CONGRESSIONAL OVERSIGHT PANEL 

APRIL OVERSIGHT REPORT * 

ASSESSING TREASURY’S STRATEGY: 

SIX MONTHS OF TARP 

APRIL 7, 2009.—Ordered to be printed 

* Submitted under Section 125(b) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


mstockstill on PROD1PC66 with HEARINGE:\Seals\Congress.#13
CONGRESSIONAL OVERSIGHT PANEL APRIL OVERSIGHT REPORT 

mstockstill on PROD1PC66 with HEARING

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

1 

48–565 2009

CONGRESSIONAL OVERSIGHT PANEL 

APRIL OVERSIGHT REPORT * 

ASSESSING TREASURY’S STRATEGY: 

SIX MONTHS OF TARP 

APRIL 7, 2009.—Ordered to be printed 

* Submitted under Section 125(b) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


mstockstill on PROD1PC66 with HEARINGE:\Seals\Congress.#13
(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

SEN. JOHN SUNUNU

REP. JEB HENSARLING

RICHARD H. NEIMAN

DAMON SILVERS

mstockstill on PROD1PC66 with HEARING

(III) 

C O N T E N T S 

Page 

Executive Summary ................................................................................................. 1 

Section One: Assessing TARP Strategy ................................................................. 5 

A. The Federal Government’s Current Strategy ............................................ 6 

B. Historical Approaches and Lessons ............................................................ 27 

C. Europe: Current Crises and Response ....................................................... 49 

D. Taking Stock: Options for Moving Forward .............................................. 57 

Section Two: Additional Views ............................................................................... 74 

A. Richard H. Neiman and John E. Sununu .................................................. 74 

B. John E. Sununu ........................................................................................... 77 

Section Three: Correspondence with Treasury Update ........................................ 79 

Section Four: TARP Updates Since Last Report ................................................... 81 

Section Five: Oversight Activities .......................................................................... 83 

Section Six: About the Congressional Oversight Panel ........................................ 84 

Appendices: 

APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY 

GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN, DATED APRIL 2, 2009 ...................................... 85 

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

DATED APRIL 1, 2009 ................................................................................. 94 

APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 30, 2009 .......................... 109 

APPENDIX IV: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 25, 2009 .......................... 116 

APPENDIX V: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 24, 2009 .......................... 119 

APPENDIX VI: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 20, 2009 .......................... 123 

APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 5, 2009 ............................ 129 

APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT 

PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED JANUARY 28, 2009 ...................... 132 

mstockstill on PROD1PC66 with HEARING

mstockstill on PROD1PC66 with HEARING

* The Panel adopted this report with a 3–2 vote. Senator John E. Sununu and Rep. Jeb 

Hensarling voted against the report. Additional views are available in Section 2. 

APRIL OVERSIGHT REPORT 

APRIL 7, 2009.—Ordered to be printed 

EXECUTIVE SUMMARY *

With this report, the Congressional Oversight Panel examines 

Treasury’s current strategy and evaluates the progress it has 

achieved thus far. This report returns the Panel’s inquiry to a central question raised in its first report: What is Treasury’s strategy? 

While there is disagreement among Panel members about whether 

it is appropriate to present alternatives to Treasury’s strategy at 

this time, this report also examines potential policy alternatives 

available to Treasury, in the event such alternatives become necessary. 

This report comes on the six month anniversary of the passage 

of the Emergency Economic Stabilization Act of 2008 (EESA). In a 

letter received by the Panel on April 2, 2009, Treasury Secretary 

Timothy Geithner described four major challenges that Treasury’s 

strategy seeks to address: (1) the collapse of the housing market; 

(2) frozen secondary markets that ‘‘have constrained the ability of 

even creditworthy small businesses and families’’ to get credit; (3) 

uncertainty about the health of financial institutions and the valuation of assets on their balance sheets; and (4) the existence of 

‘‘troubled legacy assets’’ on the balance sheets of financial institutions that affect their capitalization and limit their ability to make 

loans. The Panel appreciates Treasury’s explanation of its goals, 

and it hopes this report inspires a more informed conversation over 

the fundamental questions raised by Treasury’s strategy. In addition to drawing on the $700 billion allocated to Treasury 

under the EESA, economic stabilization efforts have depended 

heavily on the use of the Federal Reserve Board’s balance sheet. 

mstockstill on PROD1PC66 with HEARING

2 

This approach has permitted Treasury to leverage TARP funds well 

beyond the funds appropriated by Congress. Thus, while Treasury 

has spent or committed $590.4 billion of TARP funds, according to 

Panel estimates, the Federal Reserve Board has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities. The total value of 

all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts 

(including those of the Federal Deposit Insurance Corporation 

(FDIC) as well as Treasury and the Federal Reserve Board) now 

exceeds $4 trillion. This report reviews in considerable detail specific criteria for evaluating the impact of these programs on financial markets. Six months into the existence of TARP, evidence of 

success or failure is mixed. 

Evaluating the wisdom and success of these efforts requires a 

broader understanding of the basic choices available to policymakers during this crisis. To deal with a troubled financial system, 

three fundamentally different policy alternatives are possible: liquidation, receivership, or subsidization. To place these alternatives 

in context, the report evaluates historical and contemporary efforts 

to confront financial crises and their relative success. The Panel focused on six historical experiences: (1) the U.S. Depression of the 

1930s; (2) the bank run on and subsequent government seizure of 

Continental Illinois in 1984; (3) the savings and loan crisis of the 

late 1980s and establishment of the Resolution Trust Corporation; 

(4) the recapitalization of the FDIC bank insurance fund in 1991; 

(5) Sweden’s financial crisis of the early 1990s; and (6) what has 

become known as Japan’s ‘‘Lost Decade’’ of the 1990s. The report 

also surveys the approaches currently employed by Iceland, Ireland, the United Kingdom, and other European countries. 

Experiences from other times and other countries illustrate the 

benefits and problems these basic approaches present to dealing 

with failing banks. In the 1980s savings and loan crisis, for example, the U.S. government liquidated unhealthy financial institutions by transferring depositors to another bank, selling off assets, 

writing down some debt and wiping out investors. There can be 

considerable political barriers to this approach, and a surprise or 

poorly-explained liquidation can reduce market confidence and 

heighten uncertainty about future government interventions in financial markets. But liquidation also avoids the uncertainty and 

open-ended commitment that accompany subsidization. It can restore market confidence in the surviving banks, and it can potentially accelerate recovery by offering decisive and clear statements 

about the government’s evaluation of financial conditions and institutions. 

Another option is government reorganization of troubled financial institutions using conservatorships, as in the case of Continental Illinois in the U.S. and the financial crisis in Sweden in the 

1990s. This approach entails an in-place reorganization in which 

bad assets are removed, failed managers are replaced, and parts of 

the business are spun off. Depositors and some bondholders are 

protected, and institutions can emerge from government control 

with the same corporate identity but healthier balance sheets. This 

option also offers clarity to markets about the balance sheets of the 

reorganized financial institutions and encourages capital investmstockstill on PROD1PC66 with HEARING

3 

ment in the newly-reorganized entity. But reorganization can also 

tax government capacity and resources. If they are not quickly returned to private hands, government-run financial institutions also 

pose a risk that political pressure will press the institutions to lend 

to favored interests and support public policy at the expense of the 

bank’s health, although there is no evidence that this has occurred 

in recent banking crises. 

The third option is government subsidization of troubled institutions. Japan’s approach was characterized by a series of direct and 

indirect subsidizations. Subsidies may be direct, by providing 

banks with capital infusions, or indirect, by purchasing troubled assets at inflated prices or reducing prudential standards. Cash assistance can provide banks with bridge capital necessary to survive 

in tough economic times until growth begins again. But subsidies 

carry a risk of obscuring true valuations. They involve the added 

danger of distorting both specific markets and the larger economy. 

