[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
AUGUST OVERSIGHT REPORT *
----------
THE GLOBAL CONTEXT AND INTERNATIONAL EFFECTS OF THE TARP
[GRAPHIC] [TIFF OMITTED]
August 12, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL AUGUST OVERSIGHT REPORT
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CONGRESSIONAL OVERSIGHT PANEL
AUGUST OVERSIGHT REPORT *
__________
THE GLOBAL CONTEXT AND INTERNATIONAL EFFECTS OF THE TARP
[GRAPHIC] [TIFF OMITTED]
August 12, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul S. Atkins
Richard H. Neiman
Damon Silvers
J. Mark McWatters
C O N T E N T S
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Page
Executive Summary................................................ 1
C O N T E N T S
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Page
Executive Summary................................................ 00
Section One:
A. Overview.................................................. 00
B. Financial Integration and the Crisis...................... 00
1. Globalization Prior to the Crisis..................... 00
2. Globalization of the Crisis........................... 00
3. Cross-Border Integration Within Financial Institutions 00
C. Description of the International Financial Crisis......... 00
1. How the Crisis Developed.............................. 00
2. The Ad Hoc Nature of Government Responses............. 00
3. International Organizations........................... 00
4. The International Financial Landscape in the Aftermath
of the Crisis.......................................... 00
5. Winding Down Rescue Efforts........................... 00
D. International Impact of Rescue Funds...................... 00
1. U.S. Rescue Funds that May Have Benefited Foreign
Economies.............................................. 00
2. International Rescue Funds that May Have Benefited the
United States.......................................... 00
3. The Largest, Systemically Significant Institutions and
the International Flow of Rescue Funding............... 00
E. Cooperation and Conflict in the Different Government
Responses to the Crisis.................................... 00
1. International Coordination and Treasury's Role in
Supporting Financial Stabilization Internationally..... 00
2. Role of Central Banks at the Height of the Crisis..... 00
3. Assessment of Degree of Cooperation vs. Competition/
Conflict............................................... 00
F. Conclusions and Recommendations........................... 00
Annex I: Tables.................................................. 00
Annex II: Case Study: the Foreign Beneficiaries of Payments Made
to one of AIG's Domestic Counterparties........................ 00
Section Two: TARP Updates Since Last Report...................... 00
Section Three: Oversight Activities.............................. 00
Section Four: About the Congressional Oversight Panel............ 00
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AUGUST OVERSIGHT REPORT
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August 12, 2010.--Ordered to be printed
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Executive Summary*
The financial crisis that peaked in 2008 began in the
United States one mortgage at a time. Millions of people,
attracted by the prospect of homeownership or refinancing and
low initial rates, signed mortgages that they could afford only
so long as home prices continued to rise. The mortgages were
bundled, chopped into fractional ownership, sold and re-sold,
and used as the basis for huge financial bets. When the housing
market collapsed, many borrowers faced foreclosure, and many
investors faced huge losses.
In an earlier era, a mortgage crisis that began in a few
regions in the United States might have ended there as well.
But by 2008, the global financial system had become deeply
internationalized and interconnected. Mortgages signed in
Florida, California, and Arizona were securitized, repackaged,
and sold to banks and other investors in Europe, Asia, and
around the world. At the same time, other countries were
experiencing their own housing booms fueled by new financial
products. The result was a truly global financial crisis.
The conventional wisdom in the years immediately before the
crisis held that banks that operated across global markets were
more stable, given their ability to rely on a collection of
geographically dispersed businesses. The crisis showed,
however, that links within the financial system could magnify,
rather than reduce, risks, by, for example, allowing financial
firms to become overexposed to a single sector in a single
country. When subprime borrowers began to default on their
mortgages, banks around the world discovered that their balance
sheets held the same deteriorating investments. The danger was
amplified by the high leverage created by layers of financial
products based on the same underlying assets and by the fact
that banks around the world depended on overnight access to
funding in dollar-denominated markets. When short-term lenders
began to question the ability of banks to repay their
obligations, markets froze, and the international financial
system verged on chaos.
Faced with the possible collapse of their most important
financial institutions, many national governments intervened.
One of the main components of the U.S. response was the $700
billion Troubled Assets Relief Program (TARP), which pumped
capital into financial institutions, guaranteed billions of
dollars in debt and troubled assets, and directly purchased
assets. The U.S. Treasury and Federal Reserve offered further
support by allowing banks to borrow cheaply from the government
and by guaranteeing selected pools of assets. Other nations'
interventions used the same basic set of policy tools, but with
a key difference: While the United States attempted to
stabilize the system by flooding money into as many banks as
possible including those that had significant
overseas operations most other nations targeted their
efforts more narrowly toward institutions that in many cases
had no major U.S. operations. As a result, it appears likely
that America's financial rescue had a much greater impact
internationally than other nations' programs had on the United
States. This outcome was likely inevitable given the structure
of the TARP, but if the U.S. government had gathered more
information about which countries' institutions would most
benefit from some of its actions, it might have been able to
ask those countries to share the pain of rescue. For example,
banks in France and Germany were among the greatest
beneficiaries of AIG's rescue, yet the U.S. government bore the
entire $70 billion risk of the AIG capital injection program.
The U.S. share of this single rescue exceeded the size of
France's entire $35 billion capital injection program and was
nearly half the size of Germany's $133 billion program.
Even at this late date, it is difficult to assess the
precise international impact of the TARP or other U.S. rescue
programs because Treasury gathered very little data on how TARP
funds flowed overseas. As a result, neither students of the
current crisis nor those dealing with future rescue efforts
will have access to much of the information that would help
them make well-informed decisions. In the interests of
transparency and completeness, and to help inform regulators'
actions in a world that is likely to become ever more
financially integrated, the Panel strongly urges Treasury to
start now to report more data about how TARP and other rescue
funds flowed internationally and to document the impact that
the U.S. rescue had overseas. Going forward, Treasury should
create and maintain a database of this information and should
urge foreign regulators and multinational organizations to
collect and report similar data.
The crisis also underscored the fact that the international
community's formal mechanisms to resolve potential financial
crises are very limited. Even though the TARP legislation
required Treasury to coordinate its programs with similar
efforts by foreign governments, the global response to the
financial crisis unfolded on an ad hoc, informal, country-by-
country basis. Each individual government made its own
decisions based on its evaluation of what was best for its own
banking sector and for its own domestic economy. Even on the
occasions when several governments worked together to rescue
specific ailing institutions, as in the rescues of European
banks Dexia and Fortis, national interests often came to the
fore. These ad hoc actions ultimately restored a measure of
stability to the international system, but they underscored the
fact that the internationalization of the financial system has
outpaced the ability of national regulators to respond to
global crises.
In particular, the crisis revealed the need for an
international plan to handle the collapse of major, globally
significant financial institutions. A cross-border resolution
regime could establish rules that would permit the orderly
resolution of large international institutions, while also
encouraging contingency planning and the development of
resolution and recovery plans. Such a regime could help to
avoid the chaos that followed the Lehman bankruptcy, in which
foreign claimants struggled to secure priority in the
bankruptcy process, and the struggles that preceded the AIG
rescue, in which the uncertain effect of bankruptcy on
international contracts put the U.S. government under enormous
pressure to support the company. Additionally, the development
of international regulatory regimes could help to discourage
regulatory arbitrage, instead encouraging individual countries
to compete in a ``race to the top'' by adopting more effective
regimes at the national level. Such regimes would also provide
a plan of action in the event that a financial crisis hit an
internationally significant institution in a country that was
too small to bear the cost of a bailout. In the most recent
crisis, the Netherlands' rescue efforts totaled 39 percent of
its GDP, and Spain's totaled 24 percent, raising the specter
that a future crisis could swamp the ability of smaller nations
with large banking sectors to respond in absence of an
international regime.
Moving forward, it is essential for the international
community to gather information about the international
financial system, to identify vulnerabilities, and to plan for
emergency responses to a range of potential crises. The Panel
recommends that U.S. regulators encourage regular crisis
planning and ``war gaming'' for the international financial
system. This recommendation complements the Panel's repeated
recommendations that Treasury should engage in greater crisis
planning and stress testing for domestic banks.
Financial crises have occurred many times in the past and
will undoubtedly occur again in the future. Failure to plan
ahead will only undermine efforts to safeguard the financial
system. Careful policymakers would put plans in place before
the next crisis, rather than responding on an ad hoc basis at
the peak of the storm.
Section One:
A. Overview
The financial crisis that began in 2007 threw into relief
two interesting facts about the international financial system.
The first is well-known: the international financial system is
integrated to the extent that in normal circumstances a bank's
national origin is irrelevant to the people doing business with
it. One of the consequences of some aspects of international
integration, as discussed below, is that a crisis in one part
of the system rapidly spreads across national boundaries. When
such a crisis occurs, though, another fact becomes clear: in a
crisis, a bank's national origin matters very much indeed.
Although most countries followed one or more of the same
general approaches described in this report, and although the
governments affected by the crisis did coordinate effectively,
responses to the crisis have tended to be ad hoc and country-
specific. Thus, although many institutions operate across
national borders and are sometimes not identified with their
home countries, at the time of crisis their national origins
became more evident, and global expectations are that
institutions will be the responsibility of their home
countries.
This report examines the international aspects of the
rescue of the financial system. In the United States, the
Troubled Asset Relief Program (TARP) formed a large part of a
coordinated government effort by various U.S. government
agencies including the Federal Reserve Board, the FDIC, and
Treasury. The report focuses on: * To what extent the TARP and
related efforts in the United States had international
implications; and * To what extent the programs instituted by
other countries had repercussions in the United States or on
U.S. institutions.
The report also examines the degree to which the TARP and
related U.S. financial rescue efforts were coordinated with
foreign governments and central banks. Section 112 of the
Emergency Economic Stabilization Act of 2008 (EESA)1 requires
the Secretary of the Treasury to coordinate with the financial
authorities and central banks of foreign governments to
establish TARP-like programs in other countries and permits the
Secretary to purchase troubled assets held by foreign financial
authorities or banks. The Panel has not previously analyzed
Treasury's performance, and the related performance of the
Federal Reserve Board in this area, but the topic is clearly
part of the Panel's mandate. It implicates the use of the
Secretary's authority under EESA, the impact of Treasury's
actions on the financial markets, the TARP's costs and benefits
for the taxpayer, and transparency on the part of Treasury.
The report builds on the Panel's previous work, including
its April 2009 report assessing Treasury's TARP strategy in
light of historical approaches and the crisis and responses to
the crisis in Europe.2
B. Financial Integration and the Crisis
1. Globalization Prior to the Crisis
The increasing interconnectedness of capital markets, the
significant U.S. operations of foreign firms, and the rising
predominance of large, global U.S.-based institutions would
eventually help elevate the crisis that began in 2007 from one
involving problematic subprime asset exposures at select
institutions to one that provoked broader, systemic market
fears of a financial and economic collapse. The pre-crisis
organization of the international financial system was the path
through which contagion spread; it also provided the veins into
which rescue funds could be injected. This system was sprawling
and not easily cordoned off by country.
Numerous factors contributed to financial globalization
over the past decade: increased liberalization of home country
regulations, the appeal of geographic risk diversification, a
growing stable of core multinational corporate clients, and
rapidly developing capital markets in attractive, higher
growth, emerging market economies.3
The U.S. banking sector is influenced by foreign markets in
many ways, including: direct equity exposure to foreign
investors, loans to foreign entities, deposits and other
funding from overseas investors (including the interbank
lending market), and credit risk transfer instruments (such as
credit default swaps or CDSs) and other customized over-the-
counter (OTC) contracts written on assets located in another
country or entered into with a foreign counterparty. Other
forms of integration are more regulatory in nature, such as
increased uniformity in accounting and regulatory capital
requirements.4 Markets and regulators also depend on
internationally recognized credit rating agencies for
verification of creditworthiness. Finally, sovereign debt
allows governments to raise funds, exposing investors
(including banks) to interest rate, currency, fiscal and
political risks in various regions.5
The rising interconnectedness of global financial
institutions and, ultimately, economies, is illustrated by a
growing correlation between equity market returns in the United
States and those in the rest of the world, particularly over
the past decade (as shown in Figure 1 below). This trend may
indicate that geographic diversification is a less effective
risk management tool than it was in the past.
Figure 1: Correlation of Equity Market Returns, United
States vs. Rest of the World (by Decade, 1970s-2000s)6
The proportion of U.S. banking assets housed within
globally oriented institutions has grown steadily over the
years. U.S. banks with significant foreign operations rose from
just over 50 percent of total U.S. bank assets in the early
1990s to nearly 70 percent on the eve of the financial crisis7
at which time the five largest U.S. firms (all global in
nature), accounted for approximately 36 percent of total bank
assets.8
Figure 2: Share of Total U.S. Bank Assets in Globally
Oriented U.S. Banks9
Figure 3 below outlines international contributions to
revenue at the leading U.S. and international banks in 2005 and
2006. On the eve of the crisis in 2006, eight of the largest
global banking institutions headquartered in the United States
generated $110 billion in net revenue from non-U.S. operations,
accounting for 28 percent of these banks' total net revenues.
For many of the larger, more systemically important
institutions, though, overseas operations were even more
significant. For example, overseas revenue contributions for
The Goldman Sachs Group, Inc. (Goldman Sachs) (46 percent),
Citigroup Inc. (Citigroup) (44 percent), Lehman Brothers
Holdings Inc. (Lehman) (37 percent), Merrill Lynch (36
percent), and Morgan Stanley (37 percent) were materially
higher. (These figures exclude non-bank entities such as hedge
funds and insurance companies. Insurer American International
Group (AIG) generated approximately half of its 2004 to 2006
net revenue from overseas operations.10)
A similar sample of eight leading European and Canadian
banks shows that $67 billion, or approximately 34 percent of
aggregate net revenue, came from the United States or all of
North America, but outside their home market, in 2006. As with
the U.S. banks, contributions from global, systemically
important capital markets institutions were generally higher,
led by Credit Suisse Group AG (Credit Suisse) (37 percent),
HSBC Holdings plc (HSBC) (33 percent), UBS AG (UBS) (32
percent), and Deutsche Bank AG (Deutsche Bank) (28 percent).
Across the U.S. securities industry, foreign-owned broker/
dealers account for nearly one-third of U.S. securities
revenue. Aggregate 2006 revenue data for the over 5,000 U.S.-
operated broker/dealers reveal that 29 percent of this U.S.
revenue is reported by foreign-owned broker/dealer subsidiaries
in the U.S. (including Deutsche Bank, Credit Suisse, UBS, and
many others), up from a 23 percent contribution in 2001.11
Figure 3: International Net Revenue Contributions, 2005-
200612
Non-U.S. Revenue (billions of dollars)
Non-U.S. Revenue (Percentage of Total)
U.S. Banks 2005 2006 2005 2006
Bank of America 4.2 8.2 7.5 11.3
Bear Stearns 0.9 1.2 12.5 13.2
Citigroup 33.4 38.2 41.4 43.6
Goldman Sachs 10.6 17.3 42.0 45.9
JPMorgan Chase 11.5 16.1 21.4 26.2
Lehman Brothers 5.5 6.5 36.6 36.8
Merrill Lynch 8.5 12.0 33.7 35.5
Morgan Stanley 8.2 11.0 34.7 37.0
Total 82.7 110.5 25.1 28.4
U.S./North America Revenue (billions of dollars)
U.S./North America Revenue (Percentage of Total)
Non-U.S. Banks 2005 2006 2005 2006
CIBC 1.4 1.3 14.0 12.6
Credit Suisse 9.5 10.1 38.6 36.8
Deutsche Bank 7.2 10.5 24.1 27.7
HSBC 21.6 23.6 34.5 33.0
Royal Bank of Canada 3.8 4.0 23.8 21.8
Sociiti Ginirale 3.3 3.5 13.8 12.3
TD Bank 2.2 2.3 21.9 19.4
UBS 12.3 12.2 37.2 32.2
Total 61.2 67.3 36.1 34.1
U.S. investment banks have long held a commanding position
in European and Asian financial markets, and played a leading
role in modernizing the equity markets in both regions, along
with developing a more liquid debt market. The 2006 league
table data (which measure investment bank performance)
underscore the commanding market foothold of the top U.S.
investment banks Goldman Sachs, Morgan Stanley, Bank
of America/Merrill Lynch, Citigroup and JPMorgan Chase & Co.
(JPMorgan Chase). These firms accounted for five of the top
eight league table slots in equity capital markets fees and all
of the top-five positions in announced mergers and acquisitions
volume in the region.13 In comparison, the leading European
banks penetrated the U.S. market to a lesser extent by 2006,
with their footprints in many cases supplemented via
acquisitions.14
2. Globalization of the Crisis
The conventional wisdom in the pre-crisis years suggested
that banks that operate across global markets should be more
stable, given their ability to rely on a collection of
geographically dispersed businesses. But the degree of
interlinkages within the financial system and the globalized
nature of the housing downturn created a backdrop that
magnified, rather than diluted, the risk to globally
interconnected financial institutions. The most harmful
interlinkages were manifested primarily in (a) exposure to the
housing crisis, particularly via holdings of U.S. mortgage-
backed securities, and (b) funding mechanisms that relied on
the ability of financial institutions to access overnight
inter-bank funding markets, particularly in dollar-denominated
markets, in many cases to fund assets linked to U.S. housing
securities.15
A recent study by the Board of Governors of the Federal
Reserve System cites the following factors as helping to
globalize the crisis: * ``a generalized run on global financial
institutions, given lack of information as to who actually held
toxic assets and how much; * the dependence of many financial
systems on short-term funding (both in dollars and in other
currencies); * a vicious cycle of mark-to-market losses driving
fire sales of [asset-backed securities], which in turn
triggered further losses; * the realization that financial
firms around the world were pursuing similar (flawed) business
models and were subject to similar risks; and * global swings
in risk aversion supported by instantaneous worldwide
communications and a shared business culture.'' 16
Given that the U.S. subprime crisis and the
global housing market collapse more broadly is
generally acknowledged as ground zero for the financial crisis,
a review of the mechanisms by which the residential mortgage
crisis was transmitted to global financial institutions is
perhaps illustrative. At its core, the increase in the
securitization of mortgage loans broadened the exposure of the
U.S. housing market collapse beyond the traditional
relationship of borrowers and lenders, leading to what one
study called a ``lengthening of the intermediation chains that
increased the complexity and interconnectedness of the
financial system, increasing the potential for disruptions to
spread swiftly across markets and borders.''17 Under this new
framework, the old model of mortgage lending, originating and
holding loans on a bank's balance sheet, morphed into a new
``originate to distribute'' model. The economic incentives for
the mortgage originator at the front-end of the transaction
chain changed with the securitization and distribution of
mortgage loans to investors. Because the loans' originators did
not bear all the risk associated with the loans, they had less
incentive to ensure the quality of the loan and the
creditworthiness of the borrower.
Figure 4: Simple Bank Mortgage Lending Evolves Into ``Risk
Diversification'' (IMF Illustration)18
Problems in transparency as the transaction channel
lengthened and product sophistication expanded reinforced the
risks in the housing market. The manner in which these loans
were repackaged into mortgage securities, tranches of which
then served as reference entities for a host of other products
including collateralized debt obligations (CDOs) and
CDO-squareds (as outlined below in Figure 5)19 not
only widely dispersed the exposure to the U.S. mortgage market
but also greatly magnified the underlying risk in the initial
mortgage loans.20 Further, the complexity and opacity of these
products impeded the recognition of the risks they carried.
Figure 5: CDO & CDO-Squared Issuance, 2000-200821
As became abundantly clear, the increased sophistication of
mortgage products backstopped by supportive credit
ratings did not necessarily dilute the risk from a
regional, or much less a global, housing crisis.22 Rather, many
banks continued to hold the troubled securities associated with
these products, in addition to whole loans on similar
collateral.23
Of course, securitization allowed non-U.S. institutions to
gain exposure to the U.S. housing market via an assortment of
investment vehicles. This was not necessarily a two-way street,
as non-U.S. residential mortgage securities markets were
comparatively less developed, and cross-border mortgage lending
into these markets was limited.24 Securitization issuance
volumes by geography underscore the predominant role of the
U.S. asset-backed securitization market. From 1999 to 2009, the
United States accounted for 80 percent of global securitization
volume, with the balance largely driven by Europe. As outlined
in Section C.1.c below, a significant portion of these U.S.
securities, and the CDOs that referenced them, ultimately wound
up on the balance sheets of European institutions, resulting in
substantial write-downs during the 2007-2009 period.
Figure 6: Securitization Issuance by Geographic Region,
1999-2009 (billions of USD)25
At the end of 2007, $9.1 trillion in U.S. mortgage-related
securities were outstanding. Of this amount, $2.4 trillion were
non-agency residential mortgage-backed securities (RMBS), so-
called private label securities as they lacked the guarantee of
Fannie Mae or Freddie Mac, and $872 billion were commercial
mortgage-backed securities (CMBS).26 Of the outstanding non-
agency RMBS, $1.5 trillion were subprime mortgage or Alt-A
securities, which referenced loans to borrowers with lower
credit scores or with respect to properties with a higher loan-
to-value ratio, or were underwritten on the basis of more lax
documentation standards than would be typical for prime
borrowers.27 The total U.S. non-agency housing market was 2.5
times the size of the European RMBS market (see Figure 7
below).
Residential securities exposures are outlined in the table
below; regional loss tallies and specific financial
institutions' losses are detailed in Figures 10 and 11, below.
Figure 7: Residential Mortgage Backed Securities
Outstanding, 2007 (billions of USD)
U.S. Balance28
Agency MBS 4,188
Non-Agency MBS29 2,390
Prime 581
Alt-A 714
Option ARM 304
Subprime 790
Total 6,578
Europe30 977
One offshoot of globalization, and of the increased
importance and integration of emerging markets, was the higher
profile of state-controlled investment arms, or Sovereign
Wealth Funds (SWFs). SWFs were the first line of defense for
many firms during the initial phase of the crisis: banks sought
to plug holes in their balance sheets in late 2007 and early
2008, and SWFs were able to provide capital.31 Even near the
peak of the crisis in August 2008, a state-owned institution,
Korea Development Bank (KDB), was seen as a potential buyer of
Lehman Brothers. After the collapse of Lehman, there was
significant speculation that China International Capital Corp
(CICC), a Chinese government investment arm, would take a
controlling stake in Morgan Stanley.32
3. Cross-Border Integration Within Financial Institutions
While overseas operations generally presented attractive
returns to the parent companies of financial institutions, the
structure of these cross-border operations grew increasingly
complex in order to comply with the legal, regulatory, and tax
requirements of each country in which the banks operated.
Complex internal procedures ultimately permitted funds to flow
freely across national boundaries even within a specific
institution. In addition to operating across multiple
jurisdictions, the operations of the holding companies and
their subsidiaries grew increasingly intertwined. These
structures would pose challenges when the system unraveled. As
the International Monetary Fund (IMF) noted, ``legal frameworks
for facilitating cross-border finance in stable periods are
typically more effective than cross-border resolution
arrangements that are available in times of distress.''33
When the financial crisis hit, and firms with significant
operations outside their home countries experienced severe
pressure or failed, there was a widespread assumption that the
countries where they were headquartered would be responsible
for any government rescue. Officials in the United States and
across the world faced the difficult and costly task of
resolving these highly complex corporate structures, including
accounting for or unwinding internal and external business
transactions across multiple jurisdictions.34 Depending on the
relative importance and interconnectedness of a global firm's
operations in a particular host country, local regulators also
faced challenges in containing the damage from a failing
affiliate of a foreign-owned firm.35 U.S. and international
regulators faced challenges in assisting these institutions in
an effective and orderly fashion, largely because they were
unprepared and ill-equipped to deal with such complex
institutions operating across multiple jurisdictions.36
The crisis revealed that challenges in one area of the firm
can quickly infect the entire organization.37 It is important
to note that a bank's ability or the market's
perception of a bank's ability to honor its
obligations is of the utmost importance in global finance.
Regulatory capital at the parent level holds the entire
institution together by backstopping the firm's obligations and
financing arrangements across its global operations.38 Thus, if
the foreign parent of an institution is in trouble, this will
impact the market's assessment of the creditworthiness of an
affiliate located in a different country. Credit ratings will
come under pressure. Depositors, counterparties, and customers
will likely begin to flee, further pressuring the firm and its
foreign branches, affiliates or subsidiaries. As the recent
crisis demonstrated, this process is often swift and brutal.
