most importantly, there is the question of the 
role the health of the banks themselves will play. Treasury's 
strategy envisions a larger economic recovery pulling the banks 
back to health. Given the current degree of concentration in 
the banking industry, many have expressed concern that weak 
banks will drag the economy down by failing to lend. Japan's 
``lost decade,'' discussed in Part B of this section, was in 
part the story of an economy that suffered anemic yet largely 
positive economic growth in tandem with a prolonged crisis in 
the financial sector. To the extent that this is an accurate 
description of our financial situation, time is not on our 
side.
    Thus, disagreements over the true nature and severity of 
the economic downturn and expectations of credit losses are at 
the heart of debates over Treasury's strategy and programs for 
addressing the financial crisis. While the Panel does not have 
a view on the accuracy of these economic projections, it does 
note that Treasury can better anchor its strategy by sharing 
the baseline economic projections for its current approach. 
Disclosure of these assumptions for growth and expected bank 
losses will make debate over contingency strategies, in the 
event that a course change becomes necessary down the road, 
more constructive.

a. Address Bank Solvency and Capitalization--Capital Infusions and 
        Leveraged Asset Purchases

    Treasury's primary mechanisms for improving bank balance 
sheets are through its equity investment programs such as CPP 
and CAP and its forthcoming efforts to provide government 
financing for leveraged special purpose entities to purchase 
distressed assets through the PPIP. The basic elements of these 
programs are described below:

     CAP. On February 10, 2009, Secretary Geithner 
announced plans for the remainder of TARP funds.\24\ The 
central component of Treasury's plan is the Capital Assistance 
Program (CAP), which consists of a two-step program. The first 
step is a supervisory exercise, the ``stress test,'' in which 
the 19 U.S. banking organizations with over $100 billion in 
assets are evaluated for their ability to absorb losses in 
worse-than-expected economic conditions. While the 19 largest 
banks will be required to undergo stress tests, all banks are 
free to apply to the CAP. Banks deemed to require an additional 
capital cushion will receive a six month window to raise that 
capital privately or access it through the CAP. The second 
component of the CAP will consist of government investments in 
banks in the form of non-voting preferred securities that can 
be converted into common equity by the bank--an effective call 
on the preferred exercisable to the government's detriment when 
a bank is trouble.
---------------------------------------------------------------------------
    \24\ Geithner Financial Stability Statement, supra note 8.

    PPIP. On March 3, 2009, Treasury announced the details of 
the PPIP. The PPIP involves the creation of leveraged special 
purpose entities, capitalized with small amounts of equity 
capital from private sources and designed to purchase bad 
assets from banks. Private investors would capture 50 percent 
of the profits of these entities. Their purpose is to buy 
distressed bank assets at prices and volumes that private 
parties are unwilling to do. Treasury hopes that these 
transactions will promote bank lending,\25\ and improve market 
liquidity. It is unclear whether the introduction of these 
funds will lead private sector investors who do not benefit 
from government subsidies to have any greater interest in 
transacting in distressed assets than they do today. Treasury 
hopes this program will unfreeze the asset-backed securities 
market and reverse the negative economic cycle of declining 
asset prices, deleveraging, and declining asset values.\26\ 
PPIP has two components: the Legacy Loan Program targeting 
distressed loans held on bank balance sheets and the Legacy 
Securities Program that is intended to facilitate the purchase 
of certain, primarily asset-backed securities through TALF.
---------------------------------------------------------------------------
    \25\ Although the program takes these assets off bank balance 
sheets, there does not appear to be any corresponding requirement about 
a selling bank's use of the proceeds it receives for those assets.
    \26\ The illiquidity of the asset-backed securities market is 
obviously closely tied to this economic cycle. As prices have declined, 
those who hold the assets have been increasingly unwilling to sell.

    At the time of the announcement of these programs, Mr. 
Summers expressed his expectation that ``further support for 
capital markets, transparency with respect to the condition of 
banks, and infusion of capital into the banking cycle, will 
create virtuous cycles in which stronger markets beget stronger 
financial institutions, which beget stronger markets.'' \27\ 
Statements like these provide additional evidence of the 
assumptions underlying Treasury's actions, to wit, that senior 
officials believe that current prices for impaired assets are 
at or near their lowest levels and will rebound if Treasury can 
revive markets for these assets.
---------------------------------------------------------------------------
    \27\ Summers, Economic Crisis and Recovery, supra note 9.
---------------------------------------------------------------------------
    In Part D of this report, we provide further preliminary 
analysis of CAP and PPIP. In further reports, as these plans 
proceed, the Panel will seek to analyze the financial impact of 
these programs on the banks, the private sector investors in 
these leveraged investment vehicles, and on the public.

b. Increase Availability of Credit in Key Markets

    Another major component of Treasury's financial 
stabilization program is its use of TARP funds in coordination 
with the Federal Reserve Board's use of its balance sheet to 
inject over two trillion dollars of financing into credit 
markets and public-private investment facilities. A common 
thread among the various facilities that constitute this 
component of the plan is the assumption of risk by Treasury and 
the Federal Reserve Board in order to induce renewed private 
participation in securitization. Senior officials believe that 
restarting markets will increase credit availability and reduce 
the liquidity discounts impairing the sale of many toxic 
assets. Official efforts take the form of Treasury's 
investments in TALF and PPIP and the lending facilities 
established by the Federal Reserve Board. Federal Reserve Board 
Chairman Ben Bernanke stated that the purpose of these programs 
is ``both to cushion the direct effects of the financial 
turbulence on the economy and to reduce the virulence of the 
so-called adverse feedback loop, in which economic weakness and 
financial stress become mutually reinforcing.'' \28\ Mr. 
Summers reinforced this view in his address to the Brookings 
Institution on March 13, 2009: ``Reactivating the capital 
markets is essential to realistic asset valuation, to 
restarting nonbank lending, and to enabling banks to divest 
toxic assets when they judge it appropriate.'' \29\
---------------------------------------------------------------------------
    \28\ Board of Governors of the Federal Reserve System, Address by 
Ben S. Bernanke, Chairman, at the Stamp Lecture, London School of 
Economics, London, England: The Crisis and Policy Response (Jan. 13, 
2009) (online at www.federalreserve.gov/newsevents/speech/
bernanke20090113a.htm).
    \29\ Summers, Economic Crisis and Recovery, supra note 9.
---------------------------------------------------------------------------
    TALF and PPIP have some fundamental differences. TALF seeks 
to revive asset securitization markets by having the Federal 
Reserve Board encourage issuance of new high-quality 
securitized debt instruments through collateralized non-
recourse loans; loan principal will be discounted by haircuts 
on the securities' face value that depend on the type of loans 
backing the security. PPIP envisions buying existing distressed 
assets and low quality assets off bank balance sheets using 
Special Purpose Entities where private sector actors, 
presumably hedge funds and private equity firms, invest a small 
amount of capital and stand to gain 50 percent of any profits.
    Treasury and the Federal Reserve Board clearly believe that 
we cannot revive the U.S. economy without healthy asset 
securitization markets. The phenomenal growth of the size of 
those markets in recent years and their current centrality to 
mortgage, auto, student loan and credit card financing would 
tend to support that belief. Nonetheless, some question the 
fundamental premise behind the expenditure of TARP funds and 
assumption of risk by taxpayers, arguing that securitization 
itself, absent reform, weakens effective risk management by 
financial institutions.\30\ Of course, reforming securitization 
markets, as the Panel recommended in its regulatory reform 
report of January 29, 2009, is not necessarily incompatible 
with Treasury's strategy of keeping those markets from 
freezing. Another criticism of this approach is that markets 
requiring heavy government subsidization will not lead to true 
price discovery of assets or create sustainable markets for 
these assets.\31\ Such subsidization can distort markets and, 
once ceased, is unlikely to affect later, non-subsidized market 
transactions. A third concern centers on the terms of the PPIP 
deal for the American taxpayer insofar as the government is 
bearing most of the risk while splitting the gains with program 
participants.
---------------------------------------------------------------------------
    \30\ See, e.g., Paul Krugman, The Market Mystique, New York Times 
(Mar. 26, 2009) (``Above all, the key promise of securitization--that 
it would make the financial system more robust by spreading risk more 
widely--turned out to be a lie. Banks used securitization to increase 
their risk, not reduce it, and in the process they made the economy 
more, not less, vulnerable to financial disruption.''); Robert Kuttner, 
Slouching Towards Solvency, American Prospect (Mar. 23, 2009) (online 
at www.prospect.org/cs/articles?article=slouching_towards_solvency) 
(``At the heart of this entire mess is the system of securitization, 
which dates only to the 1970s. In principle, it usefully allowed banks 
to sell off loans and thereby replenish cash to make other loans. But 
in practice, the system turned into an unsupervised doomsday machine. 
Not only did the system invite lenders to relax underwriting standards 
because some sucker down the line was absorbing the risk; more 
seriously it led to an aftermath that has proven impossible to unwind 
without having government temporarily take the big banks into 
receivership to sort out what's really on their books.'').
    \31\ See, e.g., Jeffrey Sachs, Obama's Bank Plan Could Rob the 
Taxpayer, Financial Times (Mar. 25, 2009) (``It is dressed up as a 
market transaction but that is a fig-leaf, since the government will 
put in 90 per cent or more of the funds and the `price discovery' 
process is not genuine. It is no surprise that stock market 
capitalisation of the banks has risen about 50 per cent from the lows 
of two weeks ago. Taxpayers are the losers, even as they stand on the 
sidelines cheering the rise of the stock market. It is their money 
fuelling the rally, yet the banks are the beneficiaries.'').
---------------------------------------------------------------------------
    On the other hand, many forms of securitization involve 
instruments that are straightforward. A revival of 
securitization markets, if subject to strong regulatory 
oversight, can help restore financial stability because it re-
circulates capital for banks to lend again, and without a 
functioning secondary market access to credit would be sharply 
decreased, delaying or even preventing our economic recovery. 
The Panel urges Treasury, as it works to restart these markets 
to improve lending, to discuss its vision for reforming 
securitization within its broader program for modernizing 
financial regulation.

c. Assess the Health of Financial Institutions

    The stress tests build on the efforts under the Capital 
Purchase Program by the Paulson Treasury Department to assess 
the health of banks applying for funding under the CPP. The 
stress tests will analyze whether the targeted banks have the 
necessary capital to continue lending while absorbing potential 
losses in the case of a more severe economic decline than 
anticipated by consensus estimates.\32\ These examinations 
involve collaboration between Treasury, federal banking 
supervisors, and other agencies, and they commenced on February 
25, 2009. For some banks, a comparatively clean bill of health 
from Treasury may provide an opportunity for eased terms and 
early repayment. This assessment exercise may provide stronger 
signals to the industry and the market about which banks may 
face a greater government ownership stake. The actions taken by 
Treasury following the completion of these stress tests may 
also offer investors a good indication of future government 
intervention in financial markets, which could encourage a 
return to a healthy level of investment. On the other hand, the 
tests may prove to be insufficiently rigorous to give 
regulators a true picture of the health of financial 
institutions. Even if the tests are adequate, regulators may 
lack the will to act on what they learn. In either case, the 
stress tests would not produce the desired results.
---------------------------------------------------------------------------
    \32\ Treasury states that the consensus baseline assumptions for 
real GDP growth are those found in the February projections published 
by Consensus Forecasts, the Blue Chip survey, and the Survey of 
Professional Forecasters. U.S. Department of the Treasury, FAQs: 
Supervisory Capital Assessment Program (online at files.ots.treas.gov/
482033.pdf) (accessed Apr. 2, 2009).
---------------------------------------------------------------------------
    The Panel is interested in: (1) the extent to which the 
stress tests will rely on risk management models like Value At 
Risk (VAR), which some have identified as having contributed to 
risk management failures that fed the financial bubble; and (2) 
the extent to which the stress tests will be conducted, in the 
first instance, by the financial management teams of the 
financial firms themselves. The Panel needs additional 
information on the stress tests before it can offer further 
analysis.

                     3. FEDERAL GOVERNMENT EFFORTS

    Treasury's efforts to date to combat the financial crisis 
have focused upon improving bank balance sheets and providing 
liquidity to financial institutions and key credit markets. A 
critical player in government stabilization efforts is the 
Federal Reserve Board, which has added over $1.5 trillion 
dollars to its balance sheet beyond its normal monetary policy 
open-market operations.\33\ Likewise, the FDIC has also had a 
major role. FDIC, the Federal Reserve Board, and Treasury are 
extending over $1.7 trillion in guarantees as well. See Figure 
1 for a complete presentation of Federal resources--outlays, 
loans and guarantees--that have been provided to date in 
conjunction with the financial market rescue efforts.
---------------------------------------------------------------------------
    \33\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances 
(Apr. 2, 2009) (online at www.federalreserve.gov/ releases/h41/
20090502/) (hereinafter ``Fed Balance Sheet April 2'').
---------------------------------------------------------------------------
    The Panel has broadly classified the resources that the 
federal government has devoted to stabilizing the economy in a 
myriad of new programs and initiatives as outlays, loans, and 
guarantees. Although the Panel calculates the total value of 
these resources at over $4 trillion, this would translate into 
the ultimate ``cost'' of the stabilization effort only if: (1) 
assets do not appreciate; (2) no dividends are received, no 
warrants are exercised, and no TARP funds are repaid; (3) all 
loans default and are written off; and (4) all guarantees are 
exercised and subsequently written off.
    Outlays constitute $522.4 billion or about 13 percent of 
total federal resources and primarily reflect Treasury 
expenditures under the TARP. The majority of outlays are 
structured as Treasury's equity investments in financial 
institutions ($328 billion) and Treasury co-investments with 
private investors in mortgage-based loans and securities under 
the PPIP ($100 billion). It is possible that the federal 
government could recoup much of the value of its investments in 
financial institutions through receipt of dividend payments, 
financial institutions' repayments of TARP funds, appreciation 
of the value of the TARP equity investments, and resolution of 
financial institutions in bankruptcy or receivership. 
Similarly, the PPIP co-investments could be profitable if the 
mortgage loans and mortgage-backed securities in these funds 
appreciate in value. On the other hand, insolvency of financial 
institutions that are funded by the TARP, or poor performance 
or pricing of PPIP equity investments, would result in a 
substantial amount of long-term losses to the federal 
government.
    The $2.0391 trillion in loans almost exclusively represent 
an expansion of assets on the Federal Reserve Board's balance 
sheet as a result of the creation of a variety of new programs. 
According to Federal Reserve Board Chairman Ben Bernanke, ``the 
great majority of [the Federal Reserve Board's] lending is 
extremely well secured.'' \34\ Nevertheless, even if Chairman 
Bernanke is correct in his analysis, any losses incurred on 
loans not in the extremely well secured category potentially 
could create significant long-term losses to the federal 
government.
---------------------------------------------------------------------------
    \34\ Board of Governors of the Federal Reserve System, Address by 
Ben S. Bernanke, Chairman, at the Federal Reserve Bank of Richmond 2009 
Credit Market Symposium, Charlotte, North Carolina: The Federal 
Reserve's Balance Sheet (Apr. 3, 2009) (online at 
www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm).
---------------------------------------------------------------------------
    Finally, the risks of long-term losses to the federal 
government posed by the over $1.7 trillion in guarantees, 
mostly made by the Federal Reserve Board and FDIC, are 
difficult to estimate. Potential losses are largely dependent 
on the specific risks of each guarantee program, some of which 
(including PPIP) are still being designed, and on underlying 
economic performance.

   FIGURE 1: RESOURCES DESIGNATED FOR FINANCIAL STABILIZATION EFFORTS
------------------------------------------------------------------------
                                          Federal
     Program (dollars in       Treasury   Reserve      FDIC      Total
          billions)             (TARP)     Board
------------------------------------------------------------------------
American International Group         70       89.3          0      159.3
 (AIG)......................
    Outlays \35\............    \37\ 70          0          0         70
    Loans...................          0  8\38\ 9.3          0       89.3
    Guarantees \36\.........          0          0          0          0
Bank of America.............       52.5       87.2        2.5      142.2
    Outlays.................    \39\ 45          0          0         45
    Loans...................          0          0          0          0
    Guarantees..............   \40\ 7.5  \41\ 87.2   \42\ 2.5       97.2
Citigroup...................         50      229.8         10      289.8
    Outlays.................    \43\ 45          0          0         45
    Loans...................          0          0          0          0
    Guarantees..............     \44\ 5  \45\ 229.    \46\ 10      244.8
                                                 8
Capital Purchase Program            168          0          0        168
 (Other)....................
    Outlays.................   \47\ 168          0          0        168
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Capital Assistance Program..        TBD        TBD        TBD   \48\ TBD
TALF........................         55        495          0        550
    Outlays.................          0          0          0          0
    Loans...................          0   \50\ 495          0        495
    Guarantees..............    \49\ 55          0          0         55
PPIF (Loans) \51\...........         50          0        600        650
    Outlays.................         50          0          0         50
    Loans...................          0          0          0          0
    Guarantees..............          0          0   \52\ 600        600
PPIF (Securities)...........         50          0          0         50
    Outlays.................    \53\ 20          0          0         20
    Loans...................         30          0          0         30
    Guarantees..............          0          0          0          0
Commercial Paper Funding              0      249.7          0      249.7
 Facility...................
    Outlays.................          0          0          0          0
    Loans...................          0  \54\ 249.          0      249.7
                                                 7
    Guarantees..............          0          0          0          0
Asset-Backed Commercial               0        6.1          0        6.1
 Paper Money Market Mutual
 Fund Liquidity Facility....
    Outlays.................          0          0          0          0
    Loans...................          0   \55\ 6.1          0        6.1
    Guarantees..............          0          0          0          0
Homeowner Affordability and          50          0          0    \57\ 50
 Stability Plan.............
    Outlays.................    \56\ 50          0          0         50
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Automotive Industry                24.9          0          0       24.9
 Financing Plan.............
    Outlays.................  \58\ 24.9          0          0       24.9
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Auto Supplier Support                 5          0          0          5
 Program....................
    Outlays.................     \59\ 5          0          0          5
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Unlocking Credit for Small           15          0          0         15
 Business...................
    Outlays.................    \60\ 15          0          0         15
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Temporary Liquidity                   0          0      768.9      768.9
 Guarantee Program..........
    Outlays.................          0          0          0          0
    Loans...................          0          0          0          0
    Guarantees..............          0          0  \61\ 768.      768.9
                                                            9
Deposit Insurance Fund......          0          0       29.5       29.5
    Outlays.................          0          0  \62\ 29.5       29.5
    Loans...................          0          0          0          0
    Guarantees..............          0          0          0          0
Other Federal Reserve Board           0      1,169          0      1,169
 Credit Expansion Since
 September 1, 2008..........
    Outlays.................          0          0          0          0
    Loans...................          0  \63\ 1,16          0      1,169
                                                 9
    Guarantees..............          0          0          0          0
Uncommitted TARP Funds......  \64\ 109.          0          0      109.6
                                      6
    Outlays.................        TBA          0          0        TBA
    Loans...................        TBA          0          0        TBA
    Guarantees..............        TBA          0          0        TBA
Total.......................        700    2,326.1    1,410.9  \65\ 4,43
                                                                       7
    Outlays.................      492.9          0       29.5      522.4
    Loans...................         30    2,009.1          0    2,039.1
    Guarantees..............       67.5        317    1,381.4    1,765.9
    Uncommitted TARP Funds..      109.6          0          0      109.6
------------------------------------------------------------------------
\35\ Treasury outlays are face values, based on: (1) Treasury's actual
  reported expenditures and (2) Treasury's anticipated funding levels as
  estimated by a variety of sources, including Treasury pronouncements,
  GAO estimates, and news reports. Anticipated funding levels are set at
  Treasury's discretion, have changed from initial announcements, and
  are subject to change further. The outlay concept used here is not the
  same as budget outlays, which under Sec.  123 of EESA are recorded on
  a ``credit reform'' basis.
\36\ While many of the guarantees may never be exercised or exercised
  only partially, the guarantee figures included here represent the
  federal government's maximum financial exposure.
\37\ Government Accountability Office, Troubled Asset Relief Program:
  March 2009 Status of Efforts to Address Transparency and
  Accountability Issues, at 9 (Mar. 31, 2009) (GAO09/504) (online at
  www.gao.gov/new.items/d09504.pdf) (hereinafter ``March GAO Report'').
  This number includes a $40 billion investment made on November 25,
  2008 under the Systemically Significant Failing Institutions (SSFI)
  Program and a $30 billion equity capital facility announced on March
  2, 2009 that AIG may draw down when in need of additional capital in
  exchange for additional preferred stock and warrants to be held by
  Treasury. U.S. Department of the Treasury, Office of Financial
  Stability, Troubled Asset Relief Program Transactions Report For
  Period Ending March 31, 2009 (Apr. 2, 2009) (online at
  www.financialstability.gov/docs/transaction- reports/
  transaction_report_04-02-2009.pdf) (hereinafter ``April 2 Transaction
  Report''); U.S. Department of the Treasury, Term Sheet (Mar. 2, 2009)
  (online at www.treas.gov/press/releases/reports/
  030209_aig_term_sheet.pdf).
\38\ Fed Balance Sheet April 2, supra note 33. This figure includes the
  AIG credit line as well as the Maiden Lane II LLC and Maiden Lane III
  LLC special purpose vehicles.
\39\ April 2 Transaction Report, supra note 37. This figure includes:
  (1) a $15 billion investment made by Treasury on October 28, 2008
  under the Capital Purchase Program (CPP), (2) a $10 billion investment
  made by Treasury on January 9, 2009 also under the CPP, and (3) a $20
  billion investment made by Treasury under the Targeted Investment
  Program (TIP) on January 16, 2009.
\40\ U.S. Department of the Treasury, Summary of Terms: Eligible Asset
  Guarantee (Jan. 15, 2009) (online at www.treas.gov/press/releases/
  reports/011508bofatermsheet.pdf) (granting a $118 billion pool of Bank
  of America assets a 90 percent federal guarantee of all losses over
  $10 billion, the first $10 billion in federal liability to be split 75/
  25 between Treasury and the FDIC and the remaining federal liability
  to be borne by the Federal Reserve).
\41\ Id.
\42\ Id.
\43\ April 2 Transaction Report, supra note 37. This figure includes:
  (1) a $25 billion investment made by Treasury under the CPP on October
  28, 2008 and (2) a $20 billion investment made by Treasury under the
  TIP on December 31, 2008.
\44\ U.S. Department of the Treasury, Summary of Terms: Eligible Asset
  Guarantee (Nov. 23, 2008) (online at www.treasury.gov/press/releases/
  reports/cititermsheet_112308.pdf) (hereinafter ``Citigroup Asset
  Guarantee'') (granting a 90 percent federal guarantee on all losses
  over $29 billion of a $306 billion pool of Citigroup assets, with the
  first $5 billion of the cost of the guarantee borne by Treasury, the
  next $10 billion by FDIC, and the remainder by the Federal Reserve).
  See also U.S. Department of the Treasury, U.S. Government Finalizes
  Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online
  at www.treas.gov/press/releases/hp1358.htm) (reducing the size of the
  asset pool from $306 billion to $301 billion).
\45\ Citigroup Asset Guarantee, supra note 44.
\46\ Citigroup Asset Guarantee, supra note 44.
\47\ March GAO Report, supra note 37. This figure represents the $218
  billion Treasury reported anticipating spending under the CPP to GAO,
  minus the $50 billion CPP investments in Citigroup ($25 billion) and
  Bank of America ($25 billion) identified above. This figure does not
  account for anticipated repayments or redemptions of CPP investments,
  nor does it account for dividend payments from CPP investments.
  Treasury originally set CPP funding at $250 billion and has not
  officially revised that estimate.
\48\ Funding levels for the Capital Assistance Program (CAP) have not
  yet been announced but will likely include a significant portion of
  the remaining $109.6 billion of TARP funds.
\49\ March GAO Report, supra note 37. Treasury has committed $20 billion
  of TARP money to TALF already; Treasury later indicated it would
  expand to a $100 billion TARP commitment to TALF, but has recently
  pulled back to a $55 billion commitment. Michael R. Crittenden,
  Treasury Seeks to Free Up Funds by Shuffling Spending in TARP, Wall
  Street Journal (Apr. 2, 2009) (online at online.wsj.com/article/
  SB123870719693083971.html). The increase in funding has coincided with
  an increase in asset classes eligible for the facility, including
  allowing legacy securities access to the facility instead of limiting
  access only to new securitizations.
\50\ This number derives from the unofficial 1:10 ratio of the value of
  Treasury loan guarantees to the value of Federal Reserve loans under
  TALF. See U.S. Department of the Treasury, Fact Sheet: Financial
  Stability Plan, at 2-3 (Feb. 10, 2009) (online at
  www.financialstability.gov/docs/fact-sheet.pdf) (describing the
  initial $20 billion Treasury contribution tied to $200 billion in
  Federal Reserve loans and announcing potential expansion to a $100
  billion Treasury contribution tied to $1 trillion in Federal Reserve
  loans). Because Treasury is responsible for reimbursing the Federal
  Reserve for $55 billion of losses on its $550 billion in loans, the
  Federal Reserve's maximum potential exposure under TALF is $495
  billion.
\51\ Because the PPIP funding arrangements for loans and securities
  differ substantially, the Panel accounts for them separately. Treasury
  has not formally announced either total program funding level or the
  allocation of funding between PPIP Legacy Loans Program and Legacy
  Securities Program. Treasury initially provided a $75-100 billion
  range for PPIP outlays. U.S. Department of the Treasury,  Fact Sheet:
  Public- Private Investment Program, at 2 (Mar. 23, 2009) (online at
  www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter
  ``Treasury PPIP Fact Sheet''). While SIGTARP has estimated a $75
  billion Treasury commitment, we adopt GAO's higher estimate of $100
  billion. See Senate Committee on Finance, Testimony of SIGTARP Neil
  Barofsky, TARP Oversight: A Six Month Update, 111th Cong. (Mar. 31,
  2009) (hereinafter ``Barofsky Testimony''); See March GAO Report,
  supra note 37, at 9. We further assume that Treasury will fund the
  programs equally at $50 billion each.
\52\ Treasury PPIP Fact Sheet, supra note 51, at 2-3 (explaining that,
  for every $1 Treasury contributes in equity matching $1 of private
  contributions to public-private asset pools created under the Legacy
  Loans Program, FDIC will guarantee up to $12 of financing for the
  transaction to create a 6:1 debt to equity ratio). If Treasury
  ultimately allocates a lower proportion of funds to the Legacy Loans
  Program (i.e. less than $50 billion), the amount of FDIC loan
  guarantees will be reduced proportionally.
\53\ Treasury PPIP Fact Sheet, supra note 51, at 4-5 (outlining that,
  for each $1 of private investment into a fund created under the Legacy
  Securities Program, Treasury will provide a matching $1 in equity to
  the investment fund; a $1 loan to the fund; and, at Treasury's
  discretion, an additional loan up to $1). In the absence of further
  Treasury guidance, this analysis assumes that Treasury will allocate
  funds for equity co-investments and loans at a 1:1.5 ratio, a formula
  that estimates that Treasury will frequently exercise its discretion
  to provide additional financing.
\54\ Fed Balance Sheet April 2, supra note 33. The level of Federal
  Reserve lending under this facility will fluctuate in response to
  market conditions and independent of any federal policy decision.
\55\ Fed Balance Sheet April 2, supra note 33. The level of Federal
  Reserve lending under this facility will fluctuate in response to
  market conditions and independent of any federal policy decision.
\56\ March GAO Report, supra note 37, at 9.
\57\ Fannie Mae and Freddie Mac, government-sponsored entities (GSEs)
  that were placed in conservatorship of the Federal Housing Finance
  Housing Agency on September 7, 2009, will also contribute up to $25
  billion to the Homeowner Affordability and Stability Plan. See U.S.
  Department of the Treasury, Making Home Affordable: Updated Detailed
  Program Description (Mar. 4, 2009) (online at www.treas.gov/press/
  releases/reports/housing_fact_sheet.pdf).
\58\ April 2 Transaction Report, supra note 37.
\59\ March GAO Report, supra note 37, at 9.
\60\ March GAO Report, supra note 37, at 9.
\61\ Federal Deposit Insurance Corporation, Monthly Reports on Debt
  Issuance Under the Temporary Liquidity Guarantee Program: Debt
  Issuance under Guarantee Program (online at www.fdic.gov/regulations/
  resources/TLGP/total_issuance1-09.html) (accessed Apr. 1, 2009). This
  figure represents the current maximum aggregate debt guarantees that
  could be made under the program, which, in turn, is a function of the
  number and size of individual financial institutions participating.
  $252.6 billion of debt subject to the guarantee has been issued to
  date, which represents about 33 percent of the current cap. Id.
\62\ Federal Deposit Insurance Corporation, Chief Financial Officer's
  (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008)
  (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/
  income.html) (provision for insurance losses of $17.6 billion);
  Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO)
  Report to the Board: DIF Income Statement (Third Quarter 2008) (online
  at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/
  income.html) (provision for insurance losses of $11.9 billion).
  Outlays reflect disbursements or potential disbursements in
  conjunction with failed bank resolutions.
\63\ This figure is derived from adding the total credit the Federal
  Reserve has extended as of April 1, 2009 through the Term Auction
  Facility (Term Auction Credit), Discount Window (Primary Credit),
  Primary Dealer Credit Facility (Primary Dealer and Other Credit),
  Central Bank Liquidity Swaps, Bear Stearns Assets (Maiden Lane I), GSE
  Debt (Federal Agency Debt Securities), and Mortgage Backed Securities
  Issued by GSEs. See Fed Balance Sheet April 2, supra note 33.
\64\ Committed TARP funds listed above total $590.4 billion; $109.6
  billion remains uncommitted for the $700 billion authorization under
  EESA and is included in this accounting because it will almost
  certainly be allocated in the future. One potential use of uncommitted
  funds is Treasury's obligation to reimburse the Exchange Stabilization
  Fund (ESF), currently valued at $49.4 billion. See U.S. Department of
  Treasury, Exchange Stabilization Fund, Statement of Financial
  Position, as of February 28, 2009 (online at www.ustreas.gov/offices/
  international-affairs/esf/esf-monthly-statement.pdf) (accessed April
  6, 2009). Treasury must reimburse any use of the fund to guarantee
  money market mutual funds from TARP money. See EESA, supra note 1, at
  131. In September 2008, in response to the Reserve Primary Fund
  ``breaking the buck,'' see Diya Gullapalli, Shefali Anand, and Daisy
  Maxey, Money Fund, Hurt by Debt Tied to Lehman, Breaks the Buck, Wall
  Street Journal (Sept. 17, 2008) (online at online.wsj.com/article/
  SB122160102128644897.html), Treasury opened its Temporary Guarantee
  Program for Money Mutual Funds, U.S. Department of Treasury, Treasury
  Announces Temporary Guarantee Program for Money Market Mutual Funds
  (Sept. 29, 2008) (online at www.treas.gov/press/releases/hp1161.htm).
  This program uses assets of the ESF, which was created under the Gold
  Reserve Act of 1934, to guarantee the net asset value of participating
  money market mutual funds. Id. Section 131 of EESA protected the ESF
  from incurring any losses from the program by requiring that Treasury
  reimburse the ESF for any funds used in the exercise of the guarantees
  under the program. The program has recently been extended through
  September 18, 2009. U.S. Department of Treasury, Treasury Announces
  Extension of Temporary Guarantee Program for Money Market Funds (Mar.
  31, 2009) (online at www.treas.gov/press/releases/tg76.htm).
\65\ This figure differs substantially from the $2,476-2,976 billion
  range of ``Total Funds Subject to SIGTARP Oversight'' reported during
  testimony before the Senate Finance Committee on March 31, 2009.
  Barofsky Testimony, supra note 51, at 12. SIGTARP's accounting,
  designed to capture only those funds potentially under its oversight
  authority, is both less and more inclusive than, and thus not directly
  comparable to, the Panel's. Among the many differences, SIGTARP does
  not account for Federal Reserve credit extensions outside of TALF or
  FDIC guarantees under the Temporary Liquidity Guarantee Program and
  sets the maximum Federal Reserve loan extensions under TALF at $1
  trillion.