Subsidization also carries a risk that it will be open-ended, propping up insolvent banks for an extended period and delaying economic recovery. 

A review of these historical precedents reveals that each successful resolution of a financial crisis involved four critical elements: 

• Transparency. Swift action to ensure the integrity of bank 

accounting, particularly with respect to the ability of regulators 

and investors to ascertain the value of bank assets and hence assess bank solvency. 

• Assertiveness. Willingness to take aggressive action to address failing financial institutions by (1) taking early aggressive action to improve capital ratios of banks that can be rescued, and (2) 

shutting down those banks that are irreparably insolvent. 

• Accountability. Willingness to hold management accountable 

by replacing—and, in cases of criminal conduct, prosecuting—failed 

managers. • Clarity. Transparency in the government response with forthright measurement and reporting of all forms of assistance being 

provided and clearly explained criteria for the use of public sector 

funds. 

Historical precedents always involve some differences from the current crises. Nonetheless, experience can provide an important comparison against which current approaches can be tested. 

One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in 

asset values, leading to an accompanying drop in net wealth across 

the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. 

The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices 

are artificially depressed by a liquidity discount due to frozen markets—or some combination of the two. 

If its assumptions are correct, Treasury’s current approach may 

prove a reasonable response to the current crisis. Current prices 

may, in fact, prove not to be explainable without the liquidity factor. Even in areas of the country where home prices have declined 

precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even under-collateralmstockstill on PROD1PC66 with HEARING

4 

ized assets should not be trading at pennies on the dollar. Prices 

are being partially subjected to a downward self-reinforcing cycle. 

It is this notion of a liquidity discount that supports the potential 

of future gain for taxpayers and makes transactions under the CAP 

and the PPIP viable mechanisms for recovery of asset values while 

recouping a gain for taxpayers. 

On the other hand, it is possible that Treasury’s approach fails 

to acknowledge the depth of the current downturn and the degree 

to which the low valuation of troubled assets accurately reflects 

their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic 

crisis is deeper than anticipated, it is possible that Treasury will 

need to take very different actions in order to restore financial stability. 

By offering this assessment of Treasury’s current approach and 

identifying alternative strategies taken in the past, the Panel 

hopes to assist Congress and Treasury officials in weighing the 

available options as the nation grapples with the worst financial 

crisis it has faced since the Great Depression. 

mstockstill on PROD1PC66 with HEARING

5 

1The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343, passed on 

October 3, 2008. 

SECTION ONE: ASSESSING TARP STRATEGY 

This is the fifth TARP oversight report of the Congressional 

Oversight Panel. In our first and second reports, we asked the 

question, ‘‘What is Treasury’s strategy?’’ In the absence of a clear 

answer to that question, in our third report, we looked at whether 

Treasury’s programs produced a clear value for the taxpayer by 

valuing the preferred stock that Treasury had purchased using 

TARP funds. In our fourth report, we looked in detail at the mortgage crisis, a key component of the financial crisis that gave rise 

to the TARP. Now we return to the issue of strategy as a new Administration begins to announce its intentions in detail for the 

TARP. 

This report takes up four related topics: (1) an analysis of Treasury’s strategy, (2) a preliminary assessment of the direction of key 

financial and economic indicators since the inception of the TARP, 

(3) a detailed analysis, comprising the majority of this report, of approaches to bank crises historically, and (4) an analysis of the alternatives facing Treasury. The Panel strongly believes that Treasury should continue to explain its strategy to Congress and the 

public. Financial institutions, businesses, and consumers are more 

likely to return to healthy investment in the economy if they believe that the federal government is following an intelligible road 

map. Articulating a clear strategy for financial stabilization would 

have the following benefits: 

• Public Confidence. If Treasury is frank in its explanation 

of its strategy and transparent in its execution, Congress and 

the public will have greater confidence that taxpayer dollars 

are being used appropriately or, conversely, will be able to engage with the Administration in an informed manner to advocate change. 

• Expectations. A clear strategy that sets forth the guiding 

principles for future actions by the Administration, including 

the FDIC and the Federal Reserve Board, would provide the 

public with a basis for planning future investment and consumption. 

• Metrics and Accountability. A clear strategy will also provide Congress and the public with standards and metrics by 

which to measure its progress and judge its success. 

The six month anniversary of the enactment of the TARP1 presents a useful opportunity for the Panel to assess TARP strategy 

to date and review alternative courses of action for moving forward 

with this massive financial rescue program. This report will discuss 

ways to stabilize and rebuild our nation’s banking system, based 

both on current expert and government analyses and on the experiences—good and bad—of similar efforts in the past and elsewhere 

in the world. These alternative approaches will provide Congress 

and Treasury with a framework for considering course changes 

should they become necessary. 

mstockstill on PROD1PC66 with HEARING

6 

2 Congressional Oversight Panel, Foreclosure Crisis: Working Toward a Solution (Mar. 6, 

2009) (hereinafter ‘‘Panel March Oversight Report’’). 

A. The Federal Government’s Current Strategy 

In a letter sent on April 2, 2009, Secretary Geithner provided the 

Panel with a description of Treasury’s strategy for combating the 

financial crisis. Secretary Geithner described four major challenges 

that Treasury’s strategy seeks to address: (1) the collapse of the 

housing market; (2) frozen secondary markets that ‘‘have constrained the ability of even creditworthy small businesses and families’’ to get credit; (3) uncertainty about the health of financial institutions and the valuation of assets on their balance sheets; and 

(4) the existence of ‘‘troubled legacy assets’’ on the balance sheets 

of financial institutions that affect their capitalization and limit 

their ability to make loans. The letter describes the manner in 

which each of Treasury’s programs addresses these challenges. The 

Panel commends Treasury for this response, but believes that a 

clearer understanding of Treasury’s strategy is discernable from 

statements made by senior officials and Treasury’s latest TARP initiatives. The Panel believes that Treasury’s strategy can be described as follows: 

• Address Bank Solvency and Capitalization. This was accomplished first through the Capital Purchase Program (CPP) and 

the Systemically Significant Failing Institutions (SSFI) Program, 

then through the Targeted Investment Program (TIP), and, in the 

future, will be accomplished through the Capital Assistance Program (CAP). The PPIP will leverage public and private capital to 

create markets for troubled assets in order to remove them from 

the balance sheets of financial institutions. 

• Increase Availability of Credit in Key Markets. Treasury 

is coordinating with the Federal Reserve Board and FDIC to restart key credit markets through the establishment of Federal Reserve Board lending facilities targeting money and capital markets. 

Another facility, the Term Asset-Backed Securities Lending Facility 

(TALF), is designed to restart secondary markets to increase lending for auto sales, college loans, credit cards and small businesses. 

One of the two components of the PPIP is designed to revive markets for mortgage-backed securities (MBS). This effort is also an 

element of continuity between the current and previous administrations. 

• Assess the Health of Financial Institutions. The first step 

of the CAP is a coordinated supervisory assessment, the so-called 

‘‘stress test,’’ that will provide regulators with an analysis of the 

ability of the 19 largest banks to withstand worse-than-anticipated 

economic conditions. In conformity with Treasury’s assumptions, 

regulators will be relying extensively on the work of the incumbent 

financial management of the 19 firms in making these assessments. 

