MAY 2010

The Budgetary Impact 

and Subsidy Costs of 

the Federal Reserve’s 

Actions During the 

Financial Crisis

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

S T U D Y

CBO
Pub. No. 4011
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

The Budgetary Impact and 

Subsidy Costs of the 

Federal Reserve’s Actions 

During the Financial Crisis

May 2010
CBO

Notes

Unless otherwise indicated, all years referred to are calendar years.

On the cover: The Marriner S. Eccles Federal Reserve Board Building, Washington, D.C., 

photo by Britt Leckman.
Preface

CBO

Over the past several years, the nation has experienced its most severe financial crisis 

since the Great Depression of the 1930s. In response, policymakers undertook a series of 

extraordinary actions to stabilize financial markets and institutions. The Federal Reserve Sys

tem used its traditional policy tools to reduce shortterm interest rates and increase the avail

ability of funds to banks, and it created a variety of nontraditional credit programs to help 

restore liquidity and confidence to the financial sector. In doing so, it more than doubled the 

size of its asset portfolio to over $2 trillion and assumed more risk of losses than it normally 

takes on. 

This Congressional Budget Office (CBO) study—prepared at the request of the Ranking 

Member of the Senate Budget Committee—describes the various actions by the Federal 

Reserve to stabilize the financial markets and how those actions are likely to affect the federal 

budget in coming years. The report also presents estimates of the riskadjusted (or fairvalue) 

subsidies that the Federal Reserve provided to financial institutions through its emergency 

programs. Unlike the cash treatment of the Federal Reserve in the budget, fairvalue subsidies 

include the cost of the risk that the central bank has assumed. Thus, those subsidies are a more 

comprehensive measure of the cost of the central bank’s actions.

The report was written by Kim Kowalewski and Wendy Kiska of CBO’s Macroeconomic 

Analysis Division, under the direction of Robert Dennis, and by Deborah Lucas of CBO’s 

Financial Analysis Division. The report is based on an earlier draft written by Barbara 

Edwards of CBO’s Tax Analysis Division and Thomas Woodward, formerly of CBO. Barbara 

Edwards, Wendy Kiska, and Steven Weinberg prepared the baseline budget estimates with the 

assistance of Francesca Castelli, and Wendy Kiska and Deborah Lucas prepared the estimates 

of the fairvalue subsidies. Holly Battelle and Priscila Hammett provided valuable research 

assistance. Jennifer Gravelle, Jeffrey Holland, Damien Moore, and Steven Weinberg offered 

comments on earlier versions of the study.

Leah Mazade edited the manuscript, and Christine Bogusz proofread it. Jeanine Rees prepared 

the report for publication, and Maureen Costantino produced the cover. Lenny Skutnik 

printed the initial copies, Linda Schimmel coordinated the print distribution, and Simone 

Thomas prepared the electronic version for CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

May 2010

Contents

CBO

Summary and Introduction 1

Actions by the Federal Reserve to Address the Financial Crisis 9

Expanded Lending to Depository Institutions 9

New Liquidity Programs for Nondepository Financial Institutions and 

Other Market Participants 9

OpenMarket Purchases of Securities 10

Support for Systemically Important Financial Institutions 10

The Projected Impact of the Federal Reserve’s Actions on the Federal Budget 11

Effects of the Federal Reserve’s Liquidity Programs and Purchases of Securities 12

Effects of Support for Systemically Important Institutions 13

Estimates of Fair-Value Subsidies from the Federal Reserve’s Actions 14

Methodological Considerations 15

Subsidy Estimates 16

Appendix A: Programs Created by the Federal Reserve During the Financial Crisis 21

Appendix B: CBO’s Fair-Value Models 33
VI THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 

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Tables

1. FairValue Subsidies Arising from the Federal Reserve’s Actions 

During the Financial Crisis 8

A1. Overview of the Federal Reserve’s Lending Programs 

During the Financial Crisis 22

Figures

1. Assets of the Federal Reserve Banks, January 2007 to December 2009 4

2. Liabilities of the Federal Reserve Banks, January 2007 to December 2009 5

3. Funding Provided Through Selected Federal Reserve Programs 17

Boxes

1. Background on the Federal Reserve System 2

2. Monetary Policy 6
CBO

The Budgetary Impact and Subsidy Costs of the 

Federal Reserve’s Actions During the Financial Crisis

Summary and Introduction 

The financial system plays a vital role in the U.S. econ

omy. It channels funds from savers to businesses, house

holds, and governments that need money to finance 

investments and other expenditures, and it provides 

services that are essential for commercial and financial 

transactions. When the financial system is functioning 

smoothly, investors trade securities in liquid markets that 

provide reliable signals about the values of assets, and 

loans are readily available to creditworthy borrowers.1

 As 

the nation’s central bank, the Federal Reserve System 

plays an important role in maintaining the stability and 

liquidity of the financial system through its conduct of 

monetary policy and its authority as a supervisor and reg

ulator of banking institutions. (See Box 1 for more infor

mation about the Federal Reserve System.) 

Over the past several years, the nation has experienced its 

most severe financial crisis since the Great Depression of 

the 1930s. Unexpected losses on subprime mortgages 

(loans made to borrowers with poorerthanaverage 

credit) as well as heightened uncertainty about how 

exposed some financial institutions might be to addi

tional losses led to a sharp decline in the liquidity of some 

markets and the availability of credit. The contraction in 

lending became more severe as the turmoil spread beyond 

the subprime mortgage market, several large financial 

institutions failed, and the economy weakened. Net lend

ing by the private financial sector fell from more than 

$3.0 trillion in 2007 to annual rates of about $1.4 trillion 

in the fourth quarter of 2008 and $1.8 trillion in the 

first quarter of 2009.2

In response to that contraction, the Federal Reserve 

undertook a series of extraordinary actions to stabilize 

financial markets and institutions. It continued to use its 

traditional monetary policy tools, but in addition, it cre

ated a variety of targeted credit programs to help restore 

liquidity and confidence to the financial sector. Its actions 

included:

B Expanding lending to depository institutions—that is, 

to financial institutions, such as commercial banks 

and savings and loan associations, whose liabilities 

largely consist of checking and savings accounts and 

other deposits;

B Creating new lending programs, or “facilities,” for 

nondepository financial institutions and other partici

pants in the financial markets;

B Purchasing mortgagerelated securities and medium

and longterm securities of the U.S. Treasury in the 

open market to put downward pressure on medium

and longterm interest rates in the mortgage and debt 

markets; and

B Extending support to financial institutions whose fail

ures policymakers believed could lead to a systemic 

collapse of financial markets and institutions.

1. When the market for a financial asset is liquid, the asset can be 

readily and inexpensively converted to cash at a price that will not 

be very different from the price of the previous transaction. 

(Financial assets are claims that entitle the owner to receive a pay

ment or a series of payments from an entity to which the owner 

has provided funds. They include bank accounts, retirement 

accounts, stocks and bonds, and various kinds of securities.) 

When markets become illiquid, large quantities of the asset can

not be sold (or bought) without at least temporarily depressing (or 

raising) the asset’s price. The Federal Reserve can increase liquidity 

in a market—essentially make it easier to convert assets to cash—

by standing ready to buy securities or to lend against them as 

collateral. 

2. Net lending is negative when the amount of repayments and losses 

on all types of lending exceeds the amount of new lending. 
2 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

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Continued

In effect, the Federal Reserve assumed some of the credit

providing functions that participants in the financial 

markets were unable or unwilling to perform. In doing 

so, it also assumed significantly more risk of incurring 

losses than it normally takes on in its operations.

The Federal Reserve’s activities during the crisis have had 

a striking impact on the amount and types of assets that it 

holds (see Figure 1). In July 2007, before the financial 

crisis began, the Federal Reserve held about $900 billion 

in assets; U.S. Treasury securities accounted for about 

$790 billion of that amount. The central bank had 

acquired those securities during its normal operations in 

conducting monetary policy—the process of influencing 

the level of shortterm interest rates and consequently the 

pace of U.S. economic activity. (Box 2 on page 6 outlines 

Box 1.

Background on the Federal Reserve System

The Federal Reserve System is the nation’s central 

bank.1

 It was created by the Congress in 1913 to pro

vide a safer, more flexible, and more stable monetary 

and financial system.Its duties have expanded to 

include:

B Conducting monetary policy by influencing the 

monetary and credit conditions in the economy in 

pursuit of maximum employment, stable prices, 

and moderate longterm interest rates;

B Supervising and regulating certain banking insti

tutions both to ensure the safety and soundness of 

the U.S. banking and financial system and to pro

tect the rights of consumers; 

B Maintaining the stability of the financial system 

and containing the risk of a financial crisis; and 

B Providing financial services to depository institu

tions (such as commercial banks, credit unions, 

and savings and loan associations), the U.S. gov

ernment, and foreign official institutions. Those 

services include a major role in operating the 

nation’s payments system—the paperbased and 

electronic mechanisms for moving funds, pay

ments, and money among financial institutions 

throughout the country.

The Federal Reserve System comprises a board of 

governors and 12 Reserve Banks—in Atlanta, Bos

ton, Chicago, Cleveland, Dallas, Kansas City, 

Minneapolis, New York, Philadelphia, Richmond, 

San Francisco, and St. Louis. (The geographic area 

that each Reserve Bank serves is known as a Federal 

Reserve District.) The Board of Governors of the 

Federal Reserve System is an agency of the federal 

government whose members are appointed by the 

President with the advice and consent of the Senate. 

The board supervises the Reserve Banks, which are 

the operating arms of the central bank. 

The Reserve Banks were established by law as private 

institutions with certain privileges; however, that leg

islation restricts them to conducting business only as 

specified in the Federal Reserve Act.2

 Nominally, they 

are owned by their “stockholder,” or member, banks. 

Like those private institutions, the Reserve Banks 

establish their own compensation and hiring policies 

(subject to the oversight of the Board of Governors) 

and pay local property taxes. 

Each Reserve Bank has its own board of nine direc

tors who are chosen from outside the bank as pro

vided by law. The Board of Governors appoints three 

directors to represent the public (they reflect a cross 

section of business, labor, and consumer interests 

within the Federal Reserve District); one director is 

appointed the chairman and another the deputy 

chairman. The member banks of the Federal Reserve 

District elect six directors—three to represent them 

and three to represent the public.

1. This box draws on material from Board of Governors of the 

Federal Reserve System, The Federal Reserve System: Purposes 

and Functions, 9th ed. (2005).

2. Information about the act is available at www.

federalreserve.gov/aboutthefed/fract.htm.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 3

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the basic mechanics of monetary policy.) By the end of 

2008, the value of the Federal Reserve’s assets had grown 

to about $2,275 billion; of that amount, loans and other 

support extended to financial institutions made up 

$1,686 billion. At the end of 2009, when the turmoil in 

the financial markets had subsided, the total value of the 

central bank’s assets remained essentially where it was at 

the end of 2008. The amount of direct loans and other 

support to financial institutions, though still quite high 

by historical standards, had fallen markedly by the end of 

2009, to about $280 billion, but holdings of mortgagerelated securities had risen, to just over $1,000 billion. 

The Federal Reserve’s activities during the crisis have also 

led to a marked shift in the composition of the central 

bank’s liabilities (see Figure 2). Before the crisis, the 

major liability on the Federal Reserve’s balance sheet was 

the amount of currency (Federal Reserve notes) in circulation—about $814 billion as of July 2007. At the end of 

2009, the amount of reserves that banks held with the 

Federal Reserve was the central bank’s largest liability. 

Such reserves have grown from about $6 billion at the 

end of July 2007 to more than $1,022 billion at the end 

of 2009; those reserves greatly exceed the amount that 

banks are required to hold.5

 In effect, the Federal Reserve 

financed its activities during the crisis primarily by 

Box 1. Continued

Background on the Federal Reserve System

Member banks must hold stock in their regional Federal Reserve Bank in an amount equal to 6 percent of 

their capital and surplus. Half that amount must be 

paid in to their Reserve Bank; the other half can be 

called in by the Board of Governors.3

 The holding of 

such stock, however, does not carry with it the control and financial interest conveyed to holders of the 

common stock of for-profit organizations. Rather, it 

is a legal obligation of Federal Reserve membership, 

and the stock may not be sold or pledged as collateral 

for loans, nor may it be purchased by individuals or 

entities other than member banks. Member banks 

receive a 6 percent dividend annually on their paid-in 

stock, as specified by law. 

The Federal Reserve System is considered to be an 

independent central bank because its decisions do not 

have to be ratified by the President or anyone else in 

the executive branch of government. Many experts 

consider that independence important for effective 

policymaking by central banks.4

 However, the system 

is subject to Congressional oversight. The Board of 

Governors must report annually to the Congress on 

the Federal Reserve’s operations and semiannually on 

its conduct of monetary policy. Other actions and 

policies are also subject to Congressional scrutiny, 

and the Chairman and other members of the Board 

of Governors testify before the Congress frequently.5

The Federal Reserve finances its own operations and 

thus does not rely on Congressional appropriations 

for funding. It remits its net income from those operations to the Treasury. 

3. The Board of Governors requires each Reserve Bank to 

maintain a surplus equal to the paid-in capital of its member 

banks.

4. See, for example, Christopher Crowe and Ellen E. Meade, 

“The Evolution of Central Bank Governance Around the 

World,” Journal of Economic Perspectives, vol. 21, no. 4 (Fall 

2007), pp. 69–90.

5. Moreover, the Board of Governors, the Federal Reserve 

Banks, and the Federal Reserve System as a whole are subject 

to several layers of audit and review. For example, the financial statements of the Board of Governors and the Reserve 

banks are audited annually by outside auditors.

5. A depository institution’s reserve requirement is based on the type 

and amount of its deposits. Historically, most banks have held 

small amounts of excess reserves because reserves did not earn 

interest. However, the Emergency Economic Stabilization Act of 

2008 (Division A of Public Law 110-343) authorized the Federal 

Reserve, as of October 1, 2008, to begin paying interest on 

reserves. 
4 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

Figure 1.

Assets of the Federal Reserve Banks, January 2007 to December 2009

(Billions of dollars)

Source: Congressional Budget Office based on data from the Federal Reserve.

Notes: Data are as of the last Wednesday of each month. The last data point is December 30, 2009.

Appendix A contains further information on the programs noted below.

a. For the American International Group (AIG), the total consists of the outstanding balance on the line of credit, the assets of Maiden 

Lane II and Maiden Lane III, and the Federal Reserve’s equity holdings in AIA Aurora Limited Liability Company (LLC) and ALICO Holdings LLC. For Bear Stearns, the total covers the assets of the initial Maiden Lane company.

b. Consists of loans made by the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity 

Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility.

c. Comprises loans through the discount window, the assets of the Term Auction Facility, central bank liquidity swaps, and repurchase agreements.

d. Agency debt consists of securities of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Agency mortgage-backed securities 

(MBSs) are securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.

e. Comprises gold stock, special drawing rights, Treasury currency outstanding, “float,” and other assets.

creating bank reserves rather than by issuing more cur

rency or increasing its other liabilities.4

The amount and composition of the central bank’s assets 

and liabilities are major determinants of the Federal 

Reserve’s impact on the federal budget. That impact is 

measured by the central bank’s cash remittances to the 

Treasury, which are recorded as revenues in the budget. 

(The amount that is remitted is based on the Federal 

Reserve System’s income from all of its various activities 

minus the costs of generating that income, dividend pay

ments to banks that are members of the Federal Reserve 

System, and changes in the amount of the surplus that it 

holds on its books.) For fiscal years 2000 through 2008, 

annual remittances by the Federal Reserve ranged 

between $19 billion and $34 billion.

The Congressional Budget Office (CBO) projects that 

the Federal Reserve’s actions to stabilize the financial sys

tem will boost its remittances to the Treasury during the 

next several years. That increase reflects the Federal 

Jan. 

2007

Apr. 

2007

Jul. 

2007

Oct. 

2007

Jan. 

2008

Apr. 

2008

Jul. 

2008

Oct. 

2008

Jan. 

2009

Apr. 

2009

Jul. 

2009

Oct. 

2009

0

500

1,000

1,500

2,000

2,500

Othere

U.S. Treasury Securities

Agency Debt and MBSsd

Depository Institutionsc

Nonbanksb

AIG and Bear Stearnsa

4. When the Federal Reserve makes a loan to a bank, for example, it 

credits the reserve balances of the bank by the amount of the loan, 

thereby increasing both its assets (its lending to banks) and its lia

bilities (reserve balances held at the Federal Reserve) by the same 

amount. For more information on the relationship between the 

Federal Reserve’s activities during the financial crisis and bank 

reserves, see Todd Keister and James J. McAndrews, “Why Are 

Banks Holding So Many Excess Reserves?” Current Issues in Eco

nomics and Finance, Federal Reserve Bank of New York, vol. 15, 

no. 8 (December 2009), available at www.newyorkfed.org/

research/current_issues/ci158.pdf.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 5

CBO

Figure 2.