a. Treasury Programs

    Through an array of programs used to purchase preferred 
shares in financial institutions, offer loans to small 
businesses and auto companies, and leverage Federal Reserve 
Board loans for facilities designed to restart secondary 
securitization markets, Treasury has spent or committed $590.4 
billion.\66\ This figure is down from the $667.4 billion sum of 
the upper bounds of all Treasury commitments announced to 
date.\67\ The discrepancy results from Treasury revising its 
estimates of anticipated commitments down from the maximum 
announced program funding levels; for example, Treasury 
initially announced that it would commit $250 billion to CPP 
purchases but now only anticipates spending $218 billion.\68\ 
Treasury will also leverage billions more in public and private 
capital to facilitate large-scale asset purchases of legacy 
assets through the PPIP, expanding the total impact on the 
economy without extending more in outlays.
---------------------------------------------------------------------------
    \66\ March GAO Report, supra note 37, at 9.
    \67\ March GAO Report, supra note 37, at 9.
    \68\ March GAO Report, supra note 37, at 9. Treasury also 
anticipates spending only $55 billion in TALF funding as opposed to the 
$100 billion initially reported. See Figure 1, supra, and accompanying 
notes.
---------------------------------------------------------------------------
    Treasury estimates only $565.5 billion in commitments.\69\ 
The discrepancy between this figure and the numbers 
independently determined by the General Accountability Office 
(GAO), SIGTARP, and the Panel results from $25 billion in CPP 
investments that Treasury expects recipients to repay or 
liquidate.\70\ Although describing this estimate as 
``conservative,'' \71\ neither Secretary Geithner nor Treasury 
has identified the institutions who will supply these 
anticipated repayments or when they will supply these 
repayments. As a result, the Panel agrees with the GAO and 
SIGTARP estimates of $590.4 billion in TARP funds already 
committed.\72\
---------------------------------------------------------------------------
    \69\ See, e.g., Alex Tanzi and Rebecca Christie, U.S. TARP Funding 
Remaining Estimated at $134.5 Billion, Bloomberg (Mar. 30, 2009).
    \70\ See, e.g., id.
    \71\ Maya Jackson Randall, Treasury Has $134.5 Billion Left in 
TARP, Wall Street Journal (Mar. 30, 2009) (online at online.wsj.com/
article/SB123828522318566241.html) (quoting Secretary Geithner's 
appearance on ABC's This Week).
    \72\ March GAO Report, supra note 34, at 9; Barofsky Testimony, 
supra note 48, at 12.
---------------------------------------------------------------------------

b. Federal Reserve Board Facilities

    The Federal Reserve Board is taking a similarly 
unprecedented set of steps to stabilize the financial system 
and restart credit markets under its emergency powers.\73\ As 
of April 1, 2009, the Federal Reserve Board has extended almost 
$1.5 trillion in credit to financial institutions independent 
of normal open market operations.\74\ These credit extensions, 
including special credit facilities established under its 13(3) 
emergency authority, enabled the Federal Reserve Board to use 
the asset side of its balance sheet to provide liquidity to 
banks and revive credit markets. These facilities include: the 
Term Securities Lending Facility, the Primary Dealer Credit 
Facility, the Asset-Backed Commercial Paper Money Market Fund 
Liquidity Facility, the Commercial Paper Funding Facility, the 
loan to Maiden Lane LLC to facilitate the acquisition of Bear 
Stearns by JPMorgan Chase, and the lending facilities and 
Maiden Lane II and III facilities established for AIG.
---------------------------------------------------------------------------
    \73\ Emergency Relief and Construction Act of 1932, Pub. L. No. 72-
302, at Sec. 210 (amending Federal Reserve Act, Pub. L. No. 63-43 
(1913), at Sec. 13) (codified as amended at 12 U.S.C. Sec. 343). This 
power, commonly known as the Federal Reserve's 13(3) power or lender of 
last resort power, enables the Board of Governors to authorize any 
regional Federal Reserve Bank to loan money to a nonbank financial 
institution. 12 U.S.C. Sec. 343. Additional Depression-era legislation 
gave the Federal Reserve even broader power to lend outside the 
financial sector, but Congress revoked this power in 1958. David 
Fettig, The History of a Powerful Paragraph: Section 13(3) Enacted Fed 
Business Loans 76 Years Ago, Federal Reserve Bank of Minneapolis, The 
Region (June 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=3485). The Federal Reserve used 
the Sec. 13(3) power in 1991 to loan money to the FDIC's Bank Insurance 
Fund as a stopgap measure until Congress could recapitalize the fund; 
the recapitalization legislation subsequently granted the Federal 
Reserve broader Sec. 13(3) power to lend to distressed securities firms 
and other financial institutions. Id. The Federal Reserve also used 
this authority to facilitate the merger of Bear Stearns and JPMorgan 
Chase. Id. See also David Fettig, Lender of More Than Last Resort: 
Recalling Section 13(b) and the Years When the Federal Reserve Banks 
Opened Their Discount Windows to District Businesses in Times of 
Economic Stress, Federal Reserve Bank of Minneapolis, The Region (Dec. 
2002) (online at www.minneapolisfed.org/publications_papers/
pub_display.cfm?id=3392).
    \74\ Fed Balance Sheet April 2, supra note 33.
---------------------------------------------------------------------------
    In addition, the Federal Reserve Board will initially offer 
up to $200 billion in loans to participants and is open to 
expanding the program to up to $1 trillion.\75\ Assuming 
Treasury funds its guarantees of TALF loans at $55 billion,\76\ 
one can expect the Federal Reserve to ultimately extend up to 
$550 billion in loans.\77\
---------------------------------------------------------------------------
    \75\ U.S. Department of the Treasury, U.S. Treasury and Federal 
Reserve Board Announce Launch of Term Asset-Backed Securities Loan 
Facility (TALF) (Mar. 3, 2009) (online at treas.gov/press/releases/
tg45.htm).
    \76\ March GAO Report, supra note 34; Michael R. Crittenden, 
Treasury Seeks to Free Up Funds by Shuffling Spending in TARP, Wall 
Street Journal (Apr. 2, 2009) (online at online.wsj.com/article/
SB123870719693083971.html) (setting Treasury commitment to TALF at $55 
billion, which represents a reduction from the $100 billion Treasury 
initially committed to an expanded TALF).
    \77\ See Figure 1, supra, and accompanying notes.
---------------------------------------------------------------------------
    Off balance sheet vehicles such as the Maiden Lane entities 
and the entities contemplated by PPIP raise a number of serious 
issues. These entities trigger concerns about transparency and 
accountability, financial structure, and risk associated with 
high levels of leverage.

c. FDIC Programs

    The FDIC supports the government's financial stabilization 
efforts through the Temporary Liquidity Guarantee Program 
(TLGP) and the temporary increase in deposit insurance coverage 
to $250,000 per account. Banks that fail are also put into 
receivership by the FDIC, leading to additional costs for the 
Deposit Insurance Fund (DIF). The TLGP guarantees newly issued 
senior unsecured debt for banks, thrifts, and certain holding 
companies. The program also provides full coverage of non-
interest bearing deposit transaction accounts, regardless of 
amount. As of January 31, 2009, 65 financial institutions 
issued $252.6 billion \78\ in debt under the TLGP and paid $4.5 
billion in fees.\79\
---------------------------------------------------------------------------
    \78\ Federal Deposit Insurance Corporation, Monthly Reports on Debt 
Issuance Under the Temporary Liquidity Guarantee Program: Debt Issuance 
under Guarantee Program (online at www.fdic.gov/regulations/resources/
TLGP/total_issuance1-09.html) (accessed Apr. 2, 2009).
    \79\ Federal Deposit Insurance Corporation, Monthly Reports on Debt 
Issuance Under the Temporary Liquidity Guarantee Program: Fees Assessed 
Under TLGP Debt Program (online at www.fdic.gov/regulations/resources/
TLGP/fees.html) (accessed Apr. 2, 2009).
---------------------------------------------------------------------------
    The FDIC advances two strategies for covering its 
increasing costs under these programs. First, it has increased 
deposit insurance premiums paid by banks. Under the increased 
premiums, higher-risk banks will pay higher rates. The FDIC has 
also proposed a special one-time flat-rate assessment to be 
paid by banks this year.\80\ Second, it has requested increased 
borrowing authority. Under present law, the FDIC's borrowing 
from Treasury is limited to $30 billion.\81\ This limit has not 
changed since 1991.\82\ A bill currently before the Senate 
would increase the FDIC's borrowing authority to $100 
billion.\83\ The bill also allows temporary increases above 
that amount, to a maximum of $500 billion.\84\ Also, because of 
the large number and dollar amount of recent bank failures, the 
Fund's reserve ratio had fallen below the statutory 
minimum.\85\ The FDIC has extended the period of time within 
which it intends to return to the statutorily mandated reserve 
ratio.\86\
---------------------------------------------------------------------------
    \80\ Senate Subcommittee on Financial Institutions, Committee on 
Banking, Housing and Urban Affairs, Testimony of Arthur J. Murton, 
Director, Division of Insurance and Research, Federal Deposit Insurance 
Corporation, Current Issues in Deposit Insurance, 111th Cong. (March 
19, 2009) (online at www.fdic.gov/news/news/speeches/chairman/
spmar1909_2.html) (hereinafter ``Murton Testimony'').
    \81\ 12 U.S.C. Sec. 1824(a) (2009).
    \82\ Murton Testimony, supra note 80.
    \83\ Depositor Protection Act of 2009, S. 541.
    \84\ Id.
    \85\ Murton Testimony, supra note 80.
    \86\ Murton Testimony, supra note 80.
---------------------------------------------------------------------------

                         4. MEASURES OF SUCCESS

    In its December report, the Panel asked Treasury ``Is the 
Strategy Working to Stabilize Markets? What specific metrics 
can Treasury cite to show the effects of the $250B spent thus 
far on the financial markets, on credit availability, or, most 
importantly, on the economy? Have Treasury's actions increased 
lending and unfrozen the credit markets or simply bolstered the 
banks' books? How does Treasury expect to achieve the goal of 
price discovery for impaired assets? Why does Treasury believe 
that providing capital to all viable banks, regardless of 
business profile, is the most efficient use of funds?'' \87\
---------------------------------------------------------------------------
    \87\ Panel December Oversight Report, supra note 4, at 4.
---------------------------------------------------------------------------
    In its response to the Panel, Treasury identified two 
metrics: (1) the average credit default swap spread for the 
eight largest U.S. banks; and (2) the spread between the London 
Interbank Offered Rate (LIBOR) and Overnight Index Swap rates 
(OIS).\88\ According to Treasury, these measures' retreat from 
the historic levels they reached in the fall of 2008 
demonstrates that the government's programs stemmed a series of 
financial institution failures and made the financial system 
fundamentally more stable than it was when Congress passed 
EESA.\89\
---------------------------------------------------------------------------
    \88\ Panel January Oversight Report, supra note 5, at 9. Of course, 
credit default swap spreads for additional banks and other financial 
institutions may also provide insight into the effectiveness of the 
government's program, but Treasury specifically limited its December 
response to the eight largest institutions. Treasury December Response 
to Panel, supra note 7, at 5.
    \89\ Treasury December Response to Panel, supra note 7, at 5.
---------------------------------------------------------------------------
    As the Panel noted in its January report, measuring the 
success of the government's programs is more complicated. The 
metrics Treasury identified offer only a partial view of the 
effect that TARP expenditures have had on stabilizing the 
economy and accomplishing the goals set forth in the EESA.\90\ 
Of course, it is impossible to assess how well credit markets 
and the broader economy would have fared absent intervention, 
just as it is impossible to determine if markets responded to 
specific programs or merely the implicit guarantee inherent in 
the responses of Treasury, the Federal Reserve Board, and 
others in government.\91\ Nevertheless, the Panel's review of a 
broader set of measures reveals a much more nuanced picture of 
the government strategy's impact on the economy.
---------------------------------------------------------------------------
    \90\ Panel January Oversight Report, supra note 5, at 9-10.
    \91\ The Panel also notes with appropriate caution the difficulty 
of disaggregating the economic effects of TARP from the effect of other 
government responses, including Federal Reserve lending and monetary 
policy, other Treasury actions, and fiscal stimulus, as well as 
nongovernment market pressures. Nevertheless, identifying and 
monitoring measures of success represents a crucial task for those 
charged with making policy as well as those charged with overseeing 
policy.
---------------------------------------------------------------------------
    Finally, these metrics reflect the shifting nature of the 
challenge facing the United States and the world economy. We 
have moved from an acute crisis of confidence in the financial 
markets and financial institutions as a whole to an apparently 
prolonged period of weakness in financial institutions and in 
the credit structures that directly support the real economy. 
So instead of the LIBOR spread being impossibly high, we see 
the repeated return of institutions like Citigroup and Bank of 
America for further capital injections, as well as rising 
overall corporate bond spreads.

a. Improving Metrics (Good Signs)

    The programs initiated by Treasury, alongside those of the 
Federal Reserve Board and FDIC, merit praise for their ability 
to revive short-term credit markets that many perceived as in 
paralysis during the fall of 2008.\92\ By a number of measures, 
the terms on which capital is available have returned to non-
crisis levels, and markets no longer regard the imminent 
collapse of many institutions as a real possibility. However, 
the volatility and upward trends in these measures indicate 
that credit markets still have questions about the health of 
financial institutions. As such, although Treasury is right to 
say that the panic atmosphere of October 2008 has subsided, 
interbank credit market indicators still reflect continued 
uncertainty and remain well above what had previously been very 
long-term stable levels.
---------------------------------------------------------------------------
    \92\ V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe, Facts 
and Myths about the Financial Crisis of 2008 (Oct. 2008) (Federal 
Reserve Bank of Minneapolis Research Department Working Paper No. 666) 
(online at www.minneapolisfed.org/research/WP/WP666.pdf) (hereinafter 
``Minneapolis Fed Paper''). The Minneapolis Fed Paper found little 
empirical evidence of paralyzed credit markets during the height of the 
perceived crisis in September and October 2008. Id. at 1-3, 11.

     Credit Default Swap Spreads. Higher spreads on 
credit default swaps indicate a willingness to pay more for 
insurance against default, so a higher spread on an 
institution's credit default swap means that investors think it 
is more likely to default on its obligations. Treasury and the 
Financial Stability Oversight Board (FinSOB) have indicated 
that falling spreads on the credit default swaps of major 
financial institutions reflect the perception of a more stable 
financial sector in which investors are less fearful of such 
institutions collapsing.\93\ However, although these spreads 
have narrowed, they remain volatile.\94\
---------------------------------------------------------------------------
    \93\ Financial Stability Oversight Board, First Quarterly Report to 
Congress Pursuant to Section 104(g) of the Emergency Economic 
Stabilization Act of 2008, at 24-25 (Jan. 16, 2009) (hereinafter 
``FinSOB January Report'').
    \94\ Id. at 25. For example, credit default swap spreads on Merrill 
Lynch increased more than 100 basis points after Bank of America CEO 
Ken Lewis made a comment seemingly endorsing separation of commercial 
and investment banking; he later clarified the statement to indicate no 
such endorsement. Andrew Edwards, Credit Markets: The Rally That Was, 
Wall Street Journal (Mar. 27, 2009) (online at online.wsj.com/article/
BT-CO-20090327-714105.html); Lizzie O'Leary and Christine Harper, Bank 
of America CEO Says He Doesn't Want Banks Split, Bloomberg (Mar. 27, 
2009) (online at www.bloomberg.com/apps/news?pid= 
20601087&sid=aK_S8qNC2wZo).

     LIBOR-OIS Spread. Again, both Treasury and the 
FinSOB have cited the peak of the spread between three-month 
LIBOR, a measure of quarterly borrowing costs, over OIS, a 
measure of exceedingly short-term borrowing costs, as an 
appropriate metric for evaluating the success of Treasury's 
efforts on the broader economy.\95\ This figure peaked on 
October 10, 2008, the day before Treasury announced the CPP, 
and has substantially declined since. The Financial Stability 
Oversight Board indicated that this measure also indicates 
calmer markets that are less fearful of major institution 
failures. The 1-month LIBOR-OIS spread is below where it stood 
for most of 2008, and the 3-month LIBOR-OIS spread is only 
slightly above it.\96\ However, both figures are trending 
upwards in 2009 and remain well above levels that had been 
stable until late 2007.
---------------------------------------------------------------------------
    \95\ FinSOB January Report, supra note 93, at 24.
    \96\ Bloomberg, 3 Mo LIBOR-OIS Spread (online at www.bloomberg.com/
apps/quote?ticker=.LOIS3:IND|) (accessed Apr. 3, 2009); Bloomberg, 1 Mo 
LIBOR-OIS Spread (online at www.bloomberg.com/apps/
quote?ticker=.LOIS1:IND|) (accessed Apr. 3, 2009).
---------------------------------------------------------------------------

                 FIGURE 2: 3-YEAR LIBOR/OIS TREND \97\

---------------------------------------------------------------------------
    \97\ Id. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
     TED Spread. The GAO highlights the TED spread, the 
difference between a LIBOR average and the interest rate on 
U.S. Treasuries of the same term, as a credit risk indicator: 
the higher the spread, the greater the perceived risk and the 
tighter the credit market.\98\ The TED spread hit its peak in 
October 2008 but has since declined to a level near the low for 
2008, which was a year of great volatility in the spread.\99\
---------------------------------------------------------------------------
    \98\ Government Accountability Office, Troubled Asset Relief 
Program: Status of Efforts to Address Transparency and Accountability 
Issues, at 64 (Jan. 30, 2009) (GAO/09-296) (hereinafter ``January GAO 
Report'').
    \99\ Bloomberg, TED Spread (online at www.bloomberg.com/apps/
quote?ticker=.TEDSP:IND) (accessed Apr. 2, 2009).
---------------------------------------------------------------------------

b. Worsening metrics (bad signs) 

    Despite several measures that indicate that the 
government's responses to the financial crisis relieved a panic 
atmosphere in October 2008, other measures indicate that there 
is an ongoing credit crisis despite extensive expenditures, 
loans, guarantees, and regulatory forbearance. Credit has 
become more expensive for both businesses and individuals, and 
loan value and volume has declined substantially. Although some 
contraction of borrowing naturally occurs during economic 
downturns, the current credit situation continues to inhibit 
recovery.

     Mortgage Foreclosures/Defaults/Delinquencies. 
Foreclosure rates represent a key indicator of economic health 
as well as a barometer for the success of TARP efforts at 
meeting their statutory mandate of mitigating foreclosures. As 
measured by foreclosure initiations or completions, either as a 
rate or absolutely, or by delinquent mortgages, this problem 
continues to worsen.\100\
---------------------------------------------------------------------------
    \100\ See Panel March Oversight Report, supra note 2. See also 
RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008 (Jan. 15, 
2009) (online at www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847); January GAO 
Report, supra note 98 at 71-73; FinSOB January Report, supra note 93, 
at 35-37.

     Corporate Bond Spreads. Both GAO and FinSOB 
monitor the spread between corporate bonds of varying risk 
characteristics and U.S. Treasuries of the same term.\101\ 
These spreads have widened following the implementation of the 
TARP, narrowed during January and February, but are again 
widening.\102\ As GAO noted, the systematic underpricing of 
risk in corporate bonds leading up to the financial crisis may 
account for some of the widening of such spreads.\103\ 
Furthermore, declining yields on Treasuries may also 
artificially increase the spread. However, given that this 
spread continued to increase during March,\104\ the widening 
would appear to indicate that medium- and long-term corporate 
credit is harder to come by and requires borrowing on less 
favorable terms.
---------------------------------------------------------------------------
    \101\ January GAO Report, supra note 98, at 66; FinSOB January 
Report, supra note 93, at 26.
    \102\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.15: Selected Interest Rates: Historical 
Data (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: 
Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_ 
Friday_/H15_AAA_NA.txt) (accessed Apr. 2, 2009) (hereinafter ``Fed H.15 
a''); Board of Governors of the Federal Reserve System, Federal Reserve 
Statistical Release H.15: Selected Interest Rates: Historical Data 
(Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly) 
(online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_H15_ 
BAA_NA.txt) (accessed Apr. 2, 2009) (hereinafter ``Fed H.15 b''); Board 
of Governors of the Federal Reserve System, Federal Reserve Statistical 
Release H.15: Selected Interest Rates: Historical Data (Instrument: 
U.S. Government Securities/Treasury Constant Maturities/Nominal, 
Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/
Weekly_Friday_/H15_ TCMNOM_Y10.txt) (accessed Apr. 2, 2009) 
(hereinafter ``Fed H.15 c'').
    \103\ January GAO Report, supra note 98, at 66.
    \104\ Fed H.15 a, supra note 102; Fed H.15 b, supra note 102; Fed 
H.15c, supra note 102.

     Housing Prices. Although largely inflated due to 
the boom period preceding the crisis, home values illustrate 
part of the picture of dire economic circumstances. Nationally, 
housing prices have fallen by 29.1 percent since peaking in the 
second quarter of 2006.\105\ The S&P/Case-Shiller Composite 20 
index showed a decline of 28.5 percent in January 2009 from its 
peak in May 2006.\106\ Although some of the drop in real estate 
value reflects a retreat from unsustainable bubble levels, the 
continued drop in housing prices is a leading contributor to 
bank asset write downs, recent declines in household net worth, 
and the weakening broader economy.\107\
---------------------------------------------------------------------------
    \105\ Case-Shiller Press Release, supra note 22.
    \106\ Case-Shiller Indices, supra note 21.
    \107\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1: Flow of Funds Accounts of the United 
States, Flows and Outstandings Fourth Quarter 2008, at 105 (Mar. 12, 
2009) (R.100 Change in Net Worth of Households and Nonprofit 
Organizations).

     Commercial Real Estate Commitments. Like housing 
prices and mortgage measures, commercial real estate 
commitments illustrate the health of the commercial real estate 
sector. The Treasury Monthly Snapshot tracks this figure for 
the institutions it monitors. It recently reported a decrease 
in both renewals and new commitments, in contrast to rising 
renewal rates at the end of 2008.\108\
---------------------------------------------------------------------------
    \108\ U.S. Department of the Treasury, Treasury Department January 
Monthly Lending And Intermediation Snapshot (Mar. 16, 2009) 
(hereinafter ``January Treasury Snapshot''); U.S. Department of the 
Treasury, Treasury Department Monthly Lending and Intermediation 
Snapshot: Summary Analysis for October-December 2008, at 3 (Feb. 18, 
2009) (hereinafter ``2008 Treasury Snapshot'').

     Commercial Paper Outstanding. Commercial paper 
outstanding, a rough measure of short-term business debt, 
represents another indicator of the availability of credit for 
enterprises.\109\ Financial and asset backed commercial paper 
dipped to extreme lows in mid-October, largely recovered as of 
December 31, plunged again during February 2009, and recovered 
slightly during March.\110\ Nonfinancial commercial paper 
levels, largely stable until the end of February, were off more 
than 10 percent during March.\111\
---------------------------------------------------------------------------
    \109\ FinSOB January Report, supra note 93, at 27.
    \110\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Commercial Paper Outstanding (online at 
www.federalreserve.gov/releases/cp/outstandings.htm) (accessed Apr. 3, 
2009).
    \111\ Id.

     Security Repurchase Agreements. Like commercial 
paper, the volume of security repurchase agreements represents 
another measure of the availability of short-term credit for 
businesses. As measured by both assets and liabilities, total 
dollar volume dropped precipitously in Q4 2008.\112\
---------------------------------------------------------------------------
    \112\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release Z.1: Flow of Funds Accounts of the United 
States, Flows and Outstandings Fourth Quarter 2008, at 41 (Mar. 12, 
2009) (F.207 Federal Funds and Security Repurchase Agreements).

     Household/Business Debt Growth. The FinSOB noted 
that slowing growth of household and business debt has 
historically represented economic weakness.\113\ It reported 
substantial deceleration in debt growth between the last 
quarter of 2008 and the comparable period in 2007. This trend 
reflects the tightening of credit markets during the crisis.
---------------------------------------------------------------------------
    \113\ FinSOB January Report, supra note 93, at 29-30.

     Overall Loan Originations. The total volume of 
overall loan originations represents one key measure of the 
availability of credit. Treasury's Monthly Snapshot report 
tracks this indicator for twenty of the largest CPP recipients, 
who collectively represent about 90 percent of the deposits in 
the banking system. In its most recent report, Treasury cited 
rising consumer lending, especially in mortgages and student 
loans; however, seasonal changes in student loan demand and 
increased refinancing demand largely explain this 
increase.\114\ Commercial and industrial lending both fell 
considerably.\115\ The combination indicates that credit 
markets remain tight, especially in the business sector.
---------------------------------------------------------------------------
    \114\ January Treasury Snapshot, supra note 114; 2008 Treasury 
Snapshot, supra note 114, at 3.
    \115\ January Treasury Snapshot, supra note 114; 2008 Treasury 
Snapshot, supra note 114, at 3.

     Overall Loan Balances. Similarly, the overall 
volume of loan balances represents an important credit 
indicator. Treasury's Monthly Snapshot report also tracks this 
measure for the same set of CPP recipients. Both residential 
and corporate loan balances dropped for the institutions 
Treasury monitors monthly, indicating that banks' loan 
portfolios are shrinking across the board as what new lending 
does take place fails to replace loans coming off the books or 
defaulting.\116\
---------------------------------------------------------------------------
    \116\ January Treasury Snapshot, supra note 114; 2008 Treasury 
Snapshot, supra note 114, at 3. The increase in mortgage originations 
is not inconsistent with falling residential loan balances in light of 
the ongoing foreclosure crisis.

     Mortgage Rate Spread. Mortgage rates represent an 
obvious metric to determine the terms of credit available to 
qualified homebuyers, and the spread between such rates and 
comparable Treasuries indicates the risk premium associated 
with lending to homeowners versus lending to the federal 
government. GAO has reported that movement in this measure is 
associated more with the Federal Reserve Board's decision to 
purchase mortgage-backed securities rather than with any TARP-
related actions.\117\ The spread between conventional 30-year 
conforming mortgages and 10-year Treasuries peaked in December 
2008; although it has since narrowed slightly, it is still well 
above historic levels.\118\ The spread results from 
conventional mortgage rates, which hit their lowest point since 
1971 in March, nonetheless lagging behind the drop in Treasury 
rates.\119\ As with corporate bond spreads, although some of 
the spread reflects a correction from underpricing of risk 
leading up to the crisis, it still reflects problematically 
tight credit markets.
---------------------------------------------------------------------------
    \117\ January GAO Report, supra note 98, at 67-68.
    \118\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.15: Selected Interest Rates (Weekly) 
(online at www.federalreserve.gov/releases/h15/current/h15.htm) 
(accessed Apr. 2, 2009).
    \119\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release H.15: Selected Interest Rates: Historical 
Data (Instrument: Conventional Mortgages, Frequency: Weekly (Thursday)) 
(online at www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed Apr. 2, 2009); Board of Governors of the 
Federal Reserve System, Federal Reserve Statistical Release H.15: 
Selected Interest Rates: Historical Data (Instrument: Conventional 
Mortgages, Frequency: Weekly (Friday)) (online at 
www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
H15_MORTG_NA.txt) (accessed Apr. 2, 2009); Fed H.15c, supra note 102.

     Mortgage Originations. Closely related to the risk 
premium associated with lending to homebuyers is the overall 
volume of such lending. A low risk premium coupled with low 
mortgage volume indicates substantial tightening of lending 
standards.\120\ The GAO has indicated a substantial drop in 
this figure, both as measured by originations and applications, 
since the first quarter of 2008.
---------------------------------------------------------------------------
    \120\ January GAO Report, supra note 98, at 69-70.
---------------------------------------------------------------------------

c. Indeterminate Metrics (Too Early to Tell)

    Some measures of the health of both credit markets and the 
broader economy are difficult to evaluate as either improving 
or worsening, either because they are too volatile or because 
they are contradictory depending on how one examines them.