• Directly Address the Foreclosure Crisis. The Administration’s housing plan, examined in the Panel’s March oversight report,2 seeks to help families and stabilize real estate values in communities with high levels of foreclosures, thus contributing to a revival of real estate values. 

mstockstill on PROD1PC66 with HEARING

7 

3 House Committee on Financial Services, Testimony of Timothy F. Geithner, Addressing the 

Need for Comprehensive Regulatory Reform, 111th Cong. (Mar. 26, 2009) (‘‘These failures have 

caused a great loss of confidence in the basic fabric of our financial system, a system that over 

time has been a tremendous asset for the American economy. To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.’’). 4See Congressional Oversight Panel, Questions About the $700 Billion Emergency Economic 

Stabilization Funds, at 4–8 (Dec. 10, 2008) (hereinafter ‘‘Panel December Oversight Report’’). 5See Congressional Oversight Panel, Accountability for the Troubled Asset Relief Program, at 

5 (Jan. 9, 2009) (hereinafter ‘‘Panel January Oversight Report’’); Appendix VIII infra, Letter 

from Elizabeth Warren, Chairperson, Congressional Oversight Panel to Timothy Geithner, Secretary of the Treasury (Jan. 28, 2009) (requesting that Secretary Geithner respond to unanswered questions remaining from the previous two reports); Appendix VI infra, Letter from Elizabeth Warren, Chairperson, Congressional Oversight Panel to Timothy Geithner, Secretary of 

the Treasury (Mar. 5, 2009) (requesting that Treasury provide a detailed explanation of its 

strategy and respond to three specific questions about strategy). 6See Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions (Feb. 6, 2009) (hereinafter ‘‘Panel February Oversight Report’’). 

• Increase Long-Term Confidence Through Regulatory 

Reform. While regulatory reform will not be discussed at great 

length in this report, it is clear that Treasury believes that a comprehensive plan for reforming financial regulation will boost market confidence.3

Treasury’s expectation is that these measures, in concert, will 

keep the large banks afloat until the economy revives, propelled by 

the liquidity provided by TALF and the resolution of housing market and household finance weakness that will come from addressing the foreclosure crisis. The revival of the economy will lead to 

recovery of the asset side of bank balance sheets and a return of 

the major banks to health. 

Treasury’s strategy is profoundly linked to Treasury’s assumptions about the nature of major financial institution weakness, 

about the proper role for government when it has invested in private financial institutions, and whether the value of troubled assets 

can be restored through programs like PPIP and TALF. The discussion below examines this strategy in greater detail and offers some 

initial evaluation of Treasury’s efforts to stabilize the financial system. This section also examines several key metrics of economic 

performance. 

1. COP EFFORTS TO ASCERTAIN TREASURY’S STRATEGY 

The Panel’s conclusions about Treasury’s strategy laid out above 

are in part based on Secretary Geithner’s April 2 letter explaining 

Treasury’s understanding of the origins of the crisis and describing 

the Department’s strategy, in part derived from public statements 

by senior officials, and in part inferred from Treasury’s actions. 

The Panel has pressed Treasury for a clear statement of its strategy for stabilizing the financial system since it first posed the question in its initial oversight report in December 2008.4 In recognition of the value of a clear strategy to well-functioning markets, the 

Panel sought an answer to this question from Treasury in its January report and in a pair of letters sent to Secretary Geithner.5 The 

findings of the Panel’s February Valuation report, which revealed 

that Treasury provided the top ten TARP recipients with a subsidy 

of $78 billion over the market value of the preferred shares purchased,6 despite Treasury’s representations of these purchases as 

mstockstill on PROD1PC66 with HEARING

8 

7 U.S. Department of the Treasury, Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization, at 8 (Dec. 30, 2008) (hereinafter ‘‘Treasury 

December Response to Panel’’) (‘‘When measured on an accrual basis, the value of the preferred 

stock is at or near par.’’). 8 U.S. Department of the Treasury, Remarks by Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan (Feb. 10, 2009) (online at treas.gov/press/releases/tg18.htm) 

(hereinafter ‘‘Geithner Financial Stability Statement’’). 9 Brookings Institution, Lawrence Summers on the Economic Crisis and Recovery (Mar. 13, 

2009) (online at www.brookings.edu/∼/media/Files/events/2009/0313lsummers/ 

0313lsummerslremarks.pdf) (hereinafter ‘‘Summers, Economic Crisis and Recovery’’). 10See, e.g., Desmond Lachman, Obama Policies Have the U.S. on the Road to Deflation, American Banker (Apr. 1, 2009) (‘‘Particularly striking is the fact that instead of addressing the bank 

insolvency issue head on, the Administration is choosing to continue the charade that the banks’ 

problems are largely those of liquidity rather than those of solvency.’’); Ian Bremmer and 

Nouriel Roubini, Expect the World Economy to Suffer Through 2009, Wall Street Journal (Jan. 

23, 2009) (‘‘The U.S. economy is, at best, halfway through a recession that began in December 

being made ‘‘at par,’’ 7 reinforced the importance of a comprehensive explanation by Treasury of its strategy and approach. While 

the Panel understands the difficulties faced by both the Bush Administration and the Obama Administration in managing the policy response to the financial crisis while going through a change in 

administrations, the need for a clearly articulated strategy remains 

paramount. We are pleased that Secretary Geithner will appear before the Panel on April 21, we appreciate his April 2 letter to the 

Panel, and we look forward to learning more in the coming weeks 

about Treasury’s strategy. 

2. AN EXAMINATION OF TREASURY’S STRATEGY 

Explanations by the Secretary of the Treasury and by senior officials suggest that the Administration views the current crisis as a 

vicious and self-reinforcing cycle that arose as a consequence of the 

financial excesses of the past decade. Rapid drops in asset prices 

and the collapse of millions of unsustainable subprime mortgages 

led to losses both in the loans themselves and in a myriad of financial products built on those loans. Falling asset values and massive 

losses prompted system-wide deleveraging by financial institutions. 

This led to additional drops in prices, which prompted investors to 

flee capital markets and secondary markets to freeze up. The end 

result of these processes is a banking system reeling from losses 

and undercapitalization. Secretary Geithner described these cycles 

of losses and withdrawal from markets as a ‘‘dangerous dynamic’’ 

in which the ‘‘financial system is working against recovery.’’ 8 Lawrence Summers, Director of the National Economic Council, described this effect as ‘‘the paradox at the heart of the financial crisis,’’ adding, ‘‘In the past few years, we’ve seen too much greed and 

too little fear; too much spending and not enough saving; too much 

borrowing and not enough worrying. Today, however, our problem 

is exactly the opposite.’’ 9 This diagnosis of the financial crisis is 

driving the Administration’s aggressive interagency effort to revive 

credit markets and strengthen the balance sheets of financial institutions through capital injections and the removal of toxic assets. 

Yet this approach assumes that the decline in asset values and the 

accompanying drop in net wealth across the country are in large 

part the products of temporary liquidity discounts due to nonfunctioning markets for these assets and, thus, are reversible once market confidence is restored. While critics of this approach warn 

against a more fundamental solvency problem plaguing the financial institutions holding onto these toxic assets,10 Treasury and key 

mstockstill on PROD1PC66 with HEARING

9 

2007 and will prove the longest and most severe of the postwar period. Credit losses of close 

to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch 

will persist as households, financial firms and corporations with high debt ratios and solvency 

problems undergo a sharp deleveraging process.’’). 11 Council on Foreign Relations, A Conversation with Timothy F. Geithner (Mar. 25, 2009) (online at www.cfr.org/publication/18925/conversationlwithltimothylflgeithner.html) (‘‘So we’re 

not treating, have never treated, this as a liquidity crisis. It has those two core dimensions. And 

as you can see, in the president’s broad agenda * * * you’re not going to be able to fix the financial system without very strong, sustained support from monetary and fiscal policy. And that 

broad package together has the best chance of getting us * * * more quickly to the path of recovery.’’); Timothy Geithner, My Plan for Bad Bank Assets, Wall Street Journal (Mar. 23, 2009) 

(‘‘By providing a market for these assets that does not now exist, this program will help improve 

asset values, increase lending capacity by banks, and reduce uncertainty about the scale of 

losses on bank balance sheets. The ability to sell assets to this fund will make it easier for 

banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.’’). 12These hearings can be viewed in their entirety at the Panel website: www.COP.Senate.gov. 13White House Council of Economic Advisors, Economic Report of the President, at 53 (Jan. 