Liabilities of the Federal Reserve Banks, January 2007 to December 2009

(Billions of dollars)

Source: Congressional Budget Office based on data from the Federal Reserve.

Note: Data are as of the last Wednesday of each month. The last data point is December 30, 2009.

a. Comprises reverse repurchase agreements (see Box 2), Treasury cash holdings, deposits other than those of the U.S. Treasury, and other 

Federal Reserve liabilities and capital.

Reserve’s larger portfolio of assets, most of which are 

likely to earn a great deal more than the amount the sys

tem must pay in interest on reserves and its other liabili

ties. CBO projects that remittances will grow from about 

$34 billion in fiscal year 2009 to more than $70 billion 

in fiscal years 2010 and 2011.5

Projections of the Federal Reserve’s remittances to the 

Treasury over the next few years, however, are more 

uncertain than projections made in the past. The system’s 

asset holdings are now riskier, exposing the central bank 

to a considerably greater possibility of losses than its usual 

holdings of Treasury securities do. Moreover, the risk of 

losses from default associated with the amounts of the 

remittances is asymmetric. The chances are great that the 

Federal Reserve will remit slightly more than the amounts 

CBO expects. But there is also a small chance that it will 

remit much less—or even nothing—if serious problems 

reemerge in the financial markets or the economy greatly 

weakens again. 

Measuring the impact of the Federal Reserve System’s 

actions by the magnitude of its cash remittances to the 

Treasury fails to account for the cost of the risks to tax

payers from those actions. When the Federal Reserve 

invests in a risky security, it increases its expected net 

earnings because the return it anticipates on that security 

exceeds the interest rate it pays on the debt used to fund 

the purchase. If the Federal Reserve purchases the security 

at a fair market price, equivalent to what private investors 

would have paid, then the purchase creates no economic 

gain or loss for taxpayers; the price compensates the cen

tral bank for the risk it has assumed. By contrast, if the 

Federal Reserve purchases a risky security for more than 

the amount that private investors would have paid, it 

gives a subsidy to the seller of the security, creating an 

economic loss, or cost, for taxpayers.

The economic cost of the Federal Reserve System’s 

actions to stabilize the financial markets—which incor

porates the risks to taxpayers—can be estimated using 

“fairvalue” subsidies. Fair value in many instances corre

sponds to market value; it is defined as the price that 

would be received by selling an asset in an orderly trans

action between market participants on a designated 

Agency Debt and MBSs

Jan. 

2007

Apr. 

2007

Jul. 

2007

Oct. 

2007

Jan. 

2008

Apr. 

2008

Jul. 

2008

Oct. 

2008

Jan. 

2009

Apr. 

2009

Jul. 

2009

Oct. 

2009

0

500

1,000

1,500

2,000

2,500

Othera

Treasury Deposits

Bank Reserves

Currency

5. Congressional Budget Office, An Analysis of the President’s Budget

ary Proposals for Fiscal Year 2011 (March 2010). 
6 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

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Box 2.

Monetary Policy

A primary function of the Federal Reserve System is 

the conduct of monetary policy. The central bank is 

charged by the Congress to use monetary policy “to 

promote effectively the goals of maximum employ

ment, stable prices, and moderate longterm interest 

rates,” as required by the Federal Reserve Act.1

 Since 

the mid1980s, the central bank has carried out that 

directive on a daytoday basis primarily by targeting 

the federal funds rate—the interest rate that banks 

charge each other for overnight loans of their spare 

reserves.

The Federal Reserve influences the federal funds rate 

by changing the amount of available funds in the fed

eral funds market. Before the financial crisis, the cen

tral bank altered the amount of funds primarily by 

buying and selling U.S. Treasury securities and by 

participating in repurchase and reverse repurchase 

agreements.2

 Those activities have direct effects on 

the federal funds rate and indirect effects on other 

interest rates in the financial markets. For example, 

when the Federal Reserve wants to lower the federal 

funds rate, it buys Treasury securities from dealers in 

the open market. (To raise the federal funds rate, it 

sells securities.) Those transactions add to the supply 

of bank reserves that banks can lend in the overnight 

market—because the dealers deposit the proceeds of 

such sales in their banks—thereby lowering the fed

eral funds rate and adding to the Federal Reserve’s 

holdings of Treasury securities. The central bank can 

also increase (or decrease) the amount of reserves by 

carrying out a repurchase (or a reverse repurchase) 

agreement.

The central bank has traditionally used two other 

methods as well for adjusting the amount of reserves 

in the banking system, although those methods are 

less useful for daytoday adjustments of the federal 

funds rate. First, the Federal Reserve can increase the 

amount of reserves by making loans through its so

called discount window, a facility that makes collater

alized loans (typically overnight) to banks and other 

depository institutions. However, the Federal Reserve 

has discouraged banks from using the discount win

dow in situations that do not constitute an emer

gency. Consequently, the amount of discount

window lending is typically very small.

A second method that the central bank can use to 

adjust reserves is to change its reserve requirements—

which specify the amount of reserves that depository 

institutions must hold at the Federal Reserve Banks. 

However, frequent alterations in the requirements are 

impractical. 

Recently, the Federal Reserve was granted the author

ity to pay interest on bank reserves, giving it a new 

tool with which to influence the level of reserves in 

the system as well as interest rates in the broader 

financial market.

1. Information about the Federal Reserve Act of 1913 is avail

able at www.federalreserve.gov/aboutthefed/fract.htm. Fur

ther discussion of the Federal Reserve’s monetary policy role 

is at www.federalreserve.gov/generalinfo/faq/faqmpo.htm. 

2. Repurchase agreements are similar to collateralized loans. In a 

repurchase agreement, a primary dealer (a bank or another 

financial institution that meets the central bank’s capital and 

other requirements) sells highquality securities, such as Trea

sury securities, to the Federal Reserve and agrees to buy them 

back on a set date and for a set price. In a reverse repurchase 

agreement, a dealer buys highquality securities from the Fed

eral Reserve and pledges to sell them back to the central bank 

on an agreedupon date and at an agreedupon price.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 7

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measurement date.6

 Subsidies estimated on a fairvalue 

basis provide a more comprehensive measure of cost than 

do estimates made on a cash basis: They take into 

account the discounted value of all future cash flows asso

ciated with a credit obligation, and they include the cost 

of bearing risk.7

 CBO and the Administration’s Office of 

Management and Budget (OMB) use a conceptually sim

ilar subsidy measure, as specified by the Emergency Eco

nomic Stabilization Act of 2008, to estimate the budget

ary cost of the Troubled Asset Relief Program, or TARP.8

(CBO calls such subsidies “fair value” in part to distin

guish them from subsidies calculated through the method 

specified by the Federal Credit Reform Act of 1990 and 

used by CBO and OMB to estimate the budgetary cost of 

federal credit programs.)9

In CBO’s estimation, the fairvalue subsidies conferred by 

the Federal Reserve System’s actions to stabilize the finan

cial markets totaled about $21 billion (see Table 1 for 

details). The subsidies are estimated as of the date of 

inception of the main programs that the central bank put 

in place—when the major economic commitments 

occurred—and they incorporate CBO’s projections of all 

future cash flows over the life of those facilities, the 

uncertainty surrounding the flows, and the expected rate 

of return that investors would have required for taking on 

the same obligations. The gains or losses that will ulti

mately be realized from the Federal Reserve’s activities 

will almost certainly deviate from CBO’s estimates of the 

fairvalue subsidies those actions provided. Such forward

looking estimates are based on averages over many possi

ble future outcomes, whereas realized gains or losses 

reflect a particular outcome.

In total, the fairvalue subsidies that CBO has estimated 

are modest when compared, for instance, with CBO’s 

estimate of the $189 billion subsidy provided by the 

TARP at its inception—even though most of the central 

bank’s facilities were introduced near the height of the 

crisis, when the price of risk was substantial and the prob

ability of default was elevated.10 The subsidies’ relatively 

small magnitude reflects the fact that the Federal 

Reserve’s potential for losses was limited in most instances 

by requirements for borrowers to provide collateral, by 

guarantees from the Treasury under the TARP and from 

the Federal Deposit Insurance Corporation (FDIC), or 

by various restrictions on the programs. Furthermore, 

some of the assistance that the Federal Reserve provided 

involved no subsidies because the transactions were con

ducted on a fairvalue basis or at prices determined in 

competitive auctions—meaning that the central bank was 

fully compensated for the risks it assumed. 

CBO’s estimates of the economic subsidies that the Fed

eral Reserve has provided are highly uncertain. The esti

mates necessarily rely on judgments about the probability 

that the crisis would have deepened or abated, about the 

sums that might be borrowed and their associated interest 

rates at such times, and about the severity of losses. 

Uncertainty also surrounds the discount rates used in 

CBO’s calculations, but that effect is mitigated by the 

short time over which most of the facilities were sched

uled to operate. Indeed, most programs have already been 

ended.

It bears emphasizing that CBO’s fairvalue estimates 

address the costs but not the benefits of the Federal 

Reserve’s actions. In CBO’s judgment, if the Federal 

Reserve had not strategically provided credit and 

enhanced liquidity, the financial crisis probably would 

6. As such, a fair value reflects the presence of a risk premium, which 

is the additional rate of return that investors require to bear mar

ket risk—the risk that losses will be greatest during times of eco

nomic stress. See Financial Accounting Standards Board, 

Statement of Financial Accounting Standards No. 157, Fair Value 

Measurements (September 2006), p. 2. 

7. The discounted value of a future stream of promised cash flows is 

the amount they are worth today—their present value. The dis

counted value is calculated by applying a “discount rate” to future 

cash flows that accounts for the time value of money and for the 

risk of the cash flows.

8. The measure is described in Congressional Budget Office, The 

Troubled Asset Relief Program: Report on Transactions Through 

December 31, 2008 (January 2009). 

9. For the Federal Credit Reform Act of 1990, see title XIII, 

section 13201, of the Omnibus Budget Reconciliation Act of 

1990; 2 U.S.C. 661, 104 Stat. 1388610. The law specifies that in 

calculating those subsidy costs, interest rates on Treasury securities 

with similar maturities be used as discount rates (to determine the 

present value of the expected cash flows associated with a loan or 

loan guarantee). Because Treasury securities are considered to have 

little chance of default, their interest rates do not include a charge 

for the cost of default risk. 

10. CBO’s estimates of the fairvalue subsidies provided by the TARP 

at or near the inception date of that program are described in 

Congressional Budget Office, The Troubled Asset Relief Program: 

Report on Transactions Through December 31, 2008. By design, 

some activities pursued under the TARP involved a much greater 

assumption of risk by the government and the purchase of some 

assets at prices that were significantly above their fair values. CBO 

now estimates that the TARP will cost $109 billion. 
8 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

Table 1.

Fair-Value Subsidies Arising from the Federal Reserve’s Actions During the 

Financial Crisis

Source: Congressional Budget Office.

Notes: Subsidies estimated on a fair-value basis, unlike estimates made on a cash basis, take into account the discounted value of all future 

cash flows associated with a credit obligation and include noncash costs, such as that for bearing risk. 

For further information on the programs and activities listed above, see Appendix A.

n.a. = not applicable; LLC = limited liability company; AIG = American International Group.

a. Numbers in the column do not add to the total because of rounding.

b. The Maiden Lane LLC was established in conjunction with the sale of the investment bank Bear Stearns to JPMorgan Chase & Company. 

Maiden Lanes II and III were established to provide support to AIG.

Program/Activity Inception Date

Lending to Depository Institutions

Term Auction Facility December 12, 2007 0

Repurchase agreements Ongoing 0

Reciprocal currency arrangements December 12, 2007 n.a.

Lending to Nondepository Financial Institutions and 

Other Market Participants

Primary Dealer Credit Facility March 17, 2008 0

Term Securities Lending Facility March 27, 2008 0

Asset-Backed Commercial Paper Money Market Mutual Fund

Liquidity Facility September 22, 2008 2

Money Market Investor Funding Facility October 21, 2008 0

Commercial Paper Funding Facility October 27, 2008 2

Term Asset-Backed Securities Loan Facility March 3, 2009 13

Direct Purchases of Securities Ongoing 0

Support for Systemically Important Financial Institutionsb

Maiden Lane LLC March 14, 2008 0

Maiden Lane II LLC October 31, 2008 0

Maiden Lane III LLC October 31, 2008 0

AIG revolving credit facility September 16, 2008 2

Citigroup November 23, 2008 2

Bank of America January 16, 2009 1 ____

Total 21

(Billions of dollars)

Subsidy at Inceptiona
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 9

CBO

have been deeper and more protracted and the damages 

to the rest of the economy more severe. Measuring the 

benefits of the Federal Reserve’s interventions in avoiding 

those worse outcomes is much more difficult than esti

mating the subsidy costs of the interventions, and CBO 

has not attempted to do so. It is likely, though, that the 

benefits of the Federal Reserve’s actions to stabilize the 

financial system exceeded the relatively small costs 

reported here for fairvalue subsidies.

Actions by the Federal Reserve to 

Address the Financial Crisis

In reacting to the recent turmoil in the financial markets, 

the Federal Reserve used its traditional tools for imple

menting monetary policy as well as new facilities to help 

restore liquidity and confidence within the financial mar

kets and among institutions. Using its traditional tools, 

the Federal Reserve expanded lending to depository insti

tutions and lowered its target for the overnight federal 

funds rate to almost zero to put downward pressure on 

market interest rates. The Federal Reserve also created 

new facilities to provide liquidity to nondepository finan

cial institutions and other market participants and pur

chased mortgagerelated securities and medium and 

longterm U.S. Treasury securities in the open market. It 

also extended direct loans and other support to certain 

“systemically important” financial institutions (institu

tions whose financial problems during the crisis were 

believed to seriously threaten the stability of the financial 

system as a whole). 

Expanded Lending to Depository Institutions

In its earliest actions to address the financial crisis, the 

Federal Reserve focused on providing liquidity to deposi

tory institutions, generally by using existing programs. It 

expanded opportunities for borrowing from its discount 

window, which serves as a backup source of liquidity for 

individual depository institutions, by reducing the cost of 

loans and extending their maximum maturity from over

night to 90 days. And it increased its use of repurchase 

agreements (shortterm collateralized loans) to add 

liquidity to the banking system. Other actions included 

expanding its currency swap lines with foreign central 

banks to make additional dollardenominated funding 

available to foreign commercial banks and creating the 

Term Auction Facility (TAF) to provide longerterm 

loans to depository institutions at marketdetermined 

rates of interest.11 (Appendix A provides additional details 

on those and other actions by the Federal Reserve to meet 

the crisis in the banking system.) Taken together, the out

standing amount of lending through those programs rose 

from about $19 billion at the end of July 2007 to a peak 

of $1,201 billion in December 2008. By the end of 2009, 

however, lending to depository institutions had fallen to 

about $106 billion (see Figure 1 on page 4). 

New Liquidity Programs for Nondepository 

Financial Institutions and Other Market 

Participants 

As the crisis deepened, the Federal Reserve created new 

programs to provide liquidity directly to other financial 

institutions and participants in the financial markets—in 

particular, primary dealers, money market mutual funds, 

and participants in the markets for commercial paper and 

assetbacked securities.12 Those institutions and partici

pants directly or indirectly provide a significant amount 

of credit to consumers and businesses. In normal times, 

the Federal Reserve could have provided liquidity to 

many such institutions indirectly by providing additional 

reserves to banks, which could then have lent the funds to 

the institutions. However, the curtailment of banks’ lend

ing activities during the crisis blocked the normal chan

nels through which the Federal Reserve could affect the 

financial markets and the economy more broadly. Conse

quently, the central bank created:

B The Primary Dealer Credit Facility and the Term 

Securities Lending Facility (TSLF), to provide primary 

dealers with access to shortterm liquidity;

B The AssetBacked Commercial Paper Money Market 

Mutual Fund Liquidity Facility (AMLF) and the 

11. A currency swap line is an arrangement between the Federal 

Reserve and a foreign central bank to temporarily trade an 

amount of U.S. dollars for an equivalent amount of a foreign 

currency. 

12. Primary dealers—commercial banks as well as brokers and dealers 

who buy and sell U.S. government and other securities in the pri

vate financial markets—trade with the Federal Reserve. Such firms 

must meet requirements set by the central bank for liquidity and 

capital as well as for other aspects of their operations. The market 

for commercial paper (unsecured shortterm promissory notes 

issued primarily by corporations) is an important source of fund

ing for financial institutions and some commercial firms. Asset

backed securities derive their income from the assets—for exam

ple, a pool of credit card loans—that back the securities.
10 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

Money Market Investor Funding Facility (MMIFF), 

to ease the liquidity problems of money market 

funds;13

B The Commercial Paper Funding Facility (CPFF), to 

support the issuance of commercial paper by buying 

highly rated offerings; and

B The Term AssetBacked Securities Loan Facility 

(TALF), to encourage the issuance of assetbacked 

securities and hence increase the availability of credit 

to businesses and households.