C. Description of the International Financial Crisis
1. How the Crisis Developed a. Timeline of Crisis
The global financial crisis grew out of problems in the
U.S. subprime housing market. Those problems became widely
apparent in the summer of 2007, when two hedge funds from The
Bear Stearns Companies, Inc. (Bear Stearns) with heavy subprime
exposure collapsed, and rating agencies began to downgrade
scores of subprime securities.39 Numerous European banks had
invested in U.S subprime securities, and their balance sheets
experienced stress as those investments lost value. In a few
instances, those losses popped into public view in 2007. On
August 8, with the market for subprime securities cratering,
French bank BNP Paribas suspended withdrawals from three
investment funds that had exposure to subprime loans.40 On
August 9, Dutch investment bank NIBC Bank N.V. (NIBC) announced
that it lost 137 million ($189 million)41 in the first half of
2007 on investments with exposure to subprime loans.42 Also in
the summer of 2007, two state-owned German banks with exposure
to U.S. subprime loans, Sachsen Landesbank (Sachsen LB) and IKB
Deutsche Industriebank AG (IKB), received assistance from other
state-owned banks in Germany.43 The emerging problems in the
U.S. housing market also began to affect commercial paper
markets, since much of that paper, issued by banks as a source
of short-term funding, was collateralized by U.S. housing-
related securities.44
Amid the U.S.-centered market turmoil, Northern Rock plc
(Northern Rock), a highly leveraged U.K. mortgage lender that
held nearly one-fifth of all U.K. mortgages and relied heavily
on short-term financing,45 was unable by September 2007 to
continue funding its operations. The U.K. government lent an
unspecified amount to Northern Rock and, with a bank run under
way, guaranteed its deposits. In February 2008, after Northern
Rock's financial condition deteriorated further, the U.K.
government nationalized the firm.46 The collapse of Northern
Rock presaged what would become more apparent in 2008 and
beyond: not only did the United States experience a housing
bubble, but so did the United Kingdom, Ireland, Spain, and
Denmark,47 among other countries.48
March 2008 brought the collapse of Bear Stearns, which also
was highly leveraged and had considerable exposure to subprime
loans. Because the U.S. government facilitated a private
purchase with government support,49 the immediate global
repercussions of Bear Stearns' demise were limited. Still, the
crisis continued to intensify. On April 21, 2008, the Bank of
England announced a liquidity scheme under which banks could
swap certain mortgage-related securities for UK Treasury
bills,50 following the introduction of a similar program in the
United States.51 On July 11, 2008, the Danish National Bank
granted an unlimited liquidity facility to Roskilde Bank, and a
private association of nearly all the banks in Denmark provided
a guarantee on losses of DKK 750 million ($158 million) on the
liquidity facility, with further losses guaranteed by the
Danish government.52
The tremors that shook global financial markets between
August 2007 and August 2008 gave way in September 2008 to an
enormously destructive earthquake. The epicenter was the United
States, where the government took Fannie Mae and Freddie Mac
into conservatorship and guaranteed their debts, allowed Lehman
Brothers to enter bankruptcy, and authorized lending of up to
$85 billion to prevent the bankruptcy of AIG.53 But the
reverberations were felt around the world, and especially in
western Europe, where the largest banks are often more highly
integrated with the rest of the global financial system than
they are in other parts of the world.54
Fears of cascading failures across the financial landscape
were stoked by not only legacy toxic asset and counterparty
exposures, but also capitalization levels at major European
institutions that offered little cushion to absorb market fears
of more pronounced losses. Market and counterparty confidence
collapsed, necessitating increased intervention by government
entities across the globe to battle what had now become an
international financial crisis. Interbank lending rates, which
measure risk aversion and fears of bank insolvency, illustrated
the viral nature of what began as a relatively localized U.S.
subprime crisis. This played out across the European and U.S.
interbank markets, creating a credit squeeze, given the
dependence on short-term wholesale funding on both sides of the
Atlantic.
The widening in spreads shown in Figure 8 mirrors the key
phases of the financial crisis, from the onset of the crisis in
late summer 2007 to the collapse of Bear Stearns in March 2008,
and later the bankruptcy of Lehman Brothers in September 2008,
heralding the beginning of the most pronounced period of market
stress.
Figure 8: LIBOR-OIS Spread Throughout the Crisis55
Amid the market panic in September 2008, developed
countries responded rapidly. The United States and European
nations undertook numerous similar actions to stabilize
financial markets. These actions included instituting
recapitalization programs, nationalizing financial
institutions, increasing deposit insurance, guaranteeing assets
generally, purchasing toxic assets, and relaxing accounting
standards. The United States took some steps in September
2008,56 but it also quickly began coordinating with other
countries. On September 18, three days after Lehman Brothers
filed for bankruptcy, the U.S. Securities and Exchange
Commission (SEC) and the U.K.'s Financial Services Authority
orchestrated a temporary ban on short selling financial
companies.57 Over the course of the next month, the Federal
Reserve also coordinated with other central banks to expand
pre-existing currency swap agreements and cut interest rates by
0.5 percentage points.58 In late September, the U.S. government
continued to respond on an ad hoc basis,59 and several of its
counterparts across Europe organized rescues of specific
banks.60 Iceland took the most extreme steps, nationalizing
three of its largest banks, which were highly leveraged and
unable to roll over their sources of funding.61
On October 4, the day after the U.S. government's enactment
of EESA, the leaders of Germany, France, the United Kingdom and
Italy met to coordinate their responses to the crisis, and in
the following days, Germany, France, and the United Kingdom all
announced their own comprehensive responses. On October 8, the
U.K. government announced the establishment of a scheme to
guarantee bank debt. It also rolled out a plan to provide
enough capital to eight large financial institutions so that
each could raise its Tier 1 capital by #25 billion ($44
billion),62 though only Lloyds and Royal Bank of Scotland (RBS)
took the funds. On October 13, the French government announced
a 320 billion ($429 billion) fund to provide loans to financial
institutions; among the French banks that eventually got
assistance were BNP Paribas and Sociiti Ginirale. The same day,
the German government announced a 70 billion ($94 billion) fund
for recapitalizing banks, whose eventual recipients included
Commerzbank AG (Commerzbank) and WestLB AG (WestLB), and a 400
billion ($537 billion) scheme for guaranteeing bank financing.
The following day, the U.S. government announced its own plan
for guaranteeing newly issued bank debt, the Federal Deposit
Insurance Corporation's (FDIC) Temporary Liquidity Guarantee
Program;63 its own program of capital injections, Treasury's
Capital Purchase Program (CPP), which initially included eight
large financial institutions;64 and a Federal Reserve program,
the Commercial Paper Funding Facility, to purchase commercial
paper and thereby provide a backstop to that market.65 In
November 2008, the leaders of nations in the G-20 met in
Washington, where they agreed on a five-point plan for
financial reform.66
In January 2009, the British government announced another
extraordinary assistance program, the Asset Protection Scheme
(APS). Under this program, banks were able to buy protection
from the government on a specified portfolio of assets. Again,
only Lloyds and RBS agreed to participate.67 This program was
similar in structure to the U.S. government's Asset Guarantee
Program (AGP), which preceded the British plan and had only two
participants, Citigroup and Bank of America Corporation (Bank
of America).68
Despite some efforts at a more comprehensive solution, 69
the balance sheets of many European banks continued to suffer
throughout late 2008 and early 2009, and smaller European
governments responded with additional assistance on a piecemeal
basis.70 b. Impact on Major Economies Outside the United States
and Europe
Because the financial crisis originated in domestic housing
bubbles, and was transmitted by highly leveraged multinational
financial firms, countries that were shielded from those forces
fared comparatively well.71 Brazil, India, China, Australia,
and Canada, for example, generally avoided the banking crises
that plagued the United States and much of Europe;72
nonetheless their economies felt many of the aftereffects of
the global financial crisis.
Brazil's banks were subject to tighter leverage
requirements than existed in Europe and the United States, the
result of reforms implemented after Brazil's 1990s-era banking
crisis.73 Nonetheless, the Brazilian economy, which had been
experiencing strong growth, contracted in the fourth quarter of
2008 and the first quarter of 2009. The Brazilian government
responded by cutting interest rates, providing a liquidity
cushion to small Brazilian banks, and by enacting a fiscal
stimulus program, among other steps. Growth returned to the
economy in the second quarter of 2009, and according to one
analyst, Brazil is one of the countries that has fared best
during the global financial crisis.74
India also fared comparatively well. Its highly regulated
banking sector had limited operations outside India, and
therefore very little exposure to subprime lending in the
United States. India did feel the follow-on effects of the
crisis, though. Its export-driven economy suffered when global
demand dropped; its financial sector suffered from the global
liquidity squeeze, which led to a fall in lending; and its
stock market lost roughly 50 percent of its value between June
and December 2008. Although the Indian government did not
provide capital to Indian banks, it did respond to the crisis
with fiscal stimulus equal to about 2 percent of GDP, and it
shifted from a tightening monetary policy to an expansionary
one.75
China's financial system also fared relatively well during
the crisis, though it should be noted that China's state-owned
banks have benefited from repeated government rescues in the
recent past.76 China maintains capital controls that limit
foreign investment by individuals and businesses; these
controls had beneficial effects during the crisis, since
Chinese investors had little exposure to troubled parts of the
U.S. and European financial systems.77 China's banks had
invested heavily in U.S. securities, but those investments were
generally not in subprime securities, but rather in safer
Treasury bonds and securities issued by Fannie Mae and Freddie
Mac,78 which the U.S. government stepped in to backstop during
the crisis.79 Therefore, China's financial system, like
Brazil's and India's, did not sustain major damage from the
crisis. China's export-driven economy did suffer, though, from
the sharp downturn in global demand and the slowdown in foreign
investment. China's explosive growth slowed during the crisis,
but the government countered the effects of the slowdown by
increasing bank lending,80 lowering interest rates, and
introducing fiscal stimulus spending that was among the largest
in the world as a percentage of GDP.81
Australia also suffered relatively little from the crisis.
Its only decline in GDP occurred in the fourth quarter of
2009,82 meaning that Australia did not enter into a
recession.83 Australia's banks for the most part remained
healthy and profitable throughout the crisis,84 though the
country's banking system did suffer the collapse of two large
Australian companies and one particularly large write-down on
subprime mortgages.85 Australian banks maintained high capital
levels and, because domestic opportunities for investment were
plentiful, their balance sheets contained relatively few
internationally tradable securities such as securitized
loans.86 Australian banks also maintained high lending
standards by issuing relatively few loans requiring minimal
documentation or a minimal down payment.87
Although Canada's GDP decreased for four straight quarters
in late 2008 and early 2009, its recession was linked strongly
to its reliance on the United States as a market for its
exports.88 Its banking system remained healthy. Leverage in
Canadian banks was limited.89 Canadian banks also sustained
only modest losses on structured products, which include the
mortgage-related securities that led to enormous losses at U.S.
and European banks.90 To bolster the economy, the Canadian
government passed a $62 billion CAD ($51 billion) stimulus
package in January 2009 and gradually reduced interest rates
from 3 percent in October 2008 to 0.25 percent in April
2009.91c. Financial Institutions Most Affected
The interconnections within the global financial
marketplace and the significant cross-border operations of
major U.S. and foreign-based firms widened the fallout of the
crisis, requiring a multi-pronged response by a host of
national regulators and central banks. The multinational nature
of the largest global financial institutions contributed to
both the direct losses on troubled securities assets and the
cross-border panic that imperiled the functioning of global
capital markets. Figure 9 shows those losses by banks based in
the key regions impacted by the financial crisis.
Figure 9: Financial Crisis Losses on Securities Holdings
for Banks Located in North America, Europe and Asia92
Comparatively weaker capitalization levels, illustrated by
higher leverage (in many cases twice that of comparable U.S.
peers), stoked fears among investors and market participants
regarding the ability of the European banking sector to
withstand incremental losses. (Comparisons of write-downs,
leverage and Tier 1 capital ratios are outlined below in Figure
11.) In the context of the relative importance of the banking
system in Europe to economic growth (discussed below), there
was growing fear among some market participants that European
authorities were not taking sufficiently aggressive steps to
shore up capital at key institutions.93
To some degree, these fears were compounded by variations
in the accounting treatment of balance sheet assets.94 95
Outside the United States, most countries permit companies to
report under the International Financial Reporting Standards
(IFRS). While there are similarities between the IFRS and U.S.
Generally Accepted Accounting Principles (GAAP), there are
important differences regarding fair value accounting that have
created discrepancies when U.S. financial institutions and
international financial institutions recognize losses arising
from troubled assets.96 In the case of European banks, the
majority of assets are valued at amortized cost rather than
fair value, which delayed the recognition of losses and
increased uncertainty during the crisis.97
Figure 10 below compares the write-downs that U.S. and
European banks have taken on various asset classes through the
duration of the crisis.
Figure 10: Estimated Write-downs on U.S. and Foreign Bank-
Held Securities98 (billions of USD)
Estimated Holdings
Estimated Write- downs
Implied Cumulative Loss Rate
Share of Total Regional Write-downs
Share of Global Write-downs
U.S. Banks
Residential mortgage 1,495 189 12.6 50.9% 20.6%
Consumer 142 0 0.0 0.0% 0.0%
Commercial mortgage 196 63 32.1 17.0% 6.9%
Corporate 1,115 48 4.3 12.9% 5.2%
Governments 580 0 0.0 0.0% 0.0%
Foreign 975 71 7.3 19.1% 7.8%
Total for U.S. Banks 4,503 371 8.2 40.5%
European Banks99
Residential mortgage 1,191 157 13.2 33.0% 17.1%
Consumer 329 9 2.7 1.9% 1.0%
Commercial mortgage 315 74 23.5 15.5% 8.1%
Corporate 1,574 47 3.0 9.9% 5.1%
Governments 2,506 0 0.0 0.0% 0.0%
Foreign 2,615 152 5.8 31.9% 16.6%
Total for European Banks 9,261 476 5.1 52.0%
Asian Banks100
Total for Asian Banks 1,728 69 4.0 7.5%
Totals for All Bank-Held Securities (U.S., Europe &
Asia)101 15,492 916 5.9 100.0
Figure 11 below compares the write-downs during the crisis
and key balance sheet metrics on the eve of the crisis among
specific U.S. commercial banks, U.S. investment banks, and
foreign banks. (Both U.S. commercial banks and European banks
calculated and reported Tier 1 capital ratios under the Basel I
framework during the crisis. In contrast, U.S. investment banks
calculated and reported capital adequacy ratios under an
alternative computation method created by the SEC, before
beginning to report under the Basel II framework at the
beginning of 2008.)102
Figure 11: Balance Sheet Measures (Year-end 2006) and
Write-downs (2007-2010) of U.S. and Foreign Institutions
(billions of USD)
Total Assets
Total Equity
Gross Leverage Ratio103
Tier 1 Risk-Based Capital Ratio104
Write-downs & Losses 3Q2007-1Q2010105
Percent of 2006 Equity
U.S. Banks106
Bank of America 1,460 135 10.8x 8.6% 23.5 17.4%
Bear Stearns 350 12 29.0x
N/A 3.2 26.4%
Citigroup 1,884 122 15.4x 8.6% 68.2 55.8%
Goldman Sachs 838 36 23.4x
N/A 9.1 25.4%
JPMorgan Chase 1,352 116 11.7x 8.7% 16.6 14.3%
Lehman Brothers 504 19 26.2x
N/A 16.2 84.4%
Merrill Lynch 841 39 21.6x
N/A 55.9 143.3%
Morgan Stanley 1,121 35 31.7x
N/A 23.4 66.1%
Foreign Banks107
Banco Santander 1,100 62 17.7x 7.4% 0.0 0.0%
Barclays 1,951 54 36.4x 7.7% 26.2 48.9%
BNP Paribas 1,900 72 26.3x 7.4% 4.3 5.9%
CIBC 271 11 24.6x 10.4% 9.5 86.4%
Credit Suisse 1,030 48 21.3x 13.9% 19.1 39.5%
Deutsche Bank 2,090 44 47.3x 8.5% 17.0 38.5%
HBOS 930 32 29.3x 8.1% 15.2 47.9%
HSBC 1,861 115 16.2x 9.4% 26.6 23.2%
Royal Bank of Canada 411 21 19.4x 9.6% 5.9 27.8%
Royal Bank of Scotland 1,705 89 19.2x 7.5% 31.3 35.2%
Sociiti Ginirale 1,262 44 28.6x 7.8% 12.8 29.0%
Toronto-Dominion Bank 350 21 17.1x 12.0% 0.9 4.4%
UBS 1,964 46 43.0x 11.9% 52.4 114.7%
As noted above, the European dimension to the crisis was
magnified by the predominance of bank-intermediated credit in
Europe, as opposed to other sources of credit. This raised the
importance of European policy-makers stabilizing the banking
system in order to contain further disruptions to the
continent's economies. However, at the onset of the crisis
in the context of the comparatively more lenient
accounting treatment discussed above the centrality
of these institutions in credit intermediation may have
contributed to less aggressive action in the wake of Bear
Stearns and the lead-up to the Lehman Brothers failure. As
illustrated below, bank assets in the Eurozone area, including
Denmark, Sweden, and the United Kingdom, were $48.5 trillion at
the end of 2007, approximately three times the size of the
region's GDP. This compares to bank assets of $11.2 trillion in
the United States, a level on par with GDP. While these
disparities indicate that the U.S. economy was more reliant on
the capital markets to raise equity and intermediate lending
through the debt markets, both the U.S. and European financial
systems were highly susceptible to the fallout from the
financial crisis. However, the concentration within Europe's
banking sector raised the profile of a handful of multinational
banks, relative to the region's overall economy. Additionally,
many European banks were comparatively more dependent on
foreign-sourced deposits, increasing their susceptibility to
disruptions outside their home market.
Figure 12: Bank Assets and Capital Market vs. GDP, 2007
(billions of USD)108
Region
GDP
Total Bank Assets109
Stock Market Capital- ization
Debt Securities
As Percentage of GDP
Public
Private
Total
Total Bank Assets
Stock Market Capital- ization
Total Debt Securities
World 54,841 95,769 65,106 28,629 51,586 80,215 175 119 146
European Union110 15,741 48,462 14,731 8,778 19,432 28,211
308 94 179
Euro Area 12,221 35,097 10,040 7,606 15,398 23,004 287 82
188
North America 15,244 13,852 22,109 7,419 24,492 31,911 91
145 209
United
States 13,808 11,194 19,922 6,596 23,728 30,324 81 144 220
Canada 1,436 2,658 2,187 823 764 1,587 185 152 111
Japan 4,384 10,087 4,664 7,148 2,066 9,214 230 106 210
This context is important for understanding efforts by the
United States and foreign governments. Actions by Treasury and
the Federal Reserve to stabilize the U.S. financial system and
its largest financial institutions helped supplement rescue
efforts in other countries, just as overseas rescue efforts
enhanced stability measures within the U.S. market. This is due
to both the interconnectedness of global financial markets, and
the multinational nature of the largest U.S. and European
financial institutions.
2. The Ad Hoc Nature of Government Responses
The international responses to the crisis took various
forms;111 likewise, the way in which governments came to the
choices they made was varied. In some cases, governments
emulated others' actions, as seen in the EU's decision to
follow the United States' lead in stress-testing banks.112 In
some cases, markets forced governments to take certain actions,
as when Ireland's move to increase deposit insurance led to a
flow of U.K. deposits to Irish banks, prompting U.K. officials
to increase their nation's deposit insurance.113 And in some
cases governments learned from past experience and adjusted
their response accordingly, as when Ireland's asset management
agency drew lessons from the Nordic bank crisis in the 1990s.
For the most part, governments across the globe responded
to the crisis on an ad hoc basis as it unfolded. What this
meant was that most of the responses were tailored to address
immediate problems, and they tended to be targeted at specific
institutions or specific markets, rather than the entire
financial system. Home country regulators generally took
responsibility for banks headquartered in their jurisdictions,
and the evidence suggests that assistance was doled out less to
stabilize the international financial landscape than to respond
to potential fallout across a particular domestic market.114
The different conditions that nations placed on the banks they
rescued offer a good illustration of the frequent lack of
international coordination in many of the responses. For
example, the United Kingdom and France imposed lending targets
for rescued banks, while the United States did not. The United
States took warrants in rescued banks, which allowed for the
potential realization of gains on its investments, but other
nations did not follow suit. Restrictions on executive
compensation and pay for board members also varied
significantly in different countries.
These differences are not unexpected, given the speed with
which the financial crisis spread and the volatility of markets
at the time; the circumstances often did not permit measured
cross-border cooperation, and while there was certainly a great
deal of informal communication between countries, it did not
necessarily lead to coordinated action. Furthermore, it is not
clear that a more systemic global response to the crisis would
have yielded better results, given how quickly some countries
emulated other countries' responses at the height of the
crisis. There is also no reason to think that anything other
than ad hoc, country-specific measures were feasible at the
peak of the crisis, given that different countries have
different interests, and they inevitably will seek to pursue
their own interests during an emergency. Fortunately in this
instance, the interests of the countries most affected tended
to converge at the peak of the crisis when a further
meltdown of the global financial system would have had
deleterious consequences for many nations though they
later began to diverge again. a. Capital Injections
One of the most common government responses to the 2008
financial crisis was the direct purchase of securities from
troubled banks in order to inject needed capital into these
firms and the financial sector in general. Although the term
``capital injections'' most commonly refers to the purchase of
common or preferred shares by a government, it can refer to a
broad range of strategies.115 (When classifying such actions,
among the many variables to be considered are whether there is
a private capital component to the plan, the type of securities
or other assets that are purchased, whether the government
takes a minority or majority stake, whether the securities are
purchased at market value, and the degree of government
involvement in management, board membership, and operations.)
The more extreme forms of capital injections fade into
``nationalization,'' discussed in the following section.
Equity capital injections are an efficient method of
assisting failing financial institutions with non-performing
assets, compared to asset purchases for instance, since the new
equity can be leveraged. Former Treasury Secretary Henry
Paulson explained the advantage of this method in his recent
book on the financial crisis:
To oversimplify: assuming banks had a ten-to-one leverage
ratio, injecting $70 billion in equity would give us as much
impact as buying $700 billion in assets. This was the fastest
way to get the most money into the banks, renew confidence in
their strength and get them lending again.116
Although most capital injection programs followed and
appear to have been inspired by the TARP and its Capital
Purchase Program (CPP),117 some capital injections preceded the
TARP, such as Germany's purchases of equity in four major banks
between August 2007 and August 2008.118 The United Kingdom's
capital injection program, discussed below, was also a likely
inspiration for similar programs.119
Following the establishment of the TARP on October 3, 2008,
many countries created similar stabilization funds that
included a capital injection component. Figure 13 below shows
the volume of capital injections implemented by G-20 countries
between September 2008 and June 2009, with the bulk of capital
injections occurring in November 2008.
Figure 13: Government Capital Injections by G-20 Nations120
Many EU nations, in particular, established capital
injection programs. For instance, on October 17, 2008, the
German parliament enacted the Financial Market Stability Act,
which created a 480 billion ($646 billion) stabilization fund
known as the Sonderfonds Finanzmarktstabilisierung (SoFFin),
which, among other things, authorized up to 80 billion ($107
billion) in capital injections.121 Ultimately, only 29 billion
($40 billion) was expended on capital injections into four
banks, with more than half of that amount going to
Commerzbank.122
Another, similar example is France's State Shareholding
Corporation (SPPE).123 Established on October 20, 2008, this
government-owned entity purchased significant amounts of
securities in large banks such as BNP Paribas, Sociiti
Ginirale, and Credit Agricole S.A. (Credit Agricole), in two
separate rounds of recapitalization.124 Unlike the CPP, where
the shares were directly held by Treasury, SPPE was set up as a
corporation (sociiti anonyme), with the government as the sole
shareholder. SPPE was itself controlled by a preexisting
government agency, the Government Shareholding Agency (APE),
which also controls government investments in many other
sectors of the French economy, such as telecom, airports, and
defense.125 France's long history with state-owned enterprises
(entreprises publiques) made it possible for the government to
use a preexisting framework to address the unprecedented
situation of the 2008 financial crisis. SPPE imposed a number
of ``behavioral commitments'' on participating banks, including
lending targets and limits on severance payments for
executives.126
The government of the United Kingdom was another notable
user of capital injections through its Bank Recapitalisation
Scheme (BRS), which was instituted on October 8, 2008 as part
of a larger package of stability measures.127 This #50 billion
($87 billion) program was designed to boost Tier 1 capital at
British banks. Unlike the CPP, however, the British government
set a target for new capital to be raised by participating
banks. Those banks could then either raise the capital on their
own from private investors, or from funds provided by the
government in exchange for preferred and common stock.128
Although this program, mentioned earlier in Section C.1.a, was
open to all banks within the United Kingdom as well as U.K.
subsidiaries of foreign banks, the government's focus was on
eight large and systemically significant banks.129 All eight of
these banks participated in the program in the sense of raising
the requisite capital. Only two of Britain's largest banks,
Royal Bank of Scotland and Lloyds TSB, actually took the
government funds, totaling #37 billion ($65 billion).130
The British government emphasized that the Bank
Recapitalisation Scheme was designed to provide maximum
protection for the taxpayer. This was highlighted by the Prime
Minister at the time, Gordon Brown, who contrasted the British
approach with the initial TARP plan for asset purchases.131
Even after the United States switched to a strategy of capital
injections, there were substantial differences between the
countries' approaches. Unlike the CPP, which was designed to be
attractive to banks in order to maximize participation, the BRS
imposed a number of rigorous conditions on participating banks,
including, among other things, lending targets.132
Although most countries tended to focus on assisting their
own domestic banks, in certain cases, several countries jointly
contributed capital to a troubled bank.133 A notable example
occurred on September 28, 2008 when the governments of Belgium,
Netherlands, and Luxembourg purchased a 49 percent stake in
Fortis N.V./S.A. (Fortis), a large bank and insurance company,
for 16.4 billion ($23.9 billion).134 Despite a long history of
cooperation between these three countries, the subsequent sale
of Fortis to BNP Paribas was delayed and complicated by
opposition from Belgian shareholders, highlighting the
difficulties individual national concerns present in
international rescue efforts.135
The EU, through the European Central Bank (ECB), used
capital injections as one of the strategies it pursued to
assist banks in member countries. On May 7, 2009, the European
Central Bank began the Covered Bond Purchase Programme to
purchase eligible Euro-denominated corporate bonds as a way of
injecting additional capital into the financial system,
particularly banks.136 This program concluded on June 30, 2010
after being used to purchase 60 billion ($83.5 billion) in
bonds.137 ECB documents indicate that the ECB believed the
program helped reduce euro zone covered bond spreads
significantly, and thus lowered the cost of capital raised
using these instruments.138
Japan had considerable experience with capital injections
over the past two decades, and brought this experience to bear
in the recent financial crisis. Beginning in 1997, the Japanese
government injected over %10 trillion ($116 billion in today's
dollars) in new capital into the Japanese banking system in two
separate tranches. These injections were accomplished either by
purchasing preferred shares or, more commonly, through
subordinated debt.139 Some observers consider these actions to
have been successful overall.140 In 2004, the Japanese
government passed the Financial Functions Strengthening Act,
which provided a procedure for future capital injections.141
The Deposit Insurance Corporation of Japan (DIC) began using
this new authority in late 2006 with capital injections to two
banks, Kiya Bank and Howa Bank Limited. Beginning in March
2009, DIC began a series of capital injections to 11 banks, in
the form of convertible preferred shares.142 Due to their
convertible nature, these capital injections were potentially
dilutive to existing shareholders.