     Spreads on Overnight Commercial Paper. Like the 
amount outstanding on commercial paper, the yield associated 
with it as compared to the yield of other modes of short term 
borrowing constitutes another short-term commercial credit 
indicator. The FinSOB tracks this figure relative to the AA 
nonfinancial commercial paper rate. The spread for asset-backed 
paper has come down dramatically, but the spread for lower-
grade paper remains high.\121\ It is not immediately clear 
whether these developments indicate an appropriate response to 
underpricing of risk in the run-up to the financial crisis or 
an overcorrection that indicates excessively tight credit 
inhibiting economic recovery.
---------------------------------------------------------------------------
    \121\ FinSOB January Report, supra note 93, at 27.

     Credit Card Borrowing. The total balance 
outstanding on credit cards and the total unused credit 
available on credit cards marks another indicator of the 
availability of liquidity to consumers and small businesses. 
The Treasury Monthly Snapshot tracks this data for its 
institutions. Overall for these institutions, credit card 
lending has changed little since the end of 2008.\122\ This 
measure may reflect increased household savings rates and 
weakening consumer demand in response to the weakening economy, 
or it may indicate a lack of credit available on sufficiently 
favorable terms.
---------------------------------------------------------------------------
    \122\ January Treasury Snapshot, supra note 114; 2008 Treasury 
Snapshot, supra note 114, at 3.

     Perceptions of Lending Practices. The Board of 
Governors of the Federal Reserve Board conducts quarterly 
surveys of senior bank loan officers' perceptions of their 
respective institution's lending practices. Although these 
surveys ask for subjective evaluations, tracking their 
evolution over time illustrates how bankers' personal views of 
the economy and credit markets have changed in response to 
market events. The Fed's most recent survey, in January 2009, 
shows that, while the number of lenders tightening loan 
standards has declined from its October 2008 peak, the number 
remains above its historical average.\123\ Similarly, although 
the results indicate a small uptick in demand for loans and in 
willingness to make loans, the numbers still stand below their 
historical averages.\124\
---------------------------------------------------------------------------
    \123\ Board of Governors of the Federal Reserve System, The January 
2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, at 
8-11 (Feb. 2, 2009) (online at www.federalreserve.gov/boarddocs/
SnLoanSurvey/200902/fullreport.pdf).
    \124\ Id.

    These measures indicate that, although credit markets no 
longer face an acute systemic crisis in confidence that 
threatens the functioning of the economy, the underlying 
financial crisis is far from over and appears to be taking root 
in the larger economy. Furthermore, Treasury has yet to 
identify the metrics by which they will measure the ultimate 
success of the programs they have implemented and are 
implementing, making it difficult to assess performance.

                  B. Historical Approaches and Lessons

    This report seeks to examine issues of strategy associated 
with the federal government's use of the powers granted to it 
by the EESA. Part of that exercise must be to examine the 
experience of the United States and other countries that have 
faced similar financial crises in the modern era. In this 
section of this report, we will look at four major examples of 
public policy responses to financial crises: The Great 
Depression in the United States, the savings and loan collapse 
in the United States, the Swedish banking crisis of the early 
1990s, and Japan's banking crisis associated with the ``lost 
decade.'' In addition, we will briefly survey several lesser 
banking problems that have arisen in the United States since 
1980.

      1. THE U.S. DEPRESSION OF THE 1930S AND THE FEDERAL RESPONSE

    The 1929 stock market crash, the ensuing collapse of 
production and wealth, and the continued volatility of the 
markets in the 1930s led consumers and businesses to reduce 
spending dramatically, caused extraordinarily high bankruptcy 
rates, and brought about the failure or disappearance of nearly 
half of all American financial institutions.\125\ During the 
period between 1929 and 1933 alone, the number of banks in the 
U.S. declined by one-third, from 24,633 to 15,015, with three 
waves of crises--October 1930, March 1931, and January 1933--
rocking the financial system.\126\
---------------------------------------------------------------------------
    \125\ Christina D. Romer, The Great Crash and the Onset of the 
Great Depression, at ii (June 1988) (National Bureau of Economic 
Research Working Paper No. 2639) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=262094).
    \126\ Randall Kroszner, The Political-Economy of the Reconstruction 
Finance Corporation's Bail-Out of the U.S. Banking System during the 
Great Depression (Apr. 1994) (University of Chicago Working Paper).
---------------------------------------------------------------------------
    The causes of the Great Depression and the corresponding 
crisis in the U.S. financial system were complex and numerous, 
with the debate among economists and economic historians 
focusing primarily on the extent to which monetary versus 
nonmonetary factors influenced the onset and worsening of the 
Depression.\127\ Nonetheless, there is a general consensus that 
the contractionary monetary policies that the Federal Reserve 
Board pursued at the time were a significant contributing 
factor to the banking crisis of the early 1930s.\128\ These 
monetary policies were a response to the return to the gold 
standard on the part of numerous countries during the 1920s, 
which led to a shrinking of the world's money supply, as 
central banks around the world scrambled to hoard gold.\129\ 
The U.S. government's insistence on maintaining the gold 
standard, coupled with the contractionary actions taken by the 
Federal Reserve Board, spurred dramatic deflation, with prices 
of goods falling approximately 25 percent between 1929 and 
1933.\130\ The resultant debt deflation, a phenomenon by which 
the collateral underlying loans shrinks in value, causing the 
real burden of debt to rise, led the economy to spiral further 
downward, with consumers and businesses across the country 
oftentimes owing more than the collateral itself was worth, 
much as we have seen in recent months with a significant 
proportion of U.S. households owing more on their mortgages 
than their homes are worth.\131\ Further, high real rates of 
interest reduced consumption and investment throughout the 
economy.\132\
---------------------------------------------------------------------------
    \127\ Ben S. Bernanke, Essays on the Great Depression, at 7 (2000).
    \128\ Christina Romer, Prepared Remarks to be Presented at the 
Brookings Institution, Washington, DC: Lessons from the Great 
Depression for Economic Recovery in 2009, at 5 (Mar. 9, 2009) 
(hereinafter ``Romer Brookings Remarks''); Charles Calomiris and Joseph 
Mason, How to Restructure Failed Banking Systems: Lessons from the U.S. 
in the 1930s and Japan in the 1990s, at 17 (Apr. 2003) (National Bureau 
of Economic Research Working Paper No. 9624); Bernanke supra note 127.
    \129\ Calomiris and Mason, supra note 128, at 17.
    \130\ Romer Brookings Remarks, supra note 128, at 6.
    \131\ Calomiris and Mason, supra note 128, at 17; Irving Fisher: 
Out of Keynes's Shadow, The Economist (Feb. 12, 2009).
    \132\ Congressional Oversight Panel, Testimony of Eugene White, 
Learning from the Past--Lessons from the Banking Crises of the 20th 
Century, at 3 (Mar. 19, 2009) (hereinafter ``White Panel Testimony'').
---------------------------------------------------------------------------
    In a parallel that makes the Great Depression quite 
relevant to the current crisis, many economists also cite the 
collapse of the real estate bubble in the second half of the 
1920s as a major contributing factor to the stock market crash, 
the collapse of the banks, and the Great Depression.\133\ 
Existing problems in the housing market were amplified by the 
debt deflation of 1929-1933, which increased the real value of 
repaying mortgage loans, and rising unemployment rates and 
falling incomes, which made it increasingly difficult for 
homeowners to repay their debts.\134\ Borrowers were unable to 
make their payments, the value of banks' securities fell, many 
banks were unable to meet the needs of their depositors, and a 
lack of confidence in the remaining banks led to a general 
state of panic. The fact that consumer bank deposits were not 
insured at this time further contributed to the sense of 
uncertainty that pervaded the country, leading to historic 
levels of bank runs and magnifying the effects of those 
runs.\135\
---------------------------------------------------------------------------
    \133\ Robert J. Shiller, The Subprime Solution: How Today's Global 
Financial Crisis Happened, and What to Do About It, at 14 (2008).
    \134\ White Panel Testimony, supra note 132, at 8.
    \135\ The debate over the creation of the FDIC was quite 
contentious. For years prior to the onset of the Great Depression, 
there was little support for nationwide deposit insurance, due in large 
part to lessons learned from prior failures of state-based deposit 
insurance systems, as well as concerns about moral hazard. However, in 
the aftermath of the calamitous bank runs of the early 1930s, 
proponents of Federal deposit insurance were able to pass a measure 
temporarily instituting a government deposit insurance program as part 
of the Banking Act of 1933 (the Glass-Steagall Act). The system was 
made permanent in 1935. Eugene N. White, Deposit Insurance, in Gerard 
Caprio, Jr. and Dimitri Vittas, Reforming Financial Systems: Historical 
Implications for Policy, at 90-93 (1997).
---------------------------------------------------------------------------
    In an initial effort to prevent banks from failing, 
President Hoover and Treasury Secretary Andrew Mellon organized 
a conference in the fall of 1931, at which prominent bankers 
agreed to form a private lending institution, the National 
Credit Corporation (NCC). The NCC was designed to serve as a 
supplement to the Federal Reserve Board by making loans to 
banks struggling to meet their obligations that did not have 
sufficient ``eligible'' securities to serve as collateral 
receive loans from the Fed.\136\ While this effort did lead to 
a short-term boost in confidence, by late 1931, it was clear to 
President Hoover that the NCC would be insufficient. In 
response, Hoover submitted a bill to Congress on December 7, 
1931, that would create the Reconstruction Finance Corporation 
(RFC) to make loans to banks (as well as to railroads and state 
and local governments) and relax the collateral requirements 
for borrowing from the Fed.
---------------------------------------------------------------------------
    \136\ Kroszner, supra note 126, at 3.
---------------------------------------------------------------------------
    From its establishment in February 1932 until March 1933, 
the RFC was not authorized to make capital investments in 
troubled banks but rather provided support in the form of fully 
secured, short-term loans.\137\ By the end of 1932, the RFC had 
authorized approximately $1.6 billion in loans, nearly $1.3 
billion of which was provided in loans to banks.\138\ However, 
the shortcomings of this approach quickly became clear, as 
these secured loans represented a senior claim on bank assets 
relative to depositors, effectively worsening the default risk 
faced by junior depositors and providing little help to 
unhealthy banks.\139\ Indeed, some scholars have contended that 
receiving a loan from the RFC may have actually increased the 
probability of bank failure (controlling for exogenous 
differences among banks).\140\ A complicating factor was that 
the names of banks receiving funds from the RFC often became 
public, which, in turn, led to a further drop in confidence in 
those banks. According to Jesse Jones, the Texas banker who 
became the Chairman of the RFC under Roosevelt, ``[i]t became 
increasingly evident to us that loans were not an adequate 
medicine to fight the epidemic. What the ailing banks required 
was a stronger capital structure.'' \141\ The matter of 
determining whether liquidity or solvency represented the 
principal problem for struggling financial institutions and of 
using that determination to guide policy choices is one with 
distinct relevance to the current crisis.
---------------------------------------------------------------------------
    \137\ William Keeton, The Reconstruction Finance Corporation: Would 
It Work Today? Economic Review, at 38 (First Quarter 1992).
    \138\ James S. Olson, Saving Capitalism: The Reconstruction Finance 
Corporation and the New Deal, 1933-1940, at 23 (1988).
    \139\ Calomiris and Mason, supra note 128, at 20.
    \140\ Calomiris and Mason, supra note 128, at 21.
    \141\ Kroszner, supra note 126, at 4.
---------------------------------------------------------------------------
    While President Hoover was hesitant to institute stronger 
programs, President Roosevelt took swift action upon becoming 
president in March 1933, instituting a nation-wide bank holiday 
on March 3 and signing into law the Emergency Banking Act on 
March 9. This Act legalized the banking holiday, authorized the 
RFC to make preferred stock investments in financial 
institutions, instituted procedures for reopening sound banks 
and resolving insolvent banks, and further broadened the range 
of assets that would be acceptable to the Fed.\142\ Critical to 
restoring confidence in the banking system was ensuring that 
only banks liquid enough to do business were re-opened when the 
banking holiday was lifted. Therefore, banks were separated 
into three categories, based on an independent valuation of 
assets conducted by teams of bank examiners from the RFC, 
Federal Reserve Banks, Treasury, and the Comptroller of the 
Currency: (1) Banks whose capital structures were unimpaired, 
which received licenses and re-opened when the holiday was 
lifted; (2) banks with impaired capital but with assets 
valuable enough to re-pay depositors, which remained closed 
until they could receive assistance from the RFC; and (3) banks 
whose assets were incapable of a full return to depositors and 
creditors, which were placed in the hands of conservators who 
could either reorganize them with RFC assistance or liquidate 
them.\143\
---------------------------------------------------------------------------
    \142\ Keeton, supra note 137, at 38.
    \143\ Olson supra note 138, at 64.
---------------------------------------------------------------------------
    The banks that did not initially receive licenses to re-
open were further scrutinized in order to determine if they 
could re-open at a later date without reorganization and 
without major assistance from the RFC, if they could re-open 
only after receiving significant aid from the RFC and possibly 
being reorganized, or if they had to be liquidated.\144\ It is 
important to note that financial institutions that were allowed 
to re-open were nonetheless encouraged to participate in the 
government preferred stock program, in order to strengthen 
their capital position and to allow them to expand commercial 
credit.\145\ However, these banks were slow to participate in 
the preferred stock program, due in large part to the stringent 
conditions that were placed on banks that sold preferred stock 
to the government, including the provision that granted the 
government voting rights and the ability to elect directors in 
proportion to its stock ownership.\146\ Bankers also worried 
that news of the banks' receipt of government aid would become 
public, worsening their solvency and liquidity problems rather 
than helping to cure them.
---------------------------------------------------------------------------
    \144\ Olson supra note 138, at 70.
    \145\ Olson supra note 138, at 82.
    \146\ Kroszner, supra note 126, at 5.
---------------------------------------------------------------------------
    In June 1933, Congress passed the Banking Act of 1933, 
which established the FDIC and restricted initial participation 
to solvent banks upon FDIC's January 1, 1934 launch.\147\ Since 
many banks that had been allowed to re-open following the bank 
holiday were still in a precarious financial position, fears 
that they would be rejected from the FDIC, destroying market 
confidence in their institutions and leading to bank runs, 
coupled with cajoling on the part of RFC and administration 
officials likewise concerned that banks being rejected from the 
FDIC would worsen the crisis, led banks to begin applying at a 
much higher rate for the RFC preferred stock program. 
Ultimately, the RFC invested roughly $1.7 billion in 6,104 
banks through its preferred stock program.\148\ At one point in 
1933, the RFC held capital in more than 40 percent of all 
banks, representing one-third of total bank capital according 
to some estimates.\149\
---------------------------------------------------------------------------
    \147\ The Banking Act of 1933 established the FDIC as a temporary 
government agency and insured up to $2,500. The Banking Act of 1935 
ultimately made the FDIC permanent and insured commercial deposits up 
to $5,000.
    \148\ Jesse Jones, Fifty Billion Dollars, at 25-26 (1951).
    \149\ Federal Reserve Bank of Kansas City, Speech by President 
Thomas Hoenig: Too Big Has Failed (Mar. 6, 2009) (online at 
www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf).
---------------------------------------------------------------------------
    In exchange for this government support, the RFC exercised 
its control of the banks by replacing senior management at some 
banks and forcing a change in business practices when it 
determined that changes were needed.\150\ The RFC also used its 
power to negotiate and reduce the salaries of bank managers and 
executives.\151\ The RFC preferred stock had a senior claim on 
bank earnings and common stock dividend payments were strictly 
limited to a specified maximum until the government investment 
was repaid, with any remaining earnings going towards a 
preferred stock retirement fund.\152\ In fact, the RFC reserved 
the right to take virtually complete control of any bank that 
missed dividend payments on the preferred stock (payments that 
amounted to 6 percent initially but that were later reduced to 
4 percent or as low as 3.5 percent).\153\ However, the goal of 
these government takeovers was to steer the banks back toward 
profitability--not to maintain long-term government control. As 
RFC head Jesse Jones noted at the time, he had ``no desire to 
control or manage the banks;'' rather, he simply sought to 
protect the government's (and, consequently, the taxpayer's) 
investment as best as he could.\154\
---------------------------------------------------------------------------
    \150\ Calomiris and Mason, supra note 128, at 23.
    \151\ Walker F. Todd, History of and Rationales for the 
Reconstruction Finance Corporation, Federal Reserve Bank of Cleveland 
Economic Review, at 26 (Fourth Quarter 1992).
    \152\ Calomiris and Mason, supra note 128, at 23.
    \153\ Joseph R. Mason, Reconstruction Finance Corporation 
Assistance to Financial Intermediaries and Commercial & Industrial 
Enterprise in the U.S., 1932-1937, at 20 (Jan. 17, 2000) (online at 
papers.ssrn.com/sol3/papers.cfm?abstract_id=1337171).
    \154\ Olson, supra note 138, at 125.
---------------------------------------------------------------------------
    While there were relapses and the Great Depression 
persisted for some time, it is generally agreed that the RFC 
played a major role in helping to restore the health of the 
American banking system.\155\ The key steps it followed in 
resolving failing banks are often cited as the model for 
dealing with such situations: (1) write down a bank's bad 
assets to realistic economic values; (2) judge the character 
and capacity of bank management and make any needed and 
appropriate changes; (3) inject equity in the form of preferred 
stock (but, critically, not until the write-downs have taken 
place); and (4) receive the dividends and eventually recover 
the par value of the stock as the bank returns to profitability 
and full private ownership.\156\
---------------------------------------------------------------------------
    \155\ Keeton, supra note 137, at 47.
    \156\ Hoenig, supra note 149.
---------------------------------------------------------------------------
    It should be noted that the RFC valued banks' assets varied 
over the life of the RFC. At the outset, RFC examiners 
evaluated assets at their fair market value, using this 
determination to guide them in deciding if an institution was 
viable, if it could re-open with RFC investment, or if it 
needed to be liquidated; however, toward the end of 1933, the 
RFC changed its valuation standards for the purposes of the 
preferred stock program, giving book value to the highest grade 
bonds, market value for bonds in default, face value for assets 
that were fundamentally sound but that could not be converted 
immediately into cash, and a reasonable valuation for doubtful 
assets, often including assets derived from real estate.\157\ 
How such a ``reasonable valuation'' for the banks' ``doubtful'' 
or bad assets was made, however, is not well documented but 
appears to have relied heavily upon the experience and judgment 
of federal and state bank examiners. Consequently, scholars 
have noted that the underlying assumptions with regard to 
future market conditions that guided the RFCs' valuations and 
decisions on banks' solvency ``were (and still are) difficult 
or impossible to quantify.'' \158\
---------------------------------------------------------------------------
    \157\ Olson, supra note 138, at 80.
    \158\ Mason, supra note 153, at 1.
---------------------------------------------------------------------------
    Among the major reasons cited for the relative success of 
the RFC were that: (1) it required banks to submit their 
regulatory examinations for inspection and rejected hopelessly 
insolvent banks; (2) the RFC was a separately capitalized 
institution with financial and political independence to make 
decisions as it deemed them necessary; and (3) restrictions on 
recipients of RFC assistance reduced moral hazard and ensured 
that banks would not take advantage of the program. Among these 
restrictions were the voting rights that the government gained, 
the influence the RFC had over personnel matters, and the 
seniority of RFC dividends to all other stock dividends.\159\
---------------------------------------------------------------------------
    \159\ Calomiris and Mason, supra note 128, at 23.
---------------------------------------------------------------------------
    Nonetheless, whether measured by the number of banks that 
failed, the losses suffered by bank investors and depositors, 
or the extent to which credit contracted, the Great Depression 
was the most significant crisis in the U.S. banking system at 
the time it occurred, and it remains a key point of reference 
for assessing the severity of the current crisis.\160\ In this 
regard, it is important to emphasize that, while the RFC 
contributed to the stabilization of the financial system at a 
time of great crisis, it certainly did not prevent the failure 
of many financial institutions, nor did it necessarily preserve 
the deposits individuals had in these failed institutions in 
the pre-FDIC era. Indeed, considering that the RFC made a point 
not to invest in hopelessly insolvent banks and, likewise, the 
FDIC, when established in 1934, did not insure the deposits of 
insolvent banks, the result was that all stakeholders in failed 
banks--stockholders, bondholders, and depositors--shared in 
absorbing the losses.\161\ Equity in failed banks was wiped out 
and depositors and non-depository debt holders were paid on a 
pro rata basis as the liquidation of the assets of failed banks 
proceeded.\162\ Specifically, between 1930 and 1933, 10.7 
percent of commercial banks in the U.S. failed outright, and, 
by 1933, debt and equity losses to private investors, 
bondholders, and depositors totaled $2.5 billion (approximately 
2.4 percent of GDP in 1933).\163\
---------------------------------------------------------------------------
    \160\ Calomiris and Mason, supra note 128, at 8.
    \161\ White Panel Testimony, supra note 132, at 1.
    \162\ Calomiris and Mason, supra note 128, at 16.
    \163\ White Panel Testimony, supra note 132, at 4; Keeton, supra 
note 137, at 38.
---------------------------------------------------------------------------

                        2. CONTINENTAL ILLINOIS

    Following the banking reforms of the 1930s, including the 
institution of deposit insurance, the Glass-Steagall Act, and 
others, the financial sector entered into a long period of 
tranquility.\164\ Bank failures slowed to a trickle as bank 
regulatory policy focused strongly on maintaining regulatory 
safe zones of the kind discussed in the Panel's Regulatory 
Reform Report.\165\ Moreover, when failure did happen, the 
automatic regulatory machinery worked as designed: either the 
regulators sold the bank successfully or they liquidated the 
institution, made good on deposit insurance promises, and wiped 
out the uninsured depositors and other creditors.
---------------------------------------------------------------------------
    \164\ Many sources have commented on this period. See, e.g., David 
Moss, An Ounce of Prevention: The Power of Sound Risk Management in 
Stabilizing the American Financial System (2009) (Harvard Business 
School Working Paper 09-087) (online at www.hbs.edu/economic-crisis/
docs/management-in-stabilizing-the-financial-system.pdf).
    \165\ Congressional Oversight Panel, Special Report on Regulatory 
Reform: Modernizing the American Financial Regulatory System: 
Recommendations for Improving Oversight, Protecting Consumers, and 
Ensuring Stability (Jan. 29, 2009) (hereinafter ``Panel Regulatory 
Reform Report'').
---------------------------------------------------------------------------
    Occasionally, bank failures were resolved using the FDIC's 
``essentiality'' authority, but, even then, these failures 
involved comparatively small investments. Into the 1970s, 
federal regulators wrung their hands over transactions as small 
as a $1.5 million loan to save a troubled $11 million 
institution.\166\ However, until the 1980's, the federal 
government did not rescue any bank out of a fear that the 
institution's failure would pose systemic risk or that the firm 
was ``too big to fail.'' \167\ During the 1982 failure of Penn 
Square Bank, N.A., federal regulators explicitly chose to 
liquidate the bank rather than expend the funds necessary to 
protect some of the nation's largest banks, which had sizeable 
claims against Penn Square.\168\
---------------------------------------------------------------------------
    \166\ The FDIC authorized such expenditures under its 
``essentiality'' authority granted in the Federal Deposit Insurance Act 
of 1950 (FDIA), Pub. L. No. 81-797. A bank whose operations the FDIC 
deemed ``essential to the community'' could continue to operate with 
direct infusions of capital rather than being liquidated. FDIA at 
13(c). When the FDIC rescued institutions under this provision during 
the 1970s, it did so to avert unique problems rather than to stem 
systemic crises; the threat of urban riots hung over the rescue of 
minority-owned First Unity Bank of Boston, and a local municipal bond 
collapse looked imminent if Michigan's Bank of the Commonwealth failed. 
See Irvine H. Sprague, Bailout: An Insider's Account of Bank Failures 
and Rescues, at 35-76 (1986).
    \167\ Sprague, supra note 166, at 86-91. The rescue of First 
Pennsylvania Bank constitutes regulators' first recognition of what was 
then termed the ``domino effect,'' the phenomenon of one bank failure 
causing trouble at other institutions and touching off a banking 
crisis. However, in First Pennsylvania's case, regulators feared at 
worst a regional crisis precipitated by the effect First Pennsylvania's 
failure would have on the already weak mutual savings banks 
concentrated in the Northeast. See Sprague, supra note 166, at 77-106.
    \168\ Federal Deposit Insurance Corporation, History of the 
Eighties--Lessons for the Future: Volume I: An Examination of the 
Banking Crises of the 1980s and Early 1990s, at 241 (Dec. 1997) (online 
at www.fdic.gov/bank/historical/history/vol1.html) (hereinafter ``FDIC 
History: Volume I'').
---------------------------------------------------------------------------
    The bank run on Continental Illinois National Bank and 
Trust Company (Continental Illinois) was a watershed event that 
produced a major change in the federal government's response to 
a failing bank. Continental Illinois enjoyed high growth and 
the envy of its competitors throughout the late 1970s and early 
1980s.\169\ However, losses on non-performing loans 
concentrated in the energy sector and in less-developed-
countries (LDC) soared from 1982 through the first quarter of 
1984.\170\ Continental Illinois had made many of these energy 
and LDC investments alongside or through Penn Square.\171\ 
Because of its substantial investments, Continental Illinois' 
troubles began with the Penn Square failure, which almost 
singlehandedly halved its stock price, prompted downgraded 
credit ratings, and caused its sources of capital to dry 
up.\172\ Continental Illinois had to borrow on less and less 
favorable terms just to keep itself afloat.\173\
---------------------------------------------------------------------------
    \169\ See, e.g., Banker of the Year, Euromoney, at 134 (Oct. 1981); 
Here Comes Continental, Dun's Review, at 42-44 (1978) (Vol. 112, No. 
6).
    \170\ Sprague, supra note 166, at 150-51.
    \171\ Sprague, supra note 166, at 150-51.
    \172\ Sprague, supra note 166, at 150-51.
    \173\ Sprague, supra note 166, at 151-52.
---------------------------------------------------------------------------
    In May 1984, Continental Illinois's situation became 
untenable and a potentially catastrophic bank run started.\174\ 
In two days, the bank needed to borrow $3.6 billion from the 
Federal Reserve Board's discount window in order to meet its 
obligations on deposit withdrawals.\175\ The announcement of 
$4.5 billion in loans from other banks did not stop the 
bleeding.\176\
---------------------------------------------------------------------------
    \174\ Sprague, supra note 166, at 152-56.
    \175\ FDIC History: Volume 1, supra note 168, at 243. The speed of 
the run both surprised and troubled regulators; it represented the 
first run of such scope on a modern, technologically interconnected 
bank. Sprague, supra note 166, at 152-56.
    \176\ FDIC History: Volume 1, supra note 168, at 243-44.
---------------------------------------------------------------------------
    Regulators paid close attention to the run; more than two 
thousand banks had investments in Continental Illinois, and 
almost two hundred of them had more than half of their equity 
capital invested.\177\ There was serious concern that the 
bank's failure could have left uninsured depositors and 
creditors exposed, causing many more failures in its wake and 
spawning a financial crisis.\178\
---------------------------------------------------------------------------
    \177\ FDIC History: Volume 1, supra note 168, at 250.
    \178\ A deposit payoff may not have been an option at all for 
Continental Illinois; after the fact, Comptroller of the Currency Todd 
Conover told Congress that the FDIC did not have the funds to conduct a 
deposit payoff for any one of the nation's eleven largest banks should 
any of them fail. FDIC History: Volume 1, supra note 168, at 251. 
Continental Illinois was the nation's seventh largest bank in 1984. 
FDIC History: Volume 1, supra note 168, at 236.
---------------------------------------------------------------------------
    As a result, in order to stave off a systemic crisis, 
federal regulators acted quickly by announcing $2 billion in 
immediate assistance to stop the run.\179\ Furthermore, the 
Federal Reserve Board promised to meet any liquidity needs, and 
the FDIC promised to protect all of Continental Illinois's 
depositors and general creditors.\180\ Finally, a group of 
major financial institutions put up $5.3 billion in unsecured 
credit.\181\ With these guarantees, the run stopped and the 
crisis subsided.
---------------------------------------------------------------------------
    \179\ Sprague, supra note 166, at 160.
    \180\ FDIC History: Volume 1, supra note 168, at 244.
    \181\ FDIC History: Volume 1, supra note 168, at 244.
---------------------------------------------------------------------------
    However, having already determined that a deposit payoff 
would result in a systemic crisis, the government needed to 
merge the bank with another institution or bail out the bank 
and reconstitute it with new leadership.\182\ Regardless of the 
outcome, Continental Illinois would have new managers; either 
the acquirers or an FDIC-selected team would operate the bank 
going forward.\183\
---------------------------------------------------------------------------
    \182\ Sprague, supra note 166, at 165-67, 170.
    \183\ Sprague, supra note 166, at 200-201.
---------------------------------------------------------------------------
    After two months of searching for a merger partner and 
evaluating many proposals, no viable acquirer emerged.\184\ As 
a result, the FDIC instituted a good-bank-bad-bank 
restructuring of Continental Illinois. The FDIC took 
responsibility for $4.5 billion in bad loans at a price of $3.5 
billion, paid by assuming Continental's debt to the Federal 
Reserve Board.\185\ The FDIC offset the $1 billion write-off 
this transaction prompted with a $1 billion investment into 
Continental Illinois's holding company, Continental Holding 
Corporation, and required the holding company to push the 
capital downstream to the bank.\186\ In exchange for its 
investment, the FDIC received an 80 percent stake, composed of 
junior preferred stock, in the holding company.\187\
---------------------------------------------------------------------------
    \184\ Sprague, supra note 166, at 180-81.
    \185\ Sprague, supra note 166, at 209-10.
    \186\ Sprague, supra note 166, at 209-10; FDIC History: Volume 1, 
supra note 168, at 244.
    \187\ Sprague, supra note 166, at 209-10; FDIC History: Volume 1, 
supra note 168, at 247-48. These terms bear many similarities to the 
government's present interest in AIG; Treasury does not have a similar 
equity stake in any of the over 500 recipients of TARP assistance.
---------------------------------------------------------------------------
    The FDIC replaced top management, bringing in a new 
chairman, former Standard Oil of Indiana chairman John 
Swearingen, and a new CEO, former Chase CFO Bill Ogden.\188\ 
The FDIC also dismissed members of Continental Illinois's board 
of directors who had come on before 1980 and had presided over 
the operations that got the bank in trouble.\189\ The bank's 
remaining shareholders approved the plan in September 
1984.\190\ Although Continental Illinois did return to 
viability, it remained closely watched by regulators; FDIC did 
not sell its last equity stake until 1991.\191\
---------------------------------------------------------------------------
    \188\ Sprague, supra note 166, at 200-209.
    \189\ Sprague, supra note 166, at 215-17.
    \190\ Sprague, supra note 166, at 214.
    \191\ The Wharton School Financial Institutions Center, University 
of Pennsylvania, The Collapse of Continental Illinois National Bank and 
Trust Company: The Implications for Risk Management and Regulation, at 
3 (online at fic.wharton.upenn.edu/fic/case%20studies/
continental%20full.pdf) (accessed Apr. 2, 2009).
---------------------------------------------------------------------------
    Continental Illinois was the first rescue of the entire 
creditor class of a financial institution since the Depression. 
However, the stockholders of Continental Illinois were diluted 
when, in exchange for FDIC support, the FDIC took an 80 percent 
equity stake in the bank. This stake granted FDIC most of the 
upside potential and control of the governance of Continental 
Illinois.