Total lending by those facilities (excluding the TSLF, 

which lent securities rather than cash) peaked at over 

$400 billion in late November 2008 and then declined 

to approximately $62 billion at the end of 2009 (see Fig

ure 1 on page 4). In October 2008, the TSLF had loans 

totaling close to $200 billion; by August 2009, it had no 

outstanding loans.

Open-Market Purchases of Securities

The Federal Reserve began purchasing medium and 

longterm securities (those with maturities of 2 to 

10 years and more than 10 years, respectively) in the 

open market in late 2008 in an effort to lower medium

and longterm interest rates, including mortgage rates, 

and thereby support the housing market and the broader 

economy. The Federal Reserve stated that it would pur

chase as much as $200 billion (later reduced to $175 bil

lion) in debt securities—known as agency debt—from 

Fannie Mae, Freddie Mac, and the Federal Home Loan 

Banks, as well as up to $1,250 billion in mortgagebacked 

securities guaranteed by Fannie Mae, Freddie Mac, and 

Ginnie Mae—known as agency MBSs.14 (A mortgage

backed security is a claim on the cash flows of a pool of 

mortgages.) By the end of 2009, the Federal Reserve 

owned $160 billion of agency debt and $908 billion of 

agency MBSs. Over the course of that year, the central 

bank had also purchased $300 billion of medium and 

longterm Treasury securities. 

Support for Systemically Important Financial 

Institutions

In conjunction with the Treasury and the Federal Deposit 

Insurance Corporation, the Federal Reserve provided 

substantial additional support to four institutions whose 

financial problems during the crisis were believed to seri

ously threaten the financial system’s stability.

B The Federal Reserve created the Maiden Lane 

facility in conjunction with the sale of the troubled 

investment firm Bear Stearns to the bank JPMorgan 

Chase & Company. The facility, which is structured as 

a limited liability company, received financing from 

the Federal Reserve to purchase about $30 billion of 

Bear Stearns’ assets, which were residential and com

mercial mortgage loans and other mortgagerelated 

assets.15 (In essence, the Federal Reserve owns those 

underlying assets.)

B The Federal Reserve also provided assistance to Amer

ican International Group (AIG), a large financial insti

tution with businesses in insurance and other financial 

products. The assistance mainly included a line of 

credit and the creation of the Maiden Lane II and 

Maiden Lane III facilities, which own a portion of 

AIG’s assetbacked securities financed by the central 

bank. (Here again, the Federal Reserve effectively 

13. Money market mutual funds are a significant source of shortterm 

funding for financial institutions as well as for some corporations 

and government entities. For investors, the funds are an alterna

tive to bank deposits: They pay a slightly higher rate of interest, 

but they expose investors to greater risk because they are not 

insured. 

14. Fannie Mae and Freddie Mac (formally, the Federal National 

Mortgage Association and the Federal Home Loan Mortgage 

Corporation) are two federally chartered institutions that provide 

credit guarantees for almost half of the outstanding residential 

mortgages in the United States. After the two firms experienced 

sizable losses on their mortgagerelated investments and guaran

tees, the Treasury placed them in conservatorship—essentially the 

government took control of them—in September 2008. Ginnie 

Mae is a governmentowned corporation that guarantees securities 

backed by federally insured loans—mainly loans insured by the 

Federal Housing Administration and the Department of Veterans 

Affairs. The Federal Home Loan Banks are governmentsponsored 

enterprises that lending institutions use to obtain lowcost financ

ing through “advances,” which are loans backed by highquality 

collateral.

15. In a limited liability company, the profits and losses of the busi

ness pass through to its owners, although, as the name implies, 

this particular legal structure offers protection from personal lia

bility for business debts, just as a corporation does.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 11

CBO

owns the underlying assets.)16 Maiden Lane II holds 

residential MBSs, whereas Maiden Lane III holds col

lateralized debt obligations—that is, securities backed 

by a pool of various assets.

B The Federal Reserve, together with the Treasury’s 

Troubled Asset Relief Program and the FDIC, pro

vided guarantees on certain assets owned by the com

mercial banks Citigroup and Bank of America. Under 

the agreements, the Federal Reserve would provide so

called contingent loans to the banks in the event that 

losses on the assets exceeded the amounts covered by 

the TARP and the FDIC.17 By December 2009, those 

agreements had been terminated. 

The Projected Impact of the 

Federal Reserve’s Actions on the 

Federal Budget 

In the course of its regular activities, the Federal Reserve 

generates a stream of income in excess of its expenses and 

other payments that flows to the Treasury and reduces 

the budget deficit. Ordinarily, most of that income arises 

from the interest paid on Treasury securities that the Fed

eral Reserve acquires in carrying out monetary policy. 

The central bank’s other major sources of income are the 

interest on its investments in foreign currency and on 

loans to depository institutions, and the fees it receives 

for services it provides to such institutions—such as 

check clearing, transfers of funds, and automated 

clearinghouse operations. The central bank’s income 

minus its expenses, the dividends paid to member banks, 

and additions to its surplus account is remitted to the 

Treasury and appears in the federal budget as revenues—

specifically, the remittances are labeled “deposits of earn

ings of the Federal Reserve System” under the category 

“miscellaneous receipts.”18 Annual remittances by the 

Federal Reserve during fiscal years 2000 to 2008 ranged 

between $19 billion and $34 billion.

The Federal Reserve’s actions to stabilize the financial 

markets are likely to significantly increase the amount of 

its remittances over the next few years. CBO incorporates 

estimates of the Federal Reserve’s annual remittances in 

its 10year baseline projections of the federal budget. In 

CBO’s estimation, remittances will more than double 

from about $34 billion in fiscal year 2009 to over $70 bil

lion in fiscal years 2010 and 2011 but then taper off to 

$41 billion in 2013.19 The nearterm increase in remit

tances reflects CBO’s expectations that the size of the 

Federal Reserve’s asset portfolio will remain unusually 

large for the next few years and that the return on those 

assets will exceed the interest rate that the Federal Reserve 

pays on reserves. The projected decline in remittances 

between 2011 and 2013 reflects CBO’s assumptions that 

shortterm interest rates will be higher and the Federal 

Reserve will be reducing its asset holdings, primarily its 

holdings of agency MBSs. After 2013, CBO projects, 

annual remittances will rise gradually to $55 billion in 

2020, in line with growth in the overall economy, and 

derive increasingly from interest receipts on the central 

bank’s holdings of Treasury securities. 

The expansion of the central bank’s activities has also 

significantly increased the uncertainty associated with its 

remittances over the next several years. That is because 

some of the Federal Reserve’s new credit activities entail 

considerably more risk of losses—from increased interest 

rates, defaults, or prepayment of the mortgages backing 

its MBSs—than its normal asset holdings entail. More

over, the Maiden Lane facilities are a source of greater 

expected volatility in the central bank’s remittances 

because changes in the fair values of the facilities’ assets 

flow through to the Federal Reserve’s reported earnings.20

In addition, the risk of default associated with the Federal 

Reserve’s remittances is asymmetric, with a large proba

16. The Federal Reserve also created the Securities Borrowing Facility 

to help AIG avoid selling a portfolio of residential mortgage

backed securities in a weak market, but the facility was terminated 

about two months later upon the creation of Maiden Lane II. See 

Board of Governors of the Federal Reserve System, Report Pursu

ant to Section 129 of the Emergency Economic Stabilization Act of 

2008: Securities Borrowing Facility for American International 

Group, Inc., available at www.federalreserve.gov/monetarypolicy/

files/129aigsecborrowfacility.pdf.

17. The contingent loan to the Bank of America was in the form of a 

line of credit, which was never opened. 

18. The Federal Reserve’s expenses include those for its operations 

(mostly salaries and employee benefits) and various interest pay

ments, such as interest on reserves (see Box 1 on page 2).

19. Congressional Budget Office, The Budget and Economic Outlook: 

Fiscal Years 2010 to 2020 (January 2010), pp. 91–92. 

20. The accounting treatment of the assets held by the Maiden Lane 

facilities differs from the treatment of the Federal Reserve’s other 

assets, most of which are valued at their historical cost. As a result, 

earnings on those assets are based on realized gains and losses 

rather than on changes in the assets’ estimated fair values.
12 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

bility of slightly more in remittances than the amount 

CBO expects but a small probability of much less in the 

event that serious problems reemerge in the financial 

markets or the economy goes into another downturn.21

Effects of the Federal Reserve’s Liquidity 

Programs and Purchases of Securities

CBO’s projections of the Federal Reserve’s annual remit

tances to the Treasury depend on projections of the size 

and composition of the central bank’s portfolio of assets 

and the returns expected from it. Those estimated returns 

depend in turn on projections of economic activity, the 

stance of monetary policy, and developments in the 

financial markets. CBO expects that the Federal Reserve’s 

increased income over the next several years will largely 

derive from its substantial holdings of agency debt and 

agency MBSs. (CBO’s projections reflect only a small 

amount of income from the emergency liquidity facilities 

that the central bank established because most of those 

facilities were winding down and ceasing operation dur

ing the first half of fiscal year 2010.) Indeed, CBO 

expects the Federal Reserve to earn more than $45 billion 

annually in interest income from its holdings of agency 

debt and agency MBSs in fiscal years 2010 and 2011, 

accounting for about twothirds of its income. Offsetting 

some of that income, however, will be interest that the 

Federal Reserve pays on bank reserves. The interest rate 

on reserves is a shortterm rate; CBO expects shortterm 

interest rates to rise as the economy continues to recover 

but to remain lower than the interest rates on the Federal 

Reserve’s longerterm assets.

Size of the Federal Reserve’s Asset Portfolio. In its latest 

set of baseline economic projections issued in January 

2010, CBO concluded that the economy would grow at a 

subdued pace over the next few years.22 That pace in part 

reflects CBO’s assessment that financial systems both in 

the United States and abroad will take some time to heal. 

CBO believes that in those circumstances, the Federal 

Reserve will implement monetary policy by slowly reduc

ing the amount of liquidity in the financial markets over 

the next two years, while the economy is recovering from 

the recession. CBO has thus assumed that the central 

bank will carefully reduce the size of its asset portfolio, 

raise the interest rate that it pays on reserves (which will 

lead to higher shortterm interest rates in the financial 

markets), and otherwise adjust the amount of its other 

liabilities to manage the reduction in liquidity. The total 

amount of the Federal Reserve’s assets in CBO’s projec

tion begins to fall later this year, but it remains above 

$2 trillion through the early part of 2012. 

The Federal Reserve faces a considerable challenge in 

reducing the amount of liquidity in the financial system 

in a way that supports the economic recovery but avoids 

creating either inflationary or deflationary conditions. An 

overly slow reduction in the amount of liquidity would 

keep interest rates low for too long, overstimulating eco

nomic activity and contributing to higher inflation. Con

versely, an overly rapid reduction in liquidity would raise 

interest rates too quickly, possibly stifling the economic 

recovery and creating deflationary conditions. Balancing 

those risks and choosing a course of action are difficult 

because the Federal Reserve must of necessity act on the 

basis of incomplete information and uncertain forecasts, 

at times in response to rapidly changing circumstances.

The unprecedented nature of recent economic develop

ments and the central bank’s response to those occur

rences suggest that the potential for error in predicting 

monetary policy is greater than usual. When the Federal 

Reserve begins to withdraw excess liquidity from the 

financial markets, it can choose different combinations of 

reducing its asset holdings and raising the interest rate 

that it pays on bank reserves. The central bank may 

decide to sell some of its assets—in particular, its agency 

MBSs—or it may simply allow those MBS holdings to 

decline as the underlying mortgages are repaid. The speed 

with which the Federal Reserve reduces those holdings, 

however, will probably depend on conditions in the hous

ing market and in the market for those securities—a 

faster recovery of such markets would encourage the cen

tral bank to reduce its MBS holdings more quickly. 

The Federal Reserve could also tighten monetary policy 

by increasing the interest it pays on excess reserves, 

thereby encouraging banks to continue holding large 

amounts on deposit. Such a policy would effectively 

neutralize those funds (and the liquidity they represent) 

because banks would not be loaning them out to the pri

vate sector. 

21. If such losses occurred and caused the Federal Reserve’s net earn

ings to become negative, the central bank would have no income 

to remit to the Treasury. In that case, the Treasury would not be 

obligated to make payments to the Federal Reserve to cover the 

losses. 

22. See Chapter 2 in Congressional Budget Office, The Budget and 

Economic Outlook: Fiscal Years 2010 to 2020.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 13

CBO

Nevertheless, because the Federal Reserve has never had 

to manage such a large reduction in its asset holdings, it is 

difficult to forecast the path that the central bank will 

take. Any of the measures to reduce liquidity in the finan

cial markets would reduce the central bank’s net interest 

income; the amount of the reduction would vary with the 

course and extent of the action taken. 

Composition of the Federal Reserve’s Asset Portfolio.

CBO expects that the Federal Reserve’s holdings of 

agency debt and agency MBSs will account for a signifi

cant share of its asset portfolio over the next few years. By 

the second half of the 2010–2020 projection period, the 

Federal Reserve’s asset holdings will largely consist of 

Treasury securities, in CBO’s view. 

Expected Returns on the Federal Reserve’s Agency 

Debt and Agency MBSs. CBO used market data to esti

mate the rates of return on the Federal Reserve’s pur

chases of agency debt and agency MBSs. Specifically, it 

computed average returns for the central bank’s holdings 

on the basis of the characteristics of the securities that the 

Federal Reserve purchased and the market interest rates 

for those securities at the time they were acquired.

Effects of Support for Systemically 

Important Institutions 

CBO estimates that the Federal Reserve’s support of insti

tutions whose failures might have threatened the stability 

of the financial system will increase its net income by 

about $17 billion over the fiscal year 2010–2020 

period.23 That figure consists of a projected return of 

$8 billion on the three Maiden Lane facilities and interest 

of $9 billion on the line of credit to AIG. The contingent 

loan arrangements with Citigroup and Bank of America 

have been terminated. 

The Maiden Lane Facilities. The effect of the Maiden 

Lane facilities on the Federal Reserve’s remittances to the 

Treasury is measured by the facilities’ net income, which 

comprises both realized and unrealized gains and losses 

on the facilities’ portfolios of assets (see Appendix B). 

(Unrealized gains and losses are determined by changes in 

the fair values of those assets.) That definition of net 

income follows from the particular accounting standards 

that the Federal Reserve uses for those facilities.

CBO anticipates that over the lifetimes of the Maiden 

Lane facilities (that is, from the inception of the programs 

through fiscal year 2020), the Federal Reserve will gain 

$200 million in income from its investment in the initial 

Maiden Lane company (related to the Bear Stearns trans

action) and $2 billion each from its investments in 

Maiden Lane II and Maiden Lane III (both related to 

support for AIG). Those estimates include losses that 

have already occurred. As of September 30, 2009, the 

value of the assets in all of the Maiden Lane facilities had 

dropped by $7.4 billion. Approximately half that loss—

$3.7 billion—has been allocated to the Federal Reserve.24

CBO expects positive returns from all three facilities 

because the assets were purchased at their fair values.25

CBO assumed that each facility’s portfolio would have an 

expected return of 6.5 percent and that the assets had 

terms of between 21⁄2 and 5 years. (CBO based its 

assumption about expected returns on those earned by 

securities bought and sold in the private markets.)

Of course, the returns realized on assetbacked securities 

such as those in the Maiden Lane portfolios could deviate 

significantly from what is expected, given the uncertainty 

about the returns on the underlying assets. The actual 

outcomes from the Maiden Lane investments depend on 

what happens to the economy, and the Federal Reserve 

could experience significant losses if the economy wors

ens. Also a possibility, though, is that it could reap large 

gains if the market for assetbacked securities turns 

around more quickly than has been anticipated. 

Line of Credit for the American International Group.

CBO estimates that the Federal Reserve will earn almost 

23. That estimate incorporates the assumption that the facilities 

remain on the central bank’s balance sheet until they are com

pletely wound down. However, the Treasury has announced its 

intention to assume financial responsibility for the Maiden Lane 

facilities “[i]n the longer term and as its authorities permit.” See 

The Role of the Federal Reserve in Preserving Financial and Monetary 

Stability: Joint Statement by the Department of the Treasury and the 

Federal Reserve (March 23, 2009), available at www.treas.gov/

press/releases/tg66.htm. Such action would not change the finan

cial position of the federal government. 