2009) (‘‘The contraction is projected to continue into the first half of 2009, followed by a recovery 

in the second half of 2009 that is expected to be led by the interest-sensitive sectors of the economy. The overall decline, from the second-quarter level of GDP to the quarter with the lowest 

real GDP, is projected to slightly exceed the depth of the average post-World War II recession. 

This pattern translates into a small decline during the four quarters of 2008, followed by a small 

increase during 2009.’’). 14 Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook, at 19 (Mar. 2009) (‘‘In CBO’s forecast, on a fourthquarter-to-fourth-quarter basis, real (inflation-adjusted) gross domestic product falls by 1.5 percent in 2009 before growing by 4.1 percent in both 2010 and 2011.’’); Office of Management and 

Budget, A New Era of Responsibility: Renewing America’s Promise, at 132 (Feb. 26, 2009). 15Sickly U.S. Economy Set for 2nd Half Rebound: Survey, Reuters (Mar. 10, 2009) (citing 

Randell E. Moore, Blue Chip Economic Indicators: Top Analysts’ Forecasts of the U.S. Economic 

Outlook for the Year Ahead (Mar. 10, 2009)). 

policymakers in the Administration argue that the recently-passed 

fiscal stimulus passage, Treasury’s foreclosure mitigation plan, and 

the public-private program to revive markets for toxic assets will 

strengthen the fundamental value of these assets.11

The Panel has held two field hearings examining the impact of 

the financial crisis on America’s communities, one in Clark County, 

Nevada, the other in Prince Georges County, Maryland.12 The 

hearings portray home mortgage-related losses on a large scale. Assessing the extent and persistence of these losses is key to understanding the plausibility of Treasury’s assumptions. This is a matter of underlying housing values, the durability of the new housing 

stock, and the ability of borrowers to make mortgage payments in 

the future. 

Since Treasury has not provided the baseline economic projections behind its stabilization efforts, this report assumes that consensus growth estimates and the Economic Report of the President 

are the foundation for Treasury’s efforts. The Administration is in 

line with most forecasts by predicting economic contraction continuing into mid-2009 with recovery commencing in the second half 

of the year.13 This projection is consistent with forecasts issued by 

the Congressional Budget Office (CBO) and Blue Chip Economic 

Indicators, though the latter has been steadily downgrading its 

forecasts each month. As of late February, the Obama Administration projected an annual decline in real Gross Domestic Product 

(GDP) of 1.2 percent, a slightly more optimistic forecast than the 

1.5 percent contraction recently projected by the CBO.14 The Blue 

Chip Economic Indicators survey, which offered a projection of a 

1.9 percent contraction in its January report, recently downgraded 

this projection to a 2.6 percent contraction in March.15 Another economic projection that may be guiding Treasury policy is predicted 

losses from U.S. toxic assets. Goldman Sachs issued a projection of 

mstockstill on PROD1PC66 with HEARING

10 

16 Jan Hatzius and Michael A. Marschoum, Home Prices and Credit Losses: Projections and 

Policy Options, Goldman Sachs Global ECS Research, at 14 (Jan. 13, 2009) (Global Economics 

Paper No. 177) (online at garygreene.mediaroom.com/file.php/216/Global+Paper+No++177.pdf). 17 International Monetary Fund, Global Financial Stability Report Market Update, at 2 (Jan. 

28, 2009) (‘‘The worsening credit conditions affecting a broader range of markets have raised 

our estimate of the potential deterioration in U.S.-originated credit assets held by banks and 

others from $1.4 trillion in the October 2008 GFSR to $2.2 trillion.’’). 18See Douglas J. Elliott, Bank Nationalization: What is it? Should we do it?, at 10 (Feb. 25, 

2009) (‘‘In sum, the banking system can be restored to the capital levels that held prior to this 

recession, which were considered more than adequate at the time, if the economy and credit 

losses perform as the IMF or Goldman Sachs expects. These forecasts are roughly in line with 

the consensus economic view.’’). 19 Roubini Global Economics, RGE Monitor 2009 Global Economic Outlook, at 1–2 (Jan. 2009) 

(online at www.rgemonitor.com/redir.php?cid=316328&sid=1&tgid=10000). 20 Nouriel Roubini and Elisa Parisi-Capone, Total $3.6T Projected Loans and Securities Losses, $1.8T of Which at U.S. Banks/Brokers: The Specter of Technical Insolvency, RGE Analysts’ 

EconoMonitor (Jan. 21, 2009) (online at www.rgemonitor.com/blog/economonitor/255236/totall 36tlprojectedlloanslandlsecuritiesllossesl18tloflwhichlatlusl banksbrokerslthelspecterlofltechnicallinsolvency). 21Standard & Poor’s, S&P/Case-Shiller Home Price Indices (online at 

www2.standardandpoors.com/spf/pdf/index/CSHomePricelHistoryl033114.xls) (accessed Apr. 

3, 2009) (hereinafter ‘‘Case-Shiller Indices’’). 22Standard & Poor’s, The New Year Didn’t Change the Downward Spiral of Residential Real 

Estate Prices According to the S&P/Case-Shiller Home Prices Indices (Mar. 31, 2009) (online at 

www2.standardandpoors.com/spf/pdf/index/CSHomePricelReleasel033114.pdf) (hereinafter 

‘‘Case-Shiller Press Release’’). 23 Id. 

losses from U.S.-originated credit assets of $2.1 trillion.16 Another 

projection comes from the International Monetary Fund, which expects U.S. credit losses of $2.2 trillion.17 For both of these projections, half or less of these losses will take place in the U.S. because 

a portion of the risks was transferred to foreign investors. While 

these losses will likely require additional capital infusions from 

public and private sources, the road to recovery for the banking 

system will be shorter based on these projections than it would be 

if the projections of some of the leading pessimists (see below) are 

borne out.18 Even if U.S. financial institution losses are ‘‘only’’ $1 

trillion, however, they will nonetheless be approximately twice the 

entire amount of money allocated by Treasury under the TARP, including money allocated to programs like PPIP that has not been 

expended yet. 

While these estimates represent a consensus view of expected 

economic contraction and credit losses for 2009, critics of Treasury’s 

actions can point to prominent, and significantly more pessimistic, 

economic projections by economist Nouriel Roubini. Roubini, whose 

warnings of the collapse of the housing bubble proved prescient, 

forecasts an economic contraction of 3.4 percent 19 and total credit 

losses of $3.6 trillion, half of which would be borne by U.S. banks, 

in 2009.20

Furthermore, declines in housing prices as shown by the latest 

data from the Case-Shiller index could indicate that the housing 

market has yet to hit bottom. The numbers from January 2009 revealed a continued decline in home prices, with the 20-city index 

showing a 2.8 percent decline from the previous month 21 and a 19 

percent annual decline from January 2008.22 Overall, the 20-city 

index shows a 29.1 percent decrease from the housing market’s 

peak in the second quarter of 2006.23

The debate over the use of Treasury’s Public-Private Investment 

Partnerships to purchase troubled assets and achieve price discovery turns significantly on questions surrounding the health and 

trajectory of the economy as a whole, as well as the relationship 

mstockstill on PROD1PC66 with HEARING

11 

24Geithner Financial Stability Statement, supra note 8. 

the economy as a whole will have to portfolios of bad assets held 

by banks and other financial institutions. Economic forecasters 

have predicted that a recovery in GDP will commence in the fall. 