        3. SAVINGS AND LOAN CRISIS/RESOLUTION TRUST CORPORATION

    Unlike commercial banks, savings and loan associations 
(``S&Ls'' or ``thrifts'') faced increasingly difficult 
financial circumstances starting in the late 1960s. From the 
1930s onward, thrifts made money by paying out on short-term 
deposits less than they collected on long-term loans, mostly 
30-year fixed-rate mortgages. As long as short-term interest 
rates stayed low, this business model remained extremely 
profitable.\192\
---------------------------------------------------------------------------
    \192\ Barbara Rudolph et al., Special Report: The Savings And Loan 
Crisis, Time (Feb. 20, 1989). Savings and loan bankers were said to 
operate on the ``3-6-3 rule'': they could pay out 3 percent on 
deposits, collect 6 percent on loans, and make it to the golf course by 
3 every afternoon. Id.
---------------------------------------------------------------------------
    However, the U.S. economy started to overheat and the 
Federal Reserve Board raised short-term interest rates 
beginning in the late 1960s to combat the resulting inflation. 
High short-term interest rates undermined the thrift business 
model by forcing the thrift to pay out more on short-term 
deposits than it collected on long-term fixed-rate loans. The 
Federal Reserve Board responded by imposing Regulation Q, a 
provision that capped the rate at which thrifts and banks could 
pay out interest on deposits.\193\ Because the federal 
government insured S&L deposits through the Federal Savings and 
Loan Insurance Corporation (FSLIC, the thrifts' equivalent of 
the commercial banks' FDIC), the interest rate cap did not 
result in mass deposit defection to higher yielding, uninsured 
investments.\194\
---------------------------------------------------------------------------
    \193\ Lawrence J. White, The S&L Debacle: Public Policy Lessons for 
Bank and Thrift Regulation, at 62-65 (1991).
    \194\ White, supra note 193, at 62-65.
---------------------------------------------------------------------------
    However, in the late 1970s the Federal Reserve Board took 
further action to combat inflation by sharply increasing short-
term interest rates.\195\ As their customers accelerated their 
deposit withdrawals to pursue higher interest rates elsewhere 
through alternative investments, the thrifts clamored for the 
ability to pursue capital that fled to savings alternatives not 
affected by Regulation Q caps.\196\ Congress eventually 
responded by allowing S&Ls to pay much higher rates on 
deposits.\197\
---------------------------------------------------------------------------
    \195\ White, supra note 193, at 67-72.
    \196\ White, supra note 193, at 67-72.
    \197\ Depository Institutions Deregulation and Monetary Control Act 
of 1980 (DIDMCA), Pub. L. No. 96-221, at Sec. Sec. 202-210.
---------------------------------------------------------------------------
    While higher payouts stopped the problem of deposit flight, 
higher costs threatened to bleed the S&Ls to death unless they 
could find sources of income beyond the single-digit returns on 
traditional 30-year fixed-rate mortgages. As a result, 
authorities began stripping away the regulations that had 
governed thrifts' operations since the Great Depression. The 
Federal Home Loan Bank Board (FHLBB) permitted the thrifts to 
begin issuing adjustable rate mortgages in 1979.\198\ Congress 
endorsed this diversification \199\ and explicitly authorized 
further steps, including greater involvement in consumer 
lending and commercial real estate.\200\ Simultaneously, many 
states dramatically relaxed the rules that governed the 
investments their state-chartered thrifts could make, allowing 
the thrifts to get directly involved in similarly unfamiliar, 
risky investments.\201\
---------------------------------------------------------------------------
    \198\ White, supra note 193, at 72-73.
    \199\ Federal Deposit Insurance Corporation, The S&L Crisis: A 
Chrono-Bibliography (online at www.fdic.gov/bank/historical/s&l/
index.html) (accessed Apr. 2, 2009) (hereinafter ``FDIC 
Bibliography'').
    \200\ DIDMCA at Sec. 401, See also FDIC Bibliography, supra note 
199.
    \201\ FDIC Bibliography, supra note 199.
---------------------------------------------------------------------------
    At the same time as thrift regulators began eliminating 
restrictions on the thrifts' asset options, the regulators also 
relaxed safety and soundness regulation.\202\ Federal and state 
regulators stripped down the net worth requirements that S&Ls 
had to meet, allowing them to hold less and less capital to 
support the same amount in deposits.\203\ The new net worth 
guidelines permitted thrifts to substitute net worth 
certificates from the FSLIC for real capital in the regulator-
mandated calculations.\204\ Changes in accounting rules made it 
even easier to meet the new lower net worth requirements.\205\ 
Finally, the FHLBB made it significantly easier for thrifts to 
expand through acquisitions by eliminating restrictive stock 
ownership regulations.\206\
---------------------------------------------------------------------------
    \202\ Many scholars have pointed to this failure as the critical 
moment that precipitated the S&L crisis. See, e.g., White, supra note 
193, at 74-82.
    \203\ White, supra note 193, at 82-84.
    \204\ White, supra note 193, at 83.
    \205\ White, supra note 193, at 84-87.
    \206\ FDIC Bibliography, supra note 199.
---------------------------------------------------------------------------
    At the same time that policymakers expanded thrifts' 
investment options, they subjected the thrifts to reduced 
examination and oversight; thrift examinations fell nationwide 
during the early 1980s.\207\ Examinations and FHLBB activity 
fell even further in the southwest, the region that would 
become the epicenter of the S&L crisis.\208\
---------------------------------------------------------------------------
    \207\ White, supra note 193, at 88-90.
    \208\ White, supra note 193, at 89-90. The southwest here refers to 
the FHLBB's Ninth District, encompassing Arkansas, Louisiana, 
Mississippi, New Mexico, and Texas.
---------------------------------------------------------------------------
    The combination of the need for greater returns on loans 
and assets in order to cover the higher deposit interest rates 
and the new regulatory freedom to undertake a much wider range 
of investments led to dramatic expansion of the thrift 
industry. Economic conditions, especially booms in oil prices 
and real estate created an environment in which high-yield 
investments constantly tempted the thrifts.\209\ This expansion 
was concentrated in the Sun Belt and in those states with fewer 
regulatory restrictions.\210\
---------------------------------------------------------------------------
    \209\ White, supra note 193, at 109-111; FDIC Bibliography, supra 
note 199.
    \210\ White, supra note 193, at 89-90.
---------------------------------------------------------------------------
    However, as the 1980s wore on, the thrifts' fortunes 
started to change. Oil prices began declining to levels that 
made boom-time investments unprofitable.\211\ Further, Congress 
eliminated many of the tax benefits for real estate that had 
led to the building spurt of the early part of the decade.\212\ 
As a result, by 1985, it became clear that the thrift industry 
faced serious trouble. Enough S&Ls had folded or were in danger 
of folding that the FSLIC was insolvent.\213\
---------------------------------------------------------------------------
    \211\ White, supra note 193, at 111.
    \212\ White, supra note 193, at 109-111.
    \213\ Timothy Curry and Lynn Shibut, The Cost of the Savings and 
Loan Crisis: Truth and Consequences, FDIC Banking Review, at 27 (Dec. 
2000) (online at www.fdic.gov/bank/analytical/banking/2000dec/
brv13n2_2.pdf).
---------------------------------------------------------------------------
    Thrift failures increased during 1987 and into 1988, but 
the insolvency of the FSLIC meant that rescuing troubled 
thrifts would cost more than the FSLIC had available in its 
insurance fund. As a result, the regulators could not intervene 
in S&Ls that had more in liabilities than assets. This 
situation left hundreds of institutions in what came to be 
characterized as a ``zombie'' stage.\214\ A zombie thrift, one 
which was insolvent but continued to operate because the FSLIC 
had not yet intervened to liquidate or sell it, posed a 
significant asymmetric risk problem. These thrifts had dramatic 
incentives to take on greater and greater risk in order to 
generate the returns they needed to reverse their fortunes. At 
the same time, they had little or no capital of their own left 
and faced the prospect of imminent closure.\215\ Hence, the 
taxpayer bore tremendous exposure to the risks undertaken by 
these zombie institutions.\216\ Thrifts continued to pursue 
risky strategies long after the need to take them over became 
apparent and this ultimately added to the total cleanup costs.
---------------------------------------------------------------------------
    \214\ James R. Barth, Susanne Trimbath, Glenn Yago, The Savings and 
Loan Crisis: Lessons from a Regulatory Failure, at 117-18 (2004).
    \215\ Id.
    \216\ Id.
---------------------------------------------------------------------------
    Although the FSLIC fund was almost $10 billion underwater 
in 1985, when the scope of the crisis had still not become 
apparent, Congress waited until 1987 to pass the initial 
recapitalization legislation.\217\ The new law permitted the 
FSLIC to borrow against its future deposit insurance premium 
revenue in order to resolve insolvent thrifts immediately.\218\ 
However, it limited the funds the FSLIC could raise through 
this authority during any given year.\219\ Nonetheless, the 
FSLIC began using its newfound borrowing authority to start 
disposing of the most problematic thrifts by liquidating or 
forcing them into mergers, paying out insured deposits, and 
trying to find new buyers for problematic assets. In these 
transactions, only the insured depositors had full protection. 
Bondholders and equity holders took losses that depended on the 
value that the thrift itself or its disaggregated assets 
demanded on the open market; in some cases, debt and equity 
holders saw their investments wiped out entirely.\220\
---------------------------------------------------------------------------
    \217\ Competitive Equality Banking Act of 1987 (CEBA), Pub. L. No. 
100-86.
    \218\ Id. at Sec. 302.
    \219\ Id. at Sec. 302(e).
    \220\ White, supra note 193, at 147-170.
---------------------------------------------------------------------------
    The FSLIC resolutions cost a great deal of money, and 
reporting about the scandal increased dramatically. Pressure on 
legislators increased as well, and Congress passed the 
Financial Institutions Reform Recovery and Enforcement Act 
(FIRREA) in 1989.\221\ FIRREA abolished the FHLBB and shifted 
regulation of S&Ls to the Office of Thrift Supervision 
(OTS),\222\ transferred the thrifts' deposit insurance function 
from the FSLIC to the FDIC,\223\ and reinstituted many of the 
regulatory provisions that had been weakened during the 
previous decade.\224\ Finally, FIRREA created the Resolution 
Trust Corporation (RTC) to address the insolvent S&Ls.\225\
---------------------------------------------------------------------------
    \221\ Financial Institutions Reform, Recovery, and Enforcement Act 
of 1989 (FIRREA), Pub. L. No. 101-73.
    \222\ Id. at Sec. Sec. 401-403.
    \223\ Id. at Sec. Sec. 201-226. From the passage of FIRREA until 
2004, FDIC maintained the Bank Insurance Fund (BIF) for commercial 
banks and the Savings Association Insurance Fund (SAIF) for thrifts. 
This arrangement ended with the Federal Deposit Insurance Reform Act of 
2005, Pub. L. No. 109-171, and the creation of the Deposit Insurance 
Fund to replace the BIF and the SAIF.
    \224\ Among these provisions were mandates for the percentage of 
lending devoted to housing investments, greater net worth requirements, 
a minimum regulatory floor that applied to state and federally 
chartered thrifts, and new criminal and civil enforcement mechanisms. 
See White, supra note 193, at 178-80.
    \225\ FIRREA, supra note 221, at Sec. 501.
---------------------------------------------------------------------------
    The RTC fell under the control of the FDIC and was funded 
by $20 billion worth of taxpayer funds and $30 billion borrowed 
through a new entity, the Resolution Finance Corporation 
(REFCORP).\226\ FIRREA also mandated that thrifts contribute 
substantial upfront funding to REFCORP and pay greater deposit 
insurance premiums.\227\ Three subsequent pieces of legislation 
increased the total funding available to the RTC to $105 
billion, of which it received $91 billion.\228\ Using this 
funding, by the time its statutory authorization finally ran 
out, the RTC resolved 747 thrifts at a total cost of over $150 
billion, over $120 billion of which came from the federal 
treasury.\229\
---------------------------------------------------------------------------
    \226\ FIRREA, supra note 221, at Sec. Sec. 511-12.
    \227\ White, supra note 193, at 176-79.
    \228\ Curry and Shibut, supra note 213, at 29. See also Lee 
Davison, The Resolution Trust Corporation and Congress, 1989-1993, Part 
II: 1991-1993, FDIC Banking Review (2006) (online at www.fdic.gov/bank/
analytical/banking/2007apr/br18n3full.pdf).
    \229\ Curry and Shibut, supra note 213, at 27.
---------------------------------------------------------------------------
    The failed thrifts themselves were subject to the FDIC 
resolution process, which universally wiped out the equity 
holders and put creditors other than insured depositors through 
a bankruptcy-like process in which there was no guarantee of 
full recovery. Obviously, this process involved the FDIC taking 
full control of failed institutions until the institutions' 
assets or businesses were sold off.
    The RTC had responsibility for all the assets of insolvent 
thrifts. Good assets, loans, and investments which were sound 
and held their value found buyers relatively quickly. But the 
RTC also inherited a diverse set of troubled assets, and 
experts expressed great skepticism about the agency's ability 
to liquidate them.\230\ First, the RTC would have to confront 
an enormous volume of assets, the troubled investments of 
hundreds of failing thrifts.\231\ Second, the RTC would have to 
dispose of an enormous variety of assets, including complex 
commercial ventures and projects where other viable investors 
remained.\232\ Finally, and most problematically, many of the 
assets were in serious financial trouble, having already 
defaulted or requiring credit restructuring.\233\ Nobody knew 
if these assets were worth anything, much less if the RTC could 
successfully tap into what market might exist.
---------------------------------------------------------------------------
    \230\ See, e.g., Bert Ely, The Resolution Trust Corporation in 
Historical Perspective, Housing Policy Debate (1990) (online at 
www.mi.vt.edu/data/files/hpd_1_1/hpd_0101_ely.pdf).
    \231\ Id. at 56-58.
    \232\ Id. at 58-60.
    \233\ Id. at 59-60.
---------------------------------------------------------------------------
    But despite the challenges it faced, the RTC disposed of 
the thrifts' bad assets with far less fanfare than many 
observers had anticipated. In this effort, the RTC benefitted 
from most thrifts holding tangible, albeit troubled, 
assets.\234\ While a half-finished real estate development or 
office building, or a project funded by a loan in default 
represents a valuation challenge, especially when it involves 
other investors of varying financial health, it is a solvable 
one.\235\
---------------------------------------------------------------------------
    \234\ In this respect, the resolution of troubled assets in the 
present crisis represents a much greater challenge. Not only do the 
underlying assets face similar valuation problems to what the RTC had 
to address, but because each step removed from the underlying asset 
compounds the valuation problem, pooling and securitization make 
valuation dramatically harder.
    \235\ Ely, supra note 230, at 71-74.
---------------------------------------------------------------------------
    Other innovations and strategies helped the RTC. It 
discovered a new market for problematic loans securitized into 
more palatable chunks.\236\ It also found that employing 
sealed-bid, bulk auctions to dispose of its immense inherited 
real estate holdings attracted investors looking for bargain-
basement prices.\237\ The RTC promoted the stories of buyers 
who made money from purchases of their assets in the hope that 
more investors would follow.\238\ Although commentators largely 
panned this strategy,\239\ buyers quickly materialized and the 
RTC managed to dispose of the questionable assets under its 
control quicker and at less cost to the taxpayer than many 
anticipated.\240\ As a result, most modern commentators regard 
the RTC as a successful enterprise.\241\
---------------------------------------------------------------------------
    \236\ Jerry W. Markham, A Financial History of the United States, 
Volume III: From the Age of Derivatives into the New Millennium (1970-
2001), at 172-73 (2002).
    \237\ Kerry D. Vandell and Timothy J. Riddiough, On the Use of 
Auctions as a Disposition Strategy for RTC Real Estate Assets: A Policy 
Perspective, Housing Policy Debate, at 118-19 (1992) (online at 
www.mi.vt.edu/data/files/hpd%203(1)/hpd_0301_vandell.pdf).
    \238\ Id. at 119 (citing a Wall Street Journal piece from October 
3, 1991 that quotes RTC deputy director Thomas Horton as saying, ``We 
think it's the best thing in the world if someone makes money off us. 
Smart money follows smart money.'').
    \239\ See, e.g,. id. at 117.
    \240\ Mark Cassell, How Governments Privatize: The Politics of 
Divestment in the United States and Germany, at 4-8, 26-33 (2003).
    \241\ See, e.g., id.; Markham, supra note 236, at 173 (describing 
the RTC as a ``qualified success'').
---------------------------------------------------------------------------

       4. RECAPITALIZATION OF THE FDIC BANK INSURANCE FUND/FDICIA

    Although insulated from the interest rate shocks that 
created problems for the thrift industry, commercial banks also 
faced problems during the 1980s. The same economic conditions 
that so threatened the S&Ls, namely the end of the real estate 
boom and the collapse of the price of energy, impacted many 
viable commercial bank investments as well.\242\ FDIC 
interventions in commercial banks topped 250 each year from 
1987 to 1989.\243\ In all, over 1500 commercial banks failed 
between 1980 and 1992.\244\ As a result, the FDIC's Bank 
Insurance Fund, like the FSLIC before it, did not have the 
resources to resolve all the troubled institutions.\245\
---------------------------------------------------------------------------
    \242\ George J. Benston and George G. Kaufman, FDICIA After Five 
Years: A Review and Evaluation, at 7-8 (June 11, 1997) (Federal Reserve 
Bank of Chicago Working Paper Series, Issues in Financial Regulation 
WP-97-1) (online at www.chicagofed.org/publications/workingpapers/ 
papers/wp97_1.pdf).
    \243\ Federal Deposit Insurance Corporation, Failures and 
Assistance Transactions, Number of Institutions, United States and 
Other Areas: 1934-2009 (online at www2.fdic.gov/hsob/
HSOBSummaryRpt.asp?BegYear=1934&EndYear=2009&State=1) (accessed Mar. 
23, 2009).
    \244\ George G. Kaufman, FDIC Losses in Bank Failures: Has FDICIA 
Made a Difference?, Federal Reserve Bank of Chicago Economic 
Perspectives, at 16 (Third Quarter 2004) (online at www.chicagofed.org/
publications/economicperspectives/ep_3qtr2004_part2_Kaufman.pdf).
    \245\ Benston and Kaufman, supra note 242, at 8.
---------------------------------------------------------------------------
    In the wake of the Continental Illinois bailout, where the 
FDIC had to take an equity stake in the institution because it 
lacked the funds to resolve it, and the S&L crisis, where the 
FSLIC's insolvency increased the debacle's ultimate costs, 
pressure mounted to create greater bank rescue authority that 
would avoid future taxpayer expense. As such, Congress passed 
the Federal Deposit Insurance Corporation Improvement Act of 
1991 (FDICIA).\246\ FDICIA allocated funds to recapitalize the 
FDIC's Bank Insurance Fund (BIF) and implemented substantial 
regulatory and deposit insurance reforms.
---------------------------------------------------------------------------
    \246\ Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA), Pub. L. No. 102-242.
---------------------------------------------------------------------------
    FDICIA significantly altered the FDIC's ability to borrow 
and raise capital in order to address problem institutions. The 
Act substantially increased the FDIC's borrowing authority to 
up to $30 billion and allowed for it to raise emergency funds 
by borrowing against the proceeds from selling the assets of 
failed banks.\247\ FDICIA also set a target and a timeline for 
the FDIC's insurance funds to meet designated capital 
ratios.\248\ These provisions, taken together, substantially 
increased the resources which FDIC could use to step in and 
close zombie institutions instead of allowing them to continue 
pursuing risky strategies.\249\
---------------------------------------------------------------------------
    \247\ FDIC History: Volume 1, supra note 168, at 103.
    \248\ FDIC History: Volume 1, supra note 168, at 103. The Act 
mandated that the BIF meet its target within 15 years, while allowing 
the SAIF an open-ended timeframe.
    \249\ Lawrence H. White, Introduction, in The Crisis in American 
Banking, at 5 (Lawrence White, ed.) (1995).
---------------------------------------------------------------------------
    The legislation also established a set of new regulatory 
frameworks centered around capital requirements. Congress 
required the FDIC to classify banks according to their 
capitalization status; a decrease in a bank's capitalization 
status would increase the regulatory tools available to the 
FDIC to address the situation.\250\ This policy, dubbed the 
Structured Early Intervention and Resolution (SEIR) framework, 
aimed to resolve institutions before they become 
problematic.\251\ The legislation also sought to make deposit 
insurance act more like insurance by charging institutions 
variable premiums based on the likelihood that the FDIC would 
have to spend money to honor their depository obligations.\252\
---------------------------------------------------------------------------
    \250\ FDIC History: Volume 1, supra note 168, at 103.
    \251\ Benston and Kaufman, supra note 242, at 10-11.
    \252\ FDIC History: Volume 1, supra note 168, at 104.
---------------------------------------------------------------------------
    Finally, FDICIA explicitly endorsed the concept of systemic 
risk as a justification for taking extraordinary actions. 
Although mandating that the FDIC, under ordinary circumstances, 
had to resolve an institution using the least costly method, be 
it sale, liquidation, receivership, or some other means, FDICIA 
permitted a waiver of this provision if federal banking 
regulators reached the conclusion that the institution posed a 
systemic risk.\253\ Although intended to reduce the specter of 
systemic risk by systematizing the conditions under which it 
could justify action, FDICIA did represent Congress' 
endorsement of the concept as something which justified its own 
set of rules.
---------------------------------------------------------------------------
    \253\ FDIC History: Volume 1, supra note 168, at 104.
---------------------------------------------------------------------------

                               5. SWEDEN

    Like the savings and loan and subprime mortgage crises in 
the United States, the Swedish banking crisis of the early 
1990s arose from a real estate bubble that was brought on 
principally by deregulation in the financial markets. Sweden's 
banking system was highly concentrated, with the seven largest 
banks accounting for 90 percent of the market.\254\ The prior 
decade of the 1980s was ``marked by economic deregulation, the 
removal of cross-border restrictions on capital flows, 
financial innovation, and increased competition in financial 
services.'' \255\ While Swedish banks had previously been 
required to invest more than half of their assets in low-
interest bonds and had been subject to interest rate caps, 
these regulations were lifted during the period between 1983 
and 1985. Lending subsequently increased by 73 percent in real 
terms.\256\ The household debt-to-assets ratio grew from 35.8 
percent in December 1985 to 38 percent in December 1988.\257\ 
This was accompanied by a growth in the corporate debt-to-asset 
ratio from 65.5 percent to 68.2 percent.
---------------------------------------------------------------------------
    \254\ Congressional Oversight Panel, Testimony of Bo Lundgren, 
Learning from the Past: Lessons from the Banking Crises of the 20th 
Century (Mar. 19, 2009). In 1994, there were 91 savings banks and 23 
commercial banks in the country. Sweden: Economic Infrastructure, The 
Economist (1996).
    \255\ Burkhard Drees and Ceyla Pazarbasioglu, The Nordic Banking 
Crises, Pitfalls in Financial Liberalization? at 1 (Apr. 1998) 
(International Monetary Fund Working Paper Series, 95/61).
    \256\ This number may slightly overstate the increase because it 
includes an unknown number of loans between private parties that were 
converted to bank loans. Peter Englund, The Swedish Banking Crisis: 
Roots and Consequences, Oxford Review of Economic Policy, at 84 (1999).
    \257\ Id. at 85.
---------------------------------------------------------------------------
    Tax and exchange rate policies also appear to have 
contributed to the boom. In the late 1980s, ``[h]igh inflation 
interacted with a nominal tax system with full deductibility of 
interest payments * * * making real after-tax interest rates 
low or even negative.'' \258\ With such low interest rates and 
restrictions on lending and capital flows removed, borrowers 
took on unaffordable amounts of debt. Banks lacked sufficient 
internal controls to counteract the borrowers' and lenders' 
newfound appetite for risk. Government regulators facilitated 
the bubble with a hands-off approach to real estate and foreign 
currency lending.\259\
---------------------------------------------------------------------------
    \258\ Id. at 81.
    \259\ Drees and Pazarbasioglu, supra note 255, at 4-8.
---------------------------------------------------------------------------
    The danger of these factors was fully exposed when the 
fixed exchange rate forced Sweden to increase its real interest 
rates following German re-unification. High interest rates 
curtailed the demand for real estate and the bubble burst. 
Between 1990 and 1995, residential real estate values dropped 
25 percent and commercial real estate values dropped 42 
percent.\260\ Matters were made worse when the krona was taken 
off the fixed exchange rate. Its value plummeted 20 percent 
between November 19 and December 31, 1992. Many Swedish debtors 
found themselves unable to meet their obligations since 47.5 
percent of loans made in 1990 were in foreign currency.\261\ By 
1993, domestic non-performing loans had reached 11 percent of 
GDP.
---------------------------------------------------------------------------
    \260\ O. Emre Egrungor, On the Resolution of Financial Crises: The 
Swedish Experience, at 5 (June 2007) (Federal Reserve Bank of Cleveland 
Policy Discussion Paper Series, No. 21) (online at 
www.clevelandfed.org/research/PolicyDis/pdp21.pdf).
    \261\ Englund, supra note 256, at 85.
---------------------------------------------------------------------------
    The impact of the economic downturn was already in evidence 
in the financial sector in 1991 when one of Sweden's largest 
banks, Nordbanken, announced that it could no longer meet its 
eight percent capital requirement. Two other major 
institutions, Forsta Sparbanken and Gota soon found themselves 
in similar situations. In total, Sweden's banks faced bad debt 
charges averaging 6.3 percent of total loans in 1992 and 5.6 
percent the following year, up from only 0.3 percent in 
1989.\262\ From 1990 through 1993, loan losses were close to 17 
percent of total lending.\263\
---------------------------------------------------------------------------
    \262\ Citigroup Global Markets, Swedish Models: Banking Crisis and 
Recovery in the Early 1990s, at 12 (Feb. 23, 2009); Drees and 
Pazarbasioglu, supra note 255, at 1.
    \263\ This includes ``reservations for future losses for loans that 
were still performing.'' Englund, supra note 256, at 90.
---------------------------------------------------------------------------
    The government responded by taking full ownership of 
Nordbanken, the majority of which was already owned by the 
state, and Gota. A loan guarantee was provided to Forsta 
Sparbanken to help keep it afloat. The acquisitions of 
Nordbanken and Gota left the government holding 22 percent of 
the nation's banking assets. These moves naturally shook the 
faith of foreign creditors in the Swedish economy. To restore 
confidence, the Riksbank, the Swedish central bank, issued a 
blanket guarantee to all creditors and depositors on all non-
equity claims in Swedish banks in December 1992. The guarantee 
gave the Swedish parliament, the Riksdag, the breathing room it 
needed to devise an action program for removing the non-
performing loans from the banks' balance sheets.
    To ensure maximum transparency and independence, the 
Riksdag created the Bank Support Authority, an entity separate 
from the Ministry of Finance and Riksbank, and vested it with 
the authority to evaluate the financial condition of the 
struggling banks and recommend an appropriate course of action 
for each. The Bank Support Authority followed a three-part 
sequence:

           First, it audited the books of the banks to 
        determine their health;
           Second, it installed state representatives 
        on the boards of banks that required new capital and 
        replaced top management of banks that were 
        nationalized;
           Third, it provided capital injections to 
        banks that were undercapitalized.

    In the spring of 1993, the Bank Support Authority set about 
triaging Swedish banks into three categories. The approach was 
grounded in the central principle that all capital losses, 
regardless of size, had to be covered to revive the banking 
sector.\264\ The three categories included: \265\
---------------------------------------------------------------------------
    \264\ Stefan Ingves and Goran Lind, The Management of the Bank 
Crisis--In Retrospect, Quarterly Review, at 12 (Jan. 1996).
    \265\ Lundgren, supra note 254.