24. Of that $3.7 billion loss, $3.1 billion is attributable to the initial 

Maiden Lane company and $600 million to Maiden Lane II. The 

central bank has suffered no losses on its investment in Maiden 

Lane III.

25. The investment advisers hired to value the assets of the Maiden 

Lane facilities had to determine the fair value of the securities by 

using valuation models that were based on uncertain projections 

of future cash flows and the operative discount rate. The securities 

had become highly illiquid: Very few transactions—and their 

accompanying prices—were available for comparison, and the 

prices that were observed showed substantial volatility.
14 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

$12 billion in interest over the lifetime of the loans made 

to AIG under its line of credit. (The central bank had 

earned $3 billion of that amount before the start of fiscal 

year 2010.) That estimate is based on CBO’s projections 

of the interest rate on the loan (the threemonth Libor 

plus 3 percentage points), the loan’s outstanding balance, 

and the fee of 0.75 percent on the unused portion of the 

line of credit.26 CBO also judged that default losses on 

the line of credit would be negligible (because the loan is 

collateralized by all of the assets of AIG and its subsidiar

ies) and that the facility would cease operating, on sched

ule, in August 2013.

Contingent Loans to Bank of America and Citigroup.

CBO’s current projections do not incorporate the contin

gent lines of credit offered to Bank of America and Citi

group. In September 2009, Bank of America terminated 

its provisional loan agreement with the Treasury, the 

FDIC, and the Federal Reserve and paid an exit fee of 

$57 million to the central bank. In December of that 

year, Citigroup also terminated its agreement with those 

parties and paid an exit fee of $50 million. 

Estimates of Fair-Value Subsidies from 

the Federal Reserve’s Actions

From an economic perspective, the higher rate of return 

that CBO expects on the Federal Reserve’s riskier assets is 

compensation for the central bank’s increased exposure to 

the risks associated with those investments and not a true 

gain of value to the Treasury. A more comprehensive 

measure of the costs of the Federal Reserve’s activities 

during the recent crisis that takes the value of risk bearing 

into account is the economic, or fairvalue, subsidies that 

the central bank provided to financial institutions in the 

form of credit and guarantees. The concept of fair value 

has been increasingly used to account for financial obliga

tions in the private sector; it is defined as the price that 

would be received by selling an asset in an orderly trans

action between willing market participants on a specified 

measurement date.

In general, a fairvalue subsidy arises whenever the Fed

eral Reserve accepts terms on the financing it is providing 

that are less stringent than the terms that investors would 

demand for taking on comparable risks.27 The cost of 

such subsidies is borne by taxpayers because the credit 

assistance that the Federal Reserve chooses to provide 

affects the size and timing of its remittances to the Trea

sury. For instance, the central bank’s activities create a 

fairvalue subsidy when the principal amount of a loan it 

makes exceeds the value to private investors of the prom

ised repayments from the loan. But when the Federal 

Reserve acquires assets at their fair values, as it effectively 

did through its Maiden Lane facilities, it does not confer 

subsidies on the sellers of those assets because the assets’ 

purchase prices represented fair compensation for the 

risks that the central bank was assuming. Similarly, the 

Federal Reserve’s purchases of agency debt, agency MBSs, 

and longterm Treasury securities do not give rise to fair

value subsidies because those transactions all occurred in 

the open market.

Economic subsidies can be defined more or less broadly. 

For this analysis, CBO estimated only those subsidies 

that arose from activities of the Federal Reserve that 

exposed it to market risk—the risk that defaults will be 

unusually high during times of stress in the economy. 

Many of the central bank’s actions that were aimed at 

increasing liquidity and lowering interest rates involved a 

negligible risk of losses from default. However, some of 

the Federal Reserve’s actions provided financial institu

tions with credit at a price lower than that available from 

the markets and thus could be viewed as having conferred 

a subsidy. For instance, the Federal Reserve’s actions 

through its Term Auction Facility appear to have involved 

very little default risk because the loans extended through 

the TAF were highly secured. However, the terms that the 

central bank offered on those loans were probably more 

favorable to the borrowing banks than the terms they 

could have obtained privately, as evidenced by the large 

volume of lending (over $450 billion) through the TAF 

at the height of the crisis. As a practical matter, it would 

be extremely difficult to estimate those more broadly 

defined subsidies, and CBO has not attempted to do so. 

The central bank’s interventions took a number of forms 

that exposed it to varying degrees of risk. CBO used sev

eral modeling approaches to estimate the fair value of the 

26. Libor is the London interbank offered rate, an indication of the 

interest rate at which banks borrow unsecured funds from other 

banks in the London interbank market. The rates are published 

for different loan maturities and used as benchmarks for rates on 

interbank loans worldwide.

27. In general, an economic subsidy can exist even though a program 

has positive net income if the costs that are used to determine net 

income are not comprehensive. The conceptual issues surround

ing estimates of economic subsidies for credit are described in 

Congressional Budget Office, Estimating the Value of Subsidies for 

Federal Loans and Loan Guarantees (August 2004). 
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 15

CBO

assets of the different facilities, but all relied on data 

about market prices to draw inferences about the cost of 

the risks being assumed. On the basis of those models, 

CBO estimated that when the programs were introduced, 

the Federal Reserve conferred fairvalue subsidies totaling 

approximately $21 billion. (Most of that amount—an 

estimated $13 billion—is attributable to the Term Asset

Backed Securities Loan Facility.) The Federal Reserve will 

realize actual gains or losses from those programs that will 

almost certainly differ from CBO’s estimates of the fair

value subsidies, which reflect the wide range of outcomes 

that were possible when the programs were initiated. 

Methodological Considerations

The idea that investors require compensation for assum

ing certain risks is central to the concept of fair value. 

Investors require a return that compensates them for the 

“time value of money”—that a dollar today is worth more 

than a dollar in the future because it can earn interest—

and that covers the losses expected from default. In addi

tion, investors require a “risk premium”—an expected 

return in excess of the riskfree rate—that compensates 

them for bearing certain types of risk, such as market 

risk.28 CBO and the Office of Management and Budget 

use a subsidy measure that includes the cost of market 

risk to estimate the budgetary cost of the Troubled Asset 

Relief Program, as specified by the Emergency Economic 

Stabilization Act of 2008.29 CBO calls such subsidies fair

value subsidies in part to distinguish them from those 

that CBO and OMB calculate to estimate the budgetary 

cost of federal credit programs, as specified in the Federal 

Credit Reform Act of 1990. Subsidies calculated under 

the requirements of that law take into account the time 

value of money and expected losses but not the cost of 

market risk. Specifically, the act specifies that expected 

cash flows should be discounted at the interest rates of 

maturitymatched Treasury securities. As a result, such 

subsidy measures do not include a charge for the cost 

of risk. 

The fair value of an asset is generally the same as its mar

ket price when the asset is traded in a market that is func

tioning normally. However, when few or no similar pri

vate transactions occur or when there is no comparable 

private contract, then fair values must be approximated. 

During the financial crisis, private investors clearly 

viewed the risk of default as extremely costly, as evidenced 

by the marketwide decline in the price of securities that 

carried even moderate amounts of default risk. For most 

of the Federal Reserve’s programs that are evaluated here, 

CBO used comparable market interest rates to impute 

marketrisk premiums and thus calculate the fairvalue 

subsidies that the central bank was providing. When 

comparable rates were not available, CBO approximated 

risk premiums by using historical relationships and avail

able market data on related transactions. 

In valuing assets, fairvalue accounting does not generally 

distinguish between the effect of market risk and the 

effect of liquidity risk—the risk that selling an asset in an 

inactive market could require a significant concession by 

the seller on its price—although exceptions have recently 

been made.30 It is hard to draw a clear distinction, either 

in theory or in practice, between a premium to compen

sate an investor for market risk and a premium to com

pensate for liquidity risk. In fact, some analysts view the 

liquidity premium as a component of the market risk pre

mium rather than as an addition to it because investors 

place a high value on liquidity during times of market 

stress, when a lack of liquidity can be costly. In general, 

attempts by researchers to identify a separate liquidity 

premium have produced inconsistent results. CBO did 

not attempt such a decomposition; its measure of the risk 

premium includes any liquidity premium. In addition, 

CBO did not adjust its results for any administrative 

costs in excess of the fees that were collected, because it 

expects such amounts to be relatively small. 

A basic principle in valuing assets is that the cost of capi

tal for a particular activity is based on the risk of the 

activity itself but is largely independent of how it is 

financed. Following that principle, the discount rates 

CBO used in calculating fairvalue subsidies reflect the 

28. A fuller explanation of the market risk premium and how it 

affects the price of assets and their expected returns can be found 

in any standard textbook on corporate finance. See, for example, 

Chapter 9 in Richard A. Brealey, Stewart C. Myers, and Franklin 

Allen, Principles of Corporate Finance, 9th ed. (New York: 

McGrawHill/Irwin, 2008).

29. See, for example, Congressional Budget Office, The Troubled Asset 

Relief Program: Report on Transactions Through December 31, 2008. 

Discounting expected future cash flows to the present with a dis

count rate that takes into account the market risk premium is a 

common approach to estimating the fair value of a financial asset.

30. On April 2, 2009, the Financial Accounting Standards Board 

voted to revise its Statement of Financial Accounting Standards 

No. 157 to account for fairvalue calculations when a market is 

inactive. The effect of the revision is that in such circumstances, 

banks have more leeway to use their own judgment to determine 

whether an asset has suffered a decline in its fair value.
16 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

risk associated with the assets under consideration, not 

the Federal Reserve’s cost of borrowing. Borrowing costs 

are not in themselves a measure of the cost of capital for 

any specific activity but instead depend on the totality of 

the central bank’s activities. Associating the cost of capital 

with the riskiness of the acquired assets is analogous to 

the way CBO estimates subsidies under the TARP: Such 

subsidies are based on the riskiness of the assets that the 

Treasury has acquired and not simply on its low cost of 

borrowing (stemming from the government’s ability to 

raise taxes to cover the debt). 

Considerable uncertainty surrounds CBO’s estimates of 

fairvalue subsidies, which rely on assumptions about fac

tors that are difficult to quantify, such as the probability, 

at the time the policies were implemented, that the crisis 

would deepen or abate, the amount that would be bor

rowed and the interest rates on that borrowing at such 

times, and the severity of any realized losses. The uncer

tainty associated with the estimates is asymmetric—that 

is, there is a high probability that the Federal Reserve 

will experience negligible losses or realize gains and a 

much smaller chance that it will experience significant 

losses. The possibility of such losses in part reflects the 

increase in borrowing that could occur under the Federal 

Reserve’s riskier programs: For some of those programs, 

the central bank announced borrowing limits, but for 

others, no explicit limits were set.31 As it turned out, in 

the months after those programs were introduced, the 

amounts lent by the riskiest facilities rose rapidly to total 

about $500 billion in December 2008. A few months 

later, however, such lending had begun a gradual decline 

as market conditions improved (see Figure 3). 

For each of the Federal Reserve’s stabilization programs, 

CBO reports the cost of fairvalue subsidies at the pro

gram’s inception date. Those estimates capture the full 

value of the Federal Reserve’s commitments at the time 

they were made, taking into account all future cash flows 

over the life of the program and the uncertainty sur

rounding them. The Federal Reserve made significant—

and in several cases repeated—changes to some of the 

programs as conditions in the markets changed. However, 

for this analysis, CBO based each set of its estimates on 

the information available at the time the program was 

created and did not adjust the estimates for subsequent 

changes that it could not have anticipated. 

Subsidy Estimates 

In CBO’s estimation, the total amount of fairvalue subsi

dies conferred by the Federal Reserve’s new emergency 

facilities at the time that the programs were created was 

about $21 billion (see Table 1 on page 8). Subsidy 

amounts varied considerably by program, but for the 

most part, they were modest. Several programs involving 

loans that were backed only by risky collateral, that had 

interest rates that were administratively set by the Federal 

Reserve, and that would extend over months or years gave 

rise to most of the subsidy costs. For other programs that 

were structured to pose very little risk to the central bank 

or that explicitly extended credit by using a competitive 

auction or a fairvalue basis, economic subsidies were 

judged to be negligible. 

The Federal Reserve’s emergency programs as well as the 

actions taken by the Treasury under the TARP involved 

subsidies conferred on financial institutions by the federal 

government. However, the total amount of subsidies pro

vided by the Federal Reserve is much smaller than the 

subsidy arising from the TARP, which CBO estimated to 

be $189 billion at the program’s inception. By design, the 

TARP encompassed a much greater assumption of risk by 

the government and some purchases of assets at prices sig

nificantly above their fair values. 

Expanded Lending to Depository Institutions. In CBO’s 

view, the expanded use of the Federal Reserve’s discount 

window, lending by the Term Auction Facility, and, 

before 2009, the increased use of repurchase agreements 

did not create significant subsidies. The reciprocal cur

rency arrangements (dollar swaps) that the central bank 

engaged in at various times throughout the crisis were 

struck at terms favorable to the Federal Reserve and thus 

had negative subsidies—they created profits for the 

government. 

CBO judges the fairvalue subsidies conferred by the 

expanded use of the discount window and repurchase 

agreements to be negligible. That broader use is an 

31. No upper bounds were set on lending through the Primary Dealer 

Credit Facility, the Commercial Paper Funding Facility, or the 

AssetBacked Commercial Paper Money Market Mutual Fund 

Liquidity Facility. Caps of $540 billion and $200 billion were 

placed on lending through the Money Market Investor Funding 

Facility and the Term AssetBacked Securities Loan Facility, 

respectively. (For additional detail, see Appendix A.) Lending in 

support of specific institutions was initially $85 billion for AIG, 

$220 billion for Citigroup, and $87 billion for Bank of America.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 17

CBO

Figure 3.

Funding Provided Through Selected Federal Reserve Programs

(Billions of dollars)

Source: Congressional Budget Office based on data from the Federal Reserve.

Notes: Further information on the programs can be found in Appendix A.

TALF= Term Asset-Backed Securities Loan Facility; AMLF = Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity 

Facility; CPFF = Commercial Paper Funding Facility.

a. The data for the American International Group (AIG) comprise the outstanding balance on the line of credit plus equity holdings in AIA 

Aurora Limited Liability Company (LLC) and ALICO Holdings LLC.

extension of the Federal Reserve’s normal lending activi

ties, which are structured to minimize the risk of loss. 

The loans and agreements have short terms and are well 

collateralized; moreover, the loans from the discount win

dow are recourse loans—that is, in case of default, the 

Federal Reserve has recourse to the assets of borrowers 

beyond the collateral that has been provided. On repur

chase agreements, borrowers pay market rates of interest. 

CBO has also concluded that the subsidies associated 

with the TAF are negligible. In principle, the longer

maturity loans offered under the facility exposed the Fed

eral Reserve to greater risk of loss than does its traditional 

overnight lending through the discount window. How

ever, the TAF’s requirements for large amounts of collat

eral up front to secure the loans made losses unlikely. 

Moreover, a TAF loan by design carried a marketbased 

interest rate because the rate was determined through a 

competitive auction (the minimum rate was 0.25 per

cent). Another reason to believe that the TAF offered lit

tle if any subsidy is that the facility’s auctions were consis

tently undersubscribed after the height of the crisis, 

suggesting that many potential borrowers did not find 

the funds attractive even when they carried the minimum 

allowable rate under the facility. 

The dollar swaps with foreign central banks have resulted 

in gains for the Federal Reserve. However, CBO did not 

have enough information about the terms on the swaps at 

the time the program was announced to estimate the pro

spective value of those commitments. As it turned out, 

the swaps exposed the Federal Reserve to very little risk of 

default because the other parties to the arrangements 

were foreign central banks, not the foreign private banks 

that borrowed the dollardenominated funds from their 

central banks. Nevertheless, the Federal Reserve received 

interest payments on the swaps that included compensa

tion for the risk associated with the private foreign banks 

that ultimately borrowed the funds.32 As a result, the 

interest rates charged on the swaps more than compen

sated the Federal Reserve for its risk exposure.

June 

2008

Sept. 

2008

Dec. 

2008

March 

2009

June 

2009

Sept. 

2009

Dec. 

2009

0

50

100

150

200

250

300

350

400

450

500

CPFF

AMLF

AIGa

TALF

Maiden Lane

Maiden Lane II

Maiden Lane III

32. The interest rates that the Federal Reserve received on the swaps 

were determined in competitive auctions whose participants were 

the private foreign banks. 
18 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

New Liquidity Programs for Nondepository Financial 

Institutions and Other Market Participants. The Federal 

Reserve created several programs to provide liquidity to 

nondepository institutions. Some of the facilities were 

designed to protect the central bank entirely from losses 

as a result of defaults or to compensate it at nearmarket 

rates for the risks associated with such lending. But other 

facilities that the Federal Reserve established exposed it to 

risk that was not fully counterbalanced by higher interest 

rates or some other type of protection, such as collateral. 