However, the trend line in adjustments to those predictions has 

been consistently downward, with the projected beginning of the recovery receding into the future and its scale diminishing. Secondly, 

it is unclear what the relationship between economic recovery, 

when it comes, and bank assets will be. Unemployment, a key driver of consumer defaults in areas like mortgages and credit cards, 

is a lagging indicator, with joblessness typically increasing significantly after GDP turns around. More profoundly, recovery in real 

estate markets following an asset bubble can be very slow in coming. In many parts of the United States, real estate prices did not 

recover from the real estate bust of the late 1980s until ten years 

later. 

Finally and most importantly, there is the question of the role 

the health of the banks themselves will play. Treasury’s strategy 

envisions a larger economic recovery pulling the banks back to 

health. Given the current degree of concentration in the banking 

industry, many have expressed concern that weak banks will drag 

the economy down by failing to lend. Japan’s ‘‘lost decade,’’ discussed in Part B of this section, was in part the story of an economy that suffered anemic yet largely positive economic growth in 

tandem with a prolonged crisis in the financial sector. To the extent that this is an accurate description of our financial situation, 

time is not on our side. 

Thus, disagreements over the true nature and severity of the economic downturn and expectations of credit losses are at the heart 

of debates over Treasury’s strategy and programs for addressing 

the financial crisis. While the Panel does not have a view on the 

accuracy of these economic projections, it does note that Treasury 

can better anchor its strategy by sharing the baseline economic 

projections for its current approach. Disclosure of these assumptions for growth and expected bank losses will make debate over 

contingency strategies, in the event that a course change becomes 

necessary down the road, more constructive. 

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

Treasury’s primary mechanisms for improving bank balance 

sheets are through its equity investment programs such as CPP 

and CAP and its forthcoming efforts to provide government financing for leveraged special purpose entities to purchase distressed assets through the PPIP. The basic elements of these programs are 

described below: 

• CAP. On February 10, 2009, Secretary Geithner announced 

plans for the remainder of TARP funds.24 The central component 

of Treasury’s plan is the Capital Assistance Program (CAP), which 

consists of a two-step program. The first step is a supervisory exercise, the ‘‘stress test,’’ in which the 19 U.S. banking organizations 

with over $100 billion in assets are evaluated for their ability to 

absorb losses in worse-than-expected economic conditions. While 

mstockstill on PROD1PC66 with HEARING

12 

25 Although the program takes these assets off bank balance sheets, there does not appear to 

be any corresponding requirement about a selling bank’s use of the proceeds it receives for those 

assets. 26The illiquidity of the asset-backed securities market is obviously closely tied to this economic cycle. As prices have declined, those who hold the assets have been increasingly unwilling 

to sell. 27Summers, Economic Crisis and Recovery, supra note 9. 

the 19 largest banks will be required to undergo stress tests, all 

banks are free to apply to the CAP. Banks deemed to require an 

additional capital cushion will receive a six month window to raise 

that capital privately or access it through the CAP. The second 

component of the CAP will consist of government investments in 

banks in the form of non-voting preferred securities that can be 

converted into common equity by the bank—an effective call on the 

preferred exercisable to the government’s detriment when a bank 

is trouble. 

PPIP. On March 3, 2009, Treasury announced the details of the 

PPIP. The PPIP involves the creation of leveraged special purpose 

entities, capitalized with small amounts of equity capital from private sources and designed to purchase bad assets from banks. Private investors would capture 50 percent of the profits of these entities. Their purpose is to buy distressed bank assets at prices and 

volumes that private parties are unwilling to do. Treasury hopes 

that these transactions will promote bank lending,25 and improve 

market liquidity. It is unclear whether the introduction of these 

funds will lead private sector investors who do not benefit from 

government subsidies to have any greater interest in transacting in 

distressed assets than they do today. Treasury hopes this program 

will unfreeze the asset-backed securities market and reverse the 

negative economic cycle of declining asset prices, deleveraging, and 

declining asset values.26 PPIP has two components: the Legacy 

Loan Program targeting distressed loans held on bank balance 

sheets and the Legacy Securities Program that is intended to facilitate the purchase of certain, primarily asset-backed securities 

through TALF. 

At the time of the announcement of these programs, Mr. Summers expressed his expectation that ‘‘further support for capital 

markets, transparency with respect to the condition of banks, and 

infusion of capital into the banking cycle, will create virtuous cycles 

in which stronger markets beget stronger financial institutions, 

which beget stronger markets.’’ 27 Statements like these provide additional evidence of the assumptions underlying Treasury’s actions, 

to wit, that senior officials believe that current prices for impaired 

assets are at or near their lowest levels and will rebound if Treasury can revive markets for these assets. 

In Part D of this report, we provide further preliminary analysis 

of CAP and PPIP. In further reports, as these plans proceed, the 

Panel will seek to analyze the financial impact of these programs 

on the banks, the private sector investors in these leveraged investment vehicles, and on the public. 

b. Increase Availability of Credit in Key Markets 

Another major component of Treasury’s financial stabilization 

program is its use of TARP funds in coordination with the Federal 

mstockstill on PROD1PC66 with HEARING

13 

28 Board of Governors of the Federal Reserve System, Address by Ben S. Bernanke, Chairman, 

at the Stamp Lecture, London School of Economics, London, England: The Crisis and Policy 

Response (Jan. 13, 2009) (online at www.federalreserve.gov/newsevents/speech/ 

bernanke20090113a.htm). 29Summers, Economic Crisis and Recovery, supra note 9. 30See, e.g., Paul Krugman, The Market Mystique, New York Times (Mar. 26, 2009) (‘‘Above 

all, the key promise of securitization—that it would make the financial system more robust by 

spreading risk more widely—turned out to be a lie. Banks used securitization to increase their 

risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.’’); Robert Kuttner, Slouching Towards Solvency, American Prospect (Mar. 23, 

2009) (online at www.prospect.org/cs/articles?article=slouchingltowardslsolvency) (‘‘At the 

heart of this entire mess is the system of securitization, which dates only to the 1970s. In principle, it usefully allowed banks to sell off loans and thereby replenish cash to make other loans. 

But in practice, the system turned into an unsupervised doomsday machine. Not only did the 

system invite lenders to relax underwriting standards because some sucker down the line was 

absorbing the risk; more seriously it led to an aftermath that has proven impossible to unwind 

Continued 

Reserve Board’s use of its balance sheet to inject over two trillion 

dollars of financing into credit markets and public-private investment facilities. A common thread among the various facilities that 

constitute this component of the plan is the assumption of risk by 

Treasury and the Federal Reserve Board in order to induce renewed private participation in securitization. Senior officials believe that restarting markets will increase credit availability and 

reduce the liquidity discounts impairing the sale of many toxic assets. Official efforts take the form of Treasury’s investments in 

TALF and PPIP and the lending facilities established by the Federal Reserve Board. Federal Reserve Board Chairman Ben 

Bernanke stated that the purpose of these programs is ‘‘both to 

cushion the direct effects of the financial turbulence on the economy and to reduce the virulence of the so-called adverse feedback 

loop, in which economic weakness and financial stress become mutually reinforcing.’’ 28 Mr. Summers reinforced this view in his address to the Brookings Institution on March 13, 2009: ‘‘Reactivating 

the capital markets is essential to realistic asset valuation, to restarting nonbank lending, and to enabling banks to divest toxic assets when they judge it appropriate.’’ 29

TALF and PPIP have some fundamental differences. TALF seeks 

to revive asset securitization markets by having the Federal Reserve Board encourage issuance of new high-quality securitized 

debt instruments through collateralized non-recourse loans; loan 

principal will be discounted by haircuts on the securities’ face value 

that depend on the type of loans backing the security. PPIP envisions buying existing distressed assets and low quality assets off 

bank balance sheets using Special Purpose Entities where private 

sector actors, presumably hedge funds and private equity firms, invest a small amount of capital and stand to gain 50 percent of any 

profits. 