Overall, capital injections were a common government
response during the initial weeks and months of the financial
crisis. The example of the TARP certainly encouraged the use of
capital injections, although there were many variations both in
the manner in which the capital was provided, and the
consequences of the capital injection to the company and its
investors.143b. Nationalizations
In certain instances, governments went beyond capital
injections, completely or effectively nationalizing ailing
financial institutions. The term ``nationalization'' can be
used to cover a wide array of possible actions, from the
government purchase of a majority stake in a private firm as a
passive investor to putting a failed bank into receivership for
liquidation. This section will generally disregard the latter,
as this strategy is not a new response to the recent financial
crisis, and is usually simply a mechanism for conducting an
orderly bankruptcy, rather than an extraordinary government
takeover of a private enterprise. In certain cases, however, it
is difficult to draw a strict distinction between a bank
liquidation and nationalization.
The U.S. federal government's placement of Fannie Mae and
Freddie Mac into conservatorship on September 8, 2008, as well
as the acquisition of 80 percent of insurance giant AIG on
September 16, 2008, have been termed ``nationalization'' by
some, in the latter case notably by former AIG CEO Maurice
``Hank'' Greenberg.144 The federal government has not
characterized these actions as nationalization, however, likely
due to the negative connotations of the term in the United
States. Other nations, including most European nations, had no
such compunction about calling similar actions nationalization.
The U.K. takeover of Northern Rock, one of the U.K.'s
largest banks at the time, is perhaps the best known
nationalization of a bank in the financial crisis. During the
summer of 2007, ongoing problems with U.S. subprime mortgages
caused a severe contraction in the money markets, as banks
became increasingly wary of lending to one another. Beginning
in September 2007, the Bank of England made loans and provided
other assistance to Northern Rock, which had been unable to
refinance its maturing debts. The news of this support prompted
a brief run on the bank, which was only halted by promises of
asset guarantees by the U.K. Treasury. Despite this assistance,
the company's need for capital kept growing. By February 2008,
the government's potential liabilities from Northern Rock
totaled more than #100 billion ($196 billion).
Unable to find a buyer for Northern Rock, the government
announced it was nationalizing the bank on February 17,
2008.145 After a lengthy arbitration process, it was determined
that former Northern Rock shareholders should not be
compensated.146 The nationalized Northern Rock shares were held
by UK Financial Investments Ltd., a publicly owned firm that
would allow the government to remain a passive investor.
Nevertheless, sweeping changes were instituted at Northern
Rock, including a new board of directors, many layoffs, a
merger with another nationalized bank, a split into a ``good
bank'' and a ``bad bank,'' and the sale or transfer of many
assets, including much of the mortgage book. Although the
nationalization was controversial, the company has recovered
somewhat and expects to repay the government loan by the end of
2010.147
Another example of nationalization was Germany's takeover
of Hypo Real Estate AG (HRE), a major mortgage lender. After
over 80 billion ($107 billion) in loan guarantees by the German
government failed to solve HRE's substantial financial
problems, the government, through SoFFin, made a 2.9 billion
($4.1 billion) offer to purchase 90 percent of the firm, which
was accepted on June 2, 2009.148 This offer closely followed
the passage of a new expropriation law on April 9, 2009.149 On
June 8, 2009, using the provisions of the new law, SoFFin
demanded that the remaining shares be turned over to it.150
After much dispute with the minority shareholders over this
``squeeze-out,'' particularly with the American private equity
firm J.C. Flowers, HRE was finally fully acquired by SoFFin on
October 5, 2009.151 The government did not remove the HRE's
CEO, presumably because he had joined HRE in October 2008 and
was not held responsible for the company's condition.152
Although this takeover may have saved a major lender from
bankruptcy, HRE remains an extremely weak company. Despite
being under complete government ownership for over a year, HRE
was the only German bank to fail the recent EU bank stress
tests.153
The 2008 financial crisis had a greater impact on Iceland's
economy than that of any other nation. Following the collapse
of Glitnir Bank (Glitnir), the Icelandic government announced
on September 28, 2008 that it would nationalize the bank
through purchase of a 75 percent equity stake for the
equivalent of $875 million.154 Within days, however, the
government decided to cancel the purchase and put the insolvent
bank directly into receivership, as well as NBI hf (Landsbanki)
and Kaupthing Bank (Kaupthing), the two other large banks in
the country.155 These institutions were divided into ``old''
and ``new'' banks essentially a bad bank-good bank
strategy with the latter designed to be viable
businesses without the burden of the distressed assets of the
former banks.156 The CEOs of Kaupthing and Landsbanki resigned
upon takeover, presumably under government pressure. The CEO of
Glitnir was asked to stay on, but has since resigned.157
Iceland is still in the process of resolving these and other
banks in receivership. c. Expanded Deposit Insurance
Deposit insurance schemes provide a safety net that
maintains depositor confidence in the solvency of banks and
discourages bank runs by small, uninformed depositors. Insured
depositors are protected against the consequences associated
with the failure of a bank, thereby relieving them of the
difficult task of monitoring and assessing the health of their
financial institution in order to ensure the security of their
savings. Insurance levels are typically capped under the
assumption that larger depositors are better informed and thus
better able to exert discipline on banks. A trusted deposit
insurance scheme can be particularly valuable in times of
crisis when market participants of all sizes find it difficult
to distinguish between illiquid and insolvent financial
institutions or to gauge the level of implicit government
support for the financial sector. In the fall of 2008, most
developed economies expanded their deposit insurance schemes to
avoid further destabilization as a result of bank runs.158
According to the International Association of Deposit
Insurers, 99 countries had explicit deposit insurance schemes
in operation at the onset of the financial crisis.159 In the
fall of 2008, ``47 jurisdictions acted to strengthen their
deposit insurance systems in response to the crisis.''160
In the United States, language in EESA temporarily raised
the ceiling on FDIC deposit insurance from $100,000 per
depositor per bank to $250,000.161 The increase became
permanent with the enactment of the Dodd-Frank Wall Street
Reform and Consumer Protection Act on July 21, 2010.162 In
addition, two weeks prior to the passage of EESA, Treasury
responded to a broad-based run on money market mutual funds
triggered by the collapse of Lehman Brothers by creating the
Temporary Guarantee Program for Money Market Funds (TGPMMF).
TGPMMF provided a guarantee to investors in all participating
money market funds that the value of their investment would not
drop below $1.00 per share.163 After two extensions, the TGPMMF
expired on September 18, 2009.164
The first foreign government to expand its deposit
insurance scheme was Ireland. On September 20, 2008, Ireland's
Minister of Finance announced that the Irish government would
increase its insurance limit from 20,000 ($29, 000) to 100,000
($143,000).165 On September 30, only hours after the U.S. House
of Representatives surprised financial markets by failing in
its initial attempt to pass financial stability legislation,
Ireland went a step further, passing an emergency law
authorizing an unlimited temporary guarantee arrangement
safeguarding all deposits and debts with its six major banks
for two years.166
This unilateral decision to guarantee deposits of any size
raised concerns among other EU countries and the European
Commissioner for Competition Policy that Ireland was distorting
the market by providing its banks with a competitive
advantage.167 Reports of an exodus of deposits from U.K. banks
to Irish banks led the U.K.'s Financial Services Authority
(FSA), on October 3, to increase its compensation limit for
bank deposits from #35,000 ($61,834) to #50,000 ($88,335) on
individual claims and up to a maximum of #100,000 ($176,670)
for joint accounts.168 The United Kingdom also found itself in
the position of guaranteeing the deposits of Icesave, an online
branch of the failed Icelandic bank Landsbanki, which catered
to British citizens.169 The Icesave guarantee was an unusual
case of a bank being rescued by a foreign government.170 It
highlights the difficulties in effectively dealing with
globalized financial institutions, especially those
headquartered in small nations, such as Iceland, which lack the
economic capacity to rescue large firms themselves.
The lack of an initial coordinated EU approach to deposit
insurance expansion underscored the potential adverse spillover
effects of adjusting national deposit insurance in a globalized
economy.171 This problem is magnified in the European Economic
Area (EEA) where member states observe a ``single passport''
system that permits financial services operators legally
established in one member state to operate in the other member
states without further authorization requirements. Under a
European Commission directive adopted in 1994 that sets minimum
standards for deposit insurance, all EEA members must establish
a deposit insurance scheme with minimum coverage of 20,000
($27,000 in today's dollars) per depositor. Deposits in banks
that use the passport system to establish branches or
subsidiaries in other EEA member states are covered by the
deposit insurance scheme of the bank's home state.172 As the
United Kingdom found in the case of the Icelandic bank
Landsbanki, this arrangement can cost the host state in the
event that the bank's home state deposit insurance scheme is
unwilling or unable to protect depositors.173
On October 4, 2008, French Prime Minister and then-acting
EU President Nicolas Sarkozy hosted a summit with leaders from
Germany, the United Kingdom, and Italy to discuss a coordinated
response to the crisis. The four nations criticized Ireland for
issuing a unilateral deposit guarantee without first consulting
with its EU partners. A statement from the German Chancellor's
office stated that Ireland's move ``forced London in turn to
raise its own bank guarantees to prevent a stampede to transfer
savings from the United Kingdom to Ireland.''174 A day later,
German Chancellor Angela Merkel and Finance Minister Peer
Steinbrck provided a verbal guarantee of all private
bank deposits in German banks.175 Numerous other EU member
states, including Greece, Austria, Denmark, and Sweden,
followed suit in the first week of October before the EU
Economic and Financial Affairs Council announced an agreement
among all EU members to raise the minimum level of deposit
guarantee protection to 50,000 ($68,000) for an initial period
of at least one year.176 The agreement was formalized by an
amendment to the deposit insurance directive proposed by the
European Commission in mid-October and passed by the European
Parliament in March 2009.177 The amendment called for an
increase of deposit insurance to 50,000 ($63,000)178 by June
30, 2009 and harmonization of coverage levels at 100,000
($126,000) by December 31, 2010.179
Outside Europe, the most significant deposit insurance
policy responses to the crisis occurred in Australia and New
Zealand. Before the crisis began, Australia and New Zealand
were two of the only major developed economies with no deposit
insurance schemes at all, instead favoring rigorous supervisory
regimes to maintain confidence in their banking sectors. On
October 12, 2008, the two countries made coordinated
announcements of new deposit insurance policies. Australia
introduced a guarantee of deposits of up to $1 million AUD
($644,000) in Australian-owned banks, locally incorporated
subsidiaries of foreign banks, credit unions, and building
societies for a period of three years.180 New Zealand
introduced an opt-in deposit scheme covering retail deposits at
banks and non-bank deposit taking entities for two years.181
Hong Kong and Singapore followed later that same week with two-
year suspensions of the deposit coverage limit in their
existing insurance schemes. 182 d. Central Bank Liquidity and
Other Programs
Board of Governors of the Federal Reserve System
The actions undertaken by the Federal Reserve can largely
be classified into four groups:183 * Provision of Short-term
Liquidity to Banks. Through programs such as the Primary Dealer
Credit Facility (PDCF), the Term Securities Lending Facility
(TSLF), and the Term Auction Facility (TAF), which were
established in late 2007 and early 2008, the Federal Reserve
acted in its role as lender of last resort and to provide
liquidity to banks and other depository institutions. *
Provision of Liquidity to Borrowers and Investors. The Money
Market Investor Funding Facility (MMIFF), the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility
(AMLF), the Commercial Paper Funding Facility (CPFF), and the
Term Asset-Backed Securities Loan Facility (TALF), which were
established in the fall of 2008, provided liquidity to market
participants. * Purchase of Long-term Securities. As the
liquidity facilities that had been established to face the
crisis were wound down, the Federal Reserve expanded its
facilities for purchasing mortgage related securities. The
Federal Reserve purchased $175 billion of federal agency debt
securities and $1.25 trillion of agency mortgage-backed
securities by the end of March 2010.184 * Institution-Specific
Assistance. In March 2008, the Federal Reserve provided $28.8
billion in funding to Maiden Lane LLC a special
purpose vehicle (SPV) created to purchase mortgage-backed
securities from Bear Stearns in order to facilitate the merger
between that company and JPMorgan Chase. In the fall of 2008,
through the creation of two additional SPVs Maiden
Lane II and III as well as a revolving credit
facility, the Federal Reserve committed up to $137.5 billion to
AIG.185 Finally, in late 2008 and early 2009, the Federal
Reserve, along with Treasury and the FDIC, participated in
ring-fence guarantees of $118 billion for Bank of America186
and $301 billion for Citigroup.187
Figure 14: Federal Reserve's Crisis Response188
European Central Bank (ECB)
The ECB has characterized its crisis response as being
centered upon three building blocks. The first was the
expansion of liquidity through the adaptation of the ECB's
regular refinancing operations. The ECB adopted what it called
a ``fixed rate full allotment'' tender process. In normal times
the ECB would auction a set amount of central bank credit with
one-week maturity and let the market demand determine the
price. Under the ``fixed rate full allotment'' method, the ECB
was willing to fill any liquidity shortage at the interest rate
it set itself for maturities up to six months. Therefore, the
ECB acted as a ``surrogate for the market in terms of both
liquidity allocation and price-setting.''189 The second
building block of the ECB's response was the expansion of the
list of assets it took as collateral. The final building block
was the inclusion of a large number of additional
counterparties that were eligible to participate in the
refinancing operations. Prior to the crisis, 1,700
counterparties were eligible to participate; by April 2009,
2,200 credit institutions in the Euro area met the criteria to
refinance through the ECB. Finally, the ECB announced its
intention to purchase $80.5 billion in euro-denominated covered
bonds.190
Bank of England (BoE)
On April 21, 2008 the BoE announced its Special Liquidity
Scheme, which allowed banks to swap certain mortgage-backed and
other securities for UK Treasury Bills.191 In October 2008, the
BoE established a permanent Discount Window Facility, providing
banks with access to long-term liquidity. In response to the
worsening financial conditions, the BoE announced the creation
of an asset purchase facility on January 19, 2009. Under this
program, which was similar to the U.S. Asset Guarantee Program,
the BoE was initially authorized to make purchases of up to 50
billion ($66 billion) of corporate bonds, syndicated loans,
commercial paper, and certain types of ABS.192 The British
central bank eventually purchased 200 billion ($276 billion)193
in assets and, as of June 8, 2010, has announced that the
program will remain on hold.
Bank of Japan
The Bank of Japan responded to the financial crisis
primarily through asset purchases. On January 22, 2009, the
Bank of Japan announced its intention to purchase up to 3
trillion yen of commercial paper (including asset-backed
commercial paper).194 The Bank of Japan resumed its purchases
of bank stocks on February 3, 2009 with the announcement that
it had committed an additional 1 trillion yen to the
program.195 The Japanese central bank also committed 1 trillion
yen toward the creation of a subordinated loan program.196
Swiss National Bank (SNB)
The SNB announced on October 15, 2008 that it would begin
to issue its own debt SNB Bills in order to
absorb excess liquidity in the financial system. On March 12,
2009, the SNB announced its intention to purchase foreign
currency against the Swiss Franc and Swiss Franc bonds in order
to halt its rapid appreciation.197 Finally, the SNB and the
Swiss government financed an effort to rescue Switzerland-based
bank UBS. Along with other steps taken by the Swiss government,
the SNB provided financing of up to $54 billion dollars against
an equity contribution made by UBS of up to $6 billion to an
entity created solely to purchase troubled assets from UBS.198
e. Guarantees and Purchases of Impaired Assets
European governments both guaranteed and purchased impaired
assets. In contrast, in the United States, guarantees of
impaired assets played a significant role in the rescue,199 but
purchases of such assets did not, despite the fact that the
TARP was initially envisioned as a purchase program.200 One
problem with asset purchases is the difficulty of setting
prices for the transactions. If the prices are set at market
levels, then the purchases lock in bank losses, and are likely
to reveal banks as unacceptably weak. If the purchases are made
at par, they represent direct subsidies to the banks and their
shareholders subsidies potentially so large in the
U.S. case as to exceed the scale of the TARP. i. Guarantees of
Assets and Debt
Liability guarantees quickly spread through Europe amidst
concerns that banks covered by guarantees enjoyed a competitive
advantage over banks without comparable resources. Beginning in
September 2008, European and Canadian bank regulators
introduced a series of liability guarantees aimed at preventing
bank runs and managing threats to real estate prices caused by
wounded financial services providers that were deemed too big
to fail. The guarantees took various forms, ranging from highly
targeted approaches tailored to support a few large banks (an
approach taken in the United States)201 to widespread measures
pledging hundreds of billions of Euros for bank
recapitalization plans and loan guarantee initiatives. Explicit
guarantees, such as the backstops in the United States for the
government sponsored enterprises and Citigroup, are associated
with more risk than the implicit guarantees that helped other
CPP recipients raise funds and repay TARP loans quickly.202
In the United States, the FDIC's Temporary Liquidity
Guarantee Program, announced in October 2008, introduced new
debt and transaction account guarantee programs aimed at
boosting inter-bank lending and safeguarding some accounts in
excess of deposit limits.203 In late 2008, the Federal Reserve
Board and the FDIC guaranteed more than $301 billion of
Citigroup assets.204
The most extensive foreign guarantees were orchestrated by
a handful of European countries and bore numerous similarities.
From September 2008 to October 2008, Germany, France, and the
United Kingdom introduced sizeable backstops for a handful of
large financial institutions. Belgium, France, Luxembourg, and
Germany collectively established 200 billion ($287 billion) of
guarantees to support Dexia Group S.A. (Dexia) and HRE,
respectively.205 These guarantees were introduced on a
standalone basis and were kept separate from distinct plans
that raised a combined total of 720 billion of far-reaching
guarantees in both countries.206
Germany arguably executed Europe's most extensive
deployment of guarantees. Its guarantees included short-term
assurances for covered bonds and commitments to shore up
vulnerable money market funds. Germany's multifaceted approach
also involved stalled initial efforts to broker a collaborative
rescue effort between the public and private sector. HRE,
Germany's second-largest commercial property and commercial
finance lender at the height of the crisis, received an initial
35 billion ($51 billion) emergency line of guaranteed financing
in September 2008 and two separate 15 billion ($19 billion)
financing guarantees the following month.207 SoFFin, the bank
rescue fund established on October 17, 2008 by the German
Financial Market Stabilisation Act, provided approximately 62
billion ($81 billion)208 of guarantees for Bayerische
Landesbank (BayernLB), IKB, HRE, and HSH Nordbank AG between
November 2008 and March 2009.209 SoFFin later approved a one-
year extention of Hypo's rescue package starting in December
2009. Hypo also received a 52 billion ($77 billion) extension
on guarantees from SoFFin that was scheduled to end in June
2010.210
Italy and Canada took a more concentrated approach that
made guarantees available to their respective banking sectors
without establishing guarantees for specific financial
institutions. Implicit guarantees extended through the Canadian
Lenders Assurance Facility, which provided insurance on
wholesale term borrowing of federally regulated deposit-taking
institutions for six months beginning October 23, 2008.211 The
underlying stability of Canada's banking system contributed to
a climate in which commercial lending institutions neither
recapitalized nor drew down on government bank funding
guarantees.212 Italy took a different approach by enacting a
series of laws between November 27, 2008 and January 29, 2009.
The legislation was aimed at creating new resources for
oversight bodies, such as the Ministry for the Economy and
Finance, which gained the ability to guarantee capital
increases for banks identified as undercapitalized by the Bank
of Italy.213
In a combined public-private rescue not replicated in other
jurisdictions, on July 11, 2008, the Danish National Bank
granted an unlimited liquidity facility to Roskilde Bank, and a
private association of nearly all the banks in Denmark provided
a guarantee on losses of DKK 750 million ($158 million) on the
liquidity facility, with further losses guaranteed by the
Danish government.214
The United Kingdom also employed guarantees that took shape
as targeted rescue efforts and broader stabilization measures.
After providing a stream of liquidity facilities and guarantees
beginning in November 2007 to Northern Rock, the U.K.
introduced a credit guarantee scheme in October 2008.215 HM
Treasury initially announced up to #250 billion ($437 billion)
of guarantees for new short and medium-term debt issuance to
help banks recapitalize in conjunction with a separate
recapitalization scheme.216 This program initially offered
guarantees to the entire range of extended-collateral
operations at banks that subscribed to the program. As the
crisis deepened, in December 2008 HM Treasury extended the
credit guarantee scheme's deadline to 2014 from 2012 and
lowered participation fees charged to banks.217 A few weeks
later, the goverment extended the drawdown window of its credit
guarantee scheme to December 31, 2009 from April 9.218 During
the drawdown window, banks could issue new debt, and continue
rolling all of it over until April 13, 2012, and up to a third
of the total amount over the next two years.
The UK introduced its Asset Protection Scheme (APS) in
January 2009 to help banks protect capital from further
erosion. The scheme guaranteed certain types of assets, such as
commercial and residential property loans or structured credit
assets from eligible banks with at least #25 billion ($37
billion) in assets in exchange for a fee.219 Lloyds entered
into a relationship with APS in March 2009 due to its previous
purchase of Halifax Bank of Scotland Group Plc, which
regulators believed held significant troubled assets. Lloyds
placed #260 billion ($369 billion) with APS and negotiated a 4
percent fee that amounted to #10 billion ($14 billion). During
this time Lloyds was careful to avoid handing British taxpayers
a 60 percent stake, which could have occurred if the
government's #4 billion ($6 billion) of preference shares were
converted into ordinary equity. To this end, Lloyds improved
its position with a #13.5 billion ($22 billion) rights issue
and raised an additional #7.5 billion ($12 billion) by swapping
existing debt for contingent capital. The capital raise paid
off and Lloyds was allowed to exit APS in November 2009.220 The
exit relieved the British government of a potential liability
of up to 90 percent of #260 billion ($262 billion).
France participated in one of the largest guarantee
programs targeting an individual bank by providing slightly
more than 36 percent of a 150 billion ($204 billion) rescue for
Dexia SA. Belgium and Luxembourg covered the remaining
balance.221 On October 13, 2008, French President Nicolas
Sarkozy announced plans to provide up to 320 billion ($429
billion) of loan guarantees that were available through year
end 2009.222 The guarantees covered loans for up to five years.
Ireland employed a different variation that created
guarantees for six of its largest banks at once. The initial
offer, which applied to Allied Irish Banks plc (Allied Irish
Bank), Bank of Ireland Group (Bank of Ireland), Anglo Irish
Bank Corporation (Anglo Irish Bank), Irish Life and Permanent
Plc (Irish Life and Permanent), Irish Nationwide Building
Society and the Educational Building Society, was initially
structured to wind down in two years.223
Japan was the only G-7 member that addressed its banking
problems without implementing significant liability guarantees.
ii. Asset Purchases
Asset purchases were another tool that governments used
during the crisis, both to deal with problematic assets on bank
balance sheets and in some countries as a way to loosen the
monetary supply.
In the United States, the Public-Private Investment Program
(PPIP), announced by Treasury in 2009,224 was initially
designed to use up to $100 billion of TARP dollars and private
capital to facilitate private purchases of legacy loans and
securities. The program aimed to generate up to $500 million in
purchasing power for legacy assets under a partnership between
the government and private sectors. Some potential investors
were also offered non-recourse loans as an incentive to
purchase non-agency residential asset backed mortgage
securities and commercial mortgage backed securities.
Treasury's August 6, 2010 TARP transaction report indicates a
$22.4 billion final investment amount for PPIP.225 Treasury has
scaled back the program's scope from a larger initial
budget.226
As discussed earlier in Section C.2.d, the Federal Reserve
purchased roughly $1.25 trillion of agency mortgage-backed
securities between January 2009 and March 2010. The Federal
Reserve also purchased up to $300 billion of longer-term U.S.
Treasury securities over a period of several months. In
addition, Treasury purchased approximately $220 billion in
agency mortgage-backed securities under a program that ended
December 31, 2009.227
The United Kingdom introduced a #50 billion ($73 billion)
asset purchase plan on January 19, 2009,228 which was increased
to #75 billion ($106 billion) on March 5, 2009,229 and
increased again to #125 billion ($188 billion) on May 7,
2009.230 U.K. officials soon added provisions within the
facility to purchase commercial paper and corporate bonds as a
means of injecting liquidity into the credit markets. Other
purchases included medium and long-maturity conventional U.K.
Treasury bonds traded on the secondary market. Regulators also
added a secured working paper facility to help keep short-term
borrowing options solvent.231 When output and other vital
economic indicators failed to show signs of recovery, the
program's ceiling was raised to #200 billion ($330 billion)
from #175 billion ($289 billion) on November 5, 2009.232 The
asset purchase program coincided with a decision of the United
Kingdom's Monetary Policy Committee on March 5, 2009 to engage
in quantitative easing and reduce the Bank Rate to 0.50
percent. The asset purchase program was a critical part of this
operation.233 To make the scheme work, the Bank of England
provided liquidity to inject capital into commercial banks by
purchasing various public and private sector assets. The
purchases were an instrumental part of restoring liquidity to
credit markets and assisting borrowers by pushing down interest
rates tied to yields.234
Under the U.K. plan, various assets were purchased under
different pricing schemes. As an example, the plan included a
commercial paper facility that acquired assets directly from
companies or market participants trading outstanding inventory.