In those cases, the Federal Reserve provided a subsidy to 

borrowers. 

The Primary Dealer Credit Facility. With this facility, the 

Federal Reserve extended the use of its discount window 

to primary dealers—large financial institutions that are 

authorized to trade directly with the Federal Reserve 

System. As with traditional loans from the discount 

window, the Federal Reserve’s risk of losses on loans to 

primary dealers was minimal because the loans were for 

short terms and were well collateralized; in addition, the 

Federal Reserve had recourse to the borrowers’ assets in 

the event of their default. Hence, CBO estimates that the 

amount of the fairvalue subsidies provided on loans from 

this facility was negligible. 

The Term Securities Lending Facility. The Federal Reserve 

created the Term Securities Lending Facility early in 2008 

to strengthen the financing position of primary dealers 

and generally improve conditions in the financial mar

kets. Through the facility, it lent Treasury securities to 

primary dealers for terms of 28 days; the loans were 

backed by dealers’ pledged collateral of highgrade securi

ties. Dealers paid interest on the loaned securities at a rate 

determined in competitive auctions, and as a result, CBO 

has estimated that the loans were unsubsidized. 

The AssetBacked Commercial Paper Money Market Mutual 

Fund Liquidity Facility and the Money Market Investor 

Funding Facility. The Federal Reserve created these pro

grams to increase liquidity in the market for assetbacked 

commercial paper and to assure investors that money 

market mutual funds would have sufficient liquidity to 

meet the elevated demand that the financial crisis might 

generate for the redemption of shares in the funds. (Large 

redemptions from money market funds are extremely rare 

except during periods of severe financial distress.) Under 

the terms of the AMLF, the Federal Reserve provided 

loans to depository institutions to purchase highly rated 

assetbacked commercial paper from money market 

mutual funds at a fixed interest rate—the primary credit 

rate.33 The commercial paper that was purchased served 

as collateral for the loan, and the Federal Reserve had no 

further recourse to the borrowers’ assets in the event of 

default on the loan.

The MMIFF was a related facility that effectively supple

mented the AMLF. CBO judged that the MMIFF would 

be used only in times of extreme distress; as a result, it 

estimated a negligible cost arising from the facility’s activ

ities. In fact, the MMIFF was never used and was dis

continued on October 30, 2009. 

Two factors suggest that the AMLF provided a subsidy to 

participants in the financial markets by charging a rate of 

interest that did not fully cover the riskiness of the collat

eral (the commercial paper) it was accepting on its loans. 

First, had the crisis worsened, the market value of the col

lateral would probably have fallen below the principal 

owed on the loans, leaving the Federal Reserve exposed to 

losses. Second, although only highly rated commercial 

paper was eligible as collateral, credit ratings became less 

informative during the financial crisis, and money market 

mutual funds had an incentive to sell the AMLF their 

holdings of highly rated but relatively risky and illiquid 

paper, because there was no penalty for doing so.34 CBO’s 

estimates of fairvalue subsidies take into account the 

heightened level and volatility of commercial paper rates 

as well as the likelihood of additional borrowing from the 

facility in the event of a crisis (see Appendix B). 

CBO estimates that at the inception of the AMLF, in 

September 2008, fairvalue subsidies totaled about 

$2 billion, reflecting the highly distressed market condi

tions prevailing at the time. 

The Commercial Paper Funding Facility. The Federal 

Reserve designed the Commercial Paper Funding Facility, 

like the AMLF, to relieve stress in the money markets by 

increasing the liquidity of highquality commercial paper. 

The CPFF was a limited liability company authorized to 

buy highly rated, threemonth dollardenominated com

mercial paper (including assetbacked commercial paper) 

33. The primary credit rate is the interest rate at which an eligible 

depository institution may borrow funds, typically for a short 

period, directly from the discount window at a Federal Reserve 

Bank. 

34. Considerable variation can be found in the quality of the securities 

within a rating class, including the class that comprises highly 

rated commercial paper. Variation was even greater during the 

crisis, when the financial condition of issuers of the paper was 

changing rapidly.
THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 19

CBO

using financing provided by the Federal Reserve. The 

commercial paper that it purchased served as collateral 

for that financing, and the Federal Reserve had recourse 

only to the assets of the facility. 

The CPFF generated a subsidy because it provided partic

ipants in the financial markets with the option of borrow

ing money against risky collateral at terms that did not 

adjust with changes in conditions in the markets. The 

Federal Reserve charged an interest rate on loans through 

the CPFF that was high enough to discourage use of the 

facility under normal market conditions but that made its 

use attractive during times of extreme financial distress.35

It is exactly at those times that the market value of the 

collateral for such loans would be at the greatest risk of 

falling short of the loans’ principal, leaving the Federal 

Reserve at risk for losses. CBO’s estimate of fairvalue 

subsidies for the CPFF takes into account the heightened 

level and volatility of rates during the crisis, but it also 

factors in the assumption that conditions will tend to 

revert to normal over time (see Appendix B). 

CBO estimates that at the inception of the CPFF, in 

October 2008, the facility created a subsidy of about 

$2 billion. (At that point, the CPFF was scheduled 

to operate only until April 30, 2009, but the Federal 

Reserve later extended its operations to February 1, 2010. 

However, because CBO’s analysis is intended to indicate 

the subsidy provided at the program’s inception, the 

estimate does not take the cost of that extension into 

account.) As in the case of the other emergency facilities, 

the initial subsidy reflected conditions in the financial 

markets at that time. 

The Term AssetBacked Securities Loan Facility. The finan

cial crisis also caused a severe and protracted decline in 

the availability of financing for longerterm assetbacked 

securities. In November 2008, the Federal Reserve 

announced that it was creating the TALF to support seg

ments of the assetbacked securities market that provide a 

significant portion of the funding for certain types of 

commercial and consumer credit, such as commercial 

mortgages, auto loans, and credit cards. The facility was 

not actually opened until March 3, 2009, which CBO 

treats as the date of the program’s inception. 

The TALF exposes the Federal Reserve to the risk of 

losses from defaults because it provides multiyear funding 

against risky assetbacked securities. At the inception of 

the program, the TALF offered threeyear loans; shortly 

thereafter, it extended the term to five years for loans 

against some types of collateral, such as securities backed 

by student loans or commercial mortgages. Loans from 

the TALF carry administratively set interest rates that dif

fer for various types of qualifying collateral and loan 

maturities.

Despite the riskiness of the collateral backing the loans 

and their extended maturities (which leave lenders vul

nerable to changes in economic conditions), three factors 

mitigate but do not eliminate the default risk that the 

Federal Reserve assumes when it makes such loans. First, 

the Treasury has provided the central bank with “firstloss 

protection” on the loans, whereby the Treasury absorbs 

the first $20 billion of realized losses through the TARP. 

Second, the accumulated interest income on the TALF 

loans can be used to cover losses. Third, the Federal 

Reserve imposes “haircut” provisions that limit the 

amount of a loan to less than the full value of the collat

eral backing it. The riskier the class of assets backing the 

loan, the larger is the haircut that the central bank 

requires. CBO’s estimate of the fairvalue subsidy from 

the TALF takes those three types of protection into 

account (see Appendix B).

In CBO’s estimation, a subsidy of roughly $13 billion 

was generated at the inception of the TALF. Although the 

volume of lending under the program was initially small 

and increased only slowly, the subsidy that CBO calcu

lated at the program’s inception reflects the possibility 

that financial conditions might have worsened, leading to 

greater participation in the facility (as other alternatives 

became more expensive or unavailable) as well as losses 

that would have exceeded the amount of protection pro

vided by the TARP. 

Open-Market Purchases of Securities. Securities that the 

Federal Reserve purchases in the open market or in com

petitive auctions, in CBO’s estimation, are acquired at 

prices that reflect their fair value. That reasoning applies 

to mortgagebacked securities, agency debt, and Treasury 

35. The interest rate on the paper being purchased was the three

month overnight indexed swap rate plus 1 percentage point (for 

unsecured paper) and 3 percentage points (for assetbacked 

paper). (The threemonth overnight indexed swap rate is a mea

sure of the average federal funds rate that market participants 

expect over the next three months.) There was also a surcharge of 

1 percentage point on unsecured paper, and each borrower paid a 

facility fee equal to 10 basis points (a basis point is onehundredth 

of a percentage point) of the maximum amount of its commercial 

paper that the CPFF might own.
20 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

securities. As such, no fairvalue subsidy is associated with 

those transactions. 

Nevertheless, such transactions confer valuable benefits 

on participants in the financial markets that might be 

considered subsidies under a more comprehensive defini

tion of the term. The Federal Reserve’s purchases of secu

rities boost the demand for them, thereby increasing their 

liquidity, pushing up their prices (and benefiting the 

securities’ existing owners), and lowering their associated 

interest rates (which in the mortgage markets benefits 

home buyers).36 However, the central bank’s purchases 

also impose costs. For example, lower interest rates in 

general reduce the interest income of savers, whereas 

lower rates on mortgages increase the rate at which home

owners prepay their mortgages, which diminishes the 

stream of income that owners of existing mortgage

backed securities receive.

Support for Systemically Important Financial Institutions. Despite the serious financial problems that led the 

Federal Reserve to create facilities to support financial 

institutions it identified as systemically important—such 

as AIG and Citigroup—the central bank initially pro

vided either no subsidy or only a small one to those insti

tutions, in CBO’s estimation. In the case of the Maiden 

Lane facilities, which were established to facilitate the 

Bear Stearns and AIG transactions, the Federal Reserve 

initially provided support on fairvalue terms. Its bolster

ing of Citigroup and Bank of America was structured so 

that the risk of losses was primarily borne by other federal 

entities, such as the Treasury (using funding from the 

TARP) and the FDIC. 

The Maiden Lane Facilities. CBO estimates that no eco

nomic subsidies were associated with these facilities at 

their inception because the Federal Reserve reported that 

it had acquired portfolios of risky securities equal in fair

value terms to the principal amounts of the loans that it 

extended. (In other words, there was an equal exchange of 

value.) 

Line of Credit to the American International Group. The 

Federal Reserve initially extended an $85 billion line of 

credit to AIG to help it meet its obligations and restruc

ture its operations with minimal disruption to the econ

omy. CBO’s estimate of the subsidy conferred at the 

inception of the program, when the line of credit was 

established, is about $2 billion. That estimate, however, is 

considerably more uncertain than estimates for the Fed

eral Reserve’s other programs because very little informa

tion was available about AIG’s financial condition. A 

measure that is sometimes informative is the rates that 

other lenders offer on financing. However, in this case, 

such rates are not valid points of comparison because they 

take into account the government’s backing, without 

which AIG would have failed. The Federal Reserve 

charged AIG very high interest rates on the loans, but the 

fact that AIG relied heavily on the line of credit and con

tinues to draw on it suggests that the central bank’s terms 

have continued to be more favorable than those available 

from private lenders. 

Contingent Loans to Citigroup and Bank of America. The 

contingent loans to Citigroup and Bank of America ini

tially provided small subsidies, in CBO’s estimation. For 

the Citigroup portfolio, CBO estimated fairvalue subsi

dies of about $2 billion at the inception of the program. 

That amount is sensitive to assumptions about the size of 

the risk premium (among other factors), which CBO 

estimated to be 8 percent. If the risk premium was 

assumed to be 6 percent, then the subsidy at the incep

tion of the program would be about $4 billion; if the 

risk premium was assumed to be 10 percent, then the 

subsidy would be about $8 billion. 

The Federal Reserve was less exposed to losses from the 

Citigroup program than were the Treasury and the FDIC 

because those latter organizations had to absorb losses 

before the Federal Reserve suffered any. In addition, the 

central bank benefited from a relatively high rate of inter

est on the contingent loan—the threemonth overnight 

indexed swap rate plus 300 basis points—even though its 

risk was fairly limited. 

On Bank of America’s contingent loan, the subsidy that 

the Federal Reserve provided at the program’s inception 

was less than $1 billion, in CBO’s judgment. 

36. The impact of the Federal Reserve’s purchases in the market is 

analogous to the impact of foreign official purchases in the market 

for U.S. Treasury debt. A study that found evidence suggesting 

that those foreign purchases had a large effect on the prices of 

Treasury securities was Ben S. Bernanke, Brian P. Sack, and Vin

cent R. Reinhart, “Monetary Policy Alternatives at the Zero 

Bound: An Empirical Assessment,” Brookings Papers on Economic 

Activity, no. 2 (2004). The impact on prices in the bond markets 

from largesized transactions and a high frequency of purchases 

was examined by Michael Fleming in “Measuring Treasury Mar

ket Liquidity,” Federal Reserve Bank of New York Economic Policy 

Review (September 2003), and by Michael Brandt and Kenneth 

Kavajecz in “Price Discovery in the U.S. Treasury Market: The 

Impact of Orderflow and Liquidity on the Yield Curve,” Journal 

of Finance, vol. 59, no. 6 (December 2004). 
APPENDIX

CBO

A

Programs Created by the Federal Reserve 

During the Financial Crisis

During the past several years, the Federal Reserve 

significantly expanded the amount and availability of its 

lending to a broad range of financial institutions. It did so 

by invoking its authority under section 13(3) of the Fed

eral Reserve Act of 1913 to lend “[i]n unusual and exi

gent circumstances” to “any individual, partnership, or 

corporation . . . unable to secure adequate credit accom

modations from other banking institutions.”1

Using that authority, the central bank expanded existing 

lending programs that provide liquidity to depository 

institutions, such as banks and credit unions, whose lia

bilities largely consist of checking and savings accounts 

and other deposits.2

 It also created new programs to pro

vide liquidity to nondepository financial institutions and 

other market participants, such as brokers and dealers in 

securities and money market mutual funds; purchased 

mortgagerelated securities on the open market to try to 

help lower medium and longterm interest rates and 

improve the flow of credit in the market for home mort

gages; and extended direct loans and other support to 

certain “systemically important” financial institutions—

those whose failures the central bank believed could 

lead to a systemic collapse of financial markets and 

institutions.

Now that the turmoil in the financial markets has sub

sided and most of the liquidity programs have ended, the 

Federal Reserve’s holdings of mortgagerelated securities 

and its support of systemically important financial insti

tutions remain on its balance sheet. (The lending pro

grams are summarized in Table A1.)

Expanded Lending to Depository 

Institutions

The Federal Reserve’s earliest actions to address the finan

cial crisis, apart from the reduction in its target for the 

federal funds rate (the interest rate that banks charge each 

other for overnight loans of their spare reserve balances 

and that figures in the Federal Reserve’s conduct of mon

etary policy), focused on providing liquidity to deposi

tory institutions.3

 The central bank eased the terms on 

which depository institutions could borrow from its so

called discount window, increased its use of repurchase 

agreements to add liquidity to the banking system, 

expanded its currency swap lines with foreign central 

banks, and created the Term Auction Facility (TAF) to 

provide loans with longer terms through the discount 

window.

Expansion of Lending Through the Discount 

Window

The Federal Reserve extends credit directly to depository 

institutions through its discountwindow program, or 

facility. The discount window operates as a backup source 

of liquidity for individual depository institutions that 

1. Further information about the law is available at www.

federalreserve.gov/aboutthefed/fract.htm.

2. The Federal Reserve can increase liquidity in a market—essen

tially make it easier to convert assets to cash—by standing ready to 

buy securities or to lend against them as collateral. 

3. Monetary policy comprises the actions of a central bank to influ

ence the availability and cost of money and credit as a means of 

helping to promote the goals of maximum employment, stable 

prices, and moderate longterm interest rates. The traditional 

tools of monetary policy include openmarket operations, direct 

lending to depository institutions, and reserve requirements for 

certain deposit liabilities of depository institutions. (Reserves are 

an amount of funds held back from investment by a bank to meet 

probable or possible demands.) For additional information, see 

Box 2 on page 6. 
22 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

Table A-1. 

Overview of the Federal Reserve’s Lending Programs During the Financial Crisis

Continued

Participants Collateral Collateral “Haircuts”a Loan Term Interest Rates Recourseb

Discount 

Window

Depository 

institutions 

Full range of discountwindow collateral (most 

loans that are not past 

due and most highly 

rated securities)

Haircuts for securities are 

between 1 percent and 

18 percent of estimated 

fair market values; 

haircuts for loans are 

between 4 percent and 

56 percent. 

Typically 

overnight but 

up to 90 days 

during the 

financial crisis

Set as a spread over the 

target for the federal funds 

rate (the rate banks charge 

each other for overnight 

loans of their spare 

reserve balances) 

Yes

Reciprocal 

Currency 

Arrangements

Selected 

central banksc

Foreign currency and 

eligible collateral in the 

central bank’s 

jurisdiction 

No Overnight to 

3 months 

Equal to the rate earned by 

the foreign central banks 

on their loans to private 

banks

No

Term Auction 

Facility

Sound 

depository 

institutions 

Full range of discountwindow collateral (most 

loans that are not past 

due and most highly 

rated securities)

The same haircuts as for 

discount-window lending

Initially 28 days 

or 84 days

Set by auction. The 

minimum bid rate is the 

rate of interest that 

Federal Reserve Banks pay 

on excess reserve 

balances.