           ``Category A.'' These banks were the 
        healthiest, with capital adequacy of at least eight 
        percent. These banks were expected to require minimal 
        public assistance, such as temporary guarantees;
           ``Category B.'' These banks were those that 
        might fall below eight percent capital but were 
        expected to survive with the help of public capital 
        contributions (in exchange for preferred stock) or 
        loans. Banks in this category were also required to 
        raise private capital.\266\ ``B'' banks were required 
        to comply with rules on capital use;
---------------------------------------------------------------------------
    \266\ Hoenig, supra note 149, at 6.
---------------------------------------------------------------------------
           ``Category C.'' These banks were those that 
        were not expected to survive in their current form. 
        Banks in this category, which included Nordbanken and 
        Gota, were nationalized and their assets were divided 
        between good and bad (legally separate work-out units) 
        by the Valuation Board, a body of expert auditors set 
        up by the Bank Support Authority.

    The good assets of the ``C'' banks were consolidated under 
the Nordbanken name. The bad assets were transferred to two 
asset management companies (AMCs): Securum and Retriva. This 
model was derived from the Resolution Trust Corporation of the 
U.S. savings and loan crisis. The two AMCs were deliberately 
over-capitalized, allowing them to perform their salvage 
operations autonomously without the need to return to the 
Riksdag for more funding, which would have exposed them to 
political pressures. In many cases, the AMCs had to take over 
defaulting companies and assume typical management 
responsibilities, including hiring and firing management, 
managing and rehabilitating property, and adjusting business 
strategies. The government originally estimated that the 
liquidation operations of the AMCs would take 10 to 15 years to 
complete. However, better than expected macroeconomic 
conditions helped to expedite the process and, by 1997, the 
liquidation was complete.\267\ Initially, Sweden's efforts to 
rescue the financial sector cost it approximately 65 billion 
kronor, the equivalent of slightly more than four percent of 
GDP at the time. Most of that expenditure was recovered via 
proceeds from Securum and Retriva and the partial privatization 
of Nordbanken. Estimates of the net cost of the government 
intervention range from zero to two percent of GDP.\268\
---------------------------------------------------------------------------
    \267\ Egrungor, supra note 260, at 6.
    \268\ Thomas F. Cooley, Swedish Banking Lessons, Forbes (Jan. 28, 
2009).
---------------------------------------------------------------------------
    Two features of the Swedish strategy are particularly 
noteworthy. The first is transparency. As Bo Lundgren noted in 
his testimony before the Panel, a ``key objective was to ensure 
that our crisis management would be characterized by the 
greatest possible transparency'' in order to bolster confidence 
in the financial sector.\269\ Sweden effectively accomplished 
this by requiring banks to open their books, reveal all 
potential write-downs, and isolate them via separate good and 
bad aggregator banks. In addition, the blanket guarantee on all 
bank liabilities helped calm investors while this program was 
in progress. The Swedes complemented these policies with a 
public relations campaign that sent officials from the 
financial agencies to the world's various financial centers to 
explain the strategy and instill confidence in investors.
---------------------------------------------------------------------------
    \269\ Lundgren, supra note 254.
---------------------------------------------------------------------------
    Second, the Swedes made an effort to ensure that the 
executors of the program enjoyed political and financial 
independence. The creation of the Bank Support Authority was a 
necessary step to avoid any potential conflicts of interest. It 
begat the Valuation Board and the AMCs, which managed to 
successfully absorb 7.7 percent of the assets of the financial 
system (equal to eight percent of GDP) and dispose of them in 
much less time that had been initially projected.\270\
---------------------------------------------------------------------------
    \270\ Daniela Klingebiel, The Use of Asset Management Companies in 
the Resolution of Banking Crises Cross-Country Experiences, at 9 (Feb. 
2000) (World Bank Policy Research Working Paper Series, No. 2284) 
(online at papers.ssrn.com/sol3/papers.cfm?abstract_id=282518).
---------------------------------------------------------------------------

                                6. JAPAN

    In the decades after the Second World War, the Japanese 
economy underwent an unprecedented economic recovery. By the 
mid-1970s, it had become the world's largest exporter of steel 
and automobiles. Japan's remarkable post-war growth was guided 
by government protection of emerging domestic industries, which 
led to their becoming highly competitive in global 
markets.\271\ In the 1980s, financial deregulation, low 
interest rates, and the appreciation of the yen gave rise to a 
substantial excess of savings and liquidity in Japan. This, in 
turn, supported increased consumer spending and speculation in 
the stock and real estate markets, which then led to rapid run-
up in asset values.
---------------------------------------------------------------------------
    \271\ Paul Krugman, The Return of Depression Economics and the 
Crisis of 2008 (2008).
---------------------------------------------------------------------------
    The bubble finally burst in 1991 as real estate values 
dropped by 500 trillion yen (US$4.5 trillion) and the total 
value of shares lost 300 trillion yen (US$2.7 trillion).\272\ 
This helped set Japan on course for a decade-long ``growth 
recession'' that came to be known as the ``Lost Decade.'' 
During this period--which actually spanned at least a dozen 
years--the economy experienced only two years of negative 
growth. But the protracted economic stagnation was a dramatic 
reversal from the previous decade, when annual GDP growth 
averaged almost 4 percent. From 1991 to 2003, GDP grew at an 
annual average of just over 1 percent, well below the growth 
rates of every other major industrialized country during this 
period.\273\
---------------------------------------------------------------------------
    \272\ Koyo Ozeki, Responding to Financial Crises: Lessons to Learn 
from Japan's Experience, Japan Credit Perspectives (Aug. 2008) (online 
at europe.pimco.com/LeftNav/Global+Markets/Japan+Credit+Perspectives/
2008/Japan+Credit+Perspectives+Koyo+Ozeki+Responding+to+ 
Financial+Crises+August+2008.htm).
    \273\ Charles Yuji Horioka, The Causes of Japan's ``Lost Decade'': 
The Role of Household Consumption, (Nov. 2006) (National Bureau of 
Economic Research Working Paper No. 12142).
---------------------------------------------------------------------------
    Japanese policymakers failed to appreciate early on just 
how significant the impact of the asset devaluation would be on 
the financial sector. Bank lending had doubled between 1985 and 
the first half of the 1990s, with most loans geared toward the 
real estate market.\274\ Deregulation had eased restrictions on 
corporate access to capital markets, giving large businesses 
new alternatives to the banks as sources of capital. Banks were 
forced to seek new customers, particularly in small business 
and real estate, which proved to be far riskier business 
partners than Japan's established corporations.\275\ As real 
estate values continued to slide in the mid-1990s, non-
performing loans (NPLs) became a growing problem for Japan's 
banks. According to one estimate, Japan's banks were holding 50 
trillion yen (US$450 billion) in non-performing loans 
immediately after the burst of the bubble in 1993, which rose 
to nearly 100 trillion yen (US$910 billion) by 1996.\276\
---------------------------------------------------------------------------
    \274\ Ozeki, supra note 272.
    \275\ Japan's Financial Crisis and its Parallels to US Experience, 
Institute for International Economics, at 6 (Adam Posen and Ryoichi 
Mikitani, eds.) (Sept. 2000).
    \276\ Id.
---------------------------------------------------------------------------
    At the outset of the crisis, the Ministry of Finance lacked 
the legal authority to take banks facing bankruptcy into 
receivership. Thus, its initial response was to create 
stability by orchestrating mergers or asset takeovers by other 
banks. This included the establishment of both private and 
public asset management companies to help banks clear their 
balance sheets. But Japanese authorities pinned their hopes on 
a macroeconomic recovery that would restore the full value of 
assets and avoid costly writedowns.\277\ Regulators permitted 
lax accounting practices that allowed banks to book the value 
of their loan assets based on how much they could spare within 
the capital adequacy ratio. The real financial condition of the 
borrowers was seldom accurately reflected on the bank balance 
sheet. The same borrower could have different credit ratings 
from different banks depending on the level or risk each bank 
could sustain. Such accounting machinations were tolerated in 
part due to their political consequences. Leaders of Japan's 
dominant Liberal-Democratic Party sought to protect their 
powerful construction, real estate, and farming constituencies 
that were on the other end of the problematic NPLs. As 
economist Adam Posen notes, ``the ongoing political pressures 
for the rollover (evergreening) of loans to politically favored 
but bankrupt enterprises, in hopes of preserving jobs, and the 
near total erosion of bank capital between loan and equity 
losses created incentives for the problem to keep growing.'' 
\278\
---------------------------------------------------------------------------
    \277\ Richard Katz, Japan's Phoenix Economy, Foreign Affairs (Jan./
Feb. 2003) (online at www.foreignaffairs.com/articles/58624/richard-
katz/japans-phoenix-economy).
    \278\ Adam Posen, What Went Right in Japan, at 6 (Nov. 2004) 
(Peterson Institute for International Economics: Policy Briefs in 
International Economics, No. PB4-6).
---------------------------------------------------------------------------
    In late 1997, with the failure of a major bank, Hokkaido 
Tokushoku, and a major securities firm, Yamaichi Securities, 
the problems in the financial sector reached the level of 
systemic risk. There were indications in the interbank loan 
market that a number of other major banks were in trouble as 
well.\279\ In February 1998, the Japanese parliament or Diet 
passed the Financial Function Stabilization Act which provided 
for capital injections in major banks. The government then 
purchased 1.8 trillion yen (US$16 billion) in subordinated debt 
and preferred shares in 21 major banks that were 
undercapitalized but officially classified as solvent.
---------------------------------------------------------------------------
    \279\ Takeo Hoshi and Anil K. Kashyap, Will the U.S. Bank 
Recapitalization Succeed? Lessons from Japan (Dec. 2008) (National 
Bureau of Economic Research Working Paper Series, No. 14401).
---------------------------------------------------------------------------
    These efforts failed to stabilize the situation and bank 
lending remained stagnant. Under new authorities granted by the 
Financial Function Stabilization Act, the Financial Services 
Authority (FSA) was created and vested with the power to 
temporarily nationalize banks. In late-1998, the FSA exercised 
this authority for the first time and nationalized two major 
banks, Long-Term Credit Bank of Japan (LTCB) and Nippon Credit 
Bank (NCB), fully guaranteeing their debt to all creditors. 
This was followed by a second recapitalization effort in March 
1999 that injected 7.5 trillion yen (US$71 billion) into 15 
banks. The trend of small-scale recapitalization programs 
continued for the next several years, but the problem of 
chronic capital shortage persisted, in part because the size of 
the recapitalizations was simply insufficient. According to an 
analysis by economist Mitsuhiro Fukao, as late as March 2002, 
Japanese banks collectively had only 29.3 trillion yen of core 
capital to buffer the risks associated with assets of 744.8 
trillion and loans of 440.6 trillion, meaning that stated 
capital was only 3.9 percent of assets and 6.7 percent of 
loans.\280\ Furthermore, FSA's apparent weak enforcement of the 
conditions attached to participation in the program ensured 
that the balance sheet problems would persist. Even after LCTB 
and NCB were nationalized, FSA permitted banks to continue to 
operate with large amounts of non-performing loans on their 
books.\281\
---------------------------------------------------------------------------
    \280\ Id. at 13.
    \281\ Id. at 14.
---------------------------------------------------------------------------
    Japan's financial sector did not turn the corner until the 
introduction of the Financial Revitalization Program in late 
2002, under financial services minister Heizo Takenaka. 
Takenaka believed that honesty in bank balance sheets was the 
most important source of stability in financial markets.\282\ 
Thus, what became known as ``Takenaka Plan'' called for: (1) 
more rigorous evaluation of bank assets; (2) increased bank 
capital; and (3) strengthened governance for recapitalized 
banks.\283\ Takenaka's predecessor, Hakuo Yanagisawa, had 
initiated a program of special inspections of major banks aimed 
at uncovering the true health of the financial institutions and 
their debtors in 2001. Yet this commitment to transparency was 
not accompanied by rigorous enforcement until Takenaka took the 
helm at FSA. Under Takenaka, the special inspections resumed 
but with more rigorous enforcement of the auditing rules: 
assets were evaluated using discounted expected cash flows for 
NPLs; borrowers were investigated to ensure consistent and 
reliable classifications across all major bank balance sheets; 
and deferred tax assets were prohibited from being counted 
toward tier-I capital. Discrepancies between the banks' self-
evaluations and FSA's evaluations were released to the public. 
Where these special inspections identified a need for capital, 
it was injected on the condition that the banks abide by 
business improvement orders.\284\
---------------------------------------------------------------------------
    \282\ Heizo Takenaka, Lessons from Tokyo, Wall Street Journal (Oct. 
22, 2008) (online at online.wsj.com/article/SB122462152605355599.html).
    \283\ Id.
    \284\ Id.
---------------------------------------------------------------------------
    Within a year, signs of progress were already evident. The 
Takenaka Plan was forcing banks to aggressively cut costs, 
write off non-performing loans and sell their 
stockholdings.\285\ In March 2003, Resona Bank was prohibited 
from counting five years' worth of tax deferred assets as 
capital, an accounting tactic many banks had previously used to 
avoid exposure of their vulnerable capital positions. The 
government rescued the bank with a public capital injection and 
used its new majority interest to install new management.\286\ 
In August, FSA issued ``business improvement orders'' to 15 
recapitalized financial institutions for failing to meet their 
profit goals for the first quarter of 2003. These orders 
required the institutions to file business improvement plans 
and to report their progress to the FSA on a quarterly basis. 
Those institutions that failed to reform and meet their profit 
goals were forced to reduce the compensation of top management. 
One conglomerate, UFJ Holdings, was forced to remove three of 
its CEOs. Japan was finally holding banks accountable after 
more than a decade of avoiding the problems in its financial 
sector.\287\
---------------------------------------------------------------------------
    \285\ Ken Belson, Persistence Pays: Japan's Bank Regulator Makes 
Gains, New York Times (Sept. 30, 2009).
    \286\ Hoshi and Kashyap, supra note 279, at 16.
    \287\ Hoshi and Kashyap, supra note 279, at 16.
---------------------------------------------------------------------------
    In retrospect, most informed observers believe that Japan's 
greatest mistake was its excessive regulatory forbearance--
allowing banks to carry NPLs rather than demanding write-downs. 
Economists Takeo Hoshi and Anil Kashyap contend that the 
Japanese officials were in denial about the extent of the 
problems in the financial sector for most of the 1990s.\288\ 
The recapitalization efforts that the government did initiate 
were insufficient and still failed to require banks to write-
down losses on non-performing loans. The only objective pursued 
forcefully in the recapitalization efforts was increasing loan 
volumes. However, this only served to keep bad debtors and 
``zombie'' banks alive to throw good money after bad. The 
consensus view among economists who have studied Japan's 
economy during this period is that Japan simply kept banks in 
business for far too long with insufficient capital. The 
unwillingness to acknowledge the harsh reality of the asset 
bubble burst in the short-term contributed to the very sluggish 
growth rate of the Japanese economy that lasted for more than a 
decade.
---------------------------------------------------------------------------
    \288\ Hoshi and Kashyap, supra note 279.

                FIGURE 3: COMPARATIVE ANALYSIS OF GOVERNMENT RESOLUTION OF NATIONALIZED ENTITIES
----------------------------------------------------------------------------------------------------------------
                                      Shareholder         Bondholder           Depositor        Method of asset
                                      protection          protection          protection           valuation
----------------------------------------------------------------------------------------------------------------
Great Depression and              Unsecured. Bank     Unsecured.          Unsecured. Paid on  Administrative
 Reconstruction Finance            failures wiped      Bondholders         a pro rata basis    valuation. Bank
 Corporation 1930s.                out shareholders,   suffered            as the              examiners from
                                   and state laws      substantial         liquidation of      the RFC, Federal
                                   often imposed       losses; no          failed banks        Reserve Banks,
                                   double liability.   consistent policy   proceeded. The      Treasury, and the
                                   Shareholders at     existed for         FDIC, when          Comptroller of
                                   banks that          dealing with        created in 1933,    the Currency
                                   received RFC        bondholders when    insured deposits    conducted
                                   investment saw      reorganizing or     at solvent banks    valuation of
                                   their shares        liquidating         up to $2,500        seized assets.
                                   diluted.            banks.              (this increased
                                                                           to $5,000 with
                                                                           the passage of
                                                                           the Banking Act
                                                                           of 1935)
Continental Illinois............  Unsecured. Equity   Although            Secured. Fully      Administrative
                                   stake diluted by    unsecured, the      insured by FDIC.    valuation. FDIC
                                   80 percent FDIC     FDIC rescue plan                        took control of
                                   stake resulting     prevented default                       bad assets at non-
                                   from $1 billion     on outstanding                          market-determined
                                   investment in       obligations, thus                       prices.
                                   Continental         protecting
                                   Illinois' holding   creditors.
                                   company.
Savings and Loan Crisis/          Unsecured.          Unsecured.          Secured. Fully      Market valuation.
 Resolution Trust Corporation.     Received equity     Received debt       insured by FSLIC.   Thrifts or
                                   remaining after     payments                                disaggregated
                                   sale of thrift      remaining after                         assets sold on
                                   operations or, in   sale of thrift                          open-market by
                                   liquidation, sale   operations or, in                       FSLIC, FDIC, or
                                   of thrift's         liquidation, sale                       RTC.
                                   remaining assets.   of thrift's
                                   Substantial         remaining assets.
                                   losses incurred.    Substantial
                                                       losses incurred.
Sweden 1990s....................  At the two banks    Secured. Creditors  Secured.            Administrative
                                   that were           were covered by a   Depositors were     valuation. The
                                   nationalized,       government          protected by a      Bank Supervisory
                                   some shareholders   guarantee.          government          Authority
                                   were wiped out                          guarantee.          established an
                                   (at Gota) and                                               independent
                                   others (at                                                  Valuation Board
                                   Nordbanken) were                                            comprised of real
                                   bought out at the                                           estate experts to
                                   price of the                                                assign asset
                                   previous rights                                             values.
                                   issue. At banks
                                   that
                                   recapitalized
                                   privately, owners
                                   saw their shares
                                   diluted.
Japan 1990s.....................  Unsecured.          Secured. Creditors  Secured. A          Administrative
                                   Shareholder         were covered by a   temporary           valuation.
                                   capital was drawn   government          guarantee was       Financial Service
                                   on first before     guarantee.          instituted in       Authority
                                   using deposit                           1996. In 2005, a    conducted
                                   insurance funds.                        cap of 10 million   inspections of
                                   Thus, most                              yen per depositor   bank balance
                                   shareholder                             was reinstituted.   sheets.
                                   equity in
                                   nationalized
                                   banks was wiped
                                   out.
----------------------------------------------------------------------------------------------------------------

                 C. Europe: Current Crises and Response

    Late 2008 saw many of Europe's largest and fastest-growing 
economies scrambling to implement bank rescue plans. While each 
country's plan has its own unique features, most included plans 
to guarantee bank deposits and provide some type of cash 
infusion for financial institutions. Nationalization of all or 
select banks often followed but was almost uniformly viewed as 
an option of last resort and often was confined to only those 
institutions whose failure was likely to have serious 
ramifications for the entire economy. As may be anticipated, 
the aggressiveness of the plan usually tracked the intensity of 
the country's crisis, which, in turn, was often directly 
proportional to that country's economic climb over the last 
decade--i.e., the highest climbers had the sharpest falls.
    While the effects of the current downturn are widespread, 
there are certain differences between the American and European 
experiences that make some comparisons inapplicable. Most 
notably, many European countries are struggling with currency 
issues. As banking across borders has become increasingly 
feasible even for the average worker, cheap credit and lax 
lending standards in one part of Europe provides cheap and easy 
credit for almost any part of Europe. Many Europeans and 
European institutions, especially those in non-Eurozone 
countries, took out loans in foreign currencies. Now that the 
borrowers' home economies and currencies are faltering, the 
loans have become increasingly difficult to repay. The result 
is that both borrowers and lenders are damaged.
    Iceland, which is among the countries hardest hit by the 
current downturn, has been deeply impacted by such foreign 
currency exposure; however, its problems can also be attributed 
to the ease with which its relatively youthful financial 
institutions entered these cross-border markets despite a lack 
of reserves to backstop the nation's banking sector. Ireland, 
another country that has been profoundly affected by the 
crisis, has meanwhile avoided vulnerability to cross-market 
currency fluctuations by adopting the Euro. Adoption of the 
Euro was not without cost, however, as having the Euro as its 
currency provided the Irish with widespread access to credit 
with extraordinarily low interest rates, which has been linked 
to the Irish economy's current difficulties.
    Although the U.S. is not plagued by the same currency 
issues as many European countries, Americans and Europeans 
alike are struggling with the same problems of mounting debt 
and mounting unemployment while property values are down 
throughout both the U.S. and Europe. A newly burst housing 
bubble has a central place in almost every troubled economy's 
crisis. And the ubiquitous easy access to cheap credit is 
likewise at the center of each bubble. Certain economies became 
housing-focused in part because a rising tide of workers, 
either foreigners arriving for the first time or native-born 
citizens returning from abroad, flooded the then-lush job 
market and needed homes. But the influx of workers in those 
areas merely seems to have exacerbated, not caused, the bubble, 
which, in most cases, was a response to easy availability of 
credit.
    Although the British economy is suffering from its own 
burst housing bubble, its experience is somewhat different from 
its neighbors'. Unlike Ireland and Iceland, where ready access 
to mortgage credit led to overbuilding, UK builders failed to 
keep pace with the housing demand fueled by cheap credit. The 
combination of high demand and lagging supply soon led housing 
prices to outstrip wage increases. Subsequently, as credit 
contracted worldwide, the UK housing bubble burst.
    The UK, as home to a global financial center in London, 
also suffered from economic downturns among its business 
partners overseas. The sub-prime housing crisis in the U.S. 
quickly triggered aftershocks in the UK markets as banks such 
as the Royal Bank of Scotland stumbled under the weight of the 
U.S. asset-backed securities still on their books.
    Finally, the Europeans must contend not only with the 
issues arising out of linked currencies, but also with the 
issues arising out of their linked economies. Germany has been 
the most vocal regarding concerns that they will be asked not 
only to provide rescue packages for their own financial 
services industry, but for those of their poorer neighbors as 
well.

                               1. ICELAND

    Iceland has experienced both rapid economic expansion and 
sharp economic contraction. Following de-regulation in the 
early 2000s, the Icelandic banking sector expanded quickly, 
investing heavily in foreign currency loans.\289\ As a result, 
the foreign exposure of its major banks totaled 10 times the 
country's GDP as of the end of 2008.\290\ With the downturn in 
the financial markets worldwide, Iceland's three largest banks 
collapsed in late 2008. The Icelandic krona plummeted, ranking 
just above the Zimbabwean dollar as of October 2008.\291\
---------------------------------------------------------------------------
    \289\ U.S. Central Intelligence Agency, CIA World Fact Book (online 
at www.cia.gov/library/ publications/the-world-factbook/geos/ic.html) 
(accessed Apr. 2, 2009).
    \290\ Id.
    \291\ Tracy McVeigh, The Party's Over for Iceland, the Island That 
Tried to Buy the World, The Observer (Oct. 5, 2008) (online at 
www.guardian.co.uk/world/2008/oct/05/iceland.creditcrunch).
---------------------------------------------------------------------------
    The devaluation had harsh implications for any institution, 
or household, with foreign currency exposure, and many 
Icelandic households had such exposure. The relative cheapness 
of credit in Japanese Yen or Swiss Francs led many average 
Icelanders to finance their homes and cars in foreign currency 
instead of their native kronur.\292\ Additionally, principal 
payments on local currency mortgages are indexed to inflation, 
which is projected to rise to 20 percent this year. The 
combination of devaluation and inflation has doubled the amount 
of debt many Icelandic families are carrying.\293\
---------------------------------------------------------------------------
    \292\ Cracks in the Crust: Iceland's Banking Collapse Is the 
Biggest, Relative to the Size of an Economy, That Any Country Has Ever 
Suffered. There Are Lessons to Be Learnt Beyond Its Shores, The 
Economist (Dec. 11, 2008) (online at www.economist.com/world/europe/
displayStory.cfm?story_id=12762027) (hereinafter ``Cracks in the 
Crust'').
    \293\ Id.
---------------------------------------------------------------------------
    The economic crisis has prompted demonstrations and other 
types of protest that are typically alien to the country.\294\ 
Some Icelanders have expressed frustration with the banks for 
soliciting foreign depositors to whom the whole country is now 
liable.\295\ Others have expressed anger with their government 
for the way it has handled the crisis, successfully calling for 
the resignation of the head of Iceland's central bank, David 
Oddsson, through continued protests in downtown Reykjavik late 
last year.\296\ While some believe Iceland would have better 
weathered the last few months if it had adopted the very 
durable Euro instead of relying on its own krona, there is 
still some hostility toward the notion of joining the E.U., 
both because of the cultural implications of such integration 
with continental Europe (Iceland only just obtained its full 
independence from Denmark in 1944) and because of the impact 
some believe it would have an Iceland's fishing quotas.\297\
---------------------------------------------------------------------------
    \294\ Id.
    \295\ See Sarah Lyall, Icelanders Struggle After a Banking Boom 
Ended with a Thud, New York Times (Nov. 9, 2008).
    \296\ Id.
    \297\ Derek Scally, Iceland Attempts to Avoid Financial Meltdown, 
Irish Times (Oct. 24, 2008) (online at www.irishtimes.com/newspaper/
finance/2008/1024/1224715113228.html).
---------------------------------------------------------------------------
    The Icelandic bank rescue plan has included nationalization 
of its major banks and, in an unusual move for an 
industrialized country, negotiating $10 billion in loans from 
the International Monetary Fund (IMF).\298\
---------------------------------------------------------------------------
    \298\ Jon Danielsson, Why Raising Interest Rates Won't Work, BBC 
(Oct. 28, 2008) (online at news.bbc.co.uk/2/hi/business/7658908.stm) 
(noting that Iceland is the first industrialized country to request IMF 
assistance in more than 30 years).
---------------------------------------------------------------------------
    In nationalizing the banks, Reykjavik used its newly 
granted power under an act providing authority reserved for 
``Unusual Financial Market Circumstances'' to purchase a 75 
percent stake in each of its three major banking groups, 
Landsbanki, Glitnir, and Kaupthing (the ``banks'').\299\ Under 
the new act, Iceland's treasury may inject up to 20 percent of 
the book value of a bank's equity in return for voting shares 
in the bank that are equal in value to the treasury's capital 
contribution. The act also granted authority to the Financial 
Services Authority (FSA) \300\ to assume the power vested in 
each institution's shareholders' meeting and to appoint 
receivership committees to take over the functions of the 
firms' boards of directors. These committees immediately 
stopped payment on claims other than priority claims at each 
institution. The banks' receivership committees then created 
new, government-owned entities (``new banks'') that assumed 
each bank's domestic operations. The result was equity dilution 
and assumption of government control similar to that in 
Continental Illinois, but tougher treatment of non-priority 
creditors. Domestic customers, employees, and bondholders were 
not to be affected by the acquisition.\301\
---------------------------------------------------------------------------
    \299\ On March 9, 2009, Straumur, Iceland's only pure investment 
bank, was also put into receivership. It is currently closed as the 
receivership committee unwinds its assets.
    \300\ The FSA is an independent state authority charged with 
regulating and supervising Iceland's credit, insurance, securities, and 
pension markets.
    \301\ Glinir, The Government of Iceland Acquires 75 Percent Share 
in Glitnir Bank (online at www.islandsbanki.is/english/
about=islandsbanki/news/detail/item14983/The_government_of_ 
Iceland_acquires_75_percent_share_in_Glitnir_Bank/) (accessed Mar. 30, 
2009).
---------------------------------------------------------------------------
    Key to the nationalization of the banks was the intent to 
keep domestic operations functioning. The banks' web-sites 
reassured customers that business would continue as usual, with 
access to online accounts, ATM service, and debit card 
functionality available without interruption.\302\
---------------------------------------------------------------------------
    \302\ Landsbankinn, New Landsbanki Islands hf. Established (online 
at www.landsbanki.is/english/aboutlandsbanki/pressreleases/
?GroupID=720&NewsID=13358&y=0&p=1) (accessed Mar. 30, 2009); 
Islandskani, Glitnir's Operations Continued (online at 
www.islandsbanki.is/english/about-islandsbanki/news/detail/item15927/
Glitnir's_Operations_Continued/) (accessed Mar. 30, 2009); Kaupthing, 
New Kaupthing Bank Takes Over Domestic Operations of Kaupthing banki 
hf. (online at www.kaupthing.com/pages/164?path=K/133944/PR/200810/
1262007.xml) (accessed Mar. 30, 2009). See also Icelandic Financial 
Supervisory Authority, Based on New Legislation, the Icelandic 
Financial Supervisory Authority (IFSA) Proceeds to Take Control of 
Landsbanki to Ensure Continued Commercial Bank Operations in Iceland 
(online at www.landsbanki.is/Uploads/Documents/Frettir/
fme_announcement.pdf) (accessed Mar. 30, 2009).
---------------------------------------------------------------------------
    The plans did not, however, provide for continued access to 
deposits for foreign depositors. In the years leading up to the 
banking crisis, Icelandic banks offered highly attractive 
interest rates for savings accounts, prompting many Europeans 
and European entities, such as municipalities, to keep their 
cash in Icelandic accounts.\303\ The accounts were typically 
set up and managed online, with the savings in overhead used to 
improve the interest rates.\304\ Cross-border banking has 
become increasingly common in Europe and worldwide. As in the 
case of the Icelandic banks, a bank in a relatively small 
country can hold funds of hundreds of thousands of depositors 
worldwide, creating a considerable problem for the country if 
that bank fails.
---------------------------------------------------------------------------
    \303\ Id.; Icelandic Saga; Cash and Local Councils, The Economist 
(Nov. 15, 2008).
    \304\ David Jolly, Bailout of Iceland Held Up by Disputes Over 
Compensating Foreign Savers, New York Times (Nov. 13, 2008).
---------------------------------------------------------------------------
    A minority of analysts sounded the alarm early, noting that 
credit-default swap rates for Icelandic banks were rising 
steadily, signaling instability.\305\ In addition to 
instability caused by the weakening global economy, there was a 
greater issue--the Icelandic central bank did not have 
sufficient reserves to serve as a credible lender of last 
resort in the event of a run on the banks.\306\ While some 
investors pulled their funds out before the crisis, most did 
not.
---------------------------------------------------------------------------
    \305\ Icelandic Saga; Cash and Local Councils, supra note 303.
    \306\ Cracks in the Crust; Iceland, supra note 292.
---------------------------------------------------------------------------
    When the new bank entities were created by the receivership 
committee, the banks' foreign subsidiaries and foreign branches 
were not merged into the new entities.\307\ Negotiations for 
the IMF loan stalled late last year as Iceland ironed out 
disagreements with the Dutch, British, and other European 
governments over the status of savings accounts in Icelandic 
banks held by those countries' citizens.\308\ The stand-off 
over the IMF loan was ultimately resolved when several 
governments loaned money to Iceland to provide payment to these 
depositors, opening the door to Iceland's receipt of the IMF 
funds.\309\ There has been no clear discussion of how or when 
Iceland will repay the loans to the individual governments.
---------------------------------------------------------------------------
    \307\ Certain other liabilities also remain in the old banks. These 
are: certain securities issues; subordinated debt; income tax 
liabilities; and derivative contracts.
    \308\ Jolly, Bailout of Iceland Held Up, supra note 304.
    \309\ David Jolly, Concession by Iceland Clears Path for I.M.F. 
Aid, New York Times (Nov. 17, 2008).
---------------------------------------------------------------------------
    Additionally, as part of its stand-by agreement with the 
IMF, the creditors of the Icelandic banks have agreed to delay 
the sale of any of the banks' assets, essentially placing a 
moratorium on payments to creditors. Under the FSA's plan, the 
receivership committee of each bank has appointed an appraiser 
to determine the value of each banks' assets. This process has 
taken longer than expected and many creditors have disagreed 
with the appraisers' valuations, creating further delays. Once 
the process has been completed, the plan contemplates a 
settlement under which the new banks will provide ``market 
value'' compensation to the old banks for the assets that have 
been transferred.