The latter group was charged an additional fee. Eligible
commercial paper had a minimum maturity of three months, an
investment-grade rating and issuance from non-bank companies.
As of May 21, 2009 the program had accumulated #2.25 billion
($3.6 billion) of commercial paper, roughly a third of the
available stock. Corporate bonds were acquired through reverse
auctions from financial institutions that functioned as market
makers. The format was chosen to ensure banks would pay the
lowest possible prices for assets.
Ireland introduced an innovative asset purchase scheme that
enabled its largest banks to transfer up to 90 billion ($119.1
billion) into a newly created entity known as the National
Asset Management Agency (NAMA).235 NAMA stated that Ireland's
banks ``will be cleansed of risky categories of loans at a
price that is less than their current value on the banks'
balance sheets.''236 The transactions were financed by the
issuance of government bonds. NAMA announced the transfer of
its first tranche of loans from Allied Irish Banks on April 6,
2010. In the transaction NAMA acquired loans with a face value
of 3.29 billion ($4.44 billion) in exchange for NAMA securities
valued at 1.9 billion ($2.56 billion), resulting in a 42
percent discount after taking account of foreign exchange
movements.237 The initial transfers also included a 670 million
($903.8 million) purchase of loans from Irish Nationwide
Building Society for 280 million ($377.7 million) of NAMA
securities, a 58 percent discount. f. Changes in Accounting
Rules
Government assistance to financial firms was not limited to
outside sources of capital or guarantees; another tool involved
the amendment of existing fair value accounting rules, which
sometimes require changes to an institution's reported
financial statement position without a corresponding change in
actual assets or liabilities. The use of this tool proved to be
politically charged and resulted in intense and continuing
debates between regulatory authorities and accounting standard-
setters in both the United States and Europe.
The goal of fair value accounting is to estimate the value
of assets and liabilities on the balance sheet at their market
value; in other words, the amount a seller would receive for an
asset or would have to pay to offload a liability in the
current market.238 When market values are readily determinable
through actively traded securities and the prices at which debt
is issued, fair value accounting may aid in the presentation of
some reported assets and liabilities, although the extent to
which fair value accounting adds to the understanding of an
institution's balance sheet may also depend on the nature of
the institution's business. When market values become opaque
due to lack of market activity, more subjective methods are
used to determine the value of financial instruments.
The SEC, through securities regulations, has empowered the
Financial Accounting Standards Board (FASB) to establish
accounting standards for the purpose of providing investors
with the disclosure of meaningful financial information in a
way that is accurate and effective.239 The users, preparers,
and auditors of financial reports are all in the business of
decision making: investing or not investing in a company based
on the financials, determining the best method of presenting
the financial information, and ensuring the accuracy and
reliability of the information. To meet the decision-making
needs of all users of financial information, FASB established a
hierarchy of qualities for accounting information: usefulness,
relevance, reliability, comparability, and consistency,
countered by the constraints of cost and materiality.240 Thus,
information needs to be both timely and verifiable while also
consistent across organizations and without the benefit
exceeding the cost of providing the information; therefore, a
constant tension exists between requiring too much or too
little in a company's disclosures.
Accounting rules have continually expanded in recent years
to require fair value reporting for debt and equity securities
and derivative transactions, but uniformity in the application
and valuation methodology was not established until 2007 with
the issuance of Statement of Financial Accounting Standards 157
(SFAS 157).241 At the time of the financial crisis, fair value
accounting in the United States was governed by SFAS 115, which
required the classification and reporting of debt securities
and equity securities with a readily determinable fair market
value,242 and SFAS 157, which established a hierarchy of fair
value measurements to account for assets and liabilities with
active markets and those with none.243 Shortly after the
implementation of SFAS 157, however, the financial crisis
caused markets to freeze and much activity to cease, which
presented a significant problem for a valuation methodology
that relies on an open, active, liquid market. Instead,
companies relied more strongly on their own assumptions and
models, which allowed for greater subjectivity, less
comparability across organizations, and the potential for
manipulation by the firms' management. In aggregate, as of the
first quarter of 2008, S&P 500 financial sector institutions
carried 44 percent of their assets at fair value and 13 percent
of their liabilities at fair value.244 For institutions such as
commercial banks, the deposit base makes up a substantial
portion of the firm's liabilities. Capital market-oriented
firms carried approximately 30 percent of their liabilities at
fair value. While obtaining readily available market values was
complicated by frozen markets, allowing managers to use more
judgment in reported losses and write-downs through the use of
modeling, it is also possible that managers used market
uncertainty as an excuse to avoid a write-down. Fair value
accounting required companies to take significant write-downs
on assets that, in many cases, triggered regulatory and capital
adequacy requirements.245 Section 133 of EESA mandated that the
SEC, in consultation with other regulatory bodies, conduct a
study on mark-to-market accounting standards as provided by
FASB. After holding public hearings and conducting its own
analysis, the SEC ultimately declared that fair value
accounting was neither a cause of the financial crisis nor an
issue with troubled banks, but that it did need some minor
revisions.246
Amid pressure from U.S. lawmakers and financial companies
such as Citigroup and Wells Fargo & Co, in April 2009 FASB
voted to ease fair-value accounting rules during ``illiquid''
or ``inactive'' markets.247 The changes permit companies to use
``significant'' judgment when valuing certain investments in
their investment portfolios, which allows for more flexibility
in valuing impaired securities. The proposal would apply only
to equity and debt securities, though, and FASB staff said that
banks should elect to disregard only transactions that are not
orderly, i.e., those that occur under distressed circumstances.
At the time, some market analysts commented that going forward
write-ups could be expected, and these adjustments would
ultimately boost bank earnings.248
Arthur Levitt, a former SEC Chairman, was critical of the
changes. He commented that fair value ``provides the kind of
transparency essential to restoring public confidence in U.S.
markets,'' and stated that he was deeply concerned about FASB
succumbing to political pressures.249 That said, FASB did not
acquiesce to all of the lobbying pressure. The organization
rejected a request from banks that would have enabled them to
apply fair-value changes retroactively to their 2008 year-end
financial statements.
More recently, FASB has sought public comment on a proposal
that would require banks to report the fair value of loans on
their books, in addition to carrying or book values. Currently,
public financial institutions report the fair value of their
loans only in footnotes to the quarterly reports to regulators.
The American Bankers Association (ABA) has come out against the
proposal, arguing that doing so would increase ``pro-
cyclicality'' and ultimately inject volatility into the
financial system. Edward Yingling, chief executive officer of
the American Bankers Association, said in a statement, ``The
proposal would greatly undermine the availability of credit by
making it difficult to make many long-term loans, the value of
which, even if performing perfectly, would likely be reduced on
the day a loan is made.'' 250 Former FDIC Chairman William
Isaac has also criticized the proposal, saying that ``just by
making the proposal, the FASB will lead banks to quit making
loans without easily discernable market values and keep the
ones they do make to shorter maturities.''251 On the other
hand, Sandy Peters, head of the financial reporting policy
group at the CFA Institute, an association of investment
professionals, commented: ``The pro-cyclicality argument is
that when you give people information, they act on it. Banks
don't like the volatility it presents and what it might do to
the share price, but it's still relevant information.''252
Outside the United States, the International Accounting
Standards Board (IASB) has also debated the issue of fair value
accounting.253 In October 2008, IASB published educational
guidance on the application of fair value measurement when
markets become inactive, and, in the face of political pressure
from the European Commission (EC),254 allowed banks to
reclassify certain securities as held-to-maturity to allow for
reporting at historical, or amortized, cost. The EC effectively
forced IASB's hand with this decision, threatening that either
asset reclassification be allowed or that the EC would create
another ``carve out'' for international accounting rules. That
is, all IASB standards are scrutinized by the European
Financial Reporting Advisory Group (EFRAG) established by the
EC in 2001. As the aforementioned body would have hindered the
potential for an eventual convergence of accounting standards,
IASB allowed the asset reclassification, which provided
international institutions temporary relief from potential
write-downs.255
Part of the EU's argument in pushing the IASB to make this
change was to better align IFRS with U.S. GAAP. SFAS 115 and
SFAS 65 within U.S. GAAP allowed for asset reclassification in
specific instances, allowances that have carried over to the
current U.S. GAAP codified standards.256 Originally,
International Accounting Standard (IAS) 39 disallowed any
reclassifications for financial assets classified as held for
trading. Although IASB is cognizant that a reclassification
under SFAS 115 is extremely rare, it allowed for the amendment
to IAS 39 due to the fact that though it is not used in
practice, reclassification is at least an option under U.S.
GAAP. Thus, the amended IAS 39 allows for reclassifications in
similar instances as those allowed under U.S. GAAP. In a
dissenting opinion to this amendment, however, IASB members
James J. Leisenring and John T. Smith noted that though the
playing field may have been leveled in regards to asset
reclassification, they believed the original IFRS
reclassification rules to be superior to U.S. GAAP and U.S.
GAAP to be superior to IFRS in terms of timing and measurement
of asset impairment.257
Similar to FASB's allowance for more judgment in the use of
fair value methodology, IASB issued guidance on measuring fair
value in inactive markets, specifically the use of broker or
pricing service quotes as inputs as well as internal modeling.
Both standard setters have continued to require the use of fair
value accounting but emphasize that the objective of fair value
measurement is to determine the price at which an orderly
transaction would take place, not the price of a distressed
sale or liquidation.258
3. International Organizations
International organizations from the G-20 to the
IMF to the Financial Stability Board used their
different core competencies to exert significant influence over
national policy responses to the financial crisis. The G-20, a
forum of finance ministers and central bank governors from 20
systemically significant economies, promotes international
economic stability and development through cooperative action
between industrial and emerging-market countries.259 The G-20
was created as a response to the financial crises of the late
1990s and amid a growing understanding that emerging-market
countries were not sufficiently represented in global economic
discussion and governance.260 G-20 members are drawn from six
continents, and their countries collectively represent
approximately 90 percent of the world's gross national
product.261
In November 2008, the G-20 held the Summit on Financial
Markets and the World Economy in Washington, D.C., to ``achieve
needed reforms in the world's financial system.''262 The G-20
diagnosed the ``root causes'' of the global crisis, assessed
systemic ramifications, and formulated the Action Plan to
Implement Principles of Reform.263 The Plan is based on five
``common principles'' for reforming financial markets
strengthening transparency and accountability, enhancing sound
regulation, promoting integrity in financial markets,
reinforcing international cooperation, and reforming
international financial institutions and 47 short and
medium-term actions that leverage the core competencies of
international organizations to achieve financial reform.264
In April 2009, the G-20 held a London summit to further
advance the Action Plan by crafting a declaration that
authorized additional measures to promote global financial
system reform, including: stronger international frameworks for
prudential regulation; greater transparency; more effective
regulation of credit rating agencies; and more rigorous
regulation and oversight of systemically important financial
institutions, markets, and instruments.265 The G-20 also agreed
to support the ability of emerging markets and developing
countries to access capital by making significant resource
commitments to strengthen global financial institutions,
including: tripling the IMF's resources to $750 billion;
creating a new Special Drawing Rights allocation of $250
billion that serves as an international reserve asset that
supplements countries' official reserves; increasing support
for Multilateral Development Bank lending by $100 billion; and
providing $250 billion of support for trade finance.266
The G-20 also created the Financial Stability Board (FSB)
at the April 2009 Summit, as the successor to the Financial
Stability Forum (FSF), in order to support the G-20's vision
for financial system reform.267 The FSB's core purpose is to
promote international financial reform and stability by
coordinating the regulations and policies of national financial
authorities and international standard-setting bodies.268 The
FSB seeks to diagnose the weaknesses of the financial system
and devise remedies to address them; promote coordination and
information exchange among financial authorities; provide
regulatory policy advice and counsel; conduct strategic reviews
of the policy development work of the international standard
setting bodies; set guidelines for supervisory colleges;
support contingency planning for cross-border crisis management
for systemically important firms; and collaborate with the IMF
to conduct Early Warning Exercises.269 In its September 2009
report, Improving Financial Regulation, the FSB issued a
comprehensive financial reform program that included guidelines
for: strengthening the global capital and liquidity framework
for banks; making global liquidity more robust; reducing the
moral hazard posed by systemically important financial
institutions; strengthening accounting standards; improving
compensation practices; and expanding oversight of the
financial system.270
The IMF has forged a close collaborative relationship with
the G-20 and the FSB.271 The IMF has 187 member countries, and
its primary purpose is to ``safeguard the stability of the
international monetary system.''272 The IMF has assumed an
important role in identifying lessons learned from the
financial crisis and is relied upon to provide early warning,
financial vulnerability, financial soundness, and macro-
prudential indicators by gathering and analyzing data through
surveillance of individual countries, regions, and the entire
world.273
As a result of the financial crisis, the IMF has revised
its surveillance priorities to increase domestic and cross-
border regulation of major financial centers and deepened its
analysis of linkages between markets, institutions, exchange
rates, and external stability risks.274 The IMF also created
and chaired an interagency group that collects, analyzes, and
promulgates financial sector data on the G-20 economies.275 In
September 2009, the group issued a joint advisory report with
the FSB explaining the role that financial information gaps
played in the financial crisis, proposing best practices for
data collection, identifying financial network connections
across economies, and monitoring the susceptibility of domestic
economies to shocks.276 In October 2009, the FSB, IMF, and BIS
issued a collaborative report offering guidelines and
analytical frameworks for assessing the systematic importance
of financial institutions, markets, and instruments across
countries.277 The IMF has also helped developing countries to
manage their economies effectively by offering training and by
designing macroeconomic, financial, and structural policies.
Additionally, the IMF began increasing the amount of funds
available for lending and made it easier for countries with
good credit to access loans quickly in early 2009.278 The
eventual recipients of these loans, however, were developing
countries with only a marginal impact on the international
financial system.279 By contrast, developed countries preferred
to finance their capital injection and asset guarantee programs
themselves rather than apply for IMF funds.
The Bank for International Settlements (BIS) is another
international institution is working toward financial stability
and reform.280 The BIS's mission is to ``serve central banks
and financial authorities in their pursuit of monetary and
financial stability, to foster international cooperation in
those areas and to act as a bank for central banks.''281 The
BIS houses the Basel Committee on Banking Supervision, which
recommends financial reforms and issues macro-prudential
guidelines and supervisory policies for central banks to
mitigate systemic risk.282 The G-20 has charged the Basel
Committee with increasing transparency, strengthening capital
requirements, and developing enhanced guidance to improve
central banks' risk management practices.283 All G-20 members
have agreed to adopt and phase-in the Basel II capital
framework, which was initially published in 2004, by the end of
2010.284 Basel II measures and sets minimum standards for
capital adequacy based on credit risk, operational risk, and
market risk and aligns regulatory capital requirements closely
with these underlying risks to help banks better identify and
manage capital risks.285 In June 2008, the Basel Committee
issued Principles for Sound Liquidity Risk Management and
Supervision, which emphasized that banks should have a ``robust
liquidity risk management framework'' and sufficient loss-
absorbing capital to withstand stress events, and detailed best
practices for achieving these ends.286
In December 2009, the Basel Committee issued a reform
proposal commonly referred to as Basel III
that aims to strengthen global capital and liquidity
regulations and to increase resiliency within the banking
sector.287 The proposal has been endorsed by the FSB and the G-
20 leadership and contains five core reforms that would apply
to all countries that adopt it: First, it raises the quality,
consistency, and transparency of capital bases by imposing new,
more rigorous Tier I capital requirements. For example, it
requires common shares and retained earnings to be the
``predominant'' form of Tier I capital and limits the remainder
to instruments that are subordinated with fully discretionary
or non-cumulative dividends or coupons without a maturity date
or an incentive to redeem. The plan also phases out hybrid
capital instruments, which are now capped at 15 percent of Tier
I capital. Second, the proposal strengthens the risk coverage
of the capital framework by raising capital requirements for
trading book and complex securitization exposures and
resecuritization. It also incorporates a ``stressed value-at-
risk capital requirement'' based on a 12-month period of
``significant financial stress'' and raises the standards of
the supervisory review and disclosure processes. Third, it
introduces a leverage ratio as a supplement to the Basel II
risk-based framework to protect against excessive leverage in
the banking system. Fourth, it contains requirements for a
capital buffer that can be used during periods of stress.
Finally, it employs a global ``minimum liquidity standard'' for
international banks.288
4. The International Financial Landscape in the Aftermath
of the Crisis
The aftermath of the most severe stages of the global
financial crisis brought stark changes in management practices
within banks, unprecedented government intervention within the
financial sector, and modifications to the international
financial system. The dramatic crisis produced enormous
financial losses whose impact was felt throughout the entire
world.
The sheer amount of capital lost due to the crisis had the
most pervasive effects in altering the international financial
landscape. By the spring of 2009, the International Monetary
Fund (IMF) was estimating that financial institutions worldwide
would lose approximately $4 trillion on their loans and
security holdings from 2007 to 2010.289 Three of the five
large, independent U.S. investment banks Bear
Stearns, Lehman Brothers, and Merrill Lynch had
either ceased to exist or were bought up by another bank. The
two remaining independent U.S. investment banks, Goldman Sachs
and Morgan Stanley, had converted to bank holding companies
(BHCs), thereby gaining permanent access to the Federal Reserve
discount window. In Europe, Iceland's three major banks, as
well as ABN AMRO Bank N.V. (ABN AMRO) and Fortis in the
Netherlands, Northern Rock in the United Kingdom, and the Anglo
Irish Bank in Ireland had all been nationalized.
Perhaps the most striking feature of the financial
landscape after the crisis was unprecedented government
intervention. As a result of the losses they suffered, many
banks needed to raise new equity from shareholders and/or their
home-country governments.
Governments continue to fund a number of major financial
institutions. While many of the large banks in the United
States that were propped up by government intervention have
succeeded in paying back a majority of their loans, banks like
the Royal Bank of Scotland and Northern Rock continue to rely
upon British government funding as a source of bank capital.290
As noted above,291 disparities between the accounting
standards of American and international banks were also
highlighted in the wake of the crisis. In particular, fair
value accounting rules remain a source of international
regulatory friction.
Individual banks also altered their own management
practices in the wake of the financial crisis. Prior to the
crisis, very few large financial firms with international
operations had risk management structures capable of assessing
the large risks to which they were in fact exposed. An October
2009 report of the Financial Stability Board notes that firms
have undertaken a number of changes in risk management
practices in the aftermath of the crisis. Among the most
significant are engaging board and senior management in risk
management, increased use of and improvements to stress
testing, and improving funding and liquidity risk management
programs.292
5. Winding Down Rescue Efforts
Buoyed by a rising market and a dramatic turnaround in the
fortunes of global banks beginning in 2009, several significant
rescue efforts extended by foreign governmental agencies were
curtailed or wound down altogether.
Between September 2009 and January 2010, numerous banks in
G-7 countries rallied to extricate themselves from various
government support programs. In early November 2009 Lloyds
Banking Group completed its exit from the United Kingdom's
Asset Protection Scheme (APS) and paid a #2.5 billion ($4.1
billion) fee that helped recoup the taxpayers' investments.293
Formed in February 2009, the APS insured banks against the risk
of losses stemming from backlogs of shaky assets, such as
corporate and leveraged loans, commercial property loans and
structured credit assets.294 Royal Bank of Scotland, which
positioned assets originally valued at #325 billion ($471
billion) with APS under an agreement that its liability was
reduced to #19.5 billion ($28.2 billion) of potential losses,
is still covered by the plan.295 RBS reportedly agreed to fees
that amount to #6.5 billion ($9.4 billion), or 2 percent of the
assets covered by the plan, and issued non-voting B shares to
HM Treasury to cover the costs.
In the fall of 2009, France's Sociiti Ginirale and BNP
Paribas both completed separate capital raises to repay
government assistance and strengthen their capital
positions.296
Earlier this year, a number of bank support schemes in
healthier economies were shuttered. On March 31, Australia
ended a program that backstopped lenders and warned banks
against using the situation as an excuse to increase interest
rates above national levels. A separate guarantee for
depositors with up to $1 million AUD ($920,000) per account
will be held in place for at least one more year. Australian
regulators said the program enabled banks to raise more than
$32 billion AUD ($29 billion) from international credit markets
since its inception. Participating banks paid more than $1
billion AUD ($920 million) for the service.
Bank guarantee programs in the United States, Canada,
France and South Korea had shut down by late 2009, and other
programs in the United Kingdom, Sweden, Germany, Spain, Ireland
and Denmark were slated to close this year after numerous
extensions. In addition, the European Commission approved an
extension of guarantee schemes for banks in Ireland, Spain, and
Denmark and a liquidity scheme in Hungary until December 31,
2010.297
As some banking systems regain strength and regulators wind
down emergency assistance programs, governments are shifting
their focus to preventive measures. The recently enacted Wall
Street Reform and Consumer Protection Act of 2010 appears
likely to result in tougher banking regulations in the United
States. Some advocates of the United States' taking a
leadership role have pushed for a stronger version of a
provision in the Dodd-Frank Wall Street Reform and Consumer
Protection Act that sets limited conditions on the content of
Tier 1 capital at large banks298 and stated officials at the
Basel Committee on Banking Supervision had failed the
international community. These ideas were expressed by Senator
Ted Kaufman (D-DE), who called Basel I and II ``colossal
failures'' and criticized the direction of Basel III on the
Senate floor. As an alternative to relying on an international
rules committee, Senator Kaufman specifically pressed for
legislation that provided strict guidelines to define Tier 1
capital.299 Despite this criticism, the new law mainly calls
for tougher capital requirements and leaves the final details
open to interpretation by regulators and industry experts.
Future regulations in the United States will also depend on the
final form of the Basel III accords, which will establish
international capital and leverage standards for banks. Months
before President Obama signed the financial reform bill into
law, Comptroller of the Currency John C. Dugan took the
opposite side of Senator Kaufman's argument and urged Congress
to collaborate on capital standards with the international
community.300 Even though the Dodd-Frank bill was signed by
President Obama there are still questions about whether
regulators will use powers granted by the law to take a lead
role on banking standards or adopt a wait-and-see approach
concerning the talks in Switzerland.
D. International Impact of Rescue Funds
The interconnectedness of the financial system, the
increasing fluidity of borders with respect to financial
transactions and the flow of capital,301 and several decisions
concerning the allocation of TARP funds mean that U.S. rescue
programs likely had international ramifications and also that
international rescue programs likely assisted U.S.
institutions. As discussed in more detail below, however, the
flow of funds from the United States is likely to have exceeded
the flow of funds into it (both in absolute and relative
terms).
Despite the methodological challenges that make it
difficult to pinpoint the precise movement of funds,302 it is
very likely that a meaningful portion of TARP funds had an
international impact, as demonstrated in more detail below.
There may have been both positive and negative consequences of
this cross-border flow of funds. EESA requires the Secretary to
take steps to maximize taxpayer return,303 and an investor is
likely to benefit from a company's ability to pursue the best
possible business opportunities. In some cases, permitting a
company to bolster international sales through international
investments may generate revenues that allow it to repay the
taxpayer in full within a reasonable period of time. General
Motors Company (General Motors), for example, has invested in
its China operations and has seen sales there increase
dramatically.304 Limiting General Motors' ability to take
advantage of its opportunities in Asia might have weakened the
taxpayer's investment in the company.
Enabling the cross-border flow of funds may also benefit
companies over the long-term. If the government had permitted
AIG to compensate domestic counterparties in return for the
termination of certain credit default swap contracts but had
required the company to abrogate similar contracts with foreign
counterparties, AIG's ability to conduct international
transactions in the future would have been compromised. The
U.S. government might have been in an awkward negotiating
position vis-`-vis foreign governments if TARP recipients had
been required to abrogate foreign contracts while
simultaneously honoring domestic contracts.
On the other hand, there may be several drawbacks to using
domestic rescue funds to finance foreign operations. It may
encourage free riders, as foreign governments that expect their
counterparts to initiate large rescue operations may be less
likely to take action themselves. If the costs of financial
rescue efforts are realized by home countries but benefits are
distributed among foreign economies, countries may engage in a
``race to inaction.''
The cross-border flow of rescue funds may also encourage
regulatory arbitrage. Companies may be incentivized to locate
their headquarters in countries that are likely to initiate
prompt, extensive rescue efforts in the event of a crisis,
while shifting their operations and potentially the
most risky operations to countries with less
stringent regulation. Such offshore movements could reduce the
capacity of U.S. regulators to monitor the institution and
could negatively affect the U.S. labor market, which might
result in U.S. taxpayers realizing a reduced percentage of the
economic benefits of the institution's operations while bearing
a substantial portion of the costs of a rescue.
Ultimately, basic governance principles may be disrupted
when the government of one country asks its citizens to
subsidize the economy of another country. The authority of a
government to tax its citizens derives in part from the
assumption that money taken from individual citizens will be
used for the collective good of that nation's citizenry.305 To
tax one nation's citizens to benefit those of another may be
contrary to that fundamental principle. Regarding the TARP, it
is conceivable that in some cases TARP funds could be used for
purposes that are contrary to the interests of U.S. citizens
if, for example, the outsourcing of U.S. economic activities
facilitated domestic job losses.
Regardless of the policy merits of permitting the cross-
border flow of U.S. rescue funds or allowing more rescue funds
to flow out of the United States than back into it
and the Panel takes no position on that issue it is
not easy to disentangle the cross-border flow of TARP funds.