Yes

Primary Dealer 

Credit Facility

Primary 

dealersd

Full range of collateral 

accepted for triparty 

repurchase agreements 

(those in which a 

custodian bank or 

international clearing 

organization acts as an 

intermediary between 

the two parties to the 

agreement)

For collateral that is 

eligible for the Federal 

Reserve’s open market 

operations (OMOs)—that 

is, Treasury securities, 

agency debt, and agency 

mortgage-backed 

securities—the haircuts 

are those used for OMOs. 

For non-OMO-eligible 

collateral, haircuts are 

based on the riskiness of 

the asset and are generally 

higher than for OMOeligible collateral.

Overnight Equal to the primary credit 

rate (the rate that sound 

banks pay on loans from 

the discount window) in 

effect at the Federal 

Reserve Bank of New York

Yes
APPENDIX A THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 23

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Table A-1. Continued

Overview of the Federal Reserve’s Lending Programs During the Financial Crisis

Continued

Participants Collateral Collateral “Haircuts”a Loan Term Interest Rates Recourseb

Term Securities 

Lending Facility

Primary 

dealersd

Treasury securities, 

agency debt, and agency 

mortgage-backed 

securities, and all 

investment-grade debt 

securities

For collateral that is 

eligible for the Federal 

Reserve’s open market 

operations (OMOs)—that 

is, Treasury securities, 

agency debt, and agency 

mortgage-backed 

securities—the haircuts 

are those used for OMOs. 

For non-OMO-eligible 

collateral, haircuts are 

based on the riskiness of 

the asset and are generally 

higher than for OMOeligible collateral.

28 days Set in an auction process 

subject to a minimum bid 

rate of 10 or 25 basis 

points, depending on the 

type of collateral used in 

the auction 

No

Asset-Backed 

Commercial 

Paper Money 

Market Mutual 

Fund Liquidity 

Facility

Depository 

institutions, 

bank holding 

companies, 

and U.S. 

branches and 

agencies of 

foreign banks 

Highly rated assetbacked commercial 

paper

No Maturity date of 

the asset-backed 

commercial 

paper but a 

270-day 

maximum 

Equal to the primary credit 

rate (the rate that sound 

banks pay on loans from 

the discount window) in 

effect at the Federal 

Reserve Bank of Boston at 

the time the advance is 

made

No

Money Market 

Investor 

Funding Facility

Eligible money 

market mutual 

funds and 

other money 

market 

investors

U.S. dollar-denominated 

certificates of deposit, 

bank notes, and 

commercial paper 

issued by highly rated 

financial institutions 

No Overnight Equal to the primary credit 

rate (the rate that sound 

banks pay on loans from 

the discount window) in 

effect at the Federal 

Reserve Bank of New York

Yes

Commercial 

Paper Funding 

Facility

Eligible issuers 

of commercial 

paper

Newly issued 3-month 

unsecured and assetbacked commercial 

paper from eligible U.S. 

issuers 

No 3 months The lending rate on assetbacked commercial paper 

is the 3-month overnight 

indexed swap (OIS) rate 

plus 300 basis points; for 

unsecured commercial 

paper, the rate is the 

3-month OIS rate plus 

100 basis points and an 

unsecured-credit 

surcharge of 100 basis 

points.

Yes
24 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

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Table A-1. Continued

Overview of the Federal Reserve’s Lending Programs During the Financial Crisis

Source: Congressional Budget Office.

Notes: See the text for further information on the programs in the table. 

A basis point is one-hundredth of a percentage point.

a. The percentage of the collateral’s value that cannot be used to back a loan.

b. In the event of a borrower’s defaulting on a loan, the Federal Reserve has the right to collect the unpaid balance from the borrower.

c. European Central Bank, Bank of England, Swiss National Bank, Bank of Japan, Reserve Bank of Australia, Banco Central do Brasil, Bank of 

Canada, Danmarks Nationalbank, Bank of Korea, Bank of Mexico, Reserve Bank of New Zealand, Norway’s Norges Bank, Monetary Authority of Singapore, and Sweden’s Sveriges Riksbank.

d. Primary dealers are commercial banks and broker-dealers in securities that trade U.S. government and selected other securities with the 

Federal Reserve.

e. Underlying assets on the AAA-rated securities include auto loans, student loans, credit card loans, small business loans guaranteed by the 

Small Business Administration, mortgage-servicing advances, business equipment-related loans or leases, vehicle fleet leases, “floorplan” 

loans, and commercial mortgages. 

are experiencing a temporary shortfall of reserves. The 

terms of loans from the window are very short, typically 

overnight, and the loans are backed by collateral. The 

interest rate on such loans—known as the discount 

rate—is usually set higher than the Federal Reserve’s 

target for the federal funds rate.

Before the financial crisis, the total amount of borrowing 

from the discount window was small, for two main rea

sons: The Federal Reserve discouraged depository institu

tions from using the window as a regular source of funds, 

and a stigma attached to banks that borrowed from the 

window at a rate of interest that was higher than prevail

ing market rates (because such borrowing gave rise to sus

picions that the banks might be in financial trouble).4

Early in the crisis, the Federal Reserve sought to encour

age borrowing from the window as a way of providing 

additional liquidity, and so it increased the term for bor

rowing to a maximum of 90 days and lessened the differ

ence—known as the spread—between the discount rate 

and the federal funds rate.5

 The Federal Reserve extended 

the maturity on loans and lowered the cost of borrowing 

through the discount window several times during the 

crisis.

The outstanding amount of lending through the discount 

window (excluding lending for exceptional but predict

able seasonal needs) spiked as the financial crisis 

unfolded, and it remained very high, by historical stan

dards, at the end of 2009. Such credit increased from 

$3 million in July 2007 to $4.5 billion at the end of 

2007; it peaked at almost $111 billion at the end of 

October 2008. The amount of outstanding loans from 

the discount window fell to about $49 billion by the end 

of June 2009 and to $20 billion by the end of last year. 

Participants Collateral Collateral “Haircuts”a Loan Term Interest Rates Recourseb

Term AssetBacked 

Securities Loan 

Facility

Investors in 

the United 

States who 

own eligible 

collateral 

Recently originated U.S. 

dollar-denominated 

AAA-rated asset-backed 

securities and 

commercial mortgagebacked securitiese

Haircuts vary from 

5 percent to 16 percent, 

depending on the class of 

assets and a security’s 

average life but not on the 

borrower. 

3 or 5 years Varies by the type of 

collateral securing the loan 

(and in some cases by the 

term of the loan)

No

4. See William C. Dudley, Executive Vice President, Federal Reserve 

Bank of New York, “May You Live in Interesting Times” (remarks 

at the Federal Reserve Bank of Philadelphia, October 17, 2007). 

5. As the financial crisis subsided, the Federal Reserve has begun to 

normalize the terms for borrowing from the discount window. 

The maximum term of primary credit loans—loans to generally 

sound depository institutions—from the discount window fell to 

28 days in January 2010 and to overnight in March (before the 

crisis, the typical term for such credit). In addition, in February of 

this year, the Federal Reserve raised the interest rate on primary 

credit from 0.5 percent to 0.75 percent.
APPENDIX A THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 25

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Expanded Use of Repurchase Agreements

The Federal Reserve provided additional liquidity to 

depository institutions by increasing the amount of its 

repurchase agreements (“repos”) with its primary dealers.

6

A repurchase agreement is similar to a collateralized loan. 

The Federal Reserve simultaneously agrees to buy a secu

rity and sell it back to the dealer on an agreedupon 

day—typically the following day but sometimes many 

days later. The difference between the price paid by the 

dealer to buy back the security and the price originally 

paid for it by the Federal Reserve is the interest that the 

primary dealer pays to the central bank for the term of 

the agreement. The interest rate depends on the riskiness 

of the collateral (that is, the security used in the agree

ment) and the creditworthiness of the borrower. Repur

chase agreements increase reserves in the banking system 

until the dealer buys back the security because dealers 

deposit the proceeds of such sales in their banks.

In March 2008, to address strains in the markets for 

agency debt and agencyguaranteed mortgagebacked 

securities (MBSs), the Federal Reserve significantly 

increased its use of repurchase agreements by initiating 

the SingleTranche Open Market Operations Program.7

The agreements had terms of 28 days, and the securities 

eligible for repurchase included agency debt and MBSs 

guaranteed by the agencies. Near the end of 2008, for 

example, agency MBSs made up 89 percent of the collat

eral for those agreements.8

The total amount of the repurchase agreements involving 

the Federal Reserve doubled to almost $110 billion after 

the SingleTranche Program began, and it remained high 

throughout the summer of 2008. As conditions in the 

financial markets improved, the Federal Reserve gradually 

reduced its repurchase transactions, and the amount out

standing reached zero in early 2009. 

Extension of Reciprocal Currency Arrangements

In conjunction with other central banks, the Federal 

Reserve authorized reciprocal currency arrangements, also 

known as liquidity swap lines, to make available liquidity 

that was denominated in a foreign currency when it was 

temporarily needed. In the case of dollar swaps, the Fed

eral Reserve makes a collateralized loan of U.S. dollars to 

a foreign central bank; because the responsibility to repay 

the loan rests with that bank, the credit risk that the Fed

eral Reserve assumes (the risk that economic loss will 

result from the borrowers’ failure to repay the loan) is 

exceedingly small.

Dollar Swap Lines. In December 2007, the Federal 

Reserve authorized the establishment of U.S. dollar swap 

lines to help the European Central Bank and the Swiss 

National Bank provide dollardenominated liquidity to 

foreign private banks in maturities ranging from over

night to three months. The foreign central banks 

obtained dollars to lend to institutions in their jurisdic

tions, and the Federal Reserve received assets denomi

nated in euros and Swiss francs. Those arrangements ini

tially provided dollars in amounts of up to $20 billion 

and $4 billion to the European Central Bank and the 

Swiss National Bank, respectively.9

 Because the demand 

for dollar funding continued to grow, the Federal Reserve 

set up swap lines with other central banks, and it 

increased the size and lengthened the terms of its existing 

lines with the European Central and Swiss National 

Banks. In the fall of 2008, the Federal Reserve eliminated 

the formal limits on the amounts of those lines as well as 

on the swap lines that had been set up with the Bank of 

Japan and the Bank of England, and it authorized new 

liquidity swap lines with 10 other central banks.10 At the 

end of June 2009, the total amount of swaps outstanding 

was $119 billion, considerably less than the peak amount 

6. Primary dealers—commercial banks as well as brokers and dealers 

in securities who buy and sell U.S. government and other securi

ties in the private financial markets—trade with the Federal 

Reserve. Such firms must meet requirements set by the central 

bank for liquidity and capital as well as for other aspects of their 

operations.

7. A mortgagebacked security is a claim on the cash flows of a pool 

of mortgages. In this context, the “agencies” are Fannie Mae, Fred

die Mac, Ginnie Mae, and the Federal Home Loan Banks. All of 

those entities issue debt to fund their operations, and all but the 

Federal Home Loan Banks guarantee mortgagebacked securities. 

8. Federal Reserve Bank of New York, Domestic Open Market Opera

tions During 2008: A Report Prepared for the Federal Open Market 

Committee by the Markets Group of the Federal Reserve Bank of New 

York (January 2009), p. 11, footnote 7, available at www.

newyorkfed.org/markets/omo/omo2008.pdf.

9. Board of Governors of the Federal Reserve System, Monetary 

Policy Report to the Congress (February 24, 2009), p. 48, available 

at www.federalreserve.gov/monetarypolicy/files/20090224_

mprfullreport.pdf.

10. Those banks were the Reserve Bank of Australia, the Banco Cen

tral do Brasil, the Bank of Canada, the Danmarks Nationalbank, 

the Bank of Korea, the Bank of Mexico, the Reserve Bank of New 

Zealand, Norway’s Norges Bank, the Monetary Authority of Sin

gapore, and Sweden’s Sveriges Riksbank.
26 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

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of $583 billion at the end of 2008. The Federal Reserve 

terminated those swap lines on February 1, 2010. 

Foreign-Currency Swap Lines. In April 2009, the Federal 

Reserve announced that foreigncurrency swap lines had 

been set up with the Bank of England, the European 

Central Bank, the Bank of Japan, and the Swiss National 

Bank. Those liquidity lines were designed to give the Fed

eral Reserve the capacity to provide U.S. financial institu

tions with liquidity denominated in foreign currencies. 

Through the swap lines, the Federal Reserve had access to 

sterling in amounts of up to £30 billion (approximately 

$44 billion at the time of the announcement), to euros in 

amounts of up to €80 billion (about $100 billion), to yen 

in amounts of up to ¥10 trillion (about $100 billion), 

and to Swiss francs in amounts of up to CHF40 billion 

(about $35 billion). The Federal Reserve did not draw on 

those lines, and they expired on February 1, 2010.

Establishment of the Term Auction Facility

The Federal Reserve created the Term Auction Facility in 

December 2007 as an extension of the discount win

dow.11 At twoweek intervals, the central bank initially 

auctioned a fixed amount of funds, secured by qualifying 

collateral, for terms of 28 or 84 days to depository insti

tutions that were eligible to borrow under the primary 

credit program of the discount window.12 The funds were 

not available to the borrowing institution immediately 

but were disbursed three days after the auction. Those 

features of the TAF meant that it was not suited to insti

tutions that were experiencing a sudden need for liquid

ity, and thus borrowing from the TAF was less likely to 

raise concerns in the market about an institution’s viabil

ity. As a result, depository institutions were expected to 

be more inclined to borrow through the TAF than 

through the normal discount window. 

Indeed, term auction credit accounted for the majority of 

the Federal Reserve’s lending to depository institutions 

during the crisis. At the peak of such lending, in early 

March 2009, loans through the TAF amounted to 

$493 billion, or almost 90 percent of total borrowing by 

depositories. By mid2009, as the strains in the financial 

markets eased, banks’ use of the TAF fell off sharply, and 

loans by the facility amounted to $283 billion. Conse

quently, the central bank has reduced the amount and 

maturity of the credit available at the auctions.13 By the 

end of 2009, the amount of TAF loans had dropped to 

$76 billion.

New Programs for Nondepository 

Financial Institutions and Other 

Market Participants

As the financial crisis deepened, the Federal Reserve cre

ated new programs to provide liquidity directly to other 

financial institutions and market participants—in partic

ular, primary dealers, money market mutual funds, and 

participants in the markets for commercial paper and 

assetbacked securities.

The Primary Dealer Credit Facility

Exercising its emergency authority in March 2008, the 

Federal Reserve extended the privilege of discount

window borrowing to primary dealers through its new 

Primary Dealer Credit Facility (PDCF). Many dealers 

faced difficulties in financing their holdings of mortgage

backed and other securities. In more normal circum

stances, they would have funded a significant portion of 

those holdings through repurchase agreements, with 

more than half of the contracts having overnight maturi

ties.14 But the prices of securities backed by subprime and 

other risky mortgages (loans made to borrowers with 

poorerthanaverage credit) fell as losses on the under

lying loans mounted, and the dealers had trouble finding 

counterparties (the legal and financial term for the other 

parties to the dealers’ contracts) who would accept those 

securities as collateral for repurchase agreements. Many 

dealers faced the prospect of selling some of their securi

ties at a substantial loss, which would have put further 

downward pressure on prices and possibly threatened 

some dealers with insolvency. 

11. The Federal Reserve has indicated that the TAF could become a 

permanent addition to its tools for implementing monetary 

policy. 

12. In contrast, primary credit is available on a very short term basis, 

typically overnight. 

13. The last auction was on March 8, 2010, and the minimum rate 

was 0.5 percent, up from the previous minimum of 0.25 percent. 

14. For more information on the repo market, see Tobias Adrian, 

Christopher R. Burke, and James J. McAndrews, “The Federal 

Reserve’s Primary Dealer Credit Facility,” Current Issues in Eco

nomics and Finance, Federal Reserve Bank of New York, vol. 15, 

no. 4 (August 2009); and Peter Hördahl and Michael R. King, 

“Developments in Repo Markets During the Financial Turmoil,” 

BIS Quarterly Review (Bank for International Settlements, Decem

ber 2008), pp. 37–53. 
APPENDIX A THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 27

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The amount of borrowing under the PDCF fluctuated 

markedly in 2008 but wound down to zero in 2009. By 

March 26, 2008, less than two weeks after the facility’s 

creation, borrowings had climbed to more than $37 bil

lion. The outstanding amount of loans from the PDCF 

began to fall steadily after that, and by the beginning of 

July, the facility was little used. When the turmoil in the 

financial markets intensified in September 2008, the 

PDCF’s balance soared from zero to almost $147 billion 

on October 1. Since then, the need for the facility has 

diminished, and by the end of May 2009, lending by the 

PDCF had halted. The Federal Reserve terminated the 

facility on February 1, 2010. 