Treasury and the Federal Reserve Board clearly believe that we 

cannot revive the U.S. economy without healthy asset 

securitization markets. The phenomenal growth of the size of those 

markets in recent years and their current centrality to mortgage, 

auto, student loan and credit card financing would tend to support 

that belief. Nonetheless, some question the fundamental premise 

behind the expenditure of TARP funds and assumption of risk by 

taxpayers, arguing that securitization itself, absent reform, weakens effective risk management by financial institutions.30 Of 

mstockstill on PROD1PC66 with HEARING

14 

without having government temporarily take the big banks into receivership to sort out what’s 

really on their books.’’). 31See, e.g., Jeffrey Sachs, Obama’s Bank Plan Could Rob the Taxpayer, Financial Times (Mar. 

25, 2009) (‘‘It is dressed up as a market transaction but that is a fig-leaf, since the government 

will put in 90 per cent or more of the funds and the ‘price discovery’ process is not genuine. 

It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from 

the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.’’). 32Treasury states that the consensus baseline assumptions for real GDP growth are those 

found in the February projections published by Consensus Forecasts, the Blue Chip survey, and 

the Survey of Professional Forecasters. U.S. Department of the Treasury, FAQs: Supervisory 

Capital Assessment Program (online at files.ots.treas.gov/482033.pdf) (accessed Apr. 2, 2009). 

course, reforming securitization markets, as the Panel recommended in its regulatory reform report of January 29, 2009, is not 

necessarily incompatible with Treasury’s strategy of keeping those 

markets from freezing. Another criticism of this approach is that 

markets requiring heavy government subsidization will not lead to 

true price discovery of assets or create sustainable markets for 

these assets.31 Such subsidization can distort markets and, once 

ceased, is unlikely to affect later, non-subsidized market transactions. A third concern centers on the terms of the PPIP deal for 

the American taxpayer insofar as the government is bearing most 

of the risk while splitting the gains with program participants. 

On the other hand, many forms of securitization involve instruments that are straightforward. A revival of securitization markets, 

if subject to strong regulatory oversight, can help restore financial 

stability because it re-circulates capital for banks to lend again, 

and without a functioning secondary market access to credit would 

be sharply decreased, delaying or even preventing our economic recovery. The Panel urges Treasury, as it works to restart these markets to improve lending, to discuss its vision for reforming 

securitization within its broader program for modernizing financial 

regulation. 

c. Assess the Health of Financial Institutions 

The stress tests build on the efforts under the Capital Purchase 

Program by the Paulson Treasury Department to assess the health 

of banks applying for funding under the CPP. The stress tests will 

analyze whether the targeted banks have the necessary capital to 

continue lending while absorbing potential losses in the case of a 

more severe economic decline than anticipated by consensus estimates.32 These examinations involve collaboration between Treasury, federal banking supervisors, and other agencies, and they commenced on February 25, 2009. For some banks, a comparatively 

clean bill of health from Treasury may provide an opportunity for 

eased terms and early repayment. This assessment exercise may 

provide stronger signals to the industry and the market about 

which banks may face a greater government ownership stake. The 

actions taken by Treasury following the completion of these stress 

tests may also offer investors a good indication of future government intervention in financial markets, which could encourage a 

return to a healthy level of investment. On the other hand, the 

tests may prove to be insufficiently rigorous to give regulators a 

true picture of the health of financial institutions. Even if the tests 

are adequate, regulators may lack the will to act on what they 

mstockstill on PROD1PC66 with HEARING

15 

33 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release 

H.4.1: Factors Affecting Reserve Balances (Apr. 2, 2009) (online at www.federalreserve.gov/ 

releases/h41/20090502/) (hereinafter ‘‘Fed Balance Sheet April 2’’). 

learn. In either case, the stress tests would not produce the desired 

results. 

The Panel is interested in: (1) the extent to which the stress tests 

will rely on risk management models like Value At Risk (VAR), 

which some have identified as having contributed to risk management failures that fed the financial bubble; and (2) the extent to 

which the stress tests will be conducted, in the first instance, by 

the financial management teams of the financial firms themselves. 

The Panel needs additional information on the stress tests before 

it can offer further analysis. 

3. FEDERAL GOVERNMENT EFFORTS 

Treasury’s efforts to date to combat the financial crisis have focused upon improving bank balance sheets and providing liquidity 

to financial institutions and key credit markets. A critical player in 

government stabilization efforts is the Federal Reserve Board, 

which has added over $1.5 trillion dollars to its balance sheet beyond its normal monetary policy open-market operations.33 Likewise, the FDIC has also had a major role. FDIC, the Federal Reserve Board, and Treasury are extending over $1.7 trillion in guarantees as well. See Figure 1 for a complete presentation of Federal 

resources—outlays, loans and guarantees—that have been provided 

to date in conjunction with the financial market rescue efforts. 

The Panel has broadly classified the resources that the federal 

government has devoted to stabilizing the economy in a myriad of 

new programs and initiatives as outlays, loans, and guarantees. Although the Panel calculates the total value of these resources at 

over $4 trillion, this would translate into the ultimate ‘‘cost’’ of the 

stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received, no warrants are exercised, and no TARP funds 

are repaid; (3) all loans default and are written off; and (4) all 

guarantees are exercised and subsequently written off. 

Outlays constitute $522.4 billion or about 13 percent of total federal resources and primarily reflect Treasury expenditures under 

the TARP. The majority of outlays are structured as Treasury’s equity investments in financial institutions ($328 billion) and Treasury co-investments with private investors in mortgage-based loans 

and securities under the PPIP ($100 billion). It is possible that the 

federal government could recoup much of the value of its investments in financial institutions through receipt of dividend payments, financial institutions’ repayments of TARP funds, appreciation of the value of the TARP equity investments, and resolution 

of financial institutions in bankruptcy or receivership. Similarly, 

the PPIP co-investments could be profitable if the mortgage loans 

and mortgage-backed securities in these funds appreciate in value. 

On the other hand, insolvency of financial institutions that are 

funded by the TARP, or poor performance or pricing of PPIP equity 

investments, would result in a substantial amount of long-term 

losses to the federal government. 

The $2.0391 trillion in loans almost exclusively represent an expansion of assets on the Federal Reserve Board’s balance sheet as 

mstockstill on PROD1PC66 with HEARING

16 

34 Board of Governors of the Federal Reserve System, Address by Ben S. Bernanke, Chairman, 

at the Federal Reserve Bank of Richmond 2009 Credit Market Symposium, Charlotte, North 

Carolina: The Federal Reserve’s Balance Sheet (Apr. 3, 2009) (online at www.federalreserve.gov/ 

newsevents/speech/bernanke20090403a.htm). 

a result of the creation of a variety of new programs. According to 

Federal Reserve Board Chairman Ben Bernanke, ‘‘the great majority of [the Federal Reserve Board’s] lending is extremely well secured.’’ 34 Nevertheless, even if Chairman Bernanke is correct in 

his analysis, any losses incurred on loans not in the extremely well 

secured category potentially could create significant long-term 

losses to the federal government. 