The difficulty of assessing the size and scope of the cross-
border movement of rescue money makes it challenging to
evaluate the impact of those movements on both U.S. and foreign
economies.
As the Panel has described in several prior reports, two
factors make it difficult to track the flow of TARP funds.
First, the TARP did not require recipient institutions to use
the funds for specific purposes or to submit reports on their
use of the funds, a problem that was due in part to the terms
and structure of the Securities Purchase Agreements (SPAs)
signed by TARP recipients. Although the SPAs included a list of
the goals of the TARP, they did not specify how these goals
would be met, measured, or reported. They also included the
goals as part of the precatory opening clauses of the
agreement, as opposed to situating them in the binding language
that followed. As a result, the SPAs did not impose specific
obligations on TARP recipients to track the funds they
received.306 The absence of these data impedes the process of
following the money. Despite the Special Inspector General for
TARP's (SIGTARP) assessment that financial institutions may in
fact be capable of providing ``meaningful information'' on
their use of TARP funds, few institutions have done so.307
Second, because money is fungible, it is not possible to
isolate a dollar of government spending on a rescue program and
connect it to a dollar of spending by a financial
institution.308 Without careful safeguards, there is no
guarantee that money allocated for one purpose is not used for
another.
In addition, as mentioned above, regulatory barriers and
tax implications may impede the movement of money across
borders.309 This creates complications for following the money
because it means that money does not necessarily move in direct
proportion to the size of an institution's overseas business
operations. For instance, if Bank X received $100 million from
the TARP and conducts 10 percent of its operations in Brazil,
there is no certainty that $10 million of the government's
investment would be employed for its Brazilian operations.
One interesting distinction between U.S. and non-U.S.
rescue efforts may be noted, however. The CPP, the primary tool
used in the TARP rescue of the U.S. banking system, was a
systemic program: it focused on the banking industry as a
whole. In doing so, it injected $163.5 billion into the 17 of
the 19 largest U.S. banks.310 Those largest banks are, as
discussed in more detail below, the banks with the largest
international operations.311 In contrast, European rescue
programs tended in the main to focus more on specific troubled
institutions; even the U.K. capital injection program was only
taken up by two institutions. The operations of many of the
largest non-U.S. recipients of rescue funds were, as seen
below, either concentrated on their home markets, such as Hypo
Real Estate in Germany, or extended over only one national
border (as seen with the Irish and Icelandic banks operating in
the United Kingdom).312 The logical inference is that the U.S.
banking rescue may well have had significantly more
international impact than non-U.S. rescue efforts had on the
United States.
1. U.S. Rescue Funds that May Have Benefited Foreign
Economies
Figure 15 details the potential international dimension of
U.S. rescue programs. The figure shows the funds that U.S.-
based institutions received from the U.S. government and the
revenue those institutions derived from their operations
outside of the United States. Although the size of an
institution's international operations cannot serve as a
perfect proxy for the percentage of rescue funds that it used
internationally, it may provide a rough guide. Companies with
more sizeable international operations are likely to allocate a
greater percentage of rescue funds to international purposes.
Figure 15: U.S. Rescue Programs with International
Dimensions
U.S. Firms
Federal Funds Received ($millions)313
Non-U.S. Revenue ($millions)
Non-U.S. Revenue (% Total) 2005 2006 2005-2006
American Express314 3,389 8,180 8,760 33%
AIG315 69,835 49,685 55,899 48%
Bank of America316 35,000 5,178 10,699 12%
Bank of New York-Mellon317 3,000 1,810 2,063 30%
Capital One318 3,555 1,088 997 8%
Chrysler319 14,310
NA
NA
NA
Citigroup320 50,000 33,414 38,211 41%
General Motors321 50,745 54,557 63,310 35%
GMAC322 16,290 2,170 2,091 11%
Goldman Sachs323 10,000 10,599 17,304 44%
JPMorgan Chase324 25,000 11,480 16,091 24%
Merrill Lynch325 10,000 8,518 12,056 34%
Morgan Stanley326 10,000 9,540 13,511 38%
State Street327 2,000 2,130 2,741 41%
As shown in the figure above, several institutions that
received U.S. rescue funds had substantial international
operations. The amount of funding as well as the
terms varied from institution to institution. In
addition, because the TARP imposed few restrictions on the use
of the funds,328 each institution used the funds for different
purposes. Many of these large institutions had extensive non-
U.S. operations. As discussed above, the percentage of an
institution's revenue derived from foreign operations may serve
as a rough but imperfect approximation of
the cross-border flow of rescue funds, or at least the
potential overseas benefit that such funds might have provided.
The examples below provide some additional context on the ways
in which institutions have employed government assistance for
cross-border purposes.* AIG. As discussed in more detail in the
Panel's June 2010 report, due to the international nature of
AIG's business,329 approximately $61.6 billion of TARP and
other government funds received by the company went to foreign
institutions and governments.330 More than half of the money
AIG paid to credit default swap (CDS) counterparties on multi-
sector collateralized debt obligations (CDOs) went to foreign
institutions ($40.2 billion of the $62.2 billion in notional
value).331 * AIG's foreign subsidiaries received some funds
through capital contributions. Life insurance subsidiary Nan
Shan as well as others in Taiwan, Japan, and Hong Kong received
$4.4 billion. * Foreign counterparties of AIG received
government funds from AIG's payments through its securities
lending program. AIG's foreign-based securities lending
counterparties received $28.7 billion.332 * TARP and government
funds also benefited foreign banks through AIG's regulatory
capital swaps.333 Although the full list of these
counterparties is unknown, the top seven counterparties to
these swaps held a combined $210.9 billion in notional
exposure.334 * AIGFP's foreign CDS counterparties received
$17.2 billion through Maiden Lane III payments and $11.3
billion from additional collateral postings. Further foreign
counterparties benefited from the creation of the Maiden Lane
III facility.335
In addition to direct payments to foreign counterparties,
some of a domestic counterparty's own counterparties may be
located overseas, which may result in further cross-border
payments. Conversely, money paid to a foreign counterparty may
return to the United States via its own counterparty
relationships with U.S. institutions. The dealings of Goldman
Sachs with respect to the CDSs on CDOs that were eventually
acquired by Maiden Lane III provide a compelling example of the
effect of counterparty relationships on the flow of funds
across borders, as 96.9 percent of the cash received by Goldman
effectively flowed to non-U.S. institutions.336 (These
institutions, as well as other indirect foreign beneficiaries
of the AIG rescue entities that sold hedges on AIG to
Goldman and benefited from not having to make good on that
protection are listed in Annex II.)* General Motors.
GM, which received a total of $50.7 billion from Treasury amid
challenges in the domestic market, increased sales in China by
48.5 percent, and sold more vehicles in China than it did in
the United States in the past year.337 While GM has stated that
no taxpayer money has been used to further operations in China,
the Chinese government stimulus package strengthened demand
amongst Chinese citizens by encouraging sales of fuel-efficient
vehicles and assisting farmers with purchases of cars.338 It
can be inferred that assets held as a result of capital
injection programs by the U.S. government strengthened GM's
capabilities abroad. As shown in Figure 16 below, while capital
injections helped subsidize GM's losses in North America and
Europe, GM generated positive earnings in both Latin America
and the Asia Pacific region leading up to its financial rescue
by the U.S. government.
Figure 16: General Motors Income (Loss) from Continuing
Operations, Pre-Tax (Nine Months Ended September 30)339 2007
(millions of dollars) 2008 (millions of dollars)
GM North America $(2,062) $(10,553)
GM Latin America 924 1,476
GM Europe (79) (908)
GM Asia Pacific 609 117 * Chrysler. Chrysler last reported
earnings in the fall of 2007 prior to being taken private by
Cerberus Capital Management. Representatives from the company
did communicate that Chrysler lost $431 million in the first
quarter of 2008.340 Chrysler, which has received upwards of
$14.3 billion from Treasury, has seen its operations expand in
select international markets but falter in the aggregate.341
The Italian automaker Fiat benefited from U.S. government
rescue efforts, as Fiat assumed a 35 percent stake in Chrysler
without committing to make future cash injections into the
company. More recently, Chrysler has announced that its sales
increased by 92 percent in the United Kingdom, and by 75
percent in China in December 2009. Nevertheless, international
sales fell by 34 percent for all of 2009.342 * GMAC/Ally
Financial. GMAC, which recently renamed itself Ally Financial,
received $16.3 billion from Treasury. 343 Its net revenue
expanded from 2006 to 2007, but the company experienced no
significant changes in terms of geographic sources of that
revenue. In 2006, GMAC's international net revenue hovered
around 22 percent of its total net revenue.344 This is similar
to 2007, when 24 percent of its net revenue was foreign, and
the company seemed to be expanding throughout Latin America and
Canada.345 The majority of the company's 2007 foreign net
revenue was attributed to Europe and Latin America.
Undoubtedly, the rescue of GMAC enabled the company to continue
operating its profitable international and insurance
operations, whereas its domestic auto finance operations and
Residential Capital LLC (ResCap), whose mortgage assets are
both foreign and domestic, continued to generate losses for
GMAC leading up to the fall of 2008. In fact, in the first nine
months of 2008, GMAC's North American operations lost $950
million, and ResCap lost $4.6 billion. In April 2010, ResCap
announced that it had agreed to sell the majority of its
European mortgage assets to funds affiliated with the Fortress
Group. * Citigroup. Citigroup received $50 billion in TARP
funds through three investments by Treasury.346 Citigroup has
published quarterly reports specifying the uses to which it has
put its TARP funds.347 These reports detail an entirely
domestic use of capital, making funds available to U.S.
consumers and commercial borrowers. Additionally, Citigroup
used funds to help mortgage holders avoid foreclosure and to
help credit card holders manage their card debt.348 While
approximately 45 percent of Citigroup's income in 2005 and 2006
came from non-U.S. sources, the company's losses were
predominately from domestic businesses. Of the $32.1 billion in
losses Citigroup suffered in 2008, $2.1 billion, or nearly 8
percent, of the losses stemmed from the company's overseas
operations.349 Citigroup posted $1.7 billion in losses in
Europe, the Middle East, and Africa as well as $2 billion in
losses from its Latin American businesses. These losses were
countered by $1.6 billion in profits from the company's
operations in Asia. The assistance provided by the American
taxpayer through the TARP was used for a number of purposes,
including increasing liquidity and bolstering the company's
balance sheet against mounting losses both domestically and
abroad.
U.S. rescue efforts impacted foreign institutions in
several other ways. For instance, foreign institutions
benefited from the Federal Reserve's liquidity facilities, such
as the currency swaps it negotiated with foreign central banks
that allowed them to provide U.S. dollar funding to foreign
institutions.350 In addition, some foreign institutions were
able to take advantage of the FDIC's Temporary Liquidity
Guarantee Program (TLGP), so long as they owned commercial
banks in the United States: HSBC, BNP Paribas, Banco Santander,
and Mitsubishi Tokyo Financial Group all issued debt of $1
billion or more through the TLGP's Debt Guarantee Program.351
One key effect of U.S. rescue programs was the competitive
advantages they may have provided to U.S. financial
institutions. Signaling the government's implicit guarantee of
institutions it deemed to be ``too big to fail'' may have given
U.S. institutions funding advantages over their foreign
counterparts.352 Additionally, when the U.S. government
provided support to U.S. firms that might have failed
otherwise, foreign firms lost the opportunity to expand their
market share.
2. International Rescue Funds that May Have Benefited the
United States
The benefits of rescue efforts flowed not only from the
United States to other countries, the U.S. economy also
benefited both directly and indirectly from rescue efforts that
originated outside its borders. As discussed above, however,
because the major non-U.S. rescue efforts were institution-
focused as opposed to systemic, and because most of the failing
institutions were not, in general, international operators,
there was less potential for cash to flow to the United States
from those rescues. Figure 17 details the potential extent of
foreign rescue programs on the U.S. economy. As stated above,
the size of an institution's foreign operations does not
necessarily match the exact percentage of rescue funds that it
directed abroad. Nonetheless, the table below illustrates the
presence that major foreign financial institutions have in the
United States or the Americas, and it is likely that the impact
of the foreign rescue programs on the U.S. economy is roughly
commensurate with that presence.
Figure 17: Foreign Government Assistance with International
Implications
Non-U.S. Firms
Government Aid353 (millions of euros)
Total Revenue354 (millions of euros)
U.S./Americas Revenue (2005-06 % Total)
Type355
Amount 2005 2006
U.S./N.A.*/ Americas**
ABN AMRO (Netherlands) 356
C 2,600 22,334 27,641
N/A
AEGON (Netherlands)357
C 3,000 31,478 28,025 **52.5
Agricultural Bank of China (China)358
C
A 14,868 94,754 14,301 19,335
N/A
Anglo Irish Bank (Ireland)359
C
N 4,000 1,105 1,431 14.8
Allied Irish Bank (Ireland) 360
G + C 3,500 3,784 4,486 2.8
Bank of Ireland (Ireland)361
G + C 3,500 3,562 3,596
N/A
BNP Paribas (France)362
C 5,100 26,219 32,429 **12.5
Commerzbank (Germany) 363
G + C 8,200 15,000 7,311 9,419 **4.5
Credit Agricole (France)364
C 3,000 17,504 21,083 *6.4
Dexia (France/Belgium)365
G + C 6,400 150,000 6,112 7,163
N/A
Erste Bank (Austria)366
C 2,700 4,577 5,551
N/A
Fortis (Benelux) 367
C
N 11,300 12,800 90,419 96,602 *3.9
Glitnir (Iceland)
N 481 870
N/A
HRE (Germany) 368
G 52,000 970 1,141 **16.5
IKB (Germany) 369
C
G 3,500 12,000 754 685 **4.7
ING Groep (Netherlands)370
C
G 10,000 35,100 70,143 73,621 *38.4
Lloyds/HBOS (U.K.)371
C 19,000 43,711 43,138
N/A
Northern Rock (U.K.)
N
N/A 1,331 1,554
N/A
Kaupthing (Iceland)372
N
N/A 1,301 1,940
N/A
KBC (Belgium)373
C
G 7,000 14,800 9,242 10,763
N/A
Landsbanki (Iceland)374
N
N/A 809 1,021
N/A
Raiffeisen Zentralbank (Austria)375
C 1,750 2,069 3,298
N/A
Royal Bank of Scotland (U.K.) 376
C 45,500 34,108 37,075 19.0
Sociiti Ginirale (France) 377
C 3,400 21,236 24,849 **11.7
UBS (Switzerland) 378
C
A 7,200 72,900 28,042 32,571 38.0
As the table above suggests, the benefits of rescue efforts
did not flow only from the United States to other countries
the U.S. economy also benefited both directly and
indirectly from rescue efforts that originated outside its
borders. As with rescue efforts originated in the United
States, foreign rescue efforts may produce a two-way flow of
funds: on the one hand, counterparty relationships may mean
that foreign governments provide money to domestic institutions
that then flows out of the country, but on the other hand,
counterparty relationships may mean that funds provided to
foreign institutions may flow back into the domestic economy.In
contrast to the U.S. institutions listed in Figure 15 above, many of
the institutions that benefited from the largest non-U.S. rescues had
limited foreign operations (or at least limited operations in the
United States). The following list highlights some of the effects that
may have been felt in the United States as a result of the rescue
efforts undertaken by foreign governments. * Royal Bank of Scotland.
RBS operates in the United States primarily through its subsidiary
Citizens Financial Group (Citizens), which is a large commercial bank
with retail and corporate banking operations in several regions of the
United States.379 At the end of 2008, the company's U.S. operations
consisted of #126.2 billion ($183 billion) in loans and advances to
customers.380 RBS received #45.5 billion ($71 billion) in government
assistance. In light of its U.S. operations, it is possible that a
portion of this assistance helped to recapitalize Citizens, which in
turn would have provided meaningful support to U.S. customers.381 *
UBS. UBS operates a large institutional securities and investment
banking operation in the United States.382 In 2007 and 2008, UBS
recorded a loss of $34 billion associated with its exposure to the U.S.
residential mortgage market.383 On October 16, 2008, UBS reached an
agreement with the Swiss National Bank (SNB) to transfer up to $60
billion of illiquid securities and other assets off of UBS's balance
sheet and into a fund managed by the SNB. SNB financed the fund with a
loan of up to 90 percent of the purchase price, while the remaining 10
percent was provided by UBS through equity contributions. The transfer
included $31 billion of primarily cash securities in U.S. RMBS, U.S.
CMBS, U.S. student loan auction rate certificates and other student
loan-backed securities, and a U.S. reference-linked note program.384
Approximately $8 billion in U.S. subprime and Alt-A MBS was transferred
into the fund.385 This close link between U.S.-based assets and the
Swiss government's rescue program make it very likely that the program
benefited the U.S. economy by providing a market for otherwise illiquid
U.S.-based securities. * ING. The Dutch company Internationale
Nederlanden Groep (ING) operates in the United States as a commercial
investment bank, a life insurance and retirement services provider, and
an internet bank. ING, which received over 10 billion ($12.8 billion)
from the Dutch government in October 2008, saw its revenue decrease
dramatically in the United States and North America between 2008 and
2009.386 ING's U.S. operations had more than 25 billion ($35.5 billion)
in exposures to the U.S. residential market.387 These substantial
exposures to the U.S. housing market make it likely that rescue funds
provided to the parent company may have indirectly benefited the U.S.
economy. * Credit Agricole. Credit Agricole, Europe's largest retail
bank, received 3 billion ($3.8 billion) in subordinated debt from the
French government in November 2008. In their North American asset
management, private bank, and investment bank branches, they employ
1,800 workers. During the 2005-2006 period, an average of 8 percent of
Credit Agricole's revenue derived from its operations in North
America.388 Additionally, as of December 2008, 11 percent of its
commercial lending exposures to non-bank customers were in the United
States.389
Certain U.S. companies that had operations abroad also
benefited from rescue programs by other nations. For instance,
in 2008 and 2009, the governments of Canada and Ontario
announced loan programs totaling over $5 billion to assist GM
and Chrysler. The loans, repayable in three separate
installments over eight years, put stringent limitations on
dividend payments as well as executive privileges and
compensation.390
3. The Largest, Systemically Significant Institutions and
the International Flow of Rescue Funding
U.S. bank-owned assets abroad, which total $3.8 trillion,
account for approximately 20 percent of all U.S.-owned assets
abroad at the end of 2007. Likewise, as shown in Figure 18
below, foreign bank-owned assets in the United States, which
total $4.0 trillion, account for roughly 20 percent of all
foreign-owned holdings in the United States.
Figure 18: Cross-Border Asset Holdings, Year-End 2007391
(trillions of dollars)
Total
Financial Derivatives
Securities (non-U.S. Treasury)
Claims/Liabilities of U.S. Banks
Financial Sub-Total
U.S.-Owned Assets Abroad 18.3 2.6 6.8 3.8 13.2
Foreign-Owned Assets in the United States 20.4 2.5 6.2 4.0
12.7
Importantly, 80 percent of these bank assets represent
cross-border holdings owned by the bank, with the remaining 20
percent reflecting positions held on behalf of customers, such
as short-term securities (assets) and deposits (liabilities).
Of this 80 percent the positions owned by the bank
more than two-thirds are between foreign affiliates
of a U.S.-owned institution, or U.S. affiliates of a foreign-
owned institution (i.e., a multinational bank's intercompany
claims.392 By definition, the institutions included in these
data represent the largest, most systemically important banks
and securities firms in both the United States and Europe.
A review of the international operations of major TARP
recipients as well as leading foreign firms helps illustrate
the far-reaching benefits from the U.S. government's
assistance. As discussed in greater detail in Section B, firms
such as Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan
Stanley have significant operations overseas, not just as core
components in the international financial market plumbing, but
also through global treasury services for investors and
corporations (Citigroup and JPMorgan Chase), and significant
retail banking operations in Asia and Latin America
(Citigroup). Other U.S. firms, such as State Street (43 percent
non-U.S. revenue in 2006) and Bank of New York Mellon (30
percent non-U.S. revenue in 2006), provide trust bank and
global custodial services for corporations and investment
managers throughout the world. Even American Express, a
financial institution associated primarily with the U.S. retail
market, has significant non-U.S. operations (31 percent),
reflecting global transaction and payment operations that serve
international commercial and retail customers.
This is a two-way street, as foreign-headquartered banks
also rely heavily on the U.S. institutional and retail market.
Credit Suisse, Deutsche Bank, and UBS boast significant
operations in the U.S. capital markets, via their investment
banking, trading, and prime brokerage arms. Additionally, UBS
and HSBC have meaningful retail operations in the United States
UBS via the high-net-worth Paine Webber platform, and
HSBC through its more mainstream banking and consumer finance
operations.
While useful data on intercompany capital flows during the
crisis are limited, the Federal Reserve publishes aggregate
data on flows from U.S. banks to their foreign parents and from
foreign banks to their U.S. parents. The Federal Reserve cited
``unusual flows'' during the crisis, reflecting overseas demand
to fund dollar assets and a pronounced pullback in cross-border
positions based on heightened risk aversion, in the context of
a concerted effort aimed at ``channeling liquidity home to
protect the parent bank.''393 These cross-border, intercompany
flows, including much smaller flows to non-affiliates, are
categorized into three distinct stages of the crisis. (Net
shifts of U.S.-owned, Europe-owned and other foreign-owned
institutions during these stages are illustrated in Figure 19
below.) * Initial Phase, August 2007 to August 2008: A $380
billion increase in net lending abroad was driven by U.S.
affiliates of European institutions, which as a group accounted
for a $450 billion increase in overseas lending. Foreign
affiliates of U.S. parents also channeled funds back to the
United States, although in a much smaller amount ($36 billion),
presumably to shore up the parent's liquidity base. * Crisis
Peak, September 2008 to December 2008: There was a reversal of
$346 billion in net lending, as U.S. firms hoarded dollars and
short-term funding markets collapsed, whereas European parents
of U.S. affiliates took advantage of new dollar funding from
their central banks (via swap lines with the Federal Reserve),
easing the pressure on U.S. affiliates to send dollars home,
resulting in $288 billion in net inflows to European-owned
banks in the United States. * Final Phase, January 2009 to June
2009: There was a resumption of net lending abroad, with a $436
billion increase in net outflows as dollar interbank lending
markets improved, replacing a reliance on foreign central bank
dollar liquidity programs.
Figure 19: Net Flows of U.S.-owned and Europe-owned Banks,
August 2007-June 2009394
While the Federal Reserve data outlined above provide a
broad overview of cross-border financial transactions involving
U.S. affiliates and their foreign parents, and involving
foreign affiliates and their U.S. parents, these data should
not be viewed as a monolithic representation of intercompany
flows within individual institutions during the crisis.
Financial disclosures of U.S.-owned and foreign-owned banks
offer limited insight into inter-company flows during the
crisis (or any period for that matter), limiting the ability to
track the flow of TARP funds to overseas operations and
international rescue funding to U.S. operations. However, in
some instances a reconstruction of rescue funds is possible, as
with AIG and to a lesser extent General Motors and Chrysler.
Given that many of the firms that received government
assistance were interconnected with the global financial
framework, just as AIG was, it is reasonable to assume that
U.S. and foreign taxpayer assistance to systemically important
multinational financial firms benefited counterparties,
investors, and economies far beyond the home country. In the
case of the largest U.S. and foreign investment banks (such as
Morgan Stanley, Citigroup, and Deutsche Bank), their operations
were far more intertwined and of much greater scale globally
than Lehman Brothers' were.
E. Cooperation and Conflict in the Different Government
Responses to the Crisis
Throughout the financial crisis, the Federal Reserve and
Treasury have taken a number of actions to support financial
stabilization internationally. Federal Reserve Chairman Ben S.
Bernanke has commented that ``a clear lesson of the recent
period is that the world is too interconnected for nations to
go it alone in their economic, financial, and regulatory
policies. International cooperation is thus essential if we are
to address the crisis successfully and provide the basis for a
healthy, sustained recovery.''395
In this section of the report, the Panel evaluates the
extent of international cooperation with respect to financial
stabilization since the emergence of the financial crisis in
the summer of 2007 and assesses whether anything could have
been done differently.
1. International Coordination and Treasury's Role in
Supporting Financial Stabilization Internationally a. Legal
Authority
Section 112 of EESA provides a legal authority and
framework for Treasury's role in supporting financial
stabilization internationally during the financial crisis.
Section 112 requires the Secretary of the Treasury to
``coordinate, as appropriate, with foreign financial
authorities and central banks to work toward the establishment
of similar programs by such authorities and central banks. To
the extent that such foreign financial authorities or banks
hold troubled assets as a result of extending financing to
financial institutions that have failed or defaulted on such
financing, such troubled assets qualify for purchase under
section 101.''396
Treasury states that it has coordinated extensively with
its foreign counterparts throughout the financial crisis, and
that this particular statutory provision neither added to
Treasury's mandate nor changed its approach with respect to
international affairs.397 Treasury's view is that the inclusion
of this provision, therefore, resulted in no different behavior
on the part of Treasury than what it was already doing in the
international realm.
While this particular statutory provision is relatively
short in comparison to other key EESA provisions, its substance
and inclusion are telling for several reasons.
First, given the Federal Reserve's role as the U.S. central
bank and the plethora of actions it has taken during the
financial crisis, it is perplexing that the statute does not
direct the Secretary of the Treasury to consult with the
Federal Reserve when coordinating with foreign financial
authorities and central banks. While the Federal Reserve and
Treasury have very different roles (the TARP was established to
give Treasury the ability to purchase equity in a financial
institution, and the Federal Reserve is limited to making
loans), given the complementary relationship between these
roles, it seems important that they coordinate their actions.