The Term Securities Lending Facility

The Federal Reserve created the Term Securities Lending 

Facility (TSLF) in March 2008 to strengthen the financ

ing position of primary dealers and, more generally, to 

foster improved conditions in the financial markets.15

Through the TSLF, the Federal Reserve loaned U.S. Trea

sury securities to primary dealers in two types of auctions 

that differed by the collateral that dealers could offer in 

exchange for the loans.16 The Federal Reserve made avail

able up to $200 billion of Treasury securities to lend to 

primary dealers for terms of 28 days. 

In July 2008, the Federal Reserve created the TSLF 

Options Program to auction options to obtain shorter

term TSLF loans on future dates. The options program 

was intended to enhance the effectiveness of the TSLF by 

offering liquidity during periods when the demand for 

shortterm funds was high, such as at the end of a quarter. 

By the last quarter of 2008, the amount of borrowing 

under the TSLF was close to the maximum. However, as 

conditions in the markets improved, borrowing dimin

ished until outstanding loans totaled $27 billion at the 

end of May 2009. Consequently, in June of that year, the 

Federal Reserve announced that it was scaling back the 

program, and activity had ceased by the end of August. 

The facility expired on February 1, 2010.

The Asset-Backed Commercial Paper Money Market 

Mutual Fund Liquidity Facility

Money market mutual funds typically invest in short

term debt, such as Treasury bills, certificates of deposit, 

and commercial paper (unsecured shortterm promissory 

notes issued primarily by corporations).17 With those 

investments, money market funds provide a significant 

amount of financing for the assetbacked commercial 

paper market, on which some financial institutions 

depend for shortterm loans. Unexpected losses at one 

such fund as a result of the bankruptcy of the Lehman 

Brothers investment bank in the fall of 2008 triggered a 

run by the fund’s investors. That brought about a loss of 

confidence in the safety of money market funds more 

generally and led many investors to redeem their shares.

The Federal Reserve created the AssetBacked Commer

cial Paper Money Market Mutual Fund Liquidity Facility 

(AMLF) on September 19, 2008, to help money market 

funds meet spikes in the demand for redemptions and to 

foster confidence in the markets for assetbacked com

mercial paper and in the broader money markets.18 The 

AMLF provided funding to depository institutions and 

bank holding companies to finance their purchases of 

highquality assetbacked commercial paper from money 

market funds under certain conditions.19

Lending through the AMLF began the week of Septem

ber 22, 2008; by the beginning of October, the facility’s 

balance had shot up to $152 billion. The balance steadily 

15. The TSLF is an expanded version of the SOMA (System Open 

Market Account) securities lending program that the Federal 

Reserve has offered since 2002. That program provides primary 

dealers with overnight loans of particularly sought after Treasury 

securities in exchange for other Treasury securities as collateral. 

Just before the TSLF was created, lending under the SOMA secu

rities lending program averaged about $15 billion.

16. The two types of auctions were known as Schedule 1 and Sched

ule 2. In the first, loans could be collateralized by Treasury securi

ties, agency debt, and agency MBSs; in the second, they could be 

backed by the collateral eligible for Schedule 1 auction loans as 

well as by highly rated corporate, municipal, mortgagebacked, 

and assetbacked securities. 

17. Money market mutual funds are a significant source of shortterm 

funding for financial institutions as well as for some corporations 

and government entities. For investors, the funds are an alterna

tive to bank deposits: They pay a slightly higher rate of interest, 

but they expose investors to greater risk because they are not 

insured.

18. In addition, on September 29, the Treasury began a temporary 

guarantee program, funded under the Troubled Asset Relief Pro

gram, to protect shareholders of money market mutual funds 

from losses. The program ended as scheduled on September 18, 

2009.

19. A bank holding company is broadly defined as any company that 

has control over a bank. Becoming a bank holding company pro

vides a corporate and legal status that in many cases brings greater 

financial flexibility and makes it easier for banks to raise capital. 
28 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

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declined to less than $1 billion in April 2009, but it tem

porarily rose to almost $29 billion in early May and then 

fell to less than $16 billion at the end of June 2009.20

With liquidity in the money markets improving signifi

cantly, the Federal Reserve announced in June 2009 that 

it would restrict participation in the AMLF to money 

market mutual funds that were experiencing “material” 

withdrawals of funds. The program expired on 

February 1, 2010. 

The Money Market Investor Funding Facility

To ensure that money market funds had sufficient backup 

liquidity to pay investors in the event of a run, the Fed

eral Reserve created the Money Market Investor Funding 

Facility in October 2008. The program was initially 

structured to provide financing to five specialpurpose 

vehicles (SPVs). SPVs are legal entities that are created to 

serve a particular function; the SPVs in this case were 

authorized to purchase dollardenominated certificates of 

deposit, bank notes, and commercial paper from eligible 

participants in the money markets.21 (The commercial 

paper that the SPVs bought had to be issued by highly 

rated financial institutions and have remaining maturities 

of at least 7 days and no more than 90 days.) The Federal 

Reserve set the maximum amount of purchases by all of 

the SPVs at $600 billion. However, the backup facility 

was never used, and its authority expired on 

October 30, 2009.

The Commercial Paper Funding Facility

The market for commercial paper is an important 

source of shortterm funding for financial institutions 

and for some commercial firms. In the fall of 2008, the 

commercial paper market was under considerable 

strain—which was exacerbated by the bankruptcy of 

Lehman Brothers—because money market mutual funds 

and other investors that needed liquidity became increas

ingly reluctant to purchase commercial paper, especially 

at maturities that extended beyond overnight. As a result, 

the volume of outstanding commercial paper diminished, 

interest rates on longerterm commercial paper rose sig

nificantly, and an increasingly large percentage of out

standing paper had to be refinanced each day.22

The Federal Reserve created the Commercial Paper Fund

ing Facility (CPFF) in October 2008 to address the diffi

culties in the commercial paper market. The facility 

bought highly rated, threemonth dollardenominated 

commercial paper (including assetbacked commercial 

paper) using financing provided by the Federal Reserve. 

The central bank set the borrowing terms so as to dis

courage the use of the facility except when the spreads 

between the interest rates on commercial paper and those 

on relatively riskfree securities (in general, Treasury secu

rities) reached abnormally high levels. The interest rate 

on the paper was set at the threemonth overnight 

indexed swap rate plus 1 percentage point for unsecured 

paper and 3 percentage points for assetbacked paper.23 A 

surcharge of 1 percentage point was also levied on unse

cured paper, and each issuer was required to pay a fee to 

the facility equal to 10 basis points (a basis point is one

hundredth of a percentage point) of the maximum 

amount of the issuer’s commercial paper that the CPFF 

might own.24

Use of the facility increased rapidly. By the end of 2008, 

net holdings in the CPFF’s portfolio amounted to 

20. The temporary increase in May in the amount borrowed through 

the AMLF occurred at about the time of the release of the results 

of the Federal Reserve’s Supervisory Capital Assessment Program 

(commonly known as the bank stress tests), which measured the 

adequacy of the capital of major financial institutions. See Board 

of Governors of the Federal Reserve System, Federal Reserve 

System Monthly Report on Credit and Liquidity Programs and the 

Balance Sheet (June 2009), available at www.federalreserve.gov/

monetarypolicy/files/monthlyclbsreport200906.pdf. 

21. Institutions that were eligible to sell assets to the SPVs included 

money market funds and other investors in the money markets, 

such as U.S.based securities lenders and investment funds that 

operate in a manner similar to money market funds—for example, 

certain local government investment pools, common trust funds, 

and collective investment funds.

22. See Board of Governors of the Federal Reserve System, “2008 

Monetary Policy Releases: October 7, 2008” (press release), avail

able at www.federalreserve.gov/newsevents/press/monetary/

20081007c.htm.

23. The threemonth overnight indexed swap rate is a measure of the 

average federal funds rate that market participants expect over the 

next three months. 

24. The maximum amount of a single issuer’s commercial paper that 

the CPFF might own at any time was the greatest amount of 

U.S. dollardenominated commercial paper that the issuer had 

outstanding on any day between January 1 and August 31, 2008. 

Once the total amount of an issuer’s outstanding commercial 

paper held by all investors (including the CPFF) equaled or 

exceeded the issuer’s limit, the CPFF would not purchase 

additional commercial paper from that issuer. See www.

newyorkfed.org/markets/cpff_terms_conditions.html. 
APPENDIX A THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 29

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$334 billion. By the end of June 2009, the facility’s hold

ings had fallen to $124 billion. Some of that decline, 

according to the Federal Reserve, can be traced to the lack 

of renewal of a significant portion of the maturing issues, 

possibly because improvements in overall market condi

tions may have allowed some borrowers to secure funding 

from other sources.25 By the end of 2009, the facility held 

$14 billion in loans. Like many of the other lending facil

ities that the Federal Reserve created during the crisis, the 

CPFF expired on February 1, 2010.

The Term Asset-Backed Securities Loan Facility

In addition to its effects on shortterm financing, the 

financial crisis caused a severe decline in the availability of 

financing for longerterm assetbacked securities. In 

November 2008, the Federal Reserve created the Term 

AssetBacked Securities Loan Facility (TALF) to support 

segments of the market for assetbacked securities that 

provide a significant portion of the funding for certain 

types of commercial and consumer credit. Under the pro

gram, the Federal Reserve was prepared to lend up to 

$200 billion to holders of certain AAArated assetbacked 

securities (that is, those assigned the highest possible 

commercial rating and hence the least risk of default) 

whose underlying assets consisted of recently originated 

qualifying loans.26 (Included were auto loans, student 

loans, credit card loans, equipment loans, “floorplan” 

loans, insurance premium finance loans, loans guaranteed 

by the Small Business Administration, and residential 

mortgageservicing advance receivables.)27 Also eligible 

as collateral were certain highquality commercial 

mortgagebacked securities issued before January 1, 

2009. Loans from the TALF are limited to terms of three 

or five years and carry administratively set interest rates 

that differ for various types of qualifying collateral and 

loan maturities.28

Lending under the TALF has gradually increased since 

the facility began operating in March 2009, rising from 

less than $5 billion during that month to more than 

$25 billion at the end of June and almost $48 billion at 

the end of the year. Unless the Federal Reserve extends 

the deadlines, the TALF is scheduled to stop making 

loans against newly issued commercial mortgagebacked 

securities on June 30, 2010; it stopped making loans 

against all other collateral on March 31, 2010.

Open-Market Purchases of Securities

The Federal Reserve began purchasing securities in late 

2008 in an effort to lower medium and longterm inter

est rates, including mortgage rates, and thereby support 

the housing market and the broader economy. Fannie 

Mae and Freddie Mac—the two governmentsponsored 

enterprises that together accounted for about onehalf of 

the outstanding amount of home mortgages—had had 

trouble raising funds as their losses mounted in 2008, 

and their difficulties continued after they were put into 

conservatorship (placed under government control) 

by their regulator, the Federal Housing Finance Agency, 

in September 2008.29 In addition, the demand for 

mortgagebacked securities guaranteed by the two com

panies fell as investors worried about the companies’ 

ability to honor their guarantees on the MBSs. Conse

quently, the Federal Reserve began purchasing the securi

ties (agency debt) issued by Fannie Mae, Freddie Mac, 

and the Federal Home Loan Banks as well as mortgage

25. See Board of Governors of the Federal Reserve System, Federal 

Reserve System Monthly Report on Credit and Liquidity Programs 

and the Balance Sheet, p. 9.

26. The Federal Reserve announced in February 2009 (see www.

federalreserve.gov/monetarypolicy/20090210b.htm) that it was 

prepared to increase the size of the program to as much as 

$1 trillion. 

27. Floorplan loans include revolving lines of credit to finance the 

inventories of motor vehicle dealers. Insurance premium finance 

loans include loans originated for the purpose of paying premiums 

on property and casualty insurance; they do not include deferred 

payment obligations acquired from insurance companies. Eligible 

mortgageservicing advance receivables include receivables created 

by principal and interest, tax and insurance, and corporate 

advances made by residential mortgage servicers approved by 

Fannie Mae or Freddie Mac under pooling and servicing agree

ments or similar servicing agreements. For more information, see 

www.newyorkfed.org/markets/talf_terms.html. 

28. Fiveyear terms may be used for loans secured by Small Business 

Administration (SBA) Pool Certificates or by SBA Development 

Company Participation Certificates, or for securities backed by 

student loans or commercial mortgage loans.

29. Fannie Mae and Freddie Mac were originally created as federally 

chartered institutions but were privately owned and operated. 

Designed to facilitate the flow of investment funds to the housing 

market, they pool mortgages purchased from mortgage lenders 

and sell them as mortgagebacked securities, collecting annual 

guarantee fees on the mortgages they securitize. In return, Fannie 

Mae and Freddie Mac cover any losses that occur if the underlying 

mortgage loans default. The companies also hold mortgage loans 

in their portfolios and purchase mortgagebacked securities (their 

own or those of other institutions), from which they earn a return.
30 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

backed securities guaranteed by Fannie Mae, Freddie 

Mac, and Ginnie Mae (agency MBSs).30 The central bank 

also purchased longterm Treasury securities in 2009.

Agency Debt

The Federal Reserve began purchasing the debt of Fannie 

Mae, Freddie Mac, and the Federal Home Loan Banks at 

auction in September 2008. At first, it purchased only 

shortterm debt, with maturities of one year or less. 

Then, in November of that year, the central bank 

announced that it would acquire up to $100 billion in 

agency debt, and it began purchasing debt with longer 

terms in December. In March 2009, the central bank 

announced that it had increased to $200 billion the max

imum amount of agency debt that it would purchase, but 

in early November, it stated that it would instead pur

chase a total of about $175 billion by the end of March 

2010. By the end of 2009, it had purchased almost 

$160 billion in agency debt.

Agency Mortgage-Backed Securities

Initially, the Federal Reserve announced plans to buy up 

to $500 billion in agency MBSs, and it began making 

those purchases in midJanuary 2009. In March, the cen

tral bank raised the planned amount of purchases to 

$1,250 billion. At the beginning of July 2009, the Fed

eral Reserve owned $462 billion in those securities. At 

the end of 2009, it owned $908 billion. 

Medium- and Long-Term Treasury Securities

At the end of July 2007, before the financial crisis began, 

the Federal Reserve owned $514 billion in Treasury notes 

and bonds.31 That amount had fallen to $457 billion 

by mid2008. In March 2009, the Federal Reserve 

announced its intention to purchase up to $300 billion in 

notes and bonds over the following six months. By the 

end of October of that year, the central bank had com

pleted those purchases, bringing the amount of its hold

ings of notes and bonds to just over $756 billion.

Support for Systemically Important 

Financial Institutions

In conjunction with the Treasury and the Federal Deposit 

Insurance Corporation (FDIC), the Federal Reserve has 

provided substantial additional support to four institu

tions whose financial problems were believed to seriously 

threaten the stability of the financial system. That sup

port included lending to the first Maiden Lane facility 

(related to the sale of the investment bank Bear Stearns), 

a line of credit to the American International Group 

(AIG), lending to the Maiden Lane II and Maiden Lane 

III facilities (which own certain assets formerly owned by 

AIG), and socalled contingent lines of credit (compo

nents of the asset guarantees, which can be drawn on as 

needed) to Citigroup and Bank of America.

Lending Related to the Sale of the Bear Stearns 

Companies

In midMarch 2008, the large investment bank Bear 

Stearns informed the Federal Reserve, the Treasury, and 

the Securities and Exchange Commission that it might 

soon be unable to roll over (or refinance) its liabilities 

related to repurchase agreements. That possibility raised 

the concern that the sudden failure of Bear Stearns might 

have a chaotic effect on key financial markets, creating 

turmoil that could have severely undermined confidence 

and cast doubt on the financial stability of other major 

financial firms.

To prevent the adverse economic consequences that could 

have been triggered by a disorderly failure of Bear Stearns, 

the Federal Reserve, in consultation with the Treasury, 

agreed to extend funding to Bear Stearns through JPMor

gan Chase & Company, to provide some time to resolve 

Bear Stearns’ problems.32 JPMorgan Chase subsequently 

agreed to purchase Bear Stearns and assume its financial 

obligations; the acquisition was completed on June 26, 

2008. However, JPMorgan Chase did not acquire all of 

30. The Federal Home Loan Banks are governmentsponsored enter

prises that lending institutions use to obtain lowcost financing 

through “advances,” which are loans backed by highquality col

lateral. Ginnie Mae is a governmentowned corporation that guar

antees securities backed by federally insured loans—mainly loans 

insured by the Federal Housing Administration and the Depart

ment of Veterans Affairs.