                              2. IRELAND 

    Ireland similarly experienced an economic expansion in the 
1990s and early 2000s. Nicknamed the ``Celtic Tiger'' in 
reference to its ability to attract technology giants such as 
Dell, Microsoft, and Intel through the promise of low taxes, 
relatively low wages, and a highly-educated, English-speaking 
workforce, Ireland's GDP grew at an average of 6 percent during 
the years between 1995 and 2007, changing the country from one 
of Western Europe's poorest into one of its richest.\310\ By 
December 2008, however, the global economic crisis had many 
worried that Ireland would soon take Iceland's path.\311\ 
Unlike American banks, Irish banks are in trouble not because 
of loans to individuals, but because of massive growth in 
lending to property developers spurred into rapid expansion by 
substantial tax incentives.\312\
---------------------------------------------------------------------------
    \310\ Tiger, Tiger Burning Bright, The Economist (Oct. 14, 2004) 
(online at www.economist.com/surveys/
displaystory.cfm?story_id=E1_PNGTDQS).
    \311\ Paul Cullen, Developer Says Ireland Risks Iceland-like 
Financial Crisis, Irish Times (Dec. 1, 2008) (online at 
www.irishtimes.com/newspaper/ireland/2008/1201/1227910421590.html). 
Despite a local joke predicting that Ireland will become the next 
Iceland, Ireland has the advantage over its Scandinavian neighbor in 
that its currency is the Euro and therefore is unlikely to suffer the 
extreme devaluation that the krona has seen, and, despite the crisis in 
the Irish banking system, Irish banks are still not nearly as exposed 
as the Icelandic banks.
    \312\ Landon Thomas, Jr., The Irish Miracle Fizzles, New York Times 
(Jan. 4, 2009).
---------------------------------------------------------------------------
    The Irish government has taken a three-pronged approach to 
addressing its crisis. First, on September 29, 2008, the 
government became the first in Europe to guarantee all bank 
deposits, announcing that it had entered agreements with six 
major banks to guarantee all deposits, covered bonds, senior 
debt, and dated subordinated debt in exchange for a fee (of 
undisclosed value) from the banks.\313\ The plan is estimated 
to cover approximately (485 billion in liabilities.\314\
---------------------------------------------------------------------------
    \313\ On October 9, 2008, the government announced it would extend 
the program to cover an additional five banks. Ultimately, however, 
those banks opted out of the program.
    \314\ National Treasury Management Agency, Bank Guarantee Scheme & 
Recapitalisation (online at www.ntma.ie/IrishEconomy/
bankGuaranteeScheme.php) (accessed Apr. 2, 2009).
---------------------------------------------------------------------------
    Second, the government provided a capital infusion to 
certain financial institutions. On December 14, 2008, the 
government announced that it would provide Core Tier 1 capital 
infusions into several banks as a means of ensuring access to 
credit for consumers and businesses.\315\ On December 21, 2008, 
the government released a detailed plan naming specific banks 
and the terms on which those banks would receive funds.\316\ 
The two banks that received funding through the plan were Bank 
of Ireland and Allied Irish Bank.\317\ Each institution issued 
(2 billion in perpetual (non-converting) preferred stock with 
fixed annual dividends of 8 percent. The shares carried all 
voting rights on questions of change of control or change in 
capital structure, and 25 percent of voting rights on 
appointment of directors, including the right to appoint 25 
percent of board members. The banks were permitted to redeem 
their preference shares within five years at the issue price, 
or at 125 percent of the issue price any time after five years 
had passed. The recapitalization was accomplished through 
purchase of preferred stock. Banks receiving capital were 
required to implement various programs including: (1) 
restrictions on executive pay, (2) forbearance on foreclosures 
of primary residences, and (3) increasing lending to consumers 
and small businesses.\318\
---------------------------------------------------------------------------
    \315\ Id.
    \316\ Id.
    \317\ Although the release included the terms of a complex plan for 
providing capital to Anglo Irish Bank, including a (1.5 billion 
infusion via purchase of preferred shares with certain attached voting 
rights, the plan was never implemented as the bank was nationalized 
less than a month later.
    \318\ National Treasury Management Agency, Government Announcement 
on Recapitalisation (Dec. 21, 2008) (online at www.ntma.ie/
Publications/2008/govt_recap_plan_dec08PDF.
---------------------------------------------------------------------------
    Finally, the government nationalized the bank that posed 
the greatest threat to the stability of the Irish economy. On 
January 15, 2009, the government determined that 
recapitalization was no longer appropriate for Anglo Irish 
Bank.\319\ The decision to nationalize Anglo Irish Bank seems 
to have stemmed from the interplay between the fact that the 
bank had been determined to be systemically significant (i.e., 
too big to fail) and the revelation that the bank's chief 
executive and chairman had enabled the bank to provide (400 
million in undisclosed loans to certain hand-picked developers, 
leading to a crisis of confidence in the bank.\320\ That is, 
absent the (400 million scandal, it is not clear that the Irish 
government would have made the decision to nationalize the 
bank. And, obviously, had the bank posed a smaller risk to the 
economy as a whole, it is also unlikely the government would 
have seen the need to step in.
---------------------------------------------------------------------------
    \319\ National Treasury Management Agency, Minister's Statement 
Regarding Anglo Irish Bank (Jan. 15, 2009) (online at www.ntma.ie/
Publications/2009/Minister_Statement_ -Anglo_Irish_Bank.pdf).
    \320\ See Landon Thomas, Jr., As Iceland Goes, So Goes Ireland?, 
New York Times (Feb. 28, 2009).
---------------------------------------------------------------------------
    The government effected the nationalization by mandating 
the transfer of 100 percent of the bank's stock to the minister 
of finance or his nominee. The government also stated that an 
assessor would be appointed to assess whether compensation 
should be paid to shareholders and, if so, what the amount of 
that compensation should be.\321\ The bank's recently-appointed 
chairman was kept on, but the CEO and Finance Director were 
replaced and the board itself restructured. The bank's board 
and management retain day-to-day control of the bank, but the 
overall business model is determined by the board and 
management in consultation with the Minister of Finance and the 
Financial Regulator.\322\ The bank has continued as a ``covered 
institution'' under the Credit Institutions (Financial Support) 
Scheme 2008, meaning that ``covered liabilities'' remain 
guaranteed by the Irish government until September 29, 
2010.\323\ The bank's ``covered liabilities'' are: (1) all 
retail and corporate deposits, (2) interbank deposits; (3) 
senior unsecured debt, (4) covered bonds (including asset 
covered securities), and (5) dated subordinated debt.\324\
---------------------------------------------------------------------------
    \321\ Anglo-Irish Bank, General Information on the Nationalisation, 
(online at www.angloirishbank.us/Your_Questions_Answered/
General_Information_on_the_ Nationalisation.html) (accessed Mar. 22, 
2009). As of April 1, 2009, no assessor had been appointed.
    \322\ Id.
    \323\ Id.
    \324\ Id.
---------------------------------------------------------------------------

                           3. UNITED KINGDOM 

    While not in the same position as either Iceland or 
Ireland, the United Kingdom has also implemented a substantial 
economic rescue plan to respond to its own credit crunch.
    The UK Bank Rescue Plan has a number of key pieces:
    First, a Special Liquidity Scheme was announced on April 
21, 2008. Under this program, the government made #200 billion 
available in short term loans for financial institutions to use 
in swapping out illiquid assets (mostly UK or EU mortgage-
backed securities) for UK Treasury bills.\325\ The plan was 
slated to last six months but was extended in September 2008.
---------------------------------------------------------------------------
    \325\ Bank of England, Special Liquidity Scheme (Apr. 21, 2008) 
(online at www.bankofengland.co.uk/publications/news/2008/029.htm).
---------------------------------------------------------------------------
    Second, in October 2008, the government announced a number 
of initiatives. On October 8, 2008, it was announced that the 
government would purchase £50 billion in preferred stock 
(non-voting, first paying) from eight major UK banks, and that 
it would provide £250 to guarantee bank debts.\326\ Later 
that month, on October 13, the government provided an 
additional cash infusion of £37 billion to purchase 
ordinary shares in the Royal Bank of Scotland and Lloyds TSB-
HBOS.\327\ The process by which the UK government acquired an 
interest in the banks began with the banks' open offers to 
their existing shareholders to purchase additional stock. The 
government agreed in advance to purchase any shares that were 
not purchased by the shareholders. In fact, very few 
shareholders showed any interest in purchasing the stock and 
the British government purchased almost all of the ordinary 
shares offered. As a result of these transactions, the UK 
government owns 57.9 percent of one bank and 43.4 percent of 
the other.
---------------------------------------------------------------------------
    \326\ Bank of England, Recapitalisation of the UK Banking System 
(Oct. 8, 2008) (online at www.bankofengland.co.uk/publications/news/
2008/066.htm).
    \327\ HM Treasury, Treasury Statement on Financial Support to the 
Banking Industry (Oct.13, 2008) (online at www.hm-treasury.gov.uk/
press_105_08.htm).
---------------------------------------------------------------------------
    In order to secure the assistance of the UK government in 
purchasing common equity, the banks were required to agree to 
certain covenants mandating, inter alia, that the banks 
maintain lending to the mortgage and small business markets at 
2007 levels, submit restructuring plans to the government, and 
refrain from paying dividends on ordinary shares. To the extent 
the government received preferred stock from any banks, the 
covenants accompanying those transactions provided for the 
stockholder (i.e., the government) to have the right to appoint 
a certain number of directors and to receive certain voting 
rights if the shares did not pay dividends for a number of 
quarterly periods.\328\
---------------------------------------------------------------------------
    \328\ See Panel February Oversight Report, supra note 6.
---------------------------------------------------------------------------
    On October 16, the UK's central bank, the Bank of England, 
announced it would change certain disclosure rules to enable 
banks to borrow funds without having to disclose the loan.\329\ 
The Bank of England also created a Discount Window Facility 
that allows distressed banks to swap illiquid assets at a 
discount.\330\
---------------------------------------------------------------------------
    \329\ Bank of England, Operational Standing Lending and Deposit 
Facilities; Discount Window Facility (Oct. 20, 2008) (online at 
www.bankofengland.co.uk/markets/marketnotice081020.pdf).
    \330\ Id.
---------------------------------------------------------------------------
    In November 2008, the government created a new agency, UK 
Financial Investments, to manage the government's stakes in RBS 
and Lloyds, and in any other banks the government subsequently 
purchases.\331\
---------------------------------------------------------------------------
    \331\ The Go-Between: Can a New Agency Put the Banks Back on 
Track?, The Economist (Mar. 5, 2009) (online at www.economist.com/
world/britain/displaystory.cfm?story_id=13248185) (hereinafter ``Go 
Between'').
---------------------------------------------------------------------------
    In January 2009, a second bank rescue was announced. This 
Asset Protection Scheme would provide insurance to banks for 
future credit risk and would provide a £50 billion 
infusion for purchase of private sector assets.\332\ The 
Enterprise-Finance Guarantee (EFG) scheme, launched January 14, 
provides a guarantee for up to 75 percent of a bank loan to a 
business with up to £25 million in revenue.\333\ The UK 
has also announced a Homeowner Mortgage Guarantee Scheme to 
provide a bridge for homeowners who are in danger of 
foreclosure due to a temporary loss of income.\334\
---------------------------------------------------------------------------
    \332\ Graeme Wearden, Bank Bailout: Key Points of the Government's 
Statement, The Guardian (Jan. 19, 2009) (online at www.guardian.co.uk/
business/2009/jan/19/credit-crunch-bank-bailout).
    \333\ Good Sport: Banks Are Getting By; a Pity About the Customers, 
The Economist (Mar. 12, 2009) (online at www.economist.com/world/
britain/displaystory.cfm?story_id=13278900) (hereinafter ``Good 
Sport'').
    \334\ HM Treasury, New Scheme to Help People at Risk of 
Repossession (Dec. 3, 2008) (online at www.hm-treasury.gov.uk/
press_132_08.htm).
---------------------------------------------------------------------------
    Thus far, Britain's multi-faceted plan of attack closely 
mirrors that of the U.S., and the UK is facing many of the same 
challenges that have dogged the American plan.\335\ The British 
have taken steps to encourage banks to resume lending through 
the EFG, but have had only limited success in encouraging banks 
to actually make use of the plan, even in the case of banks in 
which the government owns a controlling stake.\336\ The UK has 
also had its share of bank bonuses scandalizing the 
public,\337\ and it has had difficulty making sense of many of 
the more complex components of the current financial system, 
stymieing efforts to unwind the most troublesome sectors.\338\
---------------------------------------------------------------------------
    \335\ As the legal analysis accompanying the Panel February 
Oversight Report noted, ``[t]here are differences in government 
policies and political environments, regulatory structures and 
corporate law and practice, among other things,'' which have shaped the 
UK's approach thus far and that therefore make comparisons between U.S. 
and UK government actions of somewhat limited use. Notably, the British 
government's decisions may have been impacted by the need to comply 
with certain European Commission requirements regarding the provision 
of state aid to private entities, a concern that obviously is 
inapplicable to the American decision-making process. Timothy G. 
Massad, Legal Analysis of the Investments by the U.S. Department of the 
Treasury in Financial Institutions under the Troubled Asset Relief 
Program (Feb. 4, 2009) (online at cop.senate.gov/documents/cop-020609-
report-dpvaluation-legal.pdf).
    \336\ Good Sport, supra note 333.
    \337\ Go-Between, supra note 331.
    \338\ The Spiral of Ignorance: Lack of Understanding of the Credit 
Crunch Is Magnifying Its Damage, The Economist (Feb. 19, 2009) (online 
at www.economist.com/world/britain/displaystory.cfm?story_id=13144829).
---------------------------------------------------------------------------

                      4. OTHER EUROPEAN COUNTRIES 

    Several other European countries, including Spain, Germany, 
and Italy, have implemented measures to address weaknesses in 
their banking systems and loosen the stranglehold that has 
persisted on credit markets worldwide. For example, Spain has 
committed up to =200 billion to guarantee interbank lending 
\339\ and has created a Financial Asset Acquisition Fund to 
purchase high-quality asset-backed securities.\340\ At this 
point, Spain has stated it sees no need for recapitalization of 
any financial institutions. Italy has provided =40 billion to 
buy bank debt and has guaranteed individual bank deposits up to 
=103,000.\341\ Italy has also said that it is prepared to 
provide capital to banks through the purchase of preferred 
(non-voting) stock.\342\ And Germany has announced a =500 
billion plan that includes guarantees for private savings and 
debt guarantees for two of Germany's largest banks, IKB and 
NordLB.\343\
---------------------------------------------------------------------------
    \339\ Sharon Smyth, Spain Said to Plan Savings Bank Bailout to Aid 
Merger, Bloomberg (Mar. 6, 2009) (online at www.bloomberg.com/apps/
news?pid=20601085&sid=a2NQavmsRt7Y#).
    \340\ Paul Day, Spain Bank Rescue Fund to Include All Big Lenders, 
Reuters (Oct. 22, 2008) (online at www.reuters.com/article/
rbssFinancialServicesAndRealEstateNews/idUSLM8371720081022).
    \341\ Raf Casert, EU Approves Bank Rescue Packages, Associated 
Press (Dec. 23, 2008).
    \342\ Id.
    \343\ Jann Bettinga and Oliver Suess, Commerzbank Gets Fresh 
Bailout as Germany Takes Stake, Bloomberg (Jan. 8, 2009) (online at 
www.bloomberg.com/apps/news?pid= newsarchive&sid=aEmWlKXc8q4c).
---------------------------------------------------------------------------
    Germany, however, has been more reluctant than other 
nations to provide capital infusions or similar aid to its or 
other European institutions due in large part to concerns 
regarding the so-called ``no bailout rule'' of the Treaty of 
Maastricht, which provides that EU Member States are not to be 
held liable for the debts of other Member States.\344\ 
Nonetheless, despite previously dismissing France's proposed 
bank rescue fund, German Finance Minister Peer Steinbruck now 
concedes that if one of the seriously troubled member nations 
were to default, ``the collective would have to help.'' \345\ 
France has been similarly cautious, although there are 
indications that this stance is not widely popular among the 
French people, as evidenced by a national strike by the trade 
unions on March 19, protesting French President Nicolas 
Sarkozy's current fiscal policies.\346\
---------------------------------------------------------------------------
    \344\ Mark Thoma, Should the EU Let a Member Government Default? 
RGE Monitor (Feb. 21, 2009) (online at www.rgemonitor.com/euro-monitor/
255676/should_the_eu_let_a_member_ government_default).
    \345\ Europe's Reluctant Paymaster: The German Government May Have 
to Concede, Through Gritted Teeth, That it Cannot Avoid Helping 
Financially Strapped Governments in Europe, The Economist (Feb. 26, 
2009) (online at www.economist.com/world/europe/
displaystory.cfm?story_id=13184821).
    \346\ Ben Hall, French Protesters Take to the Streets, Financial 
Times (Mar. 19, 2009).
---------------------------------------------------------------------------

              D. Taking Stock: Options for Moving Forward 

    Disagreement exists among Panel members regarding the need 
for, and appropriateness of, discussing potential alternative 
courses for Treasury to take to restore financial stability. 
This section of the report is nevertheless offered to provide 
context to Treasury's current efforts and to highlight the 
considerations involved in choosing potential alternative 
paths.

                          1. LESSONS LEARNED 

    Although diverse in cause, scope, and solution, previous 
financial crises provide important insights for contemporary 
policymakers. In particular, past experience suggests that 
effective solutions for banking crises often have in common 
certain characteristics without which a bank crisis may well 
persist or worsen:

     Transparency. Swift action to ensure the integrity 
of bank accounting, particularly with respect to the ability of 
regulators to ascertain the value of bank assets and hence 
assess bank solvency.
     Assertiveness. Willingness to take aggressive 
action to address failing financial institutions by (1) taking 
early aggressive action to improve capital ratios of banks with 
declining performance and (2) shutting down those banks that 
are irreparably insolvent.
     Accountability. Willingness to hold management 
accountable and to prevent excessive risk-taking in the future; 
also, to build public trust that any taxpayer support is 
designed to protect the system by replacing--and, in cases of 
criminal conduct, prosecuting--failed managers. Accountability 
for managers appears critical both in terms of public support 
and in terms of facilitating an accurate assessment of the 
financial status of sick financial institutions.
     Clarity. Build support by providing a clear 
roadmap for the government response with forthright measurement 
and reporting of all forms of assistance being provided, and 
clear criteria for the use of public sector funds. This clarity 
will provide investors, businesses and households with the 
predictability of government action needed to return to healthy 
levels of spending and investment.

    The successful financial recovery programs on which we 
focused involved the following steps:
    The first step was to assume a level of bank oversight 
robust enough to hold failed management accountable and to 
ensure an objective process for valuing bank assets.
    The second step was to provide an objective valuation. In 
the cases we have reviewed, valuations were either conducted on 
an administrative basis, as in the RTC and, ultimately, in 
Japan, or through genuine market processes, as in the case of 
Sweden and the RTC; either way, confidence in the accuracy of 
the valuation was critical to restarting normal credit 
functioning. The current crisis in the United States has become 
protracted at least in part because both the markets and public 
sector regulators are unable or unwilling to value such assets, 
which were ultimately financed by complex financial 
instruments. Treasury views PPIP as an effort to promote price 
discovery. Some would argue that an effective price discovery 
process cannot be achieved when some participants are being 
subsidized by the government.\347\
---------------------------------------------------------------------------
    \347\ U.S. Department of Treasury, Public-Private Investment 
Program (updated Mar. 30, 2009) (online at www.financialstability.gov/
roadtostability/publicprivatefund.html).
---------------------------------------------------------------------------
    The third step was recapitalization, which, of course, 
cannot be accomplished without confidence in bank asset 
valuations. The wide range of approaches to the treatment of 
debt holders in recapitalizations indicates the importance of 
careful attention to the particular circumstances of a given 
crisis in determining government policies toward debt holders. 
By contrast, in every case the Panel looked at, equity holders 
were either eliminated entirely or heavily diluted by ratios of 
3-1 or more.
    The process of recapitalization of banks contributes to the 
restoration of investor confidence through clear identification 
of which institutions are healthy and which are not. The 
absence of such reliable determinations can imperil even 
healthy institutions in a crisis. The U.S. government and the 
RFC closed all banks during the Great Depression and permitted 
only the certified-healthy banks to reopen. While aggressive, 
this tactic proved successful in restoring much-needed 
confidence that the banking system was sound and that new 
investments would not be lost in insolvent banks.
    Actions such as the establishment of the FDIC/RTC and the 
creation of the bad banks Securum and Retriva in Sweden had a 
somewhat different purpose, which was to separate the 
management of bad assets from those banks that had the capacity 
to prosper after restructuring. The goal was not financial but 
managerial--ensuring that the management of reorganized banks 
focused on their institutions' ongoing business.
    Treasury's stress-testing appears motivated by the desire 
to sort out healthy from non-healthy banks. In this respect, it 
is distinctly different from the approach taken by the Bush 
Administration, which obscured such distinctions through 
decisions such as the choice to sell preferred stock on the 
same terms to banks of greatly varying creditworthiness. The 
latter strategy led to the Panel's discovering that the 
taxpayers received stock worth 33 percent less than what they 
paid for it.
    In this regard, it is noteworthy that success in Japan did 
not result from loosely-targeted capital infusions or from 
deferring to the incumbent management of troubled banks about 
key decisions such as asset valuation, but occurred when 
banking authorities did their own valuation of bank assets and 
forced balance sheet restructurings reflecting the real value 
of those assets.
    Clear guidelines about the scope, scale, conditionality, 
and duration of government intervention in the economy are also 
critical to promoting private sector long-term investment 
planning and restoring stability to capital markets. The 
Japanese case demonstrates the hazards of open-ended government 
assistance. Without predictable limits or a known exit 
strategy, investors suspected, rightly, that they could 
continue to rely on capital infusions to large, powerful 
institutions indefinitely. Important economic actors lacked the 
incentive to accept their losses, accurately value assets, and 
put the assets back into their most productive use. Notably, 
the Japanese system began to recover only after reporting 
requirements, stricter valuation methods, and other conditions 
accompanied capital injections.
    Finally, the ultimate cost to the public of resolving bank 
crises depends to a very large degree on the amount of upside 
the public obtains either in the banks themselves or in the 
assets of failed banks. The RTC attempted to recover as much as 
possible for the public and other creditors on the assets the 
RTC held. In Sweden, the government took all of the upside on 
the two banks that were nationalized; if the banks survived, 
the benefits would go entirely to the taxpayers that had 
rescued them. The result was that net costs for the Swedish 
government were no more than 2 percent of GDP. By comparison, 
our valuation report estimated a net subsidy to shareholders of 
TARP banks in the initial round of TARP transactions as 0.5 
percent of GDP. TARP outlays, actual and expected, to date are 
approximately 4 percent of GDP, and total resources provided by 
all government agencies in conjunction with the current 
financial rescue plan could potentially amount to approximately 
25 percent of GDP. As our valuation report showed, it is 
difficult to secure fair treatment for the public as an 
investor in sick banks without insisting on the public 
receiving a substantial portion of the upside in the rescued 
firm in the form of common stock, warrants on common stock, or 
other equity appreciation rights.
    While history provides important lessons, every situation 
is different from its historical precedents and judgment is 
always required in applying any lessons. In this particular 
case, consolidation among the nation's money-center banks makes 
that critical part of the system look more like the 
concentrated systems in Sweden and Japan than the decentralized 
U.S. system of the Depression era or even the late 1980s. Of 
course, the U.S. system nonetheless differs considerably from 
those nations as well. The U.S., for example, can borrow 
cheaply in a manner that was not available to Sweden during its 
banking crisis. At the same time, we cannot rely on someone 
else's consumer demand to rescue us--as to some extent it seems 
both Japan and Sweden were able to rely on U.S. consumers to 
rescue them. The implication of this point is that we may in 
fact be more economically vulnerable to a weakened financial 
system than either Sweden and Japan were because we cannot rely 
on some larger economy to generate consumer demand for our 
goods and services.