It is unclear whether this omission was deliberate (i.e.,
Congress expected that Treasury and the Federal Reserve would
collaborate closely but wanted one voice to represent U.S.
interests) or due simply to a drafting error.
Second, since the financial crisis developed into a global
problem, Congress intended for Treasury to coordinate with its
foreign counterparts and likely thought that a collaborative
effort would both minimize the likelihood that one country
would be advantaged over others and send a strong signal to the
markets.
Third, Treasury's authority to coordinate with foreign
finance ministers and central banks is broad and expansive, and
is not limited to the design of programs that are exact
replicas of the TARP as implemented in the United States. While
the statute authorizes Treasury to coordinate with foreign
financial authorities and central banks to establish TARP-like
programs in other countries, the Panel notes that the U.S.
approach allows for a number of different policy and
programmatic responses, such as asset purchases, capital
injections, increased deposit insurance, and government
guarantees.
Fourth, Congress' authorization for the Treasury Secretary
to purchase troubled assets from foreign financial authorities
or banks acquired as a result of extending financing to
subsidiaries of U.S.-based financial institutions that have
failed or defaulted on the financing arrangement seems to have
been included under the assumption that Treasury would conduct
an asset purchase program (as it originally contemplated and as
described in Sections 101 and 113 of EESA), rather than capital
injections, since asset purchases work better under a reverse
auction mechanism. In Congress' view, having more sellers in an
asset pool under a reverse auction-type mechanism might have
produced better results. The greater the participation in an
auction, the better odds there are for lower pricing, which
protects the interests of the taxpayer. The significance and
relevance of this provision, however, were diminished once
Treasury made the strategic decision to pursue capital
injections instead of purchasing troubled assets.398
Finally, while the inclusion of this section is explicit
evidence of Congress' desire for Treasury to play a pivotal
role in supporting financial stabilization internationally,
Congress did not provide any content to the term
``coordinate,'' so the provision does not impose any meaningful
obligation on the part of Treasury. This may in part explain
Treasury officials' particular interpretation of this
provision, as discussed above. b. Coordination Concerning the
Creation of TARP-like Programs and Support for Banking Industry
During the latter part of 2008, various finance ministers
and central bank governors focused almost exclusively on
emergency rescues of their respective banking systems.
As discussed above (and as confirmed in Panel staff
conversations with experts and policymakers), countries
generally responded to the financial crisis by developing
rescue packages focused on systemic issues within their
jurisdictions rather than focusing heavily on specific
institutions.399 There were, however, several exceptions.
Beginning in early 2008 and continuing through mid-September,
the United States acted largely on a case-by-case basis in
response to the increasing stresses on financial institutions
including Bear Stearns, Lehman Brothers, and AIG. In March
2008, the Federal Reserve Bank of New York (FRBNY) extended
credit to Maiden Lane LLC in order to facilitate the merger of
Bear Stearns and JPMorgan Chase. In mid-September 2008, the
Federal Reserve and Treasury had to face the failure of Lehman
Brothers (after the United Kingdom's Financial Services
Authority (FSA), the regulator of all providers of financial
services in the United Kingdom, declined to approve Barclays'
acquisition of Lehman), and the rescue of AIG in light of the
systemic risks they believed its failure would impose.400
According to then-Treasury Secretary Henry M. Paulson, Jr.,
these steps were ``necessary but not sufficient,''401 prompting
his joint decision with Chairman Bernanke to shift gears and
focus on formulating a comprehensive approach to resolve
financial market stresses. On September 20, 2008, Secretary
Paulson and Chairman Bernanke asked Congress ``to take further,
decisive action to fundamentally and comprehensively address
the root cause of this turmoil''402 by submitting legislation
requesting authority to purchase troubled assets from financial
institutions in order to promote market stability. On October
3, 2008, after approval from both houses of Congress, President
George W. Bush signed EESA into law.
In a display of international partnership at a time when
global finance markets were severely strained, the G-7 finance
ministers and central bank governors held a meeting at the U.S.
Department of the Treasury during the weekend of October 10-12,
2008 (one week after the passage of EESA and amidst the IMF and
World Bank annual meetings), to discuss economic conditions,
financial market developments, and individual and collective
policy responses. According to then Undersecretary of the
Treasury for International Affairs David H. McCormick, one of
the central messages for the weekend was that ``the turmoil is
a global phenomena.''403 At this time, Mr. McCormick referenced
the recent passage of EESA, stated that other countries were
``considering appropriate programs given their national
circumstances,'' and said that Treasury looked forward ``to
working with them as they move forward with their plans.''
During the meeting, then-Secretary Paulson briefed his foreign
counterparts on the U.S. financial rescue efforts, including
strategies to use the EESA authority to purchase and insure
mortgage assets and purchase equity in financial institutions.
Secretary Paulson and Undersecretary McCormick maintained
regular contact with their G-7 and other international
counterparts in order to strengthen international collaboration
efforts to stabilize financial markets and restore confidence
in the global economy.404 It appears that the existence of the
TARP, therefore, might have served to enhance the negotiating
position of the U.S. government (at least in a limited way) as
it demonstrated the willingness of U.S. officials to be
aggressive and forceful in committing a significant amount of
resources to confront a deepening crisis.405
At the meeting, the G-7 finance ministers and central bank
governors endorsed an aggressive five-part plan to guide
individual and collective policy steps to provide liquidity and
strengthen the capital base of financial institutions. This
plan included, among other items, agreements to ``[t]ake
decisive action and use all available tools to support
systemically important financial institutions and prevent their
failure,'' ``[t]ake all necessary steps to unfreeze credit and
money markets and ensure that banks and other financial
institutions have broad access to liquidity and funding,'' and
``[e]nsure that our banks and other major financial
intermediaries, as needed, can raise capital from public as
well as private sources, in sufficient amounts to re-establish
confidence and permit them to continue lending to households
and businesses.''406 Then-Secretary Paulson also referenced the
need to ``continue to closely coordinate our actions and work
within a common framework so that the action of one country
does not come at the expense of others or the stability of the
system as a whole,'' and noted how it has never ``been more
essential to find collective solutions to ensure stable and
efficient financial markets and restore the health of the world
economy.''407 Perhaps most importantly, this meeting presented
a platform through which the G-7 finance ministers and central
bank governors could present a common front and stand behind a
common strategy at a time when aggressive and forceful action
could help calm the financial markets.
While endorsing a coordinated approach to the financial
crisis and outlining a broad set of principles, the G-7
leaders, however, failed to announce any concrete steps,
underscoring the challenge of crafting a global plan to address
turmoil in the financial markets. On the one hand, the lack of
specificity has garnered some criticism from those who argue
that these types of vague piecemeal responses fail to provide
certainty to the markets. Simon Johnson, the Ronald A. Kurtz
Professor of Entrepreneurship at the Sloan School of Management
at MIT and former chief economist at the IMF, argues that
``[y]ou need specific, concrete steps, not a list of principles
that are obvious and everyone can easily agree to.''408 In
addition, Federal Reserve Vice Chairman Donald L. Kohn
commented that ``[a]lthough most countries wound up in a
similar place, the process was not well coordinated, with
action by one country sometimes forcing responses by
others.''409 On the other hand, the flexibility contained
within the broad set of principles outlined by the G-7 provided
each country with the discretion to implement solutions to the
crisis based upon their evaluation of what was best for their
own banking sector and their domestic economy. According to
Shoichi Nakagawa, the former Japanese finance minister,
``[e]ach of the G-7 nations knows what has to be done, what the
government needs to do. Each country understands what needs to
be done.''410
Given that many countries had banking systems with
different levels of impairment, a single coordinated response
may have hindered their ability to formulate targeted responses
to their unique economic challenges and limited the amount of
experimenting and learning that occurred in the process.
Furthermore, as discussed above, despite the lack of
specificity contained in the G-7 communique, most countries
generally intervened in similar ways using the same basic set
of policy tools.411
While not all issues were resolved, since the G-7 agreement
provided each nation with the discretion and flexibility to
formulate how to safeguard its own banking system, many
countries decided to provide broad support to their banking
systems. As discussed above, the rescue plans in different
countries, while they each have some unique features, contained
similar elements: expanded deposit insurance, guarantees on
non-deposit liabilities, purchases of impaired assets, and
capital injections for financial institutions.
On October 14, 2008 less than two weeks after
EESA was signed into law then-Secretary Paulson
formally announced that, alongside the Federal Reserve's
establishment of a Commercial Paper Funding Facility (CPFF) and
the FDIC's creation of the Temporary Liquidity Program
(TLGP),412 Treasury would ``purchase equity stakes in a wide
array of banks and thrifts.''413 Treasury concluded that while
it is easy to make direct capital injections, setting up a
structure to buy particular assets or groups of assets in the
absence of liquid trading markets was more difficult.
Although Treasury officials have explained that the change
in strategy with respect to capital injections rather than
asset purchases was motivated both by the severity of the
crisis and the need for prompt action,414 as discussed above,
its decision may have also been influenced by similar actions
taken across the globe, particularly the United Kingdom under
the leadership of then-Prime Minister Gordon Brown. While such
actions were not dispositive, it is possible that they might
have played a role in the actions Treasury decided to take
domestically.415
During an interview after announcing his government's
financial rescue on October 8, 2008, Mr. Brown implied that the
United Kingdom's plan was a faster and more efficient solution
to the financial crisis than buying troubled real estate-
related assets from financial institutions (as was initially
proposed under the U.S. financial rescue plan). He remarked
that ``[t]his is not the American plan. The American plan is to
buy up these bad assets by a state fund. Our plan is to buy
shares in the banks themselves and therefore we will have a
stake in the banks. We know that the taxpayers' interest had
got to be protected at all times, and that is why we are
ensuring that it is an investment stake in the banks. We are
not just simply giving money.'' Mr. Brown also commented that
the time for purchasing impaired assets had since come and
gone, and he hoped that other countries would follow his lead.
On the same day, Mr. Brown wrote to EU leaders to urge them to
follow the United Kingdom as a model ``where a concerted
international approach could have a very powerful effect.'' 416
At a press briefing held after the United Kingdom's rescue
announcement, then-Secretary Paulson signaled that Treasury was
considering a rescue plan through which the government would
provide capital injections to financial institutions in
exchange for ownership stakes.417 This marked the first
occasion in which Treasury indicated publicly that it was
contemplating capital injections instead of asset purchases.
Furthermore, the influence of the actions of foreign
countries (such as the U.K. bank debt guarantees) upon the U.S.
response was displayed in FDIC Chairman Sheila Bair's remarks
at the joint Treasury, Federal Reserve, and FDIC press
conference on October 14, 2008. Chairman Bair noted that
``[o]ur efforts also parallel those by European and Asian
nations. Their guarantees for bank debt and increases in
deposit insurance would put U.S. banks on an uneven playing
field unless we acted as we are today.''418 As U.S. officials
worked to implement the FDIC's Temporary Liquidity Guarantee
Program (TLGP), they consulted closely with foreign financial
authorities to ensure that actions taken in the United States
would not cause problems for other countries, while also
safeguarding the interests of U.S. institutions.419
Further evidence of the close coordination or emulation
between U.S. and U.K. policymaking is displayed in the United
Kingdom's particular interest in the Asset Guarantee Program
(AGP), created pursuant to Section 102 of EESA and through
which the Federal Reserve, Treasury, and the FDIC placed
guarantees, or assurances, against distressed or illiquid
assets held by Citigroup and Bank of America.420 In the days
and weeks immediately after the announcement of the AGP, U.S.
and U.K. officials held periodic discussions about the
structure of this program and the challenges the Federal
Reserve, Treasury, and the FDIC were facing with respect to
implementation.421 Ultimately, as discussed above, the United
Kingdom established its own asset protection scheme.
On February 10, 2009, the Obama Administration announced
its Financial Stability Plan a broad framework for
financial recovery and stability that included a combination of
stress tests for the nation's largest BHCs (formally known as
the Supervisory Capital Assistance Program, or SCAP), a public-
private investment program to help remove impaired assets from
the balance sheets of financial institutions, a comprehensive
foreclosure mitigation plan, and initiatives designed to
spearhead consumer and business lending.422 Between February
and May 2009, the Federal Reserve, the Office of the
Comptroller of the Currency (OCC), and the FDIC worked
collaboratively to conduct stress tests of the 19 largest BHCs
in the United States and to identify the potential losses
across select categories of loans, resources available to
absorb those losses, and any shortfalls in capital buffers.423
Certain U.S. responses to the crisis, and especially the
stress tests, have informed foreign responses. In 2009, as
discussed above, the European Union conducted an aggregated
stress test of its 22 biggest cross-border lenders. This round
of tests was superficially similar to the U.S. stress tests.
Like the U.S. tests, the EU stress tests were guided by two
scenarios: a baseline scenario and an adverse scenario.
However, the EU tests differed from the U.S. tests in several
important ways. Unlike the U.S. stress tests, which assessed
the condition of individual institutions, the outcomes of the
EU tests were aggregated to show the health of the overall EU
banking sector (i.e., bank-by-bank results were not released),
and the exercise was not used to determine which banks needed
to be recapitalized. In addition, whereas the U.S. stress tests
were centrally coordinated, the EU tests were applied by the
relevant national supervisory authority, meaning that the
stress test application could have conceivably varied on a
country-by-country basis.
Recently, the European Union decided to conduct another
round of stress tests on 91 banks. While there still are some
differences in approach between the United States and the
European Union, this latest round appears to resemble more
closely the U.S. stress tests in both form and substance. In
contrast to its 2009 predecessor and the U.S. tests, which did
not assess smaller banks, the scope of the 2010 Committee of
European Banking Supervisors (CEBS) tests went beyond the EU's
largest banking organizations. Like the U.S. stress tests, this
latest round was guided by both baseline and adverse scenarios
to determine whether banks are sufficiently capitalized to deal
with severe economic shocks, and at least some European
governments appear inclined to recapitalize their banks if
necessary.424 Relative to the 2009 test, the 2010 CEBS test was
much more transparent. Most importantly, the 2010 CEBS test
released bank-by-bank results rather than results in the EU
aggregate. Additionally, the process for how the stress tests
were applied was disclosed. However, it is unclear whether
transparency was increased because: (1) the U.S. test was
widely regarded as more successful than the 2009 CEBS test; (2)
the EU's sovereign debt crisis prompted a crisis of confidence
among banks' investors that could be cleared up only by
increasing transparency; or (3) some combination of these two
factors. As the Panel has noted previously, the U.S. stress
tests helped to restore confidence in the nation's largest
banking organizations by looking ahead and providing clear
statements of the prospective condition of each of the BHCs
tested.425 It appears that the European regulators have learned
this lesson, as one of their primary objectives was to reassure
investors that banks are sufficiently capitalized.426 While a
bank's national origin is significant for purposes of the
stress tests (within the United States, Treasury committed to
recapitalize any of the 19 stress-tested BHCs, if necessary),
the stress test results have international implications because
investors are more prone to invest in an institution that has
been found to be adequately capitalized.
The China Banking Regulatory Commission has also conducted
stress tests on its banks over the past year (assuming
residential real estate price declines of as much as 60 percent
in the hardest hit markets). It is difficult, though, to
determine the extent to which, if any, this response was
informed by the U.S. stress tests because the Chinese economy,
as discussed above, has generally avoided the banking crises
that impacted the United States and much of Europe (as
demonstrated by the record issuance of $1.4 trillion in new
loans by Chinese banks in 2009).427
According to Assistant Secretary for Financial Stability
Herbert M. Allison, Jr., the Administration continues to work
through multilateral institutions and through direct bilateral
engagement to foster financial regulatory reform and improve
the stability of the global economy.428 The G-7/G-8 members'
finance ministers and central bank governors continued to meet
and coordinate actions into 2009, emphasizing a commitment to
reestablish full confidence in the global financial system.
From November 2008 through April 2009, the G-20 Leaders process
became increasingly relevant (as noted by the increasing
frequency of meetings and communiquis) as it focused
intensively on rescue efforts.429 Mr. Allison stated further
that the G-20 Leaders process is the ``key channel for
international cooperation to strengthen the framework for
supervising and regulating the financial markets.''430
2. Role of Central Banks at the Height of the Crisis
As Federal Reserve Vice Chairman Donald L. Kohn stated,
``[t]he financial and economic crisis that started in 2007
tested central banks as they had not been tested for many
decades,'' and the Federal Reserve and other central banks have
had to make innovative (and sometimes unprecedented) changes to
traditional policy tools as the crisis played out.431 At the
height of the financial crisis, the central banks worked
together closely in focusing their efforts largely on
addressing liquidity pressures and resolving disruptions in
funding markets. a. Focus on Liquidity Pressures
Starting in late 2007, central banks generally responded to
funding problems with significant expansions of their liquidity
facilities. Such actions typically included lengthening lending
maturities, pumping large amounts of funds into overnight
markets, broadening acceptable collateral, and sometimes
initiating new auction techniques. Starting in September 2007,
the Federal Reserve conducted several large operations in the
federal funds market (such as reducing the spread of the
discount rate over the target federal funds rate), and the Bank
of Canada, the Bank of Japan, the ECB, and other central banks
conducted special operations to inject overnight liquidity at
the same time. In addition, on October 8, 2008, the Federal
Reserve announced a reduction in its policy interest rate
jointly with five other major central banks the Bank
of Canada, the Bank of England, the ECB, the Swedish National
Bank, and the Swiss National Bank with the Bank of
Japan expressing support. The Federal Reserve also created a
number of emergency liquidity facilities at the height of the
crisis to meet the funding needs of key non-bank market
participants, including primary securities dealers, money
market mutual funds, and other users of short-term funding
markets, such as purchasers of securitized loans.432b.
Reciprocal Currency Arrangements (``Swap Lines'') i. Background
The credit and liquidity constraints seen at the height of
the financial crisis disrupted U.S. dollar funding markets not
only domestically but also overseas. While some foreign
financial institutions have relied on dollars acquired through
their U.S. affiliates, ``many others relied on interbank and
other wholesale markets to obtain dollars.''433 Normally, these
borrowers can obtain dollar funding at the same interest rates
as U.S. banks, depending upon their level of credit risk.434
Beginning in August 2007, however, the interbank lending market
experienced significant disruptions. As stated by Michael J.
Fleming, a vice president in the Capital Markets Function of
FRBNY's Research and Statistics Group, and Nicholas Klagge, an
economic analyst in the Risk Analytics Function of FRBNY's
Credit and Payment Risk Group, ``[c]oncerns about credit risk
and higher demand for liquidity placed extraordinary strains on
the global market for interbank funding in U.S. dollars,'' as
``[i]nterbank interest rates denominated in dollars increased
sharply, and market participants reported little or no
interbank lending at maturities longer than overnight.''435 The
increased spread between the London Interbank Rate (LIBOR) and
the overnight indexed swap (OIS) a measure of
illiquidity in financial markets that is used as a proxy for
fears of bank bankruptcy signaled that interbank
lending at longer maturities was perceived to be especially
risky.436 These market conditions signaled a sharp reduction in
the general availability of credit, which was driven largely by
fears over credit risk and lender uncertainty about their own
liquidity needs. ii. Summary of Swap Line Programs
In response to these market disruptions, the Federal
Reserve and other central banks established reciprocal currency
arrangements, or swap lines, starting in late 2007.437 A swap
line functions as follows: as the borrowing central bank draws
down on its swap line, it sells a specified quantity of its
currency to the lending central bank in exchange for the
lending central bank's currency at the prevailing market
exchange rate. The two central banks simultaneously enter into
an agreement that obligates the borrowing central bank to buy
back its currency at a future date at the same exchange rate
that prevailed at the time of the initial draw, along with
interest.438 Fluctuations in exchange rates or interest rates,
therefore, have no effect on the payments made at the end of
the transaction, meaning that the Federal Reserve bears no
market pricing risk as a result of its swap lines. The
borrowing central bank will then lend the dollars at variable
or fixed rates to entities in its country.
In the immediate aftermath of the Lehman Brothers
bankruptcy in September 2008, the Federal Reserve rapidly
expanded the size and scope of its swap line program,
increasing the total amount of dollars made available to
central banks under the program from $67 billion to $620
billion. In December 2008 the peak of the Federal
Reserve's swap program swaps outstanding totaled more
than $580 billion, accounting for over 25 percent of the
Federal Reserve's total assets.439 During 2009, however,
foreign demand for dollar liquidity through swap lines
decreased, primarily for two reasons: (1) funding market
conditions improved; and (2) banks were able to secure funds
elsewhere at lower costs. (Since the loans provided by the
borrowing central banks to financial institutions in their
jurisdictions are offered at rates that would be above market
rates in normal times, demand typically decreases when market
conditions improve, and market alternatives become more
attractive.)
The swap line programs established by the Federal Reserve,
which ended on February 1, 2010,440 enhanced the ability of
foreign central banks to provide U.S. dollar funding to
financial institutions in their jurisdictions at a time when
interbank lending was effectively frozen.441 According to
Messrs. Fleming and Klagge, the swaps ``potentially improve[d]
conditions in the global funding and credit markets more
generally.''442 Overall, they conclude that ``the evolution of
funding pressures during the crisis suggests that swap line
program announcements and operations were effective at easing
strains in dollar funding markets.''443 All of the swaps
established from December 2007 to February 2010 were repaid in
full, and the Federal Reserve earned $5.8 billion in interest.
3. Assessment of Degree of Cooperation vs. Competition/
Conflict
There are numerous examples of effective coordination
efforts, which are documented in more detail above: unified
interest rate cuts, currency swaps, and the use of the G-20 are
evidence of successful coordination.444 There are also numerous
examples of insufficient coordination.445 For instance, neither
central banks nor ministries of finance maintained a global
database of information, and as a result, policymakers
occasionally found themselves without key data as the crisis
unfolded.446 This lack of centralized publicly available data
on governmental financial rescue efforts continues to this day,
as there is no consistent and reliable single source for this
information. In addition, the wide range of transparency
levels amongst governments makes comparison between countries
difficult. The Panel understands that the IMF has collected
this data from various governmental authorities,447 but that
this data was provided on a confidential basis. This is the
type of information that should be publicly available for use
in policymaker analysis. Similarly, the fact that stress tests
were neither global nor uniform suggests that there is room for
substantial improvement.
A comprehensive and definitive evaluation of the degree of
coordination that occurred during the financial crisis will be
possible only with the benefit of historical perspective. Only
time will tell whether the degree of coordination was
appropriate and whether countries focused too much on their own
narrow national interests at the expense of the global economy.
Yet even if reaching a definitive conclusion is not possible,
the nature of coordination during the financial crisis raises
several key issues. a. Complete Coordination may not Always be
Desirable
Ideally, international rescue efforts would include a
mixture of uniform collective action and individuated, country-
specific action tailored to address the specific needs of
specific countries. As detailed above and in prior Panel
reports, the financial crisis is littered with numerous
examples of coordinated and isolated approaches. Acting in
concert, several central banks took the unprecedented step of
announcing a coordinated reduction in interest rates in the
fall of 2008. Acting alone, the U.S. government designed stress
tests specific to U.S. institutions and to the U.S. economy,
intending to restore confidence in its largest financial
institutions. b. The Importance of Coordinating Before a Crisis
The financial crisis demonstrated that no matter how
globally integrated the economy may be, borders still matter:
ultimately each individual nation is called upon to bear the
costs of assisting and restoring its own economy and suffers
the consequences if it does not.448 In part because they will
bear these costs, countries tend to act in their own self-
interest. Sometimes the self-interest of one country aligns
with the interests of the international community, as it did
during many phases of the financial crisis. When central banks
agreed to coordinate a cut in interest rates, for example, the
interests of individual nations were in alignment with the
broader needs of the economic system. In other situations,
however, it is less clear that these interests are in
alignment. These misalignments of interests may produce
weaknesses in international supervision (pre-crisis) or may
weaken the scope and scale of reform efforts (post-crisis).449
It is also uncertain whether these interests would align in a
future crisis.450 For example, Brookings Institution fellow
Douglas J. Elliott maintains that as institutions become more
and more internationally integrated and have less of a
footprint in one specific country, home country governments may
be more reluctant to accept the full bill for rescuing the
company.451
Making an effort to coordinate in advance of a crisis could
help to minimize the likelihood and effect of misaligned
national interests at moments when alignment is most
critical.452 The IMF has advocated this approach, asserting
that it is ``essential'' to initiate ``[e]x ante information
gathering, preparation, and war gaming.'''453 Ex ante
coordination permits countries to establish rules,
expectations, and purposes during the periods when it is
easiest to do so as one economist noted, coordinating
during a crisis is a ``scramble.''454 Advance coordination
allows countries to consider a complex interplay of factors
domestic needs, concerns about maintaining
competitiveness, and arbitrage opportunities at a
time when sustained, thoughtful consideration is possible. It
also helps government officials to develop relationships with
each other that may prove useful when they are forced to
interact during a crisis.455 Finally, ex ante coordination may
enable governments to develop processes for working across a
diverse array of national regulatory regimes.456
There are a number of ex ante mechanisms that could help to
facilitate coordination during a crisis. A cross-border
resolution regime could establish rules that would permit the
orderly resolution of large international institutions, while
also encouraging contingency planning and the development of
resolution and recovery plans.457 Such a regime could help to
avoid the chaos that followed the Lehman bankruptcy, in which
foreign claimants struggled to secure priority in the
bankruptcy process,458 and that preceded the AIG rescue, in
which the uncertain effect of bankruptcy on international
contracts pressured the U.S. government to support the
company.459 Additionally, the development of international
regulatory regimes could help to discourage regulatory
arbitrage and pressure individual countries to compete in a
``race to the top'' by adopting more effective regimes at the
national level.460 Senator Christopher Dodd (D-CT) has argued
that routine meetings between senior regulators of G-20
countries including meetings of a ``Principals
Group'' prior to G-20 summits would help to ensure
that regulations are consistent across borders.461
Finally, ex ante coordination could help to establish
robust institutions that could provide a framework for
resolving issues during the crisis itself. Regular meetings of
the G-20 and FSB, for example, establish a setting and mode of
communication that could become a convenient default during a
crisis.462 Facilitating the growth of such institutions also
helps government officials to develop working relationships
with each other that would promote efficiency in crisis
response efforts. For instance, involving international
institutions at G-20 meetings places the institution side by
side with heads of state and finance ministers.463
Strengthening such institutions has a more subtle normative
effect as well: it adds legitimacy to the notion that economic
policy is an international endeavor in addition to a national
one.