Finally, the risks of long-term losses to the federal government posed by the over $1.7 trillion in guarantees, mostly made by the 

Federal Reserve Board and FDIC, are difficult to estimate. Potential losses are largely dependent on the specific risks of each guarantee program, some of which (including PPIP) are still being designed, and on underlying economic performance. 

FIGURE 1: RESOURCES DESIGNATED FOR FINANCIAL STABILIZATION EFFORTS 

Program 

(dollars in billions) 

Treasury 

(TARP) 

Federal 

Reserve 

Board 

FDIC Total 

American International Group (AIG) ............................................................ 70 89.3 0 159.3 

Outlays 35 .............................................................................................. 37 70 0 0 70 

Loans ..................................................................................................... 0 838 9.3 0 89.3 

Guarantees 36 ........................................................................................ 0 0 0 0 

Bank of America ........................................................................................... 52.5 87.2 2.5 142.2 

Outlays .................................................................................................. 39 45 0 0 45 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 40 7.5 41 87.2 42 2.5 97.2 

Citigroup ........................................................................................................ 50 229.8 10 289.8 

Outlays .................................................................................................. 43 45 0 0 45 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 44 5 45 229.8 46 10 244.8 

Capital Purchase Program (Other) .............................................................. 168 0 0 168 

Outlays .................................................................................................. 47 168 0 0 168 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Capital Assistance Program ......................................................................... TBD TBD TBD 48 TBD 

TALF ................................................................................................................ 55 495 0 550 

Outlays .................................................................................................. 0 0 0 0 

Loans ..................................................................................................... 0 50 495 0 495 

Guarantees ............................................................................................ 49 55 0 0 55 

PPIF (Loans) 51 .............................................................................................. 50 0 600 650 

Outlays .................................................................................................. 50 0 0 50 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 52 600 600 

PPIF (Securities) ........................................................................................... 50 0 0 50 

Outlays .................................................................................................. 53 20 0 0 20 

Loans ..................................................................................................... 30 0 0 30 

Guarantees ............................................................................................ 0 0 0 0 

Commercial Paper Funding Facility ............................................................ 0 249.7 0 249.7 

Outlays .................................................................................................. 0 0 0 0 

Loans ..................................................................................................... 0 54 249.7 0 249.7 

Guarantees ............................................................................................ 0 0 0 0 

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity 

Facility ...................................................................................................... 0 6.1 0 6.1 

Outlays .................................................................................................. 0 0 0 0 

Loans ..................................................................................................... 0 55 6.1 0 6.1 

Guarantees ............................................................................................ 0 0 0 0 

Homeowner Affordability and Stability Plan ............................................... 50 0 0 57 50 

Outlays .................................................................................................. 56 50 0 0 50 

mstockstill on PROD1PC66 with HEARING

17 

FIGURE 1: RESOURCES DESIGNATED FOR FINANCIAL STABILIZATION EFFORTS—Continued 

Program 

(dollars in billions) 

Treasury 

(TARP) 

Federal 

Reserve 

Board 

FDIC Total 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Automotive Industry Financing Plan ........................................................... 24.9 0 0 24.9 

Outlays .................................................................................................. 58 24.9 0 0 24.9 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Auto Supplier Support Program ................................................................... 5 0 0 5 

Outlays .................................................................................................. 59 5 0 0 5 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Unlocking Credit for Small Business .......................................................... 15 0 0 15 

Outlays .................................................................................................. 60 15 0 0 15 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Temporary Liquidity Guarantee Program .................................................... 0 0 768.9 768.9 

Outlays .................................................................................................. 0 0 0 0 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 61 768.9 768.9 

Deposit Insurance Fund ............................................................................... 0 0 29.5 29.5 

Outlays .................................................................................................. 0 0 62 29.5 29.5 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

Other Federal Reserve Board Credit Expansion Since September 1, 

2008 ........................................................................................................... 0 1,169 0 1,169 

Outlays .................................................................................................. 0 0 0 0 

Loans ..................................................................................................... 0 63 1,169 0 1,169 

Guarantees ............................................................................................ 0 0 0 0 

Uncommitted TARP Funds ............................................................................ 64 109.6 0 0 109.6 

Outlays .................................................................................................. TBA 0 0 TBA 

Loans ..................................................................................................... TBA 0 0 TBA 

Guarantees ............................................................................................ TBA 0 0 TBA 

Total ............................................................................................................... 700 2,326.1 1,410.9 65 4,437 

Outlays .................................................................................................. 492.9 0 29.5 522.4 

Loans ..................................................................................................... 30 2,009.1 0 2,039.1 

Guarantees ............................................................................................ 67.5 317 1,381.4 1,765.9 

Uncommitted TARP Funds .................................................................... 109.6 0 0 109.6 

35 Treasury outlays are face values, based on: (1) Treasury’s actual reported expenditures and (2) Treasury’s anticipated funding levels as 

estimated by a variety of sources, including Treasury pronouncements, GAO estimates, and news reports. Anticipated funding levels are set at 

Treasury’s discretion, have changed from initial announcements, and are subject to change further. The outlay concept used here is not the 

same as budget outlays, which under § 123 of EESA are recorded on a ‘‘credit reform’’ basis. 36While many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the federal government’s maximum financial exposure. 37 Government Accountability Office, Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues, at 9 (Mar. 31, 2009) (GAO09/504) (online at www.gao.gov/new.items/d09504.pdf) (hereinafter ‘‘March GAO Report’’). This number includes a $40 billion investment made on November 25, 2008 under the Systemically Significant Failing Institutions (SSFI) Program and 

a $30 billion equity capital facility announced on March 2, 2009 that AIG may draw down when in need of additional capital in exchange for 

additional preferred stock and warrants to be held by Treasury. U.S. Department of the Treasury, Office of Financial Stability, Troubled Asset 

Relief Program Transactions Report For Period Ending March 31, 2009 (Apr. 2, 2009) (online at www.financialstability.gov/docs/transactionreports/transactionlreportl04-02-2009.pdf) (hereinafter ‘‘April 2 Transaction Report’’); U.S. Department of the Treasury, Term Sheet (Mar. 2, 

2009) (online at www.treas.gov/press/releases/reports/030209laigltermlsheet.pdf). 38 Fed Balance Sheet April 2, supra note 33. This figure includes the AIG credit line as well as the Maiden Lane II LLC and Maiden Lane 

III LLC special purpose vehicles. 39 April 2 Transaction Report, supra note 37. This figure includes: (1) a $15 billion investment made by Treasury on October 28, 2008 

under the Capital Purchase Program (CPP), (2) a $10 billion investment made by Treasury on January 9, 2009 also under the CPP, and (3) a 

$20 billion investment made by Treasury under the Targeted Investment Program (TIP) on January 16, 2009. 40 U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15, 2009) (online at www.treas.gov/press/releases/ 

reports/011508bofatermsheet.pdf) (granting a $118 billion pool of Bank of America assets a 90 percent federal guarantee of all losses over $10 billion, the first $10 billion in federal liability to be split 75/25 between Treasury and the FDIC and the remaining federal liability to be 

borne by the Federal Reserve). 41 Id. 42 Id. 43 April 2 Transaction Report, supra note 37. This figure includes: (1) a $25 billion investment made by Treasury under the CPP on October 