                      2. TREASURY'S APPROACH \348\
---------------------------------------------------------------------------

    \348\ An overview of ``An Examination of Treasury's Strategy'' and 
``Federal Government Efforts'' appear in Parts A2 and A3 of Section 
One, supra.
---------------------------------------------------------------------------
    Uncertainty in the credit markets intensified with the 
failure of Bear Stearns and Lehman Brothers. The equity markets 
subsequently reflected accelerating uneasiness for some time. 
Between the beginning of January 2008 and September 18 of that 
year, the Dow Jones Industrial Average declined by 15.22 
percent (or 1,985 points), the NASDAQ National Market declined 
by 15.4 percent (or 401.7 points) and the S&P 500 declined by 
16.2 percent (or 233.6 points). While public attention during 
this period was focused on the equity markets, financial policy 
makers rightly focused on the status of the much larger global 
debt markets.
    Behind these capital market developments lay the bursting 
of the real estate bubble and a tidal wave of residential 
mortgage foreclosures unheard of in the United States since the 
Great Depression.\349\ Congress subsequently passed EESA \350\ 
in an attempt to alleviate these issues. That Act gave 
Secretary Paulson the authority he had sought to buy ``troubled 
assets.'' But it also gave the Secretary of the Treasury more 
sweeping general authority to purchase (after consultation with 
the Chairman of the Federal Reserve Board) ``any other 
financial instrument * * * the purchase of which is necessary 
to promote financial market stability.'' \351\
---------------------------------------------------------------------------
    \349\ As the Panel noted in its last report, over a million homes 
entered foreclosure in 2007 and another 1.7 million in the first three 
quarters of 2008. Over half a million homes were actually sold in 
foreclosure or otherwise surrendered to lenders in 2007, and over 
700,000 were sold in foreclosure in the first three quarters of 2008 
alone. At the end of the third quarter of 2008, one in ten homeowners 
was either past due or in foreclosure, the highest levels on record. 
RealtyTrac, U.S. Foreclosure Activity Increases 75 Percent In 2007 
(Jan. 29, 2008) (online at www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=3988&accnt= 64847); HOPE NOW, 
Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales, 
July 2007-November 2008 (online at www.hopenow.com/upload/data/files/
HOPE%20NOW%20Loss%20Mitigation%20National%20Data% 
20July%2007%20to%20November%2008.pdf). See also Chris Mayer et al., The 
Rise in Mortgage Defaults, Journal of Economic Perspectives (2009) 
(forthcoming) (reporting 1.2 million foreclosure starts in first half 
of 2008); HOPE NOW, supra note 13; Adam J. Levitin, Resolving the 
Foreclosure Crisis: Modification of Mortgages in Bankruptcy, Wisconsin 
Law Review (2009) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1071931).
    \350\ EESA, supra note 1.
    \351\ EESA, supra note 1.
---------------------------------------------------------------------------
    The EESA became law on October 3, 2008. Five days later, 
however, Secretary Paulson indicated his intention to use the 
more general EESA authority to make capital infusions directly 
into financial institutions without purging their balance 
sheets of asset-backed securities (ABSs) or collateralized debt 
obligations (CDOs).\352\ The day before the Paulson statement, 
British Prime Minister Gordon Brown had announced that the UK 
would commit up to £50 billion to rescue British banks. 
In some quarters, the Paulson reversal was seen as a reaction 
to the Brown decision, made to prevent U.S. capital from 
flowing to the UK.\353\
---------------------------------------------------------------------------
    \352\ U.S. Department of the Treasury, Statement by Secretary Henry 
M. Paulson, Jr. on Financial Markets Update (Oct. 8, 2008) (online at 
www.treas.gov/press/releases/hp1189.htm).
    \353\ Landon Thomas, Jr. and Julia Werdigier, Britain Takes a 
Different Route to Rescue Its Banks, New York Times (Oct. 8, 2008) 
(online at www.nytimes.com/2008/10/09/business/worldbusiness/
09pound.html) (``In a bold move to restore confidence, Britain 
announced an unprecedented £50 billion government lifeline for 
the nation's banks Wednesday that it hailed as a quicker solution to 
the credit crisis than a $700 billion American plan to buy impaired 
mortgage assets from troubled financial institutions''); Parmy Olson, 
Brown Resurgent: The Credit Crisis Has Galvanized British Prime 
Minister Gordon Brown As He Urges the World To Follow His Bank Bailout, 
Forbes (Oct. 12, 2008) (online at www.forbes.com/2008/10/12/brown-
bailout-credit-biz-cx_po_1012brown.html) (``The recapitalization 
package that Brown and his finance minister, Alistair Darling, 
announced last Wednesday * * * puts Britain ahead of the U.S. on 
dealing with the crisis. The United States Treasury has since said that 
it will mimic the British approach and buy stakes in banks.'')
---------------------------------------------------------------------------
    The new capital infusion program involved the transfer of 
funds to financial institutions in exchange for preferred 
stock, and warrants to purchase common stock, of the 
institution involved.\354\ In its third report, the Panel 
commissioned a valuation of these securities by the independent 
valuation firm of Duff and Phelps, in consultation with 
Professors William N. Goetzmann and Deborah J. Lucas and 
Managing General Partner of Blue Wolf Capital Management and 
former First Deputy Comptroller of the City of New York, Adam 
Blumenthal. Duff and Phelps found that the average discount for 
securities issued under other programs was 69 percent, for an 
overall average discount of about 31 percent.\355\ This means, 
in effect, that for every $100 dollars invested in the combined 
programs, the market valuation of the securities purchased was 
only $66 dollars.
---------------------------------------------------------------------------
    \354\ Panel December Oversight Report, supra note 4, at 6. 
Government Accountability Office, Troubled Asset Relief Program: 
Additional Actions Needed to Better Ensure Integrity, at 15-16 (Dec. 
2008) (GAO/09-161) (online at www.gao.gov/new.items/d09161.pdf); U.S. 
Department of the Treasury, Statement by Secretary Henry M. Paulson, 
Jr., on Actions to Protect the U.S. Economy (Oct. 14, 2008) (online at 
www.treasury.gov/press/releases/hp1205.htm).
    \355\ See Panel February Oversight Report, supra note 6.
---------------------------------------------------------------------------
    Since October, approximately $280 billion of capital 
infusions have been made with TARP funds. Nonetheless, losses 
on impaired assets have continued to weaken the balance sheets 
of banks and foster uncertainty in the financial markets.
    There is no question that the public is well served by 
effective government strategies for addressing financial 
crises. The historical case studies reviewed in Part B of this 
section of the report demonstrate that proposition clearly. 
Inaction in the face of systemic financial crisis can be 
enormously costly--economically, politically and socially. But 
failed action can be equally costly. Wrong steps not only cost 
time and money, but they also deprive policy makers of the 
sustained public support necessary to carry out a successful 
stabilization program.
    As discussed in Part A of this section of the report, 
Treasury's current approach aims to both restore credit market 
activity broadly and stabilize particular financial 
institutions, especially the few institutions that it deems 
systemically significant. The recently announced Public-Private 
Investment Fund focuses directly on the problem of impaired 
assets; that initiative reflects the working premise that it is 
possible through government-subsidized, highly leveraged asset 
purchase vehicles to obtain valuations for non-performing or 
otherwise troubled assets, sell those assets at those values to 
willing buyers, and perhaps avoid the need for the 
reorganization or even the break-up of systemically significant 
financial institutions.\356\ Treasury has not explained its 
assumption that the proper values for these assets are their 
book values--in the case, for example, of land or whole 
mortgages--and more than their ``mark-to-market'' value in the 
case of ABSs, CDOs, and like securities; if values fall below 
those floors, the banks involved may be insolvent in any event. 
Treasury has also failed to explain its assumptions about the 
economic events that would cause investors to default or how 
long it believes assets will have to be held to produce a 
reasonable return for private investors. Without non-subsidized 
buyers, market functioning is an illusion. As some observers 
have indicated,\357\ the issue of asset valuation is now as 
critical to the recovery of the financial system as the precise 
strategy the federal government follows. There is another 
reason why this is so. A great part of the financing done in 
the markets today either flows through the banking system 
directly to investors or bypasses banks altogether through the 
same mechanisms of securitization used for mortgage lending. As 
the TALF program indicates, securitization is especially 
important for the financing of credit card, automobile, small 
business, and student loans. Markets for those pools of loans 
have also dried up because of fears that unexpected default 
rates will deflate and freeze at a deflated level the value of 
those pools. If Treasury's initiative can show that the 
problems with the ABS markets were liquidity rather than 
inherent value issues, it would be possible to restore the 
other markets without the need for the overwhelming commitment 
of taxpayer funds that the TALF contemplates. While the Panel 
has previously argued for reform of the securitization process, 
the Panel has not reached a consensus as to whether it is 
necessary to revive securitization markets in the interim in 
order to restart lending in the short-term future.
---------------------------------------------------------------------------
    \356\ U.S. Department of the Treasury, White Paper: Public-Private 
Investment Program (Mar. 23, 2009) (online at www.treas.gov/press/
releases/reports/ppip_whitepaper_032309.pdf) (``This program should 
facilitate price discovery and should help, over time, to reduce the 
excessive liquidity discounts embedded in current legacy asset prices. 
This in turn should free up capital and allow U.S. financial 
institutions to engage in new credit formation. Furthermore, enhanced 
clarity about the value of legacy assets should increase investor 
confidence and enhance the ability of financial institutions to raise 
new capital from private investors.''); Treasury has also not explained 
its assumptions that (i) a number of years are available in which to 
accomplish these goals without simply transferring losses to the 
taxpayer, and (ii) it is unnecessary or inappropriate to require that 
common shareholders (except for dilution) and bondholders accept losses 
on their stakes in bank capital structures.
    \357\ See Ricardo J. Caballero, Nationalisation Without Prices: A 
Recipe for Disaster, Financial Times (Feb. 17, 2009); Charles W. 
Calomiris, The U.S. Government Must Take Risks, Financial Times (Feb. 
19, 2009); Douglas J. Elliott, The Public-Private Investment Program: 
An Assessment, Brookings Institution (March 23, 2009) (online at 
www.brookings.edu//media/Files/rc/papers/2009/
0323_investment_program_elliott/0323_investment_program_elliott.pdf); 
Matthew Richardson, The Case for and Against Bank Nationalization 
(February 26, 2009) (online at http://www.voxeu.org/index.php?q=node/
3143).
---------------------------------------------------------------------------
    On the other hand, the frozen ABS markets raise several 
issues discussed earlier in this report. First, to what degree 
is the freeze a rational reaction to the problems of over-
leverage, opacity, and lack of intermediaries' money being 
truly at risk that were endemic in these markets during the 
bubble years? Second, should government seek to restart these 
markets before reforms necessary to solve those problems (for 
example, increased capital requirements, increased 
transparency, and reasonable controls on the structure and 
economics of securitization vehicles) can be implemented? 
Third, how critical will the securitization system continue to 
be in financing our economy? Treasury must address these 
questions in the coming weeks as it discusses its program for 
modernizing financial regulation to assure markets that it 
recognizes the importance of such reforms to preventing future 
crises.
    The debate over the ultimate effectiveness of efforts 
designed to utilize market mechanisms to restore the values of 
impaired assets turns on whether current prices, particularly 
for mortgage-related assets, reflect fundamental values or 
whether prices are artificially depressed by a liquidity 
discount due to the market strain. If the liquidity discount is 
real, public-private sector solutions are not only viable but 
preferable, as they avoid creating new and unpredictable risks 
that arise from preemptive government seizure of private 
interests. It is reasonable to assume that a liquidity discount 
is impairing these assets, for which there is limited trading. 
Current prices cannot be fully explained without the liquidity 
factor. Even in areas of the country where home prices have 
declined precipitously, the collateral behind mortgage-related 
assets still retains substantial value. In a liquid market, 
even under-collateralized assets should not be untradable or 
trading at pennies on the dollar. Prices are being partially 
subjected to a downward self-reinforcing cycle.
    In the view of some, it is this notion of a liquidity 
discount that supports the potential of future gain for 
taxpayers and makes transactions under the CAP and the PPIP 
investments, and not subsidies in the usual sense. This is an 
issue that will continue to divide observers of Treasury's 
actions, and ultimately events will bear out whether this 
approach will work. The Panel notes that Treasury's approach 
may prove to be a viable and successful strategy, and offers 
historical context and the discussion of alternate approaches 
in the event that changes to Treasury's current plans become 
necessary. The Panel has not reached agreement as to whether a 
change in strategy is currently needed.

                      3. OPTIONS FOR FUTURE ACTION

    Lessons from this report's historical examination of 
previous efforts at addressing banking crises highlight several 
paths Treasury can take if future course changes become 
necessary.

a. Prologue--Understanding the FDIC's Resolution Authority in the 
        Context of Banks and Bank Holding Companies Facing Distress

    When faced with a distressed bank in the current regulatory 
system,\358\ the federal government has several options. The 
options can be characterized as liquidation (after the FDIC has 
become the bank's receiver); reorganization (after the FDIC has 
become the bank's conservator); or subsidization either through 
the FDIC or from taxpayer funds.\359\
---------------------------------------------------------------------------
    \358\ In this discussion, the term ``bank'' includes all insured 
depository institutions. Treasury is now proposing to give the FDIC 
``resolution authority'' of the type described in this part of the 
report covering systemically significant non-bank financial 
institutions. Geithner Financial Services Committee Testimony, supra 
note 3.
    \359\ Although the power of the FDIC is not limited to seizure of 
systemically significant institutions, the FDIC may be able to define 
the terms for such failure on a different basis than for other 
institutions, or additional legislation may clarify its authority to do 
so.
---------------------------------------------------------------------------
    Most large banks are owned by bank holding companies or 
``BHCs.'' The BHC issues stock and debt obligations to 
investors to raise money for the bank and other companies that 
the BHC owns. For the most part, only the banks are subject to 
supervisory and regulatory authority by the FDIC and other 
federal financial supervisors; the Federal Reserve Board 
regulates BHCs, although as a practical matter few important 
decisions are taken about banks owned by holding companies 
without the concurrence of the Federal Reserve Board. The FDIC 
ensures bank deposits and, when necessary, takes over those 
banks that fail. The FDIC's takeover powers relate to banks, 
not to their parent bank holding companies. When the FDIC has 
taken over sick banks, it has done so with an eye toward 
assuring that depositors' money is safe and that the FDIC's own 
insurance fund will remain solvent.
    The accounts that are insured by the FDIC are guaranteed up 
to a specified limit \360\ without using general taxpayer 
revenues (except possibly in extreme cases caused by an 
overwhelming financial collapse or the distress of a single 
massive institution). The FDIC can place insured deposit 
accounts with other institutions. In some cases, it can 
transfer both accounts and branch operations over a weekend.
---------------------------------------------------------------------------
    \360\ Currently, individual accounts are insured up to $250,000. 
This ceiling is temporary; on January 1, 2010 it will revert back to 
the previous limit of $100,000 other than for retirement accounts, 
which will continue to be insured up to $250,000. Business accounts are 
also insured up to the $250,000 limit.
---------------------------------------------------------------------------
    Historically, only banks, not investment banks like Bear 
Stearns and Lehman Brothers, have been rescued by the federal 
government. The failure to rescue Lehman Brothers is only 
anomalous against this backdrop of extensive government 
interventions in failing non-deposit taking institutions. 
Government non-intervention in the collapse of Lehman Brothers 
was consistent with 70 years of government policy.
    However the failure to rescue Lehman Brothers was not 
consistent with the involvement of Treasury and the Federal 
Reserve Board in the rescue of Bear Stearns and its acquisition 
by JP Morgan Chase in March 2008; the Bear Stearns action 
marked a new degree of public governmental involvement in the 
rescue of a non-depository institution. But even if the Bear 
Stearns rescue was unprecedented (because Bear Stearns was not 
a bank), the economic result resembled the economic result of 
the rescue of Continental Illinois in the mid-1980s--in both 
cases the shareholders of the company received relatively 
little and the focus was on ensuring that the institution (in 
the latter case, Bear Stearns) met its fixed obligations.
    Subsequent government interventions in Wachovia and AIG 
followed this pattern. At the same time, the liquidations of 
the truly insured thrifts--Washington Mutual and IndyMac--by 
the FDIC followed the same pattern of protecting depositors and 
wiping out investors.
    It is helpful to keep the structure and history of the U.S. 
banking industry in mind as a backdrop against which to assess 
the options for dealing with distressed banks.

    Option A: Liquidation: Receivership and Breakup or Sale of 
Distressed Banks.

    Rather than subsidizing large distressed banks as going 
concerns through government investment under the TARP, 
critically undercapitalized banks could be selected for 
effective liquidation by being placed into the receivership of 
the FDIC. Then the FDIC would help resolve the failure, as it 
has done more than a dozen times already this year.\361\
---------------------------------------------------------------------------
    \361\ See Congressional Research Service, The Federal Deposit 
Insurance Corporation (FDIC): Summary of Actions in Support of Housing 
and Financial Markets (Mar. 5, 2009) (CRS/7-5700) (hereinafter ``CRS 
FDIC Report'').
---------------------------------------------------------------------------
    As receiver, the FDIC could place the bank in liquidation--
sell any or all of the bank's assets, organize a new bank 
containing assets of the bank, merge all or part of the bank 
into another bank, or transfer assets or liabilities of the 
bank to another bank. As it did in the savings and loan crisis 
of the late 1980s and as it has done when individual banks have 
failed in the past, the government would continue to protect 
savings and checking account holders by moving those accounts 
to another bank or by paying amounts in FDIC-insured accounts 
directly to the account-holders.
    At the same time, the BHC that owns the large bank would 
almost certainly enter bankruptcy under Chapter 7 or 11 of the 
federal Bankruptcy Code. (The bankruptcy proceeding would 
determine the fate of the securities firms and other financial 
companies owned by the BHC). The result of the receivership and 
bankruptcy proceedings would likely be to wipe out the 
interests of the BHC's stockholders; in some cases the holders 
of debt obligations in the BHC could recover part of their 
investment.\362\
---------------------------------------------------------------------------
    \362\ While only bankruptcy courts have the authority to wind down 
bank-holding companies and non-bank institutions, Congress could 
provide that authority to the FDIC or another agency moving forward. 
See Panel Regulatory Reform Report, supra note 164.
---------------------------------------------------------------------------
    The FDIC's Temporary Liquidity Guarantee Program would 
soften the negative impact of increased liquidations on BHC 
bondholders.\363\ By guaranteeing senior unsecured bonds 
(including some bonds that are convertible into common stock), 
the FDIC agreed to treat these bonds more like deposits. This 
has reduced the likelihood that liquidations will chill 
investment or have spillover effects on other banks. The fees 
that bond-issuers pay under the program would also mitigate the 
costs of its operation, although it is unclear to what extent 
the FDIC will have the resources to deal with liquidations of 
large institutions.\364\
---------------------------------------------------------------------------
    \363\ See generally Federal Deposit Insurance Corporation, 
Temporary Liquidity Guarantee Program (online at www.fdic.gov/
regulations/resources/tlgp/index.html) (accessed Mar. 22, 2009); CRS 
FDIC Report, supra note 361, at 5-6.
    \364\ See Part A of Section One, supra, for a discussion of the 
FDIC's financial condition.
---------------------------------------------------------------------------
    Treasury could supplement this approach for systemic 
reasons with broader protection for bondholders. This was the 
approach of the Swedish government, which guaranteed all fixed 
obligations. Such a guarantee would be extremely expensive. 
However, the reason to expand the existing FDIC Guarantee 
Program would be to reassure credit markets generally, or, 
specifically, to avoid a chain of defaults set off by the 
consequences of credit default swap obligations coming due as a 
result of a bond default.

    Option B: Receivership.

    As an alternative to a windup, the government could place a 
distressed bank into conservatorship. As conservator, the FDIC 
would try to restore the bank's safe and sound condition 
(leaving insured and hopefully other deposit holders in place) 
and carry on the bank's business in the meantime.
    In either a receivership or conservatorship, the FDIC can 
remove failed managers. It can also sell assets at their 
current market value both to raise funds and to remove the bad 
assets from the bank's balance sheet, and it can sell off parts 
of its business. The FDIC could also conceivably use this 
authority to break up one or more large, systemically 
significant institutions into several smaller, more manageable 
banks.\365\ The preservation of the interests of existing 
shareholders is not a constraint on the FDIC's exercise of its 
authority.
---------------------------------------------------------------------------
    \365\ Simon Johnson, The Quiet Coup, The Atlantic (May 2009) 
(online at www.theatlantic.com/doc/200905/imf-advice).
---------------------------------------------------------------------------
    This approach is similar to the steps that were taken in 
countries with crises in relatively concentrated banking 
sectors in the recent past, including the United Kingdom 
currently. It is also similar to the approach of the 
Reconstruction Finance Corporation during the New Deal. The 
only successful cases noted in Part B of this section of the 
report that do not effectively fall into the conservatorship 
category was the RTC experience, which, of course, involved 
numerous smaller insolvent institutions that disappeared during 
the crisis.
    Treasury could obtain FDIC-type powers over institutions 
that received TARP funds, similar to the powers the UK 
government has exercised over some banks. Simply by insisting 
on voting control as the price for further capital infusions, 
Treasury would be in a position to exercise more control and to 
guard the interests of taxpayers.

    Option C: Subsidization of Distressed Banks.

    A third option is that, as the crisis spreads and financial 
institutions are at risk of becoming insolvent, the government 
can provide financial resources to keep those institutions 
afloat (which some may view as ``subsidization''). In most 
cases, before government aid is delivered to a sick bank, the 
BHC must first support the bank itself, but, again, it is 
likely that, by the time a crisis is reached, a distressed bank 
will have already exhausted available assets of its BHC.
    Government financial support may be in the form of a loan, 
a guarantee, or a direct infusion of capital, all of which are 
among the tools available to Treasury as part of its authority 
under the TARP. In addition, asset purchases from banks 
arranged with government involvement and guarantees can be 
vehicles for government subsidies. In each case, this 
assistance means transferring value from the taxpayer to the 
financial institution. Such transfer may be temporary (i.e., 
when the subsidy must be repaid) or permanent. Subsidization 
might be provided to all banks that request it or just the 
banks that threaten systemic risk. The amounts and kinds of 
subsidization are open-ended.
    In most cases, the assistance flows to the bank through the 
BHC, although some forms of FDIC assistance can flow directly 
to the bank. This structure is used because often only the BHC 
can issue preferred stock. By funding the corporation that 
holds the bank as opposed to the bank itself, the government 
does not achieve a legal claim as a bank creditor that could be 
senior to other creditors. Instead, the government holds senior 
preferred equity in the BHC, and is thus at a higher risk of 
losing its investment in a liquidation proceeding than other 
creditors. By lending to BHCs, the government increases the 
risk of taxpayer non-payment. At present, the TARP involves two 
approaches. The first is the provision of capital for a 
distressed bank to help it maintain solvency, lending volume, 
and financial operations during the current crisis. The second 
is purchase of bad (so-called ``toxic'') assets--as Secretary 
Paulson initially recommended--to remove the threat those 
assets pose to bank solvency. Under this approach, the 
government could purchase the assets outright or it could 
purchase the assets as part of a general restructuring. One 
restructuring that is widely described involves placing 
institutions in conservatorship with the FDIC transferring the 
toxic assets to one or more institutions (so-called ``bad 
banks'') created specifically to hold and ultimately to sell 
those assets for the highest amounts possible. In that case, 
banks stripped of their toxic assets would emerge from 
receivership as healthier institutions and the separated, bad 
assets, could be held until their value increased as the 
markets recovered.

                        4. ASSESSING THE OPTIONS

    The overall objective of the TARP and related actions by 
the FDIC and the Federal Reserve Board is to stabilize the 
financial system and promote the return of economic growth. The 
choice of which route to pursue among the options discussed 
above would appear to depend upon the relative weight that 
policymakers assign to several other important considerations.

a. Time--Is it on Our Side or Not?

    Assuming the most immediate goal is to have functioning 
major financial institutions, the question is how to achieve 
that goal as quickly as possible, at the lowest cost to the 
taxpayers, and with minimal risk to the public interest and the 
financial system. If, with the passage of time, assets will be 
restored to their earlier, true values and banks will come back 
to life on their own accord, then time is on our side. In such 
a case, the risks of action likely outweigh the risks of 
inaction.
    On the other hand, if the economy is unlikely to recover 
quickly, so that the banks cannot rely on a rising economy to 
restore their balance sheets, time is not on our side. The 
banking system itself creates a possible timing problem. The 
existence of weak institutions that are sustained only by 
taxpayer guarantees and infusions of cash threatens the health 
of all banks, drawing off depositors and undermining public 
support. Continued operation of systemically significant but 
weakened institutions at the heart of a nation's financial 
system may prevent a robust economic recovery of the sort that 
would cause time to be on our side. In such a case, delay and 
half steps would seem to be the main enemy.

b. Taxpayer Exposure and Exit Strategy

    Subsidization, liquidation, and reorganization all require 
upfront outlays by the government, and the greater the desire 
to protect one or another class of otherwise uninsured 
investors, the greater that initial outlay will be. If Treasury 
policy was to only protect insured depositors, the costs of 
either liquidation or reorganization would be quite low. 
Ensuring all bondholders is costly, and keeping equity holders 
alive is the most expensive of all, because: (1) protecting 
equity means you must protect all debt holders as well as the 
equity holders; and (2) doing so prohibits the public from 
capturing the upside of a recovered bank.
    Under any of the three strategies, the cost to the taxpayer 
depends not only on which classes of capital policymakers want 
to support, but also on precisely how insolvent the applicable 
institutions may be. In the case of liquidation or 
reorganization, the cost to the taxpayer is minimal where 
assets are adequate to cover deposits and, as necessary, 
guaranteed debt. The total cost of each of these strategies 
also depends on their effectiveness at thawing credit markets 
and restoring economic growth. An ineffective strategy is 
likely to prolong the crisis and require further investment of 
taxpayer funds.
    With regard to subsidization, capital infusions generally 
come to mean equity (or ``common stock'') investments that 
increase the cost to the taxpayer if banks fail or produce 
gains if the market recovers. Of course, that assumes that the 
government is focused on capturing upside opportunities through 
equity ownership. In the case of the transactions with shaky 
financial firms under TARP to date, with the exception of AIG, 
Treasury has taken only small amounts of equity upside in 
relation to the large risks Treasury has assumed through its 
preferred stock investments and asset guarantees.
    In the case of asset purchases, the bad assets could fail 
to increase in value, leaving the taxpayers with similar, if 
not larger, losses. On the other hand, a very successful 
government asset purchase program would provide the government 
with 100 percent of the upside in those assets. These assets 
could gain in value as the market turns around, producing gains 
to the government upon ultimate disposition. While Swedish 
authorities were aided by the rapid recovery of the economy 
both nationally and globally as they sought to dispose assets, 
such economic recovery is uncertain today, as it was uncertain 
ex ante in Sweden. Similarly, with regard to liquidation and 
reorganization, the disposal of assets in the current 
environment may require steep discounts and thus greater 
taxpayer cost, depending on whether the government, as opposed 
to the FDIC, is guaranteeing any particular class of investors 
in the firm.
    While the total cost of the various options is open to 
doubt, liquidation provides clarity relatively quickly. In that 
sense, allowing institutions to fail in a structured manner 
supervised by appropriate regulators offers a clearer exit 
strategy than allowing those institutions to drift into 
government control piecemeal.\366\ Liquidation is less likely 
to be open-ended and stretch over years, as subsidization did 
in Japan.
---------------------------------------------------------------------------
    \366\ See Hoenig, supra note 149.
---------------------------------------------------------------------------
    Liquidation is also the option least likely to sap the 
patience of taxpayers. It is noteworthy how little controversy 
has been associated with the FDIC's windup of numerous banks 
and thrifts over the last year. The process for liquidating 
thrifts such as Washington Mutual and IndyMac has been executed 
without public alarm. The confidence in this system seems to be 
related in part to the FDIC's long established role as 
conservator and, in part, to the clear rules and purposes the 
FDIC has in place for its functioning as conservator. By 
contrast, taxpayers become particularly impatient when 
subsidies are used to help banks acquire other banks, stave off 
losses by bank shareholders, or serve existing management.
    Thus, while liquidation can offer a clear exit strategy, 
FDIC's experience with Continental Illinois suggests that 
reorganization may not offer quite such a clear ending if the 
government is committed both to minimizing the expenditure of 
government funds and to making all creditors whole. Unable to 
find an acquirer, unwilling to pay bondholders less than the 
value of the bond, and either unwilling or unable to infuse 
sufficient capital to bring Continental Illinois back to life, 
the government was forced to own and operate the bank for a 
prolonged period, retaining an equity stake in that institution 
for seven years. On the other hand, where there is a 
willingness to fund losses or to discount payments made to 
investors, reorganization has been relatively quick.
    Finally, liquidation raises concerns related to enterprise 
value. Liquidation typically breaks up the firm. In some cases, 
that could involve significant destruction of going concern 
value. A large multinational institution's franchise value 
created by the web of consumer, corporate, and international 
banking relationships may be lost as a result of government 
seizure and reorganization, a cost that is not imposed on the 
economy under open bank assistance.
    But liquidation forms are not so limited. Liquidation can 
mean a sale of the whole entity to a buyer capable of absorbing 
and benefiting from the business as a whole. Going concern 
sales occur with some frequency outside the banking world, even 
among very complex institutions. Enterprise value might be more 
easily preserved in a conservatorship. By restructuring their 
balance sheets, writing down liabilities, and eliminating old 
equity, such firms might continue in operation and attract 
significant new capital. It may be true that some firms are 
systemically significant, but that does not mean every slice of 
their capital structure is systemically significant. In fact, 
it may be that a restructuring represents the best way to bring 
the franchise value back to full life.

c. Government Capacity and Expertise 

    All successful efforts to address bank crises have involved 
the combination of moving aside failed management and getting 
control of the process of valuing bank balance sheets. There 
are two models for the independent balance sheet valuation: 
mark to market (Sweden, RTC), and independent administrative 
pricing overseen by new management (RFC, ultimately Japan). 
Reorganization and subsidization without effective assessment 
of asset values does not work, as it can easily lead to the 
perpetuation of banks in a weakened condition or to significant 
government subsidies to private parties.\367\ History offers no 
examples in which subsidization of existing shareholders and 
management produced effective assessment of asset values.
---------------------------------------------------------------------------
    \367\ See Ricardo J. Caballero, Nationalisation Without Prices: A 
Recipe for Disaster, Financial Times (Feb. 17, 2009).
---------------------------------------------------------------------------
    The prospect of conservatorships at large U.S. banks raises 
issues of government capacity to manage such processes at one 
or more systemically significant financial institutions. 
Although the FDIC has shown skill and professionalism in 
dealing with failed banks in the past, it has never seized an 
institution as complex as a systemically significant banking 
institution would necessarily be. The fact that most such 
institutions operate in dozens of countries makes their seizure 
particularly complex. The government's capacity to dispose of 
bad assets could be overwhelmed by the amount and complexity of 
the assets held by those institutions.
    Some recent large FDIC takeovers may not offer relevant 
examples. While the FDIC has recent experience acting as the 
conservator of major financial institutions, that experience 
does not necessarily translate directly into the complex 
processes involved in seizing large, complex holding companies 
with operations spanning many countries. In July 2008, for 
example, the Office of Thrift Supervision closed IndyMac and 
placed it under an FDIC conservatorship.\368\ While IndyMac was 
the one of the largest mortgage originators in the nation, its 
day-to-day operations were relatively simple; at the time of 
seizure, the thrift had only 33 branches, all of which were 
located in California.\369\ Similarly, when regulators closed 
Washington Mutual last September and put it under FDIC 
conservatorship, the FDIC was able to facilitate the purchase 
of the thrift by JP Morgan immediately, seamlessly, and with 
relatively minimal effort.\370\ While that experience 
demonstrates how quickly the FDIC can cleanse the balance 
sheets of a troubled institution and return that institution to 
private hands, Washington Mutual's operations were considerably 
simpler than those of large bank holding companies. The seizure 
of a large, systemically significant institution--let alone of 
multiple ones at the same time--may create additional and 
complex policy challenges.
---------------------------------------------------------------------------
    \368\ Federal Deposit Insurance Corporation, Failed Bank 
Information: Information for IndyMac Bank, F.S.B., Pasadena, CA (online 
at www.fdic.gov/bank/individual/failed/IndyMac.html) (accessed Apr. 6, 
2009); Federal Deposit Insurance Corporation, FDIC Establishes IndyMac 
Federal Bank, FSB as Successor to IndyMac Bank, F.S.B., Pasadena, 
California (July 11, 2008) (online at www.fdic.gov/news/news/press/
2008/pr08056.html).
    \369\ Federal Deposit Insurance Corporation, FDIC Establishes 
IndyMac Federal Bank, FSB as Successor to IndyMac Bank, F.S.B., 
Pasadena, California (July 11, 2008) (online at www.fdic.gov/news/news/
press/2008/pr08056.html).
    \370\ Federal Deposit Insurance Corporation, Bank Acquisition 
Information: Information for Washington Mutual Bank, Henderson NV and 
Washington Mutual Bank, FSB, Park City UT (online at www.fdic.gov/bank/
individual/failed/wamu.html) (accessed Apr. 6, 2009).
---------------------------------------------------------------------------
    On the other hand, it is not clear whether (1) the 
resources of the United States government, including its global 
reach, are any less in relationship to its largest banks than 
the resources of the Swedish government were to its largest 
banks, (2) whether the complexity of a small number of 
systemically significant financial institutions is actually 
greater than the complexity involved in a massively multi-
institution enterprise like the RTC, and (3) whether these 
concerns suggest that the preferred approach for large 
institutions is to look to restructure balance sheets in short 
order through investor concessions, rather than trying to 
manage institutions over time to fund complete guarantees for 
bondholders, which was the approach in Continental Illinois and 
in Sweden.
    Several further observations on the subject of complexity 
and liquidation are relevant. First, Treasury and the Federal 
Reserve Bank of New York appear to be pursuing a liquidation 
strategy with AIG. They appear to be selling off the pieces of 
that gigantic conglomerate while making whole all its 
creditors. It is less clear what the Administration's strategy 
is with Fannie Mae and Freddie Mac, but it does not appear to 
be a short-term liquidation strategy. In neither case does the 
government's role appear to be beyond its organizational 
capacity, though it appears in all those cases to be a 
politically challenging task. In addition, the government would 
not be limited to current personnel. Among the many retired 
banking professionals and those currently operating smaller 
banks, there may be substantial talent available to assist in 
the management of banks under conservatorships.