There are also less formal coordinating mechanisms that
could be developed prior to a crisis. For instance, an
international information database could provide details on
international markets and on multinational companies' cross-
border exposures that could assist both national governments
and international bodies in coordinating rescue efforts during
a crisis. According to the IMF, some countries have already
begun taking steps to make such information accessible.464 c.
The Role of the TARP in Multilateral Negotiations
According to Administration officials who were working
closely with their foreign counterparts during the fall and
early winter of 2008, the existence of the TARP enhanced the
ability of the United States to convince other countries to
enact measures to combat the financial crisis.465 When the
United States hosted the G-20 summit in Washington, DC in
November 2008, the TARP had been in effect for more than a
month, and several U.S. financial institutions had already
received TARP funds. By the time of the next summit, in London
in April 2009, hundreds of institutions had received TARP
funds.466 The existence of the TARP evidenced the willingness
of the United States to address its own economic challenges and
signaled to the international community that the country
recognized the seriousness of the financial crisis. The TARP
also thrust the United States into a position of ``demonstrable
leadership,''467 according to one former Treasury official, and
provided credibility at a time when the United States was
trying to convince other countries to join it in developing a
robust crisis response.468 Without the TARP, the United States
would have had little credibility in these negotiations.469
At the same time, Vincent Reinhart, a resident scholar at
the American Enterprise Institute, maintains that the TARP
eventually became perceived as a liability for the U.S.
government in its interactions with foreign governments.
Whereas initially it had been viewed as a bold, early step to
address the financial crisis, as time progressed it was viewed
less as a systematic response and more as a reflection of a
disjointed, ad hoc effort. This perception of the program
decreased its usefulness in enhancing U.S. credibility.470 In
addition, the government's ability to use the existence of the
TARP to bolster its negotiating position was blunted by the
perception that the United States was responsible for causing
the financial crisis.471 d. The Power of Informal Coordination
Networks
Much of the coordination that occurred during the crisis
took the form of informal communications.472 In some
situations, Treasury officials picked up a phone to call their
foreign counterparts; in others, small groups of countries
gathered to share information. Informal communication helped
officials to stay informed as to what their counterparts were
doing, which was particularly important because of the speed at
which the crisis unfolded. For example, according to then-
Secretary Paulson, Treasury officials communicated regularly
with foreign governments about a variety of subjects, including
Fannie Mae and Freddie Mac. In addition, Secretary Paulson
himself would occasionally talk to very senior foreign
officials during critical times.473
In other cases, without any direct communication, one
country's action on a particular issue inspired another country
to act.474 In some cases, these parallel actions were due to
competitive pressures in this manner, competition
fostered outcomes that looked from a distance as though they
had been the product of collaboration. In other cases, such as
the stress tests, one country's actions served as a best
practices template that other countries could employ when they
faced similar challenges.475 Some experts maintain that few
examples of real coordination exist in most cases,
one country simply emulated the rescue efforts of another.476
It is also possible that as the crisis developed, informal
coordination efforts hardened into more formal processes. The
G-20 supplanted the G-8 as the primary international economic
negotiating body, possibly in part because the large volume of
information being communicated between G-8 participants and
other countries made it easier to bring those countries
directly to the negotiating table. The expansion served the
purpose of raising the views of countries with emerging
markets,477 and also permitted policymakers to resolve many
issues within the context of a single negotiating body.
The emergence of the G-20 also reflects the importance of
symbolism and tone in crisis response.478 Regardless of the
number of concrete measures that have been implemented as a
direct result of G-20 summits, the meetings facilitated
aggressive action by governments across the globe by setting a
tone that the international community supported timely,
substantial economic interventions. As one Treasury official
stated, the goal was to use a ``show of force'' to present a
common front in fighting the financial crisis.479
F. Conclusions and Recommendations
The international response to the crisis that started in
2007 developed on an ad hoc, informal, jurisdiction-by-
jurisdiction basis. The G-7/G-8, G-20, and multinational
organizations such as the IMF all played a significant role in
the rescue and an even larger role in the subsequent reform
efforts. The international response was by no means
uncoordinated; however, governments ultimately made their
decisions based on an evaluation of what was best for their own
banking sector and their domestic economy, and consideration of
the specific impact of their actions on either the financial
institutions or banking sector or the economies of other
jurisdictions was not a high priority. This owed to both the
rapid and brutal pace of the crisis, as well as the absence of
effective cross-border crisis response structures. Ultimately,
this meant that the assistance that was provided to specific
troubled institutions depended very much on where they were
headquartered.
Despite the limitations of international coordination, most
countries ultimately intervened in similar ways, using the same
basic set of policy tools: capital injections to financial
institutions, guarantees of debt or troubled assets, asset
purchases, and expanded deposit insurance. As the report
illustrates, macro-economic responses taken by central banks,
which had a broader discretion to design liquidity facilities,
were the most coordinated.
Although these ad hoc actions ultimately restored a measure
of stability to the international system, and the role of the
capital injection programs adopted by the governments of both
the United Kingdom and the United States was key to that
stability, there is no doubt that international cooperation
could be improved. Even when several governments came together
to rescue a specific ailing institution over a short period, as
in the rescues of Dexia and Fortis, national interests came to
the fore. Instances of effective collaboration to orchestrate
broader, market-wide interventions occurred on a more limited
basis. The internationalization of the financial system has, in
short, outpaced the ability of national regulators to respond
to global crises.
In light of the international integration of markets, and
in light of the fact that some of the recipients of rescue
funds were large international institutions, it was inevitable
that rescue funds would flow across borders. In the absence of
reliable data, however, it is possible to say only that it
seems likely that U.S. money had more impact on non-U.S.
institutions and economies than non-U.S. rescue funds had on
the United States, even after adjusting for the relative size
of the various jurisdictions' rescues. Because Treasury has
gathered very little data on how bailout funds flowed overseas,
however, neither students of the current crisis nor those
dealing with future rescue efforts will have access to all the
information needed to make well-informed decisions. One of the
most crucial problems in the crisis was the lack of
transparency about which parties were exposed and to whom they
were exposed, and where cash flowed could be helpful in
informing future estimates of exposure.
In the interests of transparency and completeness, and to
help inform regulators' actions in a world that is likely to
become ever more financially integrated, the Panel strongly
urges Treasury to collect and report more data about how TARP
and other rescue funds flowed internationally, and to document
the impact that the U.S. rescue had overseas. Treasury should
create and maintain a database of this information and should
urge foreign regulators to collect and report similar data.
Information of this type would have enabled regulators in all
jurisdictions to formulate a more tailored and coordinated
response, to know with whom they should have coordinated those
responses, and to anticipate better the effects of any actions
taken.
In enacting the TARP, Congress explicitly required Treasury
to coordinate its financial stability efforts with those of
other nations. The crisis underscored the fact that the
international community's formal mechanism to plan in advance
for potential financial crises is limited. Financial crises
have occurred many times in the past and will occur again in
the future, and policymakers would do well to have plans in
place before they happen, rather than responding, however well,
on an ad hoc basis at the peak of the storm. Moving forward, it
is essential for the international community to gather
information about the international financial system, identify
vulnerabilities, and plan for emergency responses to a wide
range of potential future crises. U.S. regulators should
encourage regular crisis planning and financial ``war gaming.''
Without this kind of cross-national forward planning, efforts
in the United States to limit exposure and to address the
impact of ``too big to fail'' institutions will be undermined.
Finally, international bodies such as the FSB and the BIS
are likely to become ever more important in crisis response and
regulation. For this reason, it is crucial that their dealings,
and the interaction of U.S. regulators with them, are open and
transparent and that U.S. regulators make clear to policymakers
the impact that such bodies have on the U.S. banking industry
and broader economy. The FSB especially should be sensitive to
the transparency of its processes.
Annex I: Tables
Figure 20: Global Financial Rescue Efforts by Country (as
of May 2010)i (billions of USD)ii
GDPiii
Bank Assetsiv
Commitments
Outlays 2007 2007 % of GDP % Bank Assets % of GDP % Bank
Assets
Australia
Commitments 826.2 950 1,680 86.9% 49.2%
Outlays 162.8 17.1% 9.7%
Belgium
Commitments
NA 459 2,324
NA
NA
Outlays 221.6 48.3% 9.5%
France
Commitments 468.0 2,594 10,230 18.0% 4.6%
Outlays 199.7 7.7% 2.0%
Germany
Commitments 658.8 3,321 6,600 19.8% 10.0%
Outlays 406.6 12.2% 6.2%
Icelandv
Commitmentvi 13.5 20 47 66.2% 28.8%
Outlaysvii 1.4 6.9% 3.0%
Ireland
Commitments 802.9 261 1,631 307.4% 49.2%
Outlays 137.0 52.4% 8.4%
Italy
Commitments 85.1 2,118 4,336 4.0% 2.0% utlays 5.6 0.3% 0.1%
Japan
Commitmentsviii 54.6 4,384 10,087 1.2% 0.5%
Outlaysix 54.6 1.2% 0.5%
Luxembourg
Commitments
NA 50 1,348
NA
NA
Outlays 13.0 26.2% 1.0%
Netherlands
Commitments 301.9 777 3,869 38.8% 7.8%
Outlays 209.4 26.9% 5.4%
Spain
Commitments 341.7 1,440 2,979 23.7% 11.5%
Outlays 136.6 9.5% 4.6%
Switzerland
Commitments
61. 8 434 3,620 14.2% 1.7%
Outlays 56.5 13.0% 1.6%
United Kingdom
Commitments 487.2 2,803 11,655 17.4% 4.2%
Outlays 610.0 21.8% 5.2%
United Statesx
Commitments 2,995.2 13,807 11,194 21.7% 26.8%
Outlays 1,630.6 11.8% 14.6%
Figure 21: Federal Reserve Liquidity Programs
Start Date
End Date
Description
Maximum Commitment
Final Disposition
Term Asset-Backed Securities Loan Facility (TALF)
June 30, 2010
FRBNY makes loans on a collateralized basis to holders of
eligible asset-backed securities (ABS) and commercial mortgage-
backed securities (CMBS)
Term Auction Facility (TAF)
December 12, 2007
March 8, 2010
The TAF provided credit through an auction mechanism to
depository institutions in generally sound financial condition.
The TAF offered 28-day and, beginning in August 2008, 84-day
loans
Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF)
September 18, 2008
February 1, 2010
The AMLF was a lending facility that financed the purchase
of high-quality asset-backed commercial paper from money market
mutual funds (MMMFs) by U.S. depository institutions and bank
holding companies
Commercial Paper Funding Facility (CPFF)
October 7, 2008
February 1, 2010
The CPFF provided a liquidity backstop to U.S. issuers of
commercial paper through a specially created limited liability
company (LLC) called CPFF LLC. This LLC purchased three-month
unsecured and asset-backed commercial paper directly from
eligible issuers
The CPFF's holdings of commercial paper peaked at $350
billion in January 2009
The CPFF incurred no losses on its commercial paper
holdings, and accumulated nearly $5 billion in earn-ings,
primarily from interest income, credit enhancement fees, and
registration fees
Primary Dealer Credit Facility (PDCF)
March 16, 2008
February 1, 2010
An overnight loan facility that provided funding to primary
dealers.
Term Securities Lending Facility (TSLF)
March 11, 2008
February 1, 2010
FRBNY lent Treasury securities to primary dealers for 28
days against eligible collateral in two types of auctions.
Money Market Investor Funding Facility (MMIFF)
October 21, 2008
FRBNY provided senior secured funding to SPVs to facilitate
a private-sector initiative to finance the purchase of eligible
assets from eligible investors.
Figure 22: Reciprocal Foreign Exchange Swap Lines with the
United States, 2007-2009480
Country
Agreement Date
Original Amount (millions of dollars)
Changes to Original Agreement
Total Amount (millions of dollars)
Expiration of Swap Line481
European Union 12/12/2007 $20,000
Swap line extended and increased 7 times until the Fed
removed the cap on 10/13/2008
Full allotment482 2/1/2010
Switzerland 12/12/2007 4,000
Swap line increased 6 times until the Fed removed the cap
on 10/13/2008
Full allotment483 2/1/2010
Japan 9/18/2008 60,000
Swap line increased twice before the Fed removed the cap on
10/14/2008
Full allotment484 2/1/2010
United Kingdom 9/18/2008 40,000
Swap line increased twice before the Fed removed the cap on
10/13/2008
Full allotment485 2/1/2010
Canada 9/18/2008 10,000
Swap line increased once on 9/29/2008 $30,000 2/1/2010
Australia 9/24/2008 10,000
Swap line increased once on 9/29/2008 $30,000 2/1/2010
Sweden 9/24/2008 10,000
Swap line increased once on 9/29/2008 $30,000 2/1/2010
Denmark 9/24/2008 5,000
Swap line increased once on 9/29/2008 $15,000 2/1/2010
Norway 9/24/2008 5,000
Swap line increased once on 9/29/2008 $15,000 2/1/2010
New Zealand 10/28/2008 15,000
None $15,000 2/1/2010
Brazil 10/29/2008 30,000
None $30,000 2/1/2010
Mexico 10/29/2008 30,000
None $30,000 2/1/2010
South Korea 10/29/2008 30,000
None $30,000 2/1/2010
Singapore 10/29/2008 30,000
None $30,000 2/1/2010
Annex II: Case Study: the Foreign Beneficiaries of Payments
Made to one of AIG's Domestic Counterparties
The interconnected nature of the international financial
system and the ease with which cash flows across national
boundaries have been noted throughout this report. Although the
Panel cannot obtain information about the ultimate recipients
of all TARP payments, the Panel now has a more complete picture
of the dealings between AIG, recipient of one of the largest
U.S. rescue packages, and Goldman Sachs. These dealings provide
a useful example of the way in which a payment to a U.S
company, which fulfills its contractual obligations to its U.S.
counterparties, ultimately ends up in the hands of institutions
all around the world. While the information below relates
exclusively to Goldman and its relationships with foreign
counterparties, it is likely that many other beneficiaries of
government rescue efforts had similar counterparty
relationships. Accordingly, it is also likely that these
relationships produced significant indirect benefits for
foreign institutions.
As the following data make clear, taxpayer aid to AIG
became aid to Goldman, and aid to Goldman became aid to a
number of domestic and foreign investors. In some cases, the
aid was in the form of repayment in full of obligations that,
without government help, could have ended in default. In other
cases, the aid was in the form of guarantees that other parties
did not have to pay because the government prevented any
defaults.
AIG provided credit default swap (CDS) protection on a
number of collateralized debt obligations (CDOs), which were
the source of continuing collateral demands on AIG. As part of
the AIG rescue, the CDOs underlying the CDSs were acquired by a
special-purpose vehicle primarily funded by the government,
Maiden Lane III. The entities set out in the table below held
CDSs written by Goldman against the CDOs that were eventually
acquired by Maiden Lane III. In order to sell those CDOs to
Maiden Lane III, in most cases Goldman had to obtain them from
these counterparties, so the Maiden Lane III funds effectively
flowed to Goldman's counterparties.486 Nearly all of these
second-level counterparties, both by number and dollar amount,
were non-U.S. institutions, with European banks making up by
far the largest contingent.
Figure 23: Goldman's Counterparties to Maiden Lane III CDOs
Institution
Total Funds Received from ML3 (millions of dollars)
DZ Bank $2,504
Banco Santander Central Hispano SA 1,544
Rabobank Nederland-London Branch 852
ZurcherKantonalbank 998
Dexia Bank SA 865
BGI INV FDS GSI AG 633
Calyon-Cedex Branch 663
The Hongkong & Shanghai Banking Corporation 631
Depfa Bank Plc 692
Skandinaviska Enskilda Bankensweden 365
Sierra Finance 322
PGGM 440
Natixis 399
Zulma Finance 661
Stoneheath 300
Hospitals of Ontario Pension Plan 273
Venice Finance 363
KBC Asset Management NVD Star Finance 308
MNGD Pension Funds LTD 244
Shackleton Re Limited 128
Infinity finance plc 375
Legal & General Assurance 87
Barclays 102
GSAM Credit CDO LTD 84
Signum Platinum 102
Lion Capital Global Credit I LTD 16
Kommunalkredit Int Bank 24
Credit Linked Notes LTD 14
Ocelot CDO I PLC 9
Hoogovens PSF ST 46
Hypo Public Finance Bank 10
Royal Bank of Scotland 5
Total 14,059
The table below identifies 87 entities that benefited
indirectly from government assistance provided to AIG. Each of
these entities wrote credit default swap protection on AIG for
Goldman. Of these 87 entities, 43 are foreign. When the
government intervened to prevent AIG from failing, these
foreign entities were not required to make payments on that
protection, which they would have been obligated to do in the
event of an AIG default.487 Foreign hedge providers made up
43.4 percent of the total, by dollar amount, with European
banks and other financial institutions being most heavily
represented.
Figure 24: Goldman Counterparties' Exposure to an AIG
Default
Institution
Net Exposure to Goldman on AIG CDSs
Citibank, N.A. $402,246,000
Credit Suisse International 309,730,000
Morgan Stanley Capital Services Inc. 242,500,000
JPMorgan Chase Bank N.A. London Branch 216,040,000
Lehman Brothers Special Financing, Inc. 174,780,082
Swiss Re Financial Products Corporation 132,100,000
PIMCO Funds Total Return Fund 120,000,000
Deutsche Bank AG London Branch 87,246,700
KBC Financial Products Cayman Islands Ltd. 84,650,000
Royal Bank of Canada London Branch 76,000,000
PIMCO Funds Low Duration Fund 70,200,000
Sociiti Ginirale 62,280,000
Wachovia Bank, National Association 60,214,000
Natixis Financial Products Inc. 56,345,000
Merrill Lynch International 41,435,000
Natixis 37,064,400
Bank of Nova Scotia, The 36,165,000
Credit Agricole Corporate and Investment Bank 34,800,000
BNP Paribas 31,500,000
Dresdner Bank AG London Branch 29,110,000
Alphadyne International Master Fund, Ltd. 27,771,000
Bank of America, National Association 25,070,000
MBIA INC. 25,000,000
Bank of Montreal London Branch 25,000,000
Commerzbank Aktiengesellschaft 25,000,000
Lyxor Starway SPC Lyxor Starway PFLO 22,729,000
Unicredit Bank AG 20,000,000
Government of Singapore Investment Corporation PTE Ltd
20,000,000
Banco Finantia SA 20,000,000
Bank of Montreal Chicago Branch 18,000,000
Wicker Park CDO I, Ltd. 17,500,000
Bluecorr Fund, LLC 15,600,000
Suttonbrook Capital Portfolio LP 15,000,000
Citibank, N.A. London Branch 12,500,000
BlueMountain Timberline Ltd. 12,000,000
PIMCO Global Credit Opportunity Master Fund LDC PIMCO
12,000,000
AQR Absolute Return Master Account L.P. 11,750,000
Moore Macro Fund, L.P. 10,000,000
Norges Bank 10,000,000
JPMorgan Chase Bank, National Association 9,246,000
Fortis Bank 8,000,000
PIMCO Combined Alpha Strategies Master Fund LDC PIMCO
8,000,000
WestLB AG London Branch 8,000,000
AQR Global Asset Allocation Master Account, L.P. 7,750,000
Citadel Equity Fund Ltd. 7,400,000
Allianz Global Investors KAG Allianz PIMCO Mobil Fonds
7,000,000
Barclay's Bank plc 6,090,000
PIMCO Combined Alpha Strategies Master Fund LDC PIMCO
6,000,000
Arrowgrass Master Fund Ltd 5,500,000
Mizuho International plc 5,400,000
Rabobank International London Branch 5,000,000
Standard Chartered Bank Singapore Branch 5,000,000
Millennium Park CDO I, Ltd. 5,000,000
III Relative Value Credit Strategies Hub Fund Ltd.
5,000,000
Internationale KAG mbH INKA B 4,500,000
Goldentree Master Fund, Ltd. 4,480,000
National Bank of Canada 3,000,000
Loomis Sayles Multistrategy Master Alpha, Ltd. 3,000,000
PIMCO Variable Insurance Trust Low Duration Bond Portfolio
2,700,000
Tiden Destiny Master Fund Limited 2,500,000
Stichting Pensioenfonds Oce 2,450,000
Intesa Sanpaolo SpA 2,000,000
PIMCO Global Credit Opportunity Master Fund LDC PIMCO
2,000,000
DCI Umbrella Fund plc Diversified Cred Investments FD Three
2,000,000
Halbis Distressed Opportunities Master Fund LTD. 2,000,000
UBS Funds, The, UBS Dynamic Alpha Fund 1,250,000
Goldentree Master Fund II, Ltd. 1,180,000
RP Rendite Plus Multi Strategie Investment Grade MSIG
1,100,000
Cairn Capital Structured Credit Master Fund Limited
1,000,000
Allianz Global Inv KAG mbH DBI PIMCO Global Corp Bd Fds
1,000,000
PIMCO Funds: Pacific Investment Mgmt Serfloating Income Fd
800,000
UBS Dynamic Alpha Strategies Master Fund Ltd. 750,000
Allianz Global Investors KAG mbH DIT FDS Victoria DFS
600,000
PIMCO Funds: Global Investors Series plc Low Ave Duration
Fd 600,000
Internationale Kapitalanlagegesellschaft mbH PKMF INKA
550,000
BFT Vol 2 500,000
PIMCO Funds Low Duration Fund II 500,000
Goldentree Credit Opportunities Master Fund, Ltd. 340,000
Embarq Savings Plan Master Trust 300,000
Russell Investment Company Russell Short Duration Bond Fund
300,000
PIMCO Funds Low Duration Fund III 300,000
Equity Trustees Limited PIMCO Australian Bond Fund 300,000
Public Education Employee Retirement System of Missouri
200,000
PIMCO Bermuda Trust II PIMCO JGB Floater Foreign Strategy
Fd 200,000
D.B. Zwirn Special Opportunities Fund, Ltd. 101,500
PIMCO Bermuda Trust IIPIMCO Bermuda JGB Floater US
Stra Fd 100,000
Frank Russell Investment Company Fixed Income II Fund
100,000
Total $2,790,413,682
Section Two: TARP Updates Since Last Report
A. TARP Repayments
In July 2010, Fulton Financial Corporation and Green City
Bancshares, Inc. fully repurchased their preferred shares under
CPP. Treasury received $377 million in repayments from these
two companies. On July 14, 2010, Green City Bancshares also
repurchased $33,000 in preferred shares that Treasury held from
warrants that were already exercised. A total of 20 banks have
fully repaid $16.5 billion in preferred equity CPP investments
in 2010. As of July 30, 2010, 78 institutions have redeemed
their CPP investments.
B. CPP Warrant Dispositions
As part of its investment in senior preferred stock of
certain banks under the CPP, Treasury received warrants to
purchase shares of common stock or other securities in those
institutions. In July, Discover Financial Services and Bar
Harbor Bancshares repurchased their warrants from Treasury for
$172.3 million in total proceeds. The Panel's best valuation
estimate at repurchase date for Discover and Bar Harbor
warrants were $166 million and $518,511 respectively. As of
July 30, 2010, the warrants from 52 banks have been liquidated.
Of these banks, 39 have repurchased their warrants; Treasury
sold the warrants for 13 institutions at auction.
C. Conference on the Future of Housing Finance Reform
On July 27, 2010, President Obama announced plans to hold
the ``Conference on the Future of Housing Finance'' on August
17, 2010. The conference will be the culmination of a series of
events meant to gather public input on a housing finance reform
proposal, which is planned to be sent to Congress in January
2011. In April 2010, Treasury and the U.S. Department of
Housing and Urban Development issued a series of questions for
public comment regarding plans for a more stable housing
financing system. Among the topics addressed in the questions
were federal housing finance objectives in the context of
broader housing policy objectives, the role of the federal
government in a housing financing system, and suggested
improvements to the current financing system.
D. Community Development Capital Initiative
On July 30, 2010, two companies exchanged their CPP
investments for equivalent investments under the Community
Development Capital Initiative (CDCI). These were the first two
transactions under the program. University Financial Corp.,
Inc., which received $11.9 million for subordinated debentures
from CPP, received an additional $10.2 million from CDCI upon
its entrance into the program. Guaranty Financial Corporation
received $14 million for subordinated debentures from CPP;
however, Treasury did not make an additional investment in this
bank as part of the exchange. As of July 30, 2010, the total
CDCI investment amount was $36.1 million.
The CDCI was announced on February 3, 2010 as a means of
providing lower-cost capital to Community Development Financial
Institutions (CDFIs) that lend to small businesses in the
country's economically hard-hit areas. As participating CDFIs,
Guaranty Financial and University Financial receive capital
investments at a 2 percent initial dividend rate. The rate
will increase to 9 percent after eight years if there are any
outstanding investments in the participating institution. Under
the CPP, banks pay an initial 5 percent dividend rate, which
increases to 9 percent after only five years.