31. The Treasury issues notes with maturities that range from 2 to 

10 years and bonds with maturities of 30 years. (At the end of 

July 2007, the Federal Reserve also held more than $277 billion in 

shortterm Treasury bills.)

32. The Federal Reserve extended a loan of $13 billion through the 

discount window to JPMorgan Chase on March 14, 2008. That 

loan was repaid three days later with almost $4 million of interest.
APPENDIX A THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 31

CBO

the nearly $400 billion in assets in Bear Stearns’ portfolio. 

As part of the agreement, mortgagerelated assets from 

Bear Stearns valued at approximately $30 billion were 

segregated into a newly formed limited liability company 

(LLC) called Maiden Lane.33 Maiden Lane’s assets were 

financed by loans of nearly $29 billion from the Federal 

Reserve Bank of New York and $1 billion from JPMor

gan Chase, with JPMorgan Chase liable for the first 

$1 billion of any losses sustained by Maiden Lane. (The 

overall portfolio is managed and will be liquidated by 

BlackRock, an investment management firm retained by 

the Federal Reserve Bank of New York.) 

That arrangement is a significant shift from the Federal 

Reserve’s usual policy of extending loans that not only 

have recourse provisions—in the event of default, the 

central bank has recourse to the assets of borrowers 

beyond the collateral provided—but also protection 

through collateral requirements. Although the financing 

takes the form of a loan from the Federal Reserve Bank of 

New York to Maiden Lane, the Federal Reserve essentially 

has acquired the underlying assets—that is, it has taken 

on all of the risk of those assets (with the exception of the 

$1 billion from JPMorgan Chase) and has control of the 

Maiden Lane facility. 

Support to American International Group

AIG, a large and diversified financial institution, experi

enced serious financial problems in September 2008 

stemming from one of its subsidiaries’ involvement in the 

market for subprime residential mortgage loans. AIG suf

fered large losses on its investments in securities backed 

by subprime mortgages and on the credit default swaps—

essentially insurance policies—it sold on such securities.34

AIG faced a crisis as its lenders, worried about its capacity 

to meet its debts, refused to continue to provide financ

ing. With slightly more than $1 trillion in consolidated 

assets at the end of September 2008, AIG was an impor

tant firm with dealings around the world. Its collapse 

would have created problems for its counterparties and 

for other financial institutions at a time when the finan

cial markets had been badly shaken by the failure of 

Lehman Brothers a few days earlier.

The assistance that the Federal Reserve provided to AIG 

was channeled through four distinct facilities: a line of 

credit, the Securities Borrowing Facility, Maiden Lane II, 

and Maiden Lane III. 

The line of credit to AIG is a facility that has been modi

fied significantly since it was initiated on September 16, 

2008. At that time, the Federal Reserve agreed to lend 

AIG up to $85 billion to help it meet its obligations and 

sell some of its businesses with the least possible disrup

tion to the overall economy. As part of the arrangement, 

the U.S. government received warrants (a warrant pro

vides the option but not the obligation to purchase stock 

at a fixed price) for a 79.9 percent ownership stake in 

AIG and the right to veto the payment of dividends to 

common and preferred shareholders. On October 8, fol

lowing the revelation of additional problems at AIG, the 

Federal Reserve announced the creation of the Securities 

Borrowing Facility, under which it would lend up to 

about $38 billion against investmentgrade debt securi

ties held by AIG. (“Investment grade” is a rating that 

indicates that a municipal or corporate bond has a rela

tively low risk of default.)

In November 2008, the arrangement with AIG was again 

modified to provide additional federal support. The Trea

sury announced that it would purchase $40 billion of 

newly issued AIG preferred shares under the TARP, 

which allowed the Federal Reserve to reduce the total 

amount available under the line of credit from $85 bil

lion to $60 billion. The central bank also lengthened the 

maximum term of its loans under the line of credit to five 

years and lowered the interest rate on the outstanding 

balances as well as the fee charged on the unused portion 

of the credit line.35

33. An LLC offers protection from personal liability for business 

debts, just as a corporation does. The profits and losses of the 

business pass through to its owners, as they would if the business 

were a partnership or sole proprietorship.

34. For a detailed explanation of AIG’s financial problems, see 

William K. Sjostrom Jr., “The AIG Bailout,” Washington and 

Lee Law Review, vol. 66 (November 1, 2009), available at http://

papers.ssrn.com/sol3/papers.cfm?abstract_id=1346552.

35. As of November 5, 2008, AIG had approximately $61 billion out

standing under the line of credit and $19.9 billion in outstanding 

advances under the Securities Borrowing Facility. See Board of 

Governors of the Federal Reserve System, Report Pursuant to 

Section 129 of the Emergency Economic Stabilization Act of 2008: 

Restructuring of the Government’s Financial Support to the 

American International Group, Inc., on November 10, 2008, 

available at www.federalreserve.gov/monetarypolicy/files/

129aigrestructure.pdf. 
32 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

In November as well, the Federal Reserve announced 

plans to restructure its lending related to AIG by extend

ing credit to two newly formed limited liability 

companies: 

B The first, Maiden Lane II LLC, received a loan of 

$22.5 billion from the Federal Reserve and a subordi

nated loan—a loan that is repaid after the loan from 

the Federal Reserve—of $1 billion from AIG, with 

which Maiden Lane purchased residential mortgage

backed securities from AIG. As a result of those 

actions, the Securities Borrowing Facility established 

on October 8 was subsequently repaid and 

terminated. 

B The second new company, Maiden Lane III LLC, 

received a loan of $30 billion from the Federal Reserve 

and a subordinated loan of $5 billion from AIG. With 

those funds, it purchased certain securities as part of 

an arrangement to terminate related credit default 

swap contracts that AIG had written.

Under Maiden Lane II and Maiden Lane III, the Federal 

Reserve essentially acquired mortgagebacked securities 

at prices judged to represent fair values—that is, the 

prices that would be received by selling the assets in 

orderly transactions between market participants. Ulti

mately, the central bank will realize gains or losses on 

those securities, depending on the underlying loans’ per

formance over time.

In June 2009, the Federal Reserve agreed to reduce the 

line of credit to AIG by $25 billion in exchange for pre

ferred shares in two of AIG’s largest life insurance units 

outside of the United States: American International 

Assurance and American Life Insurance Company. That 

transaction was completed in December 2009.

The assistance to AIG from federal sources totaled 

approximately $128 billion outstanding at the end of 

2009. Of that amount, $81 billion had been provided by 

the Federal Reserve, and $47 billion had come from the 

TARP. 

Contingent Loan to Citigroup

The financial condition of Citigroup, the largest com

mercial bank in the United States at the beginning of 

2008, deteriorated near the end of that year, raising ques

tions about the bank’s solvency. On November 23, 2008, 

the Treasury and the FDIC arranged a guarantee (against 

losses) on $301 billion of Citigroup’s assets, more than 

half of which were residential and commercial real estate 

loans. The guarantee on the bank’s residential assets was 

to last for 10 years; the guarantee on its nonresidential 

assets was for 5 years. Under that arrangement, the first 

$39.5 billion in losses would be absorbed by Citigroup. 

Additional losses (subject to loss sharing of 10 percent by 

Citigroup) would be absorbed first by the Treasury (up to 

$5 billion), then by the FDIC (up to $10 billion), and 

finally by the Federal Reserve (the remainder). In the 

event that losses exceeded the resources pledged by Citi

group, the Treasury, and the FDIC, the Federal Reserve 

would be obligated to issue a nonrecourse loan to Citi

group, backed by the remaining assets, with an interest 

rate tied to an overnight borrowing rate plus 3 percentage 

points. Effectively, if that contingency had arisen, the 

assets would have been sold to the central bank at their 

current values. 

In December 2009, Citigroup terminated its agreement 

with the Treasury, the Federal Deposit Insurance Corpo

ration, and the Federal Reserve and paid an exit fee of 

$50 million to the central bank. The Federal Reserve 

experienced no losses on this guarantee because Citigroup 

never used the line of credit. 

Contingent Loan to Bank of America

Bank of America experienced intense borrowing prob

lems early in 2009, when it announced losses on its busi

ness operations in the fourth quarter of 2008. The Trea

sury and the FDIC agreed to guarantee $118 billion of 

the bank’s assets under terms similar to those extended to 

Citigroup. The guarantee on the bank’s residential assets 

was to last 10 years; the guarantee on its nonresidential 

assets was for 5 years. Under the guarantee agreement, the 

first $10 billion in losses would be absorbed by Bank of 

America. Additional losses (subject to loss sharing of 

10 percent by the bank) would be absorbed by the Trea

sury (up to $7.5 billion) and the FDIC (up to $2.5 bil

lion). If the backing to be provided by those two entities 

was exhausted, the Federal Reserve would be obligated to 

lend Bank of America up to a maximum of $87.2 billion 

with the bank’s remaining assets as collateral. Bank of 

America did not request activation of the guarantee and 

in September 2009 paid an exit fee of $57 million to the 

Federal Reserve to terminate the arrangement.
APPENDIX

CBO

B

CBO’s Fair-Value Models

Some of the Federal Reserve’s programs to provide 

credit to financial institutions during the financial crisis 

offered terms that were more favorable than the terms 

those borrowers could have obtained from private inves

tors—thereby providing fairvalue subsidies on that 

credit. To estimate such subsidies, the Congressional 

Budget Office (CBO) developed a stochastic simulation 

model for each major program. In general, under that 

approach, CBO projected probability distributions of 

future cash flows associated with each program and then 

discounted the cash flows to their present value using 

rates that reflected the risk associated with the particular 

flows.1

 The probability distribution of a program’s cash 

flows depended on several factors: the program’s rules and 

structure; the probability distributions of interest rates, 

default rates, and recovery rates on defaults; and how the 

demand for a program was affected by those variables.

CBO used such models to estimate the fairvalue subsi

dies provided by the AssetBacked Commercial Paper 

Money Market Mutual Fund Liquidity Facility (AMLF), 

the Commercial Paper Funding Facility (CPFF), and the 

Term AssetBacked Securities Loan Facility (TALF). 

CBO also used a similar approach to evaluate the subsi

dies provided by the contingent loan programs that the 

Federal Reserve extended to Citigroup and Bank of 

America. (For additional information on the programs, 

see Appendix A.)

The Asset-Backed Commercial Paper 

Money Market Mutual Fund Liquidity 

Facility

CBO’s estimate of the subsidies provided by the AMLF is 

based on a model of the probability distribution of future 

spreads, or differences, between the interest rates on 

threemonth AArated assetbacked commercial paper 

and the primary credit rate and a rule for when and how 

much depositories will borrow to fund their commercial 

paper purchases. The model uses historical data on those 

spreads, which are a measure of stress in the market for 

commercial paper. In addition, the model accounts for 

the heightened level and volatility of commercial paper 

rates during a crisis.

In the model, new borrowing through the facility occurs 

when the spread rises above its longrun level by two or 

more standard deviations. At such a time, some money 

market funds may experience a surge in the demand for 

redemptions that could result in new borrowing under 

the facility. CBO assumed that new borrowing would 

equal, on average, 2 percent of outstanding balances in 

U.S. money market mutual funds. It also assumed that 

the new loans and their underlying collateral would have 

average maturities of 90 days and that once the loans 

matured, additional borrowing would not occur unless 

crisis conditions continued or reemerged.2

1. Each discount rate reflects a premium over the rate on a Treasury 

security that accounts for the “market risk” associated with the 

programs—the risk that losses will be largest when the economy is 

weak and the economic cost of the losses is greatest. 

2. The maturity of the collateral (the commercial paper) for such 

borrowing may extend in some cases to 270 days, but because 

shorter loan terms are more common for commercial paper, CBO 

assumed that the average maturity backing the loans was 90 days. 

Assuming a longer (or shorter) maturity would increase (or 

decrease) the estimated subsidy. 
34 THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS

CBO

CBO calculated the monthly value of the subsidies pro

vided by the facility in two steps. First, it multiplied the 

facility’s outstanding balances by 1 percent or the spread 

between the commercial paper and the primary credit 

rate, whichever was larger. It then discounted those 

monthly values back to September 2008, the date of the 

program’s inception. The subsidies are based on averages 

calculated from more than 5,000 stochastic simulations.

The Commercial Paper Funding 

Facility

CBO’s estimate of the subsidies provided through the 

CPFF, like its estimate for the AMLF, is based on a sto

chastic model of commercial paper spreads and a rule for 

when and how much commercial paper will be sold to 

this facility. CBO calibrated the model of commercial 

paper spreads by using historical data, taking into 

account the heightened level and volatility of rates during 

the crisis. 

CBO assumed that new borrowing under the facility 

would occur only when rate spreads increased above their 

average precrisis level by two or more standard deviations. 

It also assumed that the amount of the facility’s new bor

rowing would respond to interest rate conditions simi

larly to the way such borrowing responded in the early 

months of the program. 

CBO calculated the monthly subsidy value by multiply

ing the facility’s outstanding balances by the maximum of 

1 percent or the difference between an interest rate on 

threemonth AArated commercial paper (calculated as 

onethird of the rate on financial paper plus twothirds of 

the rate on assetbacked paper) and the rate charged to 

borrowers under the facility by the Federal Reserve.3

 It 

then discounted those monthly values back to October 

2008, when the program was created. CBO’s estimates 

are based on averages calculated over 5,000 simulations of 

the stochastic model.

The Term Asset-Backed Securities Loan 

Facility

CBO’s approach to estimating the economic subsidy cre

ated by the Federal Reserve’s activities through the TALF 

is based on several factors:

B The type of securities that serve as collateral and the 

risk associated with them; 

B The effect of protection against losses provided by the 

Troubled Asset Relief Program (TARP) and the Fed

eral Reserve’s “haircut” provisions, which restrict the 

amount of a loan to less than the value of the posted 

collateral; 

B The prevailing market rates for loans backed by simi

lar collateral; and 

B The projected volume of future lending, which is 

based on CBO’s 10year (2011 to 2020) baseline bud

get projections for the program. 

In estimating subsidies generated by the TALF’s activities, 

CBO used market rates to calibrate a stochastic pricing 

model for each type of assetbacked security that was used 

as collateral for a loan; it then used the model to estimate 

the fair value of the TALF’s cash flows to the Federal 

Reserve, taking into account the protection against losses 

that various features of the facility afforded. The amount 

of protection offered by the Treasury was uncertain. It 

was initially set at $20 billion and was not explicitly 

raised when the Federal Reserve announced that it would 

consider expanding the size of the facility from $200 bil

lion to $1 trillion. In calculating subsidies, CBO consid

ered it likely that additional TARP protection would have 

been advanced had the volume of borrowing or the 

amounts of losses increased, and thus it assumed that the 

TARP would also cover 70 percent of any losses by the 

TALF in excess of the $20 billion that was explicitly pro

vided. CBO based its subsidy calculations on projections 

of the amount of TALF lending that would be outstand

ing over time—CBO assumed $40 billion in new activity 

each month over the life of the facility. 

Contingent Loans to Citigroup and 

Bank of America

The Federal Reserve offered Citigroup and Bank of 

America contingent loans that provided the banks with 

3. The rate charged by the Federal Reserve depends on whether the 

commercial paper serving as collateral is backed by assets. The rate 

is set at a spread over the threemonth overnight indexed swap 

rate, which is closely related to other overnight bank rates, such as 

the federal funds rate and the overnight Libor rate. 
APPENDIX B THE BUDGETARY IMPACT AND SUBSIDY COSTS OF THE FEDERAL RESERVE’S ACTIONS DURING THE FINANCIAL CRISIS 35

CBO

the option of drawing funds at a future date at a preset 

interest rate, with the funds to be secured only by risky 

collateral. Those contracts gave the banks a valuable 

funding alternative but one that they would be likely to 

use only if the terms were more attractive than what was 

available in the open market. To the extent that the fair 

value of the option exceeded the value of the fees and the 

interest that the Federal Reserve could expect to receive, 

the option provided a fairvalue subsidy to the banks.

CBO calculated the subsidy using a stochastic model of 

the Federal Reserve’s expected cash flows under those 

arrangements. The model used projected future interest 

payments, repayments of principal, losses from default, 

and the value of the collateral assets.4

 CBO assumed, on 

the basis of the riskiness of the various classes of assets 

that could serve as collateral, that at the time the contin

gent loans were set up, the fair value of that collateral 

was significantly less than the amount that could be 

borrowed.

4. CBO modeled those cash flows using an expected net chargeoff 

rate (loan losses minus recoveries, as a percentage of outstanding 

loans) each period that was consistent with its economic forecast.