28, 2008 and (2) a $20 billion investment made by Treasury under the TIP on December 31, 2008. 44 U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at www.treasury.gov/press/releases/ 

reports/cititermsheetl112308.pdf) (hereinafter ‘‘Citigroup Asset Guarantee’’) (granting a 90 percent federal guarantee on all losses over $29 

billion of a $306 billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion 

by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from 

$306 billion to $301 billion). 45 Citigroup Asset Guarantee, supra note 44. 

mstockstill on PROD1PC66 with HEARING

18 

46 Citigroup Asset Guarantee, supra note 44. 47March GAO Report, supra note 37. This figure represents the $218 billion Treasury reported anticipating spending under the CPP to GAO, 

minus the $50 billion CPP investments in Citigroup ($25 billion) and Bank of America ($25 billion) identified above. This figure does not account for anticipated repayments or redemptions of CPP investments, nor does it account for dividend payments from CPP investments. Treasury originally set CPP funding at $250 billion and has not officially revised that estimate. 48 Funding levels for the Capital Assistance Program (CAP) have not yet been announced but will likely include a significant portion of the 

remaining $109.6 billion of TARP funds. 49March GAO Report, supra note 37. Treasury has committed $20 billion of TARP money to TALF already; Treasury later indicated it would 

expand to a $100 billion TARP commitment to TALF, but has recently pulled back to a $55 billion commitment. Michael R. Crittenden, 

Treasury Seeks to Free Up Funds by Shuffling Spending in TARP, Wall Street Journal (Apr. 2, 2009) (online at online.wsj.com/article/ 

SB123870719693083971.html). The increase in funding has coincided with an increase in asset classes eligible for the facility, including allowing legacy securities access to the facility instead of limiting access only to new securitizations. 50 This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans under 

TALF. See U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan, at 2–3 (Feb. 10, 2009) (online at www.financialstability.gov/ 

docs/fact-sheet.pdf) (describing the initial $20 billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is responsible for reimbursing the Federal Reserve for $55 billion of losses on its $550 billion in loans, the Federal Reserve’s maximum potential exposure under 

TALF is $495 billion. 51 Because the PPIP funding arrangements for loans and securities differ substantially, the Panel accounts for them separately. Treasury 

has not formally announced either total program funding level or the allocation of funding between PPIP Legacy Loans Program and Legacy 

Securities Program. Treasury initially provided a $75–100 billion range for PPIP outlays. U.S. Department of the Treasury, 

Fact Sheet: Public- Private Investment Program, at 2 (Mar. 23, 2009) (online at www.treas.gov/press/releases/reports/ppiplfactlsheet.pdf) 

(hereinafter ‘‘Treasury PPIP Fact Sheet’’). While SIGTARP has estimated a $75 billion Treasury commitment, we adopt GAO’s higher estimate of 

$100 billion. See Senate Committee on Finance, Testimony of SIGTARP Neil Barofsky, TARP Oversight: A Six Month Update, 111th Cong. (Mar. 

31, 2009) (hereinafter ‘‘Barofsky Testimony’’); See March GAO Report, supra note 37, at 9. We further assume that Treasury will fund the programs equally at $50 billion each. 52 Treasury PPIP Fact Sheet, supra note 51, at 2–3 (explaining that, for every $1 Treasury contributes in equity matching $1 of private contributions to public-private asset pools created under the Legacy Loans Program, FDIC will guarantee up to $12 of financing for the transaction to create a 6:1 debt to equity ratio). If Treasury ultimately allocates a lower proportion of funds to the Legacy Loans Program (i.e. less 

than $50 billion), the amount of FDIC loan guarantees will be reduced proportionally. 53 Treasury PPIP Fact Sheet, supra note 51, at 4–5 (outlining that, for each $1 of private investment into a fund created under the Legacy 

Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In the absence of further Treasury guidance, this analysis assumes that Treasury will allocate funds for 

equity co-investments and loans at a 1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its discretion to provide additional financing. 54 Fed Balance Sheet April 2, supra note 33. The level of Federal Reserve lending under this facility will fluctuate in response to market 

conditions and independent of any federal policy decision. 55 Fed Balance Sheet April 2, supra note 33. The level of Federal Reserve lending under this facility will fluctuate in response to market 

conditions and independent of any federal policy decision. 56March GAO Report, supra note 37, at 9. 57 Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the Federal Housing Finance 

Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Homeowner Affordability and Stability Plan. See U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/ 

releases/reports/housinglfactlsheet.pdf). 58 April 2 Transaction Report, supra note 37. 59March GAO Report, supra note 37, at 9. 60March GAO Report, supra note 37, at 9. 61 Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program: Debt 

Issuance under Guarantee Program (online at www.fdic.gov/regulations/resources/TLGP/totallissuance1–09.html) (accessed Apr. 1, 2009). This 

figure represents the current maximum aggregate debt guarantees that could be made under the program, which, in turn, is a function of 

the number and size of individual financial institutions participating. $252.6 billion of debt subject to the guarantee has been issued to date, 

which represents about 33 percent of the current cap. Id. 62 Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008) 

(online at www.fdic.gov/about/strategic/corporate/cfolreportl4qtrl08/income.html) (provision for insurance losses of $17.6 billion); Federal 

Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008) (online at 

www.fdic.gov/about/strategic/corporate/cfolreportl3rdqtrl08/income.html) (provision for insurance losses of $11.9 billion). Outlays reflect 

disbursements or potential disbursements in conjunction with failed bank resolutions. 63 This figure is derived from adding the total credit the Federal Reserve has extended as of April 1, 2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer Credit Facility (Primary Dealer and Other Credit), Central Bank Liquidity Swaps, Bear Stearns Assets (Maiden Lane I), GSE Debt (Federal Agency Debt Securities), and Mortgage Backed Securities Issued by 

GSEs. See Fed Balance Sheet April 2, supra note 33. 64 Committed TARP funds listed above total $590.4 billion; $109.6 billion remains uncommitted for the $700 billion authorization under 

EESA and is included in this accounting because it will almost certainly be allocated in the future. One potential use of uncommitted funds 

is Treasury’s obligation to reimburse the Exchange Stabilization Fund (ESF), currently valued at $49.4 billion. See U.S. Department of Treasury, 

Exchange Stabilization Fund, Statement of Financial Position, as of February 28, 2009 (online at www.ustreas.gov/offices/international-affairs/ 

esf/esf-monthly-statement.pdf) (accessed April 6, 2009). Treasury must reimburse any use of the fund to guarantee money market mutual 

funds from TARP money. See EESA, supra note 1, at 131. In September 2008, in response to the Reserve Primary Fund ‘‘breaking the buck,’’ 

see Diya Gullapalli, Shefali Anand, and Daisy Maxey, Money Fund, Hurt by Debt Tied to Lehman, Breaks the Buck, Wall Street Journal (Sept. 

17, 2008) (online at online.wsj.com/article/SB122160102128644897.html), Treasury opened its Temporary Guarantee Program for Money Mutual 

Funds, U.S. Department of Treasury, Treasury Announces Temporary Guarantee Program for Money Market Mutual Funds (Sept. 29, 2008) (online at www.treas.gov/press/releases/hp1161.htm). This program uses assets of the ESF, which was created under the Gold Reserve Act of 

1934, to guarantee the net asset value of participating money market mutual funds. Id. Section 131 of EESA protected the ESF from incurring 

any losses from the program by requiring that Treasury reimburse the ESF for any funds used in the exercise of the guarantees under the 

program. The program has recently been extended through September 18, 2009. U.S. Department of Treasury, Treasury Announces Extension of 

Temporary Guarantee Program for Money Market Funds (Mar. 31, 2009) (online at www.treas.gov/press/releases/tg76.htm). 65 This figure differs substantially from the $2,476–2,976 billion range of ‘‘Total Funds Subject to SIGTARP