E. HFA Hardest Hit Fund Program
On March 29, 2010, Treasury announced a second round of HFA
Hardest Hit Fund assistance with a focus on the states with
large concentrations of people living in economically
distressed areas. On August 3, 2010, the Administration
approved the use of $600 million in ``Hardest Hit Fund''
foreclosure-prevention funding by the Housing Finance Agencies
(HFAs). The state HFAs will receive the following amounts from
the HFA Hardest Hit Fund: North Carolina ($159 million), Ohio
($172 million), Oregon ($88 million), Rhode Island ($43
million), and South Carolina ($138 million). Programs in these
states aim to provide mortgage assistance for the unemployed or
underemployed, as well as to assist in reduction or settlement
of second liens, payment for arrearages, and facilitation of
short sales and/or deeds-in-lieu to avoid foreclosure. Last
month, the Administration approved $1.5 billion in HFA funding
for the top five states most affected by the decline in housing
prices.
F. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's July report and
includes two additional indicators that aid in understanding
the international aspects of the financial crisis. * Financial
Indices. Since its post-crisis trough in April 2010, the St.
Louis Financial Stress Index has increased over elevenfold,
although it has fallen by a third since the Panel's July
report.488 The recent trend suggests that financial stress
continues moving towards its long-run norm. The index has
decreased over three standard deviations from the starting date
of EESA in October 2008, indicating better overall financial
health since the initiation of TARP.
Figure 25: St. Louis Federal Reserve Financial Stress Index
Volatility has decreased of late. The Chicago Board Options
Exchange Volatility Index (VIX) has fallen about 25 percent
since the COP July report, although the level is still higher
than its post-crisis low on April 12, 2010.
Figure 26: Chicago Board Options Exchange Volatility
Index489
1. Interest Rates and Spreads * LIBOR Rates. As of August
6, 2010, the 3-month and 1-month London Interbank Offer Rates
(LIBOR), the prices at which banks lend and borrow from each
other, were 0.411 and 0.293, respectively. Although they had
increased significantly in the three preceding months, there
has been a slight easing in these rates since the Panel's July
Report. This may reflect the results of the European bank
stress test. Over the longer term, rates remain heightened
relative to pre-crisis levels.490
Figure 27: 3-Month and 1-Month LIBOR Rates (as of August 6,
2010)
Indicator
Current Rates (as of 8/6/2010)
Percent Change from Data Available at Time of Last Report
(6/24/2010) 3-Month LIBOR491 .411 (15.5)% 1-Month LIBOR492 .293
(23.4)%
Since the Panel's July report, interest rate spreads have
generally fallen slightly. Thirty-year mortgage interest rates
and 10-year Treasury bond yields have both declined recently
and the conventional mortgage spread, which measures the 30-
year mortgage rate over 10-year Treasury bond yields, has
fallen very slightly since late June as well.493
The TED spread, which serves as an indicator for perceived
risk in the financial markets, fell slightly since June as
compared to nearly doubling over the month of May.494 The
LIBOR-OIS spread reflects the health of the banking system.
While it increased over threefold from early April to July, it
has fallen by almost a third since peaking in mid-July.495
Decreases in the LIBOR-OIS spread and the TED spread suggest
that hesitation among banks to lend to counterparties is
receding.
The interest rate spread for AA asset-backed commercial
paper, which is considered mid-investment grade, has fallen by
about fourteen percent since the Panel's July report. The
interest rate spread on A2/P2 commercial paper, a lower grade
investment than AA asset-backed commercial paper, has fallen by
over a quarter since the Panel's July report.
Figure 28: Interest Rate Spreads
Indicator
Current Spread (as of 7/31/2010)
Percent Change Since Last Report (7/1/2010)
Conventional mortgage rate spread496 1.52 (1.9)%
TED Spread (basis points) 26.41 (27.3)%
Overnight AA asset-backed commercial paper interest rate
spread497 0.11 (14.1)%
Overnight A2/P2 nonfinancial commercial paper interest rate
spread498 0.19 (28.1)%
Figure 29: TED Spread499
Figure 30: LIBOR-OIS Spread500 * Corporate Bond Spread. The
spread between Moody's Baa Corporate Bond Yield Index and 30-
year constant maturity U.S. Treasury Bond yields doubled from
late April to mid-June. However, since mid-June, the trend has
reversed and the spread has fallen about fifteen percent. This
spread indicates the difference in perceived risk between
corporate and government bonds, and a declining spread could
indicate waning concerns about the riskiness of corporate
bonds.
Figure 31: Moody's Baa Corporate Bond Index and 30-Year
U.S. Treasury Yield501 * Housing Indicators. Foreclosure
actions, which consist of default notices, scheduled auctions,
and bank repossessions, dropped 2 percent in May to 313,841.
This metric is over 12 percent above the foreclosure action
level at the time of the EESA enactment.502 Foreclosure sales
accounted for 31 percent of all residential sales in the first
quarter of 2010.503 Sales of new homes rose slightly to
330,000, but remain extremely low.504 Both the Case-Shiller
Composite 20-City Composite as well as the FHFA Housing Price
Index increased slightly in May 2010. The Case-Shiller and FHFA
indices are 6 percent and 3 percent, respectively, below their
levels of October 2008.505
Additionally, Case-Shiller futures prices indicate a market
expectation that home-price values will stay constant or
decrease through the end of 2010.506 These futures are cash-
settled to a weighted composite index of U.S. housing prices,
as well as to specific markets in 10 major U.S. cities, and are
used both to hedge, by businesses whose profits and losses are
related to any area of the housing industry, and to balance
portfolios by businesses seeking exposure to an uncorrelated
asset class. As such, futures prices are a composite indicator
of market information known to date and can be used to indicate
market expectations for home prices.
Figure 32: Housing Indicators
Indicator
Most Recent Monthly Data
Percent Change from Data Available at Time of Last Report
Percent Change Since October 2008
Monthly foreclosure actions507 313,841 (1.9)% 12.3%
S&P/Case-Shiller Composite 20 Index508 147.3 1.1% (5.7)%
FHFA Housing Price Index509 196.0 0.5% (3.0)%
Figure 33: Case-Shiller Home Price Index and Futures
Values510 * International Indicators. The crisis, while
originating in the U.S. housing market, spread rapidly through
the international financial system and resulted in recessions
of varying degrees worldwide. While developing countries'
growth rates fell steeply but never dropped below zero, the
U.S. contraction was of less depth and less duration than those
of the Euro area, United Kingdom, and Japan.
Figure 34: Percent Change in GDP, Constant Prices511
Foreign investment in the United States was at historically
high levels pre-crisis. However, as the risk associated with
U.S. subprime assets became known in the summer of 2007, this
reversed drastically, with record outflow numbers being reached
in Q1 2009.
Figure 35: Foreign Assets in the United States, Net Capital
Flow512
G. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to economic stabilization. The
following financial update provides: (1) an updated accounting
of the TARP, including a tally of dividend income, repayments
and warrant dispositions that the program has received as of
June 30, 2010; and (2) an updated accounting of the full
federal resource commitment as of July 28, 2010.
1. The TARP a. Program Snapshot513
As of July 30, 2010, Treasury was committed to spend up to
$475 billion of TARP funds through an assortment of programs.
Of this amount, $393.8 billion had been spent under the $475
billion514 ceiling and $203.9 billion in TARP funds have been
repaid. There have also been $5.8 billion in losses, leaving
$184.1billion in TARP funds currently outstanding.
During the month of July, Treasury received $377.1 million
in full repayments from Fulton Financial Corporation and Green
City Bancshares for its CPP investments. To date, a total of 78
institutions have fully repurchased their CPP preferred shares.
Of the institutions that have fully repaid, 39 repurchased
their warrants for common shares that Treasury received in
conjunction with its preferred stock investments. Treasury sold
the warrants for common shares for 13 other institutions at
auction.
In total, $22.9 billion in income has been earned by the
TARP through warrant repurchases, additional notes, dividends
and interest paid on investments. For further information on
TARP profit and loss, please see Figure 37. b. Program Updates
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act was signed into law. As part of this
legislation, the ceiling on the amount of TARP funds that can
be allocated to programs was reduced from $698.7 billion to
$475 billion. While a large portion of the savings can be taken
from unallocated funds, there were several notable program
changes. The Small Business Lending Fund (SBLF), a proposed $30
billion TARP program that was never launched, was eliminated.
The Term Asset-Backed Securities Loan Facility (TALF) program
was reduced $15.7 billion from the $20 billion committed,
leaving $4.3 billion in TARP funds committed to the TALF.515
The ceiling for the Public-Private Investment Program (PPIP)
was reduced by $8 billion, leaving $22.4 billion in TARP funds
committed to the program. Treasury also reduced the $48.8
billion in TARP funds dedicated to foreclosure mitigation
efforts by $3.2 billion. For further detail on TARP reductions,
please see Figure 36 below.
TARP Foreclosure Mitigation Efforts
Treasury has reduced its intended total allocation for the
foreclosure mitigation programs by only $3.2 billion, from
$48.8 billion to $45.6 billion. The revised program total of
$45.6 billion is comprised of $11 billion for the FHA Refinance
Program, $4.1 billion for the HFA Hardest Hit Fund and $30.6
billion for the remaining Making Home Affordable (MHA)
programs.516
Citigroup Stock Sale
On July 23, 2010, the Treasury Department authorized Morgan
Stanley, as its sales agent, to sell another block of up to 1.5
billion shares of Citigroup stock that Treasury received
through its CPP investment in Citigroup. Treasury first sold
1.5 billion shares of Citigroup stock between April 26 and May
26, 2010 at a weighted price of $4.12. During the second sale
period, May 26 to June 30, 2010, only 1.1 billion of the 1.5
billion shares authorized for sale were sold at a weighted
price of $3.90. A third selling period opened on July 23, 2010.
Treasury intends to sell another 1.5 billion shares by
September 30, 2010. Thus far, Treasury has earned a 24 percent
premium on the Citigroup shares it has sold at market.517 c.
Income: Dividends, Interest, Repayments, and Warrant Sales
As of July 30, 2010, a total of 78 institutions have
completely repurchased their CPP preferred shares. Of these
institutions, 39 have repurchased their warrants for common
shares that Treasury received in conjunction with its preferred
stock investments; Treasury sold the warrants for common shares
for 13 other institutions at auction. Bar Harbor Bancshares and
Discover Financial Services repurchased their warrants for
$250,000 and $172 million, respectively. In addition, Treasury
receives dividend payments on the preferred shares that it
holds, usually five percent per annum for the first five years
and nine percent per annum thereafter.518 To date, Treasury has
received approximately $22.8 billion in net income from warrant
repurchases, dividends, interest payments and other
considerations deriving from TARP investments.519 d. TARP
Accounting
Figure 36: TARP Accounting (as of July 30, 2010) (billions
of dollars)xi
Program
Original Program Commit-ment
Dodd-Frank Program Adjust-ments
Current Maxi-mum Amount Available
Actual Fund-ing
Total
Repay-ments/
Reduced Exposure
Total Losses
Funding Current-ly Out-standing
Fund-ing
Avail-able
Capital Purchase Program (CPP) $204.9 $0 $204.9 $204.9
xii($147.3) xiii($2.3) $55.3 $0
Targeted Investment Program (TIP) 40.0 0 40.0 40.0 (40.0) 0
0 0
Asset Guarantee Program (AGP) 5.0 0 5.0 5.0 xiv(5.0) 0 0 0
AIG Investment Program (AIGIP) 69.8 0 69.8 xv49.1 0 0 49.1
20.7
Auto Industry Financing Program (AIFP) 81.3 0.1 81.4 81.3
(10.8) xvi(3.5) 67 0
Auto Supplier Support Program (ASSP)xvii 3.5 (3.1) 0.4 0.4
(0.4) 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 20.0
(15.7) xviii4.3 xix0.1 0 0 0.1 4.2
Public-Private Investment Program (PPIP)xx 30.4 (8.0) 22.4
11.0 xxi(0.4) 0 10.6 11.8
Small Business Lending Fund (SBLF) 30.0 xxii(30.0)
N/A
N/A
N/A
N/A
N/A
N/A
SBA 7(a) Securities Purchase 1
(0.6) xxiii0.4 0.23 0 0 0.23 0.17
Home Affordable Modification Program (HAMP) xxiv46.7
xxv(16.2) 30.5 0.25 0 0 0.25 30.25
Hardest Hit Fund (HHF) 2.1 2.0 xxvi4.1 1.5 0 0 1.5 2.6
FHA Refinance Program 0 xxvii11.0 11.0 0 0 0 0 11
Community Development Capital Initiative (CDCI) 0.8 0
xxviii0.8 0.04 0 0 0.04 0.76
Total xxix535.5 ($60.5) $475 393.82 (203.9) (5.8) 184.12
81.48
Figure 37: TARP Profit and Loss (millions of dollars)
TARP Initiative
Dividendsxxx (as of 6/30/10)
Interestxxxi (as of 6/30/10)
Warrant Repurchasesxxxii (as of 7/30/10)
Other Proceeds (as of 6/30/10)
Lossesxxxiii (as of 7/30/10)
Total
Total $15,858 $884 $7,214 $4,719 ($5,822) $22,853
CPP 9,428 38 5,943 xxxiv2,026 (2,334) 15,101
TIP 3,004 1,256 4,260
AIFP xxxv3,060 802 15 (3,488) 389
ASSP 15 xxxvi101 116
AGP 366 0 xxxvii2,234 2,600
PPIP 29 xxxviii82 110
Bank of America Guarantee
xxxix276 276d. Rate of Return
As of August 4, 2010, the average internal rate of return
for all public financial institutions that participated in the
CPP and fully repaid the U.S. government (including preferred
shares, dividends, and warrants) was 9.9 percent. The internal
rate of return is the annualized effective compounded return
rate that can be earned on invested capital. e. Warrant
Disposition
Figure 38: Warrant Repurchases/Auctions for Financial
Institutions who have fully Repaid CPP Funds as of August 4,
2010
Institution
Investment Date
Warrant Repurchase Date
Warrant Repurchase/
Sale Amount
Panel's Best Valuation Estimate at Repurchase Date
Price/
Estimate Ratio
IRR
Old National Bancorp 12/12/2008 5/8/2009 $1,200,000
$2,150,000 0.558 9.3%
Iberiabank Corporation 12/5/2008 5/20/2009 1,200,000
2,010,000 0.597 9.4%
Firstmerit Corporation 1/9/2009 5/27/2009 5,025,000
4,260,000 1.180 20.3%
Sun Bancorp, Inc 1/9/2009 5/27/2009 2,100,000 5,580,000
0.376 15.3%
Independent Bank Corp. 1/9/2009 5/27/2009 2,200,000
3,870,000 0.568 15.6%
Alliance Financial Corporation 12/19/2008 6/17/2009 900,000
1,580,000 0.570 13.8%
First Niagara Financial Group 11/21/2008 6/24/2009
2,700,000 3,050,000 0.885 8.0%
Berkshire Hills Bancorp, Inc. 12/19/2008 6/24/2009
1,040,000 1,620,000 0.642 11.3%
Somerset Hills Bancorp 1/16/2009 6/24/2009 275,000 580,000
0.474 16.6%
SCBT Financial Corporation 1/16/2009 6/24/2009 1,400,000
2,290,000 0.611 11.7%
HF Financial Corp 11/21/2008 6/30/2009 650,000 1,240,000
0.524 10.1%
State Street 10/28/2008 7/8/2009 60,000,000 54,200,000
1.107 9.9%
U.S. Bancorp 11/14/2008 7/15/2009 139,000,000 135,100,000
1.029 8.7%
The Goldman Sachs Group, Inc. 10/28/2008 7/22/2009
1,100,000,000 1,128,400,000 0.975 22.8%
BB&T Corp. 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983
8.7%
American Express Company 1/9/2009 7/29/2009 340,000,000
391,200,000 0.869 29.5%
Bank of New York Mellon Corp 10/28/2008 8/5/2009
136,000,000 155,700,000 0.873 12.3%
Morgan Stanley 10/28/2008 8/12/2009 950,000,000
1,039,800,000 0.914 20.2%
Northern Trust Corporation 11/14/2008 8/26/2009 87,000,000
89,800,000 0.969 14.5%
Old Line Bancshares Inc. 12/5/2008 9/2/2009 225,000 500,000
0.450 10.4%
Bancorp Rhode Island, Inc. 12/19/2008 9/30/2009 1,400,000
1,400,000 1.000 12.6%
Centerstate Banks of Florida Inc. 11/21/2008 10/28/2009
212,000 220,000 0.964 5.9%
Manhattan Bancorp 12/5/2008 10/14/2009 63,364 140,000 0.453
9.8%
CVB Financial Corp 12/5/2008 10/28/2009 1,307,000 3,522,198
0.371 6.4%
Bank of the Ozarks 12/12/2008 11/24/2009 2,650,000
3,500,000 0.757 9.0%
Capital One Financial 11/14/2008 12/3/2009 148,731,030
232,000,000 0.641 12.0%
JP Morgan Chase & Co. 10/28/2008 12/10/2009 950,318,243
1,006,587,697 0.944 10.9%
TCF Financial Corp 1/16/2009 12/16/2009 9,599,964
11,825,830 0.812 11.0%
LSB Corporation 12/12/2008 12/16/2009 560,000 535,202 1.046
9.0%
Wainwright Bank & Trust Company 12/19/2008 12/16/2009
568,700 1,071,494 0.531 7.8%
Wesbanco Bank, Inc. 12/5/2008 12/23/2009 950,000 2,387,617
0.398 6.7%
Union First Market Bankshares Corporation (Union Bankshares
Corporation) 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8%
Trustmark Corporation 11/21/2008 12/30/2009 10,000,000
11,573,699 0.864 9.4%
Flushing Financial Corporation 12/19/2008 12/30/2009
900,000 2,861,919 0.314 6.5%
OceanFirst Financial Corporation 1/16/2009 2/3/2010 430,797
279,359 1.542 6.2%
Monarch Financial Holdings, Inc. 12/19/2008 2/10/2010
260,000 623,434 0.417 6.7%
Bank of America 10/28/2008520; 1/9/2009521; 1/14/2009522 3/
3/2010 1,566,210,714 1,006,416,684 1.533 6.5%
Washington Federal Inc./ Washington Federal Savings & Loan
Association 11/14/2008 3/9/2010 15,623,222 10,166,404 1.537
18.6%
Signature Bank 12/12/2008 3/10/2010 11,320,751 11,458,577
0.988 32.4%
Texas Capital Bancshares, Inc. 1/16/2009 3/11/2010
6,709,061 8,316,604 0.807 30.1%
Umpqua Holdings Corp. 11/14/2008 3/31/2010 4,500,000
5,162,400 0.872 6.6%
City National Corporation 11/21/2008 4/7/2010 18,500,000
24,376,448 0.759 8.5%
First Litchfield Financial Corporation 12/12/2008 4/7/2010
1,488,046 1,863,158 0.799 15.9%
PNC Financial Services Group Inc. 12/31/2008 4/29/2010
324,195,686 346,800,388 0.935 8.7%
Comerica Inc 11/14/2008 5/4/2010 183,673,472 276,426,071
0.664 10.8%
Valley National Bancorp 11/14/2008 5/18/2010 5,571,592
5,955,884 0.935 8.3%
Wells Fargo Bank 10/28/2008 5/20/2010 849,014,998
1,064,247,725 0.798 7.8%
First Financial Bancorp 12/23/2008 6/2/2010 3,116,284
3,051,431 1.021 8.2%
Sterling Bancshares, Inc./Sterling Bank 12/12/2008 6/9/2010
3,007,891 5,287,665 0.569 10.8%
SVB Financial Group 12/12/2008 6/16/2010 6,820,000
7,884,633 0.865 7.7%
Discover Financial Services 3/13/2009 7/7/2010 172,000,000
166,182,652 1.035 17.1%
Bar Harbor Bancshares 1/16/2009 7/28/2010 250,000 518,511
0.482 6.2%
Total $7,198,328,217 $7,314,904,102 0.984 9.9%
Figure 39: Valuation of Current Holdings of Warrants as of
August 4, 2010
Stress Test Financial Institutions with
Warrants Outstanding
Warrant Valuation (millions of dollars)
Low Estimate
High Estimate
Best Estimate
Citigroup $18.37 $1,132.91 $121.87
SunTrust Banks, Inc. 18.17 357.33 133.59
Regions Financial Corporation 14.04 227.13 83.66
Fifth Third Bancorp 105.62 404.39 195.68
Hartford Financial Services Group, Inc. 418.43 768.39
514.10
KeyCorp 24.13 178.94 76.01
AIG 303.91 1,873.31 1,093.38
All Other Banks 738.31 1,860.14 1,158.34
Total $1,640.98 $6,802.54 $3,376.62
2. Federal Financial Stability Efforts a. Federal Reserve
and FDIC Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between PPIP and TALF. Other programs, like the
Federal Reserve's extension of credit through its Section 13(3)
facilities and SPVs and the FDIC's Temporary Liquidity
Guarantee Program, operate independently of the TARP. b. Total
Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. With the
reductions in funding for certain TARP programs, the Panel
calculates the total value of these resources to be over $2.6
trillion. However, 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.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November report, the FDIC assesses a premium of up to 100 basis
points on TLGP debt guarantees.523 In contrast, the Federal
Reserve's liquidity programs are generally available only to
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan
realize a decline in value greater than the ``haircut,'' the
Federal Reserve is able to demand more collateral from the
borrower. Similarly, should a borrower default on a recourse
loan, the Federal Reserve can turn to the borrower's other
assets to make the Federal Reserve whole. In this way, the
risk to the taxpayer on recourse loans only materializes if the
borrower enters bankruptcy. The only loan currently
``underwater'' where the outstanding principal loan
amount exceeds the current market value of the collateral
is the loan to Maiden Lane LLC, which was formed to
purchase certain Bear Stearns assets.
Figure 40: Federal Government Financial Stability Effort
(as of July 28, 2010)xl
Program (billions of dollars)
Treasury (TARP)
Federal Reserve
FDIC
Total
Total
Outlaysxli
Loans
Guaranteesxlii
Repaid and Unavailable TARP Funds $475 237.6 24.2 4.3 208.9
$1,475.7 1,302.6 173.1 0 0 $702.9 188.4 0 514.5 0 $2,653.6
1,728.6 197.2 518.8 208.9
AIGxliii
Outlays
Loans
Guarantees 69.8 xliv69.8 0 0 89.3 xlv25.7 xlvi63.6 0 0 0 0
0 159.1 95.5 63.6 0
Citigroup
Outlays
Loans
Guarantees 25 xlvii25 0 0 0 0 0 0 0 0 0 0 25 25 0 0
Capital Purchase Program (Other)
Outlays
Loans
Guarantees 30.3 xlviii30.3 0 0 0 0 0 0 0 0 0 0 30.3 30.3 0
0
Capital Assistance Program
N/A 0 0 xlixN/A
TALF
Outlays
Loans
Guarantees 4.3 0 0 l4.3 38.7 0 li38.7 0 0 0 0 0 43 0 38.7
4.3
PPIP (Loans)lii
Outlays
Loans
Guarantees 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
PPIP (Securities)
Outlays
Loans
Guarantees liii22.4 7.5 14.9 0 0 0 0 0 0 0 0 0 22.4 7.5
14.9 0
Making Home Affordable Program/Foreclosure Mitigation
Outlays
Loans
Guarantees 45.6 liv45.6 0 0 0 0 0 0 0 0 0 0 45.6 45.6 0 0
Automotive Industry Financing Program
Outlays
Loans
Guarantees lv67.1 59.0 8.1 0 0 0 0 0 0 0 0 0 67.1 59.0 8.1
0
Auto Supplier Support Program
Outlays
Loans
Guarantees 0.4 0 lvi0.4 0 0 0 0 0 0 0 0 0 0.4 0 0.4 0
SBA 7(a) Securities Purchase
Outlays
Loans
Guarantees lvii0.4 0.4 0 0 0 0 0 0 0 0 0 0 0.4 0.4 0 0
Community Development Capital Initiative
Outlays
Loans
Guarantees lviii0.78 0 0.78 0 0 0 0 0 0 0 0 0 0.78 0 0.78 0
Temporary Liquidity Guarantee Program
Outlays
Loans
Guarantees 0 0 0 0 0 0 0 0 514.5 0 0 lix514.5 514.5 0 0
514.5
Deposit Insurance Fund
Outlays
Loans
Guarantees 0 0 0 0 0 0 0 0 188.4 lx188.4 0 0 188.4 188.4 0
0
Other Federal Reserve Credit Expansion
Outlays
Loans
Guarantees 0 0 0 0 1,347.7 lxi1,276.9 lxii70.8 0 0 0 0 0
1,347.7 1,276.9 70.8 0
Repaid TARP Funds lxiii208.9 0 0 208.9
Section Three: Oversight Activities
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced 21
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. No hearings have been
held since the release of the Panel's July 2010 report.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
September. With the Dodd-Frank financial regulatory overhaul
signed into law in late July, Treasury's authority to commit
new funds or to establish new programs under the TARP has
expired. To accompany this official ``end'' of the TARP, the
Panel's September report will provide a summary view of the
TARP's accomplishments, and shortcomings, since its inception
in October 2008, and discuss Treasury's plan for the program in
the coming months and years. The Panel's last report to take a
broad view of the TARP as a whole was published in December
2009.
Section Four: About the Congressional Oversight Panel
In response to the escalating financial crisis, on October
3, 2008, Congress provided 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 Stability (OFS) within Treasury to
implement the TARP. 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 instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
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, Director of Policy and Special 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, 2008, 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. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat. Senate Minority Leader Mitch
McConnell appointed Kenneth Troske, Sturgill Professor of
Economics at the University of Kentucky, to fill the vacancy
created by the resignation of Paul Atkins on May 21, 2010.