d. Competitive Impact on Financial Institutions 

    Subsidization can have a substantial negative impact on the 
functioning of competitive markets. It undoes market discipline 
for financial institution investors, particularly equity 
investors, and it effectively puts the financial power of the 
government behind some ``private'' firms and not behind others. 
While some institutions--like Lehman Brothers--are left to fail 
without government assistance, others remain solvent and 
benefit from increased stock values that take public 
subsidization into account.
    Perhaps the most pernicious impact of subsidization is its 
effect on prudent banks. Institutions that were conservative in 
their risk profiles and remained solvent during tough times 
lose the comparative advantage of that prudence when the 
government subsidizes imprudent actors. Although liquidation 
and reorganization can be costly and painful, those processes 
do not raise the same risks of moral hazard or market 
distortion that accompany government subsidization.
    While systemically significant institutions will have 
competitive advantages over others because of government 
financial assistance, if the special protection available to 
them is not accompanied by heightened regulatory requirements 
(relatively stringent capital and liquidity requirements, an 
overall maximum leverage ratio, etc.), then the comparative 
advantages of size will promote severe market distortions--and 
impose growing risks on the taxpayer.\371\
---------------------------------------------------------------------------
    \371\ See Panel Regulatory Reform Report, supra note 164, at 23-24.
---------------------------------------------------------------------------

e. Impact on Investors and Capital Markets 

    Some investors would nearly always be wiped out under 
liquidation or reorganization strategies. This is a harsh 
outcome, but the investors also reaped profits during the good 
times, for which they agreed to take the losses when things 
went sour. This is the nature of a market economy, and it 
certainly is the fate of most business people who take risks in 
a market economy. It is also the market discipline that the 
leaders of the financial community have urged on their fellow 
citizens for decades.
    Some concern has been expressed that shareholders may 
include pension funds and municipal governments, which would 
spread the public costs of liquidation. On the other hand, it 
would undoubtedly be less expensive to assist the subset of 
investors that might deserve protections (such as pension funds 
or municipal governments), than to continue to support all 
investors in the hopes that some portion of the assistance 
would flow to these groups. In fact, even when accounting for 
pension funds, stock ownership is concentrated heavily among 
higher-income families, which means that protection of 
investors involves wealth transfers from all taxpayers to a 
wealthier minority.\372\ This is particularly true for very low 
valued stocks and junk bonds, which are typically held by long-
term broadly representative investors but which are shifted in 
a time of crisis to specialty, risk-friendly investors like 
vulture funds.
---------------------------------------------------------------------------
    \372\ Frank Ackerman et al., The Political Economy of Inequality 
(2000).
---------------------------------------------------------------------------
    It is also possible that a more aggressive approach toward 
seizures may further undermine the efforts of banks to attract 
critical private capital. On the other hand, with 
subsidization, private capital must also factor deep 
uncertainty about how long the subsidies will last, the 
underlying value of the assets, and whether taxpayers will 
eventually insist that banks be liquidated. The post-
reorganization bank has a cleaned up balance sheet that would 
pose almost no risk and would likely be very attractive to 
investors bringing new capital.

f. Asset Price Transparency 

    Attempting to ensure that the securities issued by an 
institution in exchange for a capital infusion are equal in 
value to that infusion is difficult at best, and some pricing 
mechanisms are designed to create hidden subsidies. Valuation 
issues are even more extreme when the government purchases bad 
assets. While the shares of many larger banks are publicly 
traded, providing a market price that can be referenced in 
setting the terms for capital infusions, the banks' assets 
often have no readily ascertainable market value. If the 
government pays for the assets at a distress price, reflecting 
the assets' current market value, the selling institution may 
be demonstrably insolvent. But if the government pays more for 
the assets than their current market value, it will simply 
provide a subsidy to the bank at taxpayer cost. These 
considerations led to decisions on the one hand to have 
government initially absorb the losses associated with mark-to-
market accounting for distressed assets, as was the case with 
the RTC and Sweden, and on the other hand, to engage in 
independent administrative valuation of distressed assets, as 
was the case in the RFC and in the eventual Japanese approach 
to the crisis.
    Liquidation presents its own valuation challenges. If the 
government takes over a failed bank, it will eventually sell 
the assets. It will have to make the decision about how long to 
hold them and what price to offer initially. By ``dumping'' 
assets too quickly, Treasury could depress prices and 
indirectly impose losses upon other financial institutions, and 
by holding too long, the taxpayer could take unnecessary risks. 
This was the challenge facing the RTC when it liquidated the 
assets of failed institutions in the late 1980s and early 
1990s. But, as David Cooke testified to the Panel, the RTC 
experience is generally viewed as providing lessons in how to 
sell off assets effectively and efficiently. Ultimately, the 
RTC was able to restore functioning markets for the kinds of 
assets (defaulted construction loans, mortgages, and real 
estate) that typically comprise a large portion of the bad 
assets of even the largest institutions.
    Historical precedents always involve some differences from 
the current crises and the turmoil in the global financial 
system over the last nearly two years has produced challenges 
not faced in prior banking crises. Nevertheless, our review of 
prior episodes strongly underscores the importance of reliable 
asset values, an assertive government response to failing 
financial institutions and a willingness to hold management 
accountable, including replacement of key officials when 
necessary. And perhaps most important of all, clear, consistent 
communications to the public of the government's goals, 
strategy and progress in achieving its objectives--expressed in 
terms the broad public can understand--will continue to be 
critical to sustained support for the current efforts from 
American taxpayers.
                     SECTION TWO: ADDITIONAL VIEWS 


                A. Richard H. Neiman and John E. Sununu 

    The report issued today by the Congressional Oversight 
Panel identifies central issues that should frame the public 
policy debate on financial stability, including the importance 
of asset valuation, the extent to which the current crisis is 
being driven by liquidity as well as credit factors, and the 
proper relationship between the public and private sectors.
    These issues are complex, however, and the Panel did not 
reach an agreement on either the economic assumptions 
underlying strategic choices or on the optimal strategy to 
pursue. Further, we are concerned that the prominence of 
alternate approaches presented in the report, particularly 
reorganization through nationalization, could incorrectly imply 
both that the banking system is insolvent and that the new 
Administration does not have a workable plan. The stakes for 
the American people are too high to permit any such 
misapprehensions to develop and intrude on successful outcomes 
that affect our national financial security.
    Therefore, we have issued this Statement of Separate Views, 
to highlight what we consider to be the key points and to 
provide Congress and the public with a fuller context in which 
to consider the Panel's report.

1. THE PRIMARY MISSION OF THE PANEL IS TO EVALUATE THE EFFECTIVENESS OF 
                          TREASURY'S ACTIONS 

    First and foremost, the Panel is charged with evaluating 
the effectiveness of Treasury's use of the new authority 
granted it under the Emergency Economic Stabilization Act. It 
is not our role to design or approve Treasury's strategy, nor 
should the Panel's mission be expanded to encroach on that 
authority.
    Advocating an alternative strategy comes within the scope 
of our mission only if Treasury either offers no plan, or 
attempts to proceed with a plan that the Panel determines 
cannot reasonably be expected to succeed. As we will describe, 
neither of these conditions exists at present. Therefore, to 
the extent that the Panel report focuses more on alternatives 
and less on evaluation of current activities through objective 
metrics, we have missed an opportunity to closely engage with 
our primary task.

   2. THE CURRENT TREASURY STRATEGY ALIGNS WITH CONGRESSIONAL INTENT 

    The new Administration has set forth a comprehensive plan, 
in particular through the Capital Assistance Program (CAP) and 
the Public-Private Investment Program (PPIP). Collectively, 
these programs deal with the need for banks to engage in 
controlled deleveraging by addressing both the equity and the 
asset challenges to the balance sheet. The combination of these 
two approaches provides a more comprehensive strategy than 
either capital infusions or asset purchases alone. The Treasury 
has further allocated funds to directly address mortgage 
modification and foreclosure mitigation efforts for homeowners.
    Taken together, these programs comprise a strategy that 
aligns with the Congressional intent in passing the TARP 
legislation. They return to the original concept of asset 
purchases and address the housing crisis. Furthermore, they 
embody a preference for maintaining a private banking system 
via temporary public support or partnership, which is 
consistent with this country's tradition of private rather than 
government control of business. Congress passed the EESA to 
protect the American public from financial chaos, and 
preventing collapse also avoids the subsequent need for more 
extensive forms of government intervention in the markets--
forms less consistent with our American experience of 
democratic capitalism.

       3. THE CURRENT TREASURY STRATEGY IS REASONABLE AND VIABLE 

    Much of the Panel's report is premised upon the tension 
between subsidization and reorganization through 
nationalization, in considering which options are preferable. 
Embedded within this tension are profound differences in 
assumptions, both on the origins of the crisis and on the 
optimal shape of the financial services industry that emerges 
post-crisis.
    Some still question the viability of any plan involving 
public support that does not first divest private ownership; 
however, less drastic options such as public-private sector 
solutions are based on very reasonable assumptions.
    The debate turns on whether current prices, particularly 
for mortgage-related assets, reflect fundamental values or 
whether prices are being artificially depressed by a liquidity 
discount due to the market strain. As stated in the report, one 
school of thought focuses on the liquidity factor:

        ``If the liquidity discount is real, approaches such as 
        Treasury's Public Private Investment Partnership (PPIP) 
        are more likely to succeed. Current prices may, in 
        fact, prove not to be explainable without the liquidity 
        factor. Even in areas of the country where home prices 
        have declined precipitously, the collateral behind 
        mortgage-related assets still retains substantial 
        value.''

    We affirm that it is entirely reasonable to assume that a 
liquidity discount is impairing these assets, and thus that the 
Treasury has adopted a viable plan based on this valid 
assumption. Further, we believe that a viable plan should be 
given the opportunity to work. Speculation on alternatives runs 
the risk of distracting our energy from implementation of a 
viable plan and needlessly eroding market confidence. Market 
prices are being partially subjected to a downward self-
reinforcing cycle that could be exacerbated by unwarranted 
consideration of more radical solutions such as 
nationalization.
    This positive assessment of Treasury's view on the 
underlying causes of the financial crisis is not meant to 
suggest that the housing bubble should be re-inflated. But we 
do admit to being confident that the long-term values of 
mortgage-related assets secured by American homes remain a good 
investment.

 4. RESTORING FINANCIAL STABILITY DURING AN EMERGENCY TAKES PRECEDENCE 
                        OVER OTHER POLICY GOALS

    In thinking long-term, other issues remain to be 
considered. The financial crisis has revealed underlying 
weaknesses in our regulatory system, and a reform effort will 
contribute to preventing future crises. Regulatory reform is a 
process, however, and we should not withhold access to existing 
tools for restoring financial stability while that reform 
process is in progress.
    Two examples of broader issues that should be addressed in 
the context of financial stability are (1) the role of 
securitization in reviving markets, and (2) the need for 
prudence in setting the degree of transparency for stress-
testing of the major banks in connection with the CAP.
    Reforms are certainly necessary in securitization and 
secondary markets, as the Panel has noted on previous 
occasions. We need to improve the credit quality of securities 
issued and better manage risk going forward, but this does not 
mean that securitization should be abandoned in the interim.
    The Panel's report presents a variety of views on the role 
of securitization both in a reformed regulatory structure and 
as a potential tool in reviving markets. We agree with the 
perspective which acknowledges that economic recovery depends 
upon the existence of a functioning secondary market, to re-
cycle capital and support credit access for consumers and 
businesses.
    That is why the Federal Reserve has developed the Term 
Asset-Backed Securities Loan Facility (TALF), in which the 
Treasury has chosen to invest limited TARP funds. The secondary 
market has been largely frozen for a wide class of assets, 
including student loans, auto loans, credit cards, and small 
businesses credit. An added safeguard is that the TALF will not 
accept the more exotic forms of securitized structures.
    On the issue of transparency, specifically in the stress-
testing that federal banking regulators will be performing 
under the CAP, results should be held confidential. We believe 
that government agencies and officials who monitor the industry 
have a public trust and should be held accountable for their 
oversight. But there is also a critical difference between 
public information and confidential information, and respecting 
this distinction is in our national interest. Regulatory 
examination findings for banks are confidential, and this rule 
should extend to the results of stress-tests to prevent misuse 
of information and rumors that could place depositors' funds at 
risk.

         5. THE PANEL'S MISSION REMAINS OF CRITICAL IMPORTANCE

    There is much serious and constructive work for the Panel 
to contribute in evaluating the Treasury's existing 
initiatives, including the structure of both the TALF and PPIP, 
and we should be zealous in pursuit of our mission. Open issues 
that need to be addressed in-depth in future Panel reports 
include:

           Treasury's decision to limit the number of 
        fund managers for the PPIP, and the eligibility 
        criteria for fund managers;
           The impact of new FASB rules on mark-to-
        market accounting;
           The implications of redemptions of TARP 
        funds on the design and goals of the program; and,
           Additional metrics to quantify the health of 
        the financial system.

    Congress would be much better served by those lines of 
inquiry, which we believe will identify ways in which to 
maximize the opportunities for success.
    And success is achievable. We have the wherewithal not only 
to restore financial stability, but to emerge from this crisis 
in an even stronger position. Prosperity is not a zero-sum 
game. It is not the case that one person or group necessarily 
prospers at another's expense. If we stand together in 
investing in our common future, as individual and as corporate 
citizens, we continue in our country's tradition of pragmatic 
optimism and lay the most enduring foundation of all for our 
lasting economic stability.

                           B. John E. Sununu

    In producing monthly reports assessing the performance of 
programs under the Troubled Asset Relief Program (TARP), the 
Congressional Oversight Panel has worked effectively to build 
consensus among panel members. While it is unusual that any 
single panel member would fully agree with every sentence and 
statement in a comprehensive oversight report, in each previous 
case, I have found broad agreement with the sentiment and 
priorities pursued, and as a result, voted to support their 
release.
    In reviewing the drafting of the April Oversight Report, 
however, it became clear that much of the content pursued 
topics which strayed far from the Panel's core mission. 
Moreover, the April Report engages in a premature discussion of 
dramatic changes in Treasury's chosen approach to supporting 
stabilization in the US financial markets. These and other 
concerns are more fully discussed in the joint additional views 
which I have submitted with Richard Neiman.\373\ Given the 
magnitude of these differences, I am unable to support the full 
April Oversight Report.
---------------------------------------------------------------------------
    \373\ Part B of Section 2 of this report, infra.
---------------------------------------------------------------------------
    In addition to the concerns expressed in the joint 
additional views, I wish to briefly highlight two significant 
areas of disagreement with the Report's choice of content and 
prioritization. In the end, these differences were simply too 
great to overcome through the submission of supplemental views 
alone.

    1. The main element of the April Report, a discussion of 
alternatives to the programs Treasury has established under the 
TARP, takes the Panel too far from its core mission of 
monitoring and assessing the performance of existing programs 
and making recommendations for improvement. In utilizing 
resources to pursue this lengthy discussion (pp. 70-87), the 
Panel has lost the opportunity to develop a more in depth 
assessment of key questions including:

           How much lending and what type of lending 
        has been done by firms receiving funding under the Bank 
        Capital Program (CPP)?
           What factors have driven roughly 200 
        financial institutions to decline CPP funding after 
        their applications had been approved, and what 
        implications does this have for the success of the 
        program?
           How successful have the initial TALF 
        auctions been, and what implications does this have for 
        the structure and price discovery mechanism of the 
        PPIP?
           To what extent has the recent debate and 
        proposed legislation regarding taxation and limitation 
        of executive compensation discouraged firms from 
        participating in CAP, TALF, and the PPIP?

    2. The April Report contains a lengthy discussion (pp. 60-
70) of the unfolding financial crisis in Ireland, Iceland, the 
United Kingdom, and other European Countries. While a short 
description of the steps each nation has taken may be 
appropriate to the context of the Report, attempting a detailed 
analysis of the economic--and political--response is well 
outside the core mission of the Congressional Oversight Panel. 
Given the very dynamic nature of the current crisis, and the 
relative proximity of recent decisions taken in these 
countries, it is of little use to employ these examples to 
guide our oversight of the Treasury Programs.
    In summary, the central parts of the April Report of the 
Congressional Oversight Panel is consumed with discussion 
which, although interesting to many readers, is at the edge 
of--and outside--the core mission of the Panel. Expending 
resources to develop this analysis has precluded a more 
detailed assessment of the performance of TARP programs to 
date. Furthermore, the prominence of alternate approaches could 
be used incorrectly to suggest that the Panel believes that 
existing programs have failed, or that it has concluded that 
the Administration Plan is not viable.
    Given the weight of these concerns, I am unable to support 
the release of the April Oversight Report.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    As Treasury continues to announce new initiatives, the 
Panel continues to review and investigate different aspects of 
the financial crisis and the related programs. Since its first 
report, the Panel has requested clarification on Treasury's 
strategy. On March 5, 2009,\374\ Chair Elizabeth Warren replied 
to Secretary Geithner's letter of February 23, 2009, with a 
request for a direct response to the Panel's outstanding 
questions regarding Treasury's overall strategy for combating 
the financial crisis. The letter requested a reply by March 20, 
2009. On April 2, 2009, Secretary Geithner replied.\375\
---------------------------------------------------------------------------
    \374\ See Appendix VII, infra.
    \375\ See Appendix VIII, infra.
---------------------------------------------------------------------------
    Despite months of requests, the Panel was unable to secure 
a commitment from Secretary Geithner to testify at a Panel 
hearing regarding Treasury's strategy. In recent days, a date 
was finally set for April 21. The Panel appreciates the 
commitment, but it is concerned about the prolonged process.
    The Panel was also quite surprised to discover it was 
excluded from the PPIP term sheet providing information access 
to GAO and SIGTARP. Thus far, Treasury has offered no 
explanation for why it would attempt to exclude the Panel from 
access to this information.
    In a letter to Secretary Geithner dated March 25, 2009, the 
Panel Chair expressed her concerns on these issues.\376\ While 
the Panel understands the many demands on Treasury at this 
time, this delayed response is deeply worrisome. In his April 2 
letter, Secretary Geithner promised regular meetings and 
briefings before major announcements. This would be a 
significant improvement. A productive working relationship with 
Treasury would provide greater transparency to Congress and the 
public.
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    \376\ See Appendix IV, infra.

    TALF Inquiry. Recently, the Oversight Board opened an 
inquiry into the TALF.\377\ Specifically, the Panel is 
concerned that the TALF appears to involve substantial downside 
risk and high costs for the American taxpayer, while offering 
substantial rewards to a small number of private parties. 
Equally important, the TALF appears to subsidize the 
continuation of financial instruments and arrangements whose 
failure was a primary cause of the current economic crisis. The 
Panel is further concerned because the documents posted on 
Treasury's website describing the terms of operation of the 
TALF and press reports about the content of those terms as they 
are to be implemented by the Federal Reserve Bank of New York 
are contradictory.
---------------------------------------------------------------------------
    \377\ See Appendix VI, infra.
---------------------------------------------------------------------------
    To clarify the questions surrounding TALF, the Panel Chair 
asked Treasury for more information in her March 20, 2009, 
letter. Generally, the Panel is seeking information on a number 
of points to better understand what Treasury intends to 
accomplish with TALF and why the TALF structure is the most 
effective way to accomplish that goal. A reply was requested by 
March 27, 2009, and was received as part of the April 2, 2009, 
letter. The Panel is currently reviewing the letter.

    AIG Inquiry. The Panel has also initiated an inquiry into 
Treasury and Federal Reserve Bank actions to provide continued 
capital infusions and other assistance to AIG.\378\ The Panel 
has raised a number of important questions. These include the 
basis for deciding that AIG posed systemic risk, the economic 
consequences of the assistance provided to AIG, the identity of 
the ultimate beneficiaries of this assistance, and the manner 
in which Treasury and the Board have monitored the recipients 
of taxpayer dollars. The Panel is particularly concerned that 
the opaque nature of the relationship among AIG, its 
counterparties, Treasury, and the Federal Reserve Banks, 
particularly the Federal Reserve Bank of New York, has 
substantially hampered oversight of the TARP program by 
Congress and, equally important, has impaired the understanding 
of that program by the American people.
---------------------------------------------------------------------------
    \378\ See Appendix V, infra.
---------------------------------------------------------------------------
    In a letter dated March 24, 2009, the Panel Chair requested 
information from Treasury and the Federal Reserve Board on a 
number of points related to AIG, including how the assistance 
was requested and need was analyzed, the assessment of risk to 
the national and international financial system, any conditions 
placed on the assistance, and information about counterparties 
and credit default swaps. The Panel awaits the requested 
information from Treasury.

    Capital Assistance Program Inquiry. Most recently, on March 
30, 2009, Chair Elizabeth Warren sent a request to Secretary 
Geithner regarding the Capital Assistance Program's stress 
tests.\379\ Because the stress tests represent a key component 
of the program, the Panel has undertaken a study of the 
theories underlying and details of the assessment.
---------------------------------------------------------------------------
    \379\ See Appendix III, infra.
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    The Panel is hopeful that Treasury will provide a prompt, 
substantive response to outstanding inquiries. In addition, the 
Panel would find it helpful to have a single point of contact 
within Treasury charged with providing information requested by 
the Panel. Without detailed and accurate information, the Panel 
cannot perform its oversight function as effectively as it 
should. The Panel is encouraged by Secretary Geithner's recent 
letter, and the Panel will continue to work with Treasury in 
the hopes of restoring public confidence in the recovery 
process.
             SECTION FOUR: TARP UPDATES SINCE LAST REPORT 

    Since the last report, Treasury, the Federal Reserve Board, 
and the FDIC have released details on several programs that 
were initially announced as part of Treasury's Financial 
Stability Plan (FSP). Additionally, Treasury has begun 
discussions regarding regulatory reforms to provide a more 
stable economic system going forward.

    Restructuring of Assistance to AIG. On March 2, 2009, the 
Federal Reserve Board and Treasury announced that they would be 
restricting AIG's government aid to speed the process of 
returning full ownership of the company to the private sector. 
The restructuring included exchanging the preferred stock the 
government held for stock that had characteristics closer to 
common equity stock as a means of improving the company's 
equity and financial leverage. Second, Treasury would create a 
new equity capital facility that would allow AIG to draw down 
up to $30 billion as another means to improve the company's 
leverage, and to raise its capital levels. Finally, the Federal 
Reserve Board announced it would make certain changes to the 
$60 billion revolving credit facility that had been established 
by the Federal Reserve Bank of New York, most significantly by 
reducing the size of the facility to $25 billion.

    Term Asset-Backed Securities Loan Facility (TALF). On March 
3, 2009, the Federal Reserve Board and Treasury announced 
details of a facility, the purpose of which, according to the 
White Paper issued by the Federal Reserve Board, is to 
``improve credit market conditions by addressing the 
securitization markets'' by stimulating demand for asset-backed 
securities. Under the TALF, $200 billion in non-recourse 
collateralized debt will be made available through the New York 
Federal Reserve Bank for the purchase of new, highly-rated 
asset-backed securities. The smallest available TALF loans are 
$10 million; there is no upper limit. The loans will be 
collateralized by the securities purchased.

    Details for the Making Home Affordable Loan Modification 
Program. On March 4, 2009, detailed guidelines and instructions 
were provided to loan servicers to enable them to modify 
mortgages under the terms of the Homeowner Affordability and 
Stability Plan that was announced as part of FSP in February. 
On March 19, 2009, Treasury and the Department of Housing and 
Urban Affairs launched a web site, MakingHomeAffordable.gov, to 
provide additional guidance and information.

    Public-Private Investment Program (PPIP). On March 23, 
2009, Treasury and the FDIC announced details of a program 
intended to target the so-called ``toxic assets,'' called 
``legacy assets'' in program documents, that remain on many 
banks' and other institutions' books. The PPIP has two parts: 
(1) the Legacy Loan Program, intended to help banks sell 
troubled real estate loans by providing buyer assistance in the 
form of equity contributions from Treasury and financing 
through FDIC-guaranteed loans; and (2) the Legacy Security 
Program, which designates several asset managers as ``Fund 
Managers'' and creates partnerships between Treasury and Fund 
Managers whose purpose is to buy up mortgage-backed securities 
including those issued prior to 2009.

    Framework for Regulatory Reform. On March 26, 2009, through 
a press release and testimony by Secretary Geithner before the 
House Financial Services Committee, Treasury announced a 
proposed framework for reforming financial regulation. The 
proposal focused on identifying and addressing those 
institutions that pose a systemic risk to the U.S. economy, 
providing protections for consumers and investors, eliminating 
gaps in the regulatory structure by means such as requiring 
hedge funds to register, and coordinating with other nations to 
improve international regulation. Additional details are to be 
forthcoming.
                  SECTION FIVE: OVERSIGHT ACTIVITIES 

    The Congressional Oversight Panel was established as part 
of EESA and formed on November 26, 2008. Since then the Panel 
has issued four oversight reports, as well as a special report 
on regulatory reform which came out on January 29, 2009.
    Since the release of the Panel's March oversight report, 
the following developments pertaining to the Panel's oversight 
of the TARP took place:

     The Panel held a hearing in Washington, DC on 
March 19, entitled, ``Learning from the Past: Lessons from the 
Banking Crises of the 20th Century.'' At the hearing, the Panel 
heard testimony from experts on the banking crises in Japan and 
Sweden during the early 1990s, the savings and loan collapse in 
the 1980s, and the Great Depression of the 1930s. The 
historical lessons captured in this testimony played an 
important role in the Panel's evaluation of Treasury's current 
strategy, as reflected in this report.
     Secretary Geithner sent a response letter on April 
2, 2009 \380\ to the Panel in response to letters from 
Elizabeth Warren sent on March 5 \381\ and 20,\382\ 2009. 
Treasury's letter provided the Panel with answers to questions 
posed in the March 5 letter and directed the Panel to examine a 
letter from the New York Federal Reserve for answers to its 
TALF questions in the March 20 letter.
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    \380\ See Appendix I, infra.
    \381\ See Appendix VII, infra.
    \382\ See Appendix VI, infra.
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     On behalf of the Panel, Elizabeth Warren sent a 
letter to Secretary Geithner on March 20, 2009,\383\ requesting 
clarification on several aspects of the TALF. Copies of the 
same letter were also sent to Chairman of the Federal Reserve 
Board Ben Bernanke, and President of the New York Federal 
Reserve William Dudley, asking for their comments on the issues 
raised in the letter. Chairman Bernanke and Mr. Dudley 
responded in a joint letter on April 1, 2009.\384\ The Panel is 
currently reviewing the specific responses contained in the 
letter and expects to provide further analysis in the next 
report.
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    \383\ See id.
    \384\ See Appendix II, infra.
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                     Upcoming Reports and Hearings 

     On Tuesday, April 21, Secretary Geithner will make 
his first appearance before the Panel at a hearing in 
Washington, DC.
     On Wednesday, April 29, the Panel will hold a 
field hearing in Milwaukee, WI. The purpose of the field 
hearing will be to explore the impact of TARP on credit access 
for small businesses. The Panel will announce more details in 
the coming weeks.
     The Panel will release its next oversight report 
in May, which will examine the effects of TARP on small 
business and household lending. The Panel will continue to 
release oversight reports every 30 days.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided the U.S. Department of the Treasury with the 
authority to spend $700 billion to stabilize the U.S. economy, 
preserve home ownership, and promote economic growth. Congress 
created the Office of Financial Stabilization (OFS) within 
Treasury to implement a Troubled Asset Relief Program. At the 
same time, Congress created the Congressional Oversight Panel 
to ``review the current state of financial markets and the 
regulatory system.'' The Panel is empowered to hold hearings, 
review official data, and write reports on actions taken by 
Treasury and financial institutions and their effect on the 
economy. Through regular reports, the Panel must oversee 
Treasury's actions, assess the impact of spending to stabilize 
the economy, evaluate market transparency, ensure effective 
foreclosure mitigation efforts, and guarantee that Treasury's 
actions are in the best interests of the American people. In 
addition, Congress has instructed the Panel to produce a 
special report on regulatory reform that will analyze ``the 
current state of the regulatory system and its effectiveness at 
overseeing the participants in the financial system and 
protecting consumers.''
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 
at Harvard Law School to the Panel. With the appointment on 
November 19 of Congressman Jeb Hensarling to the Panel by House 
Minority Leader John Boehner, the Panel had a quorum and met 
for the first time on November 26, 2008, electing Professor 
Warren as its chair. On December 16, 2008, Senate Minority 
Leader Mitch McConnell named Senator John E. Sununu to the 
Panel, completing the Panel's membership.

  APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY GEITHNER TO 
 CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED APRIL 2, 
                                  2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

   APPENDIX II: LETTER FROM CHAIRMAN OF THE FEDERAL RESERVE BOARD OF 
   GOVERNORS MR. BEN BERNANKE TO CONGRESSIONAL OVERSIGHT PANEL CHAIR 
                 ELIZABETH WARREN, DATED APRIL 1, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 30, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

APPENDIX IV: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 25, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 APPENDIX V: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 24, 2009


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


APPENDIX VI: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 20, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
 WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 5, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 
  ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED 
                            JANUARY 28, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


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