[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

                              ----------                              
                                                                   Page
Executive Summary................................................     1

                            C O N T E N T S

                              ----------                              
                                                                   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
======================================================================


                        AUGUST OVERSIGHT REPORT

                                _______
                                

                August 12, 2010.--Ordered to be printed

                                _______
                                

                           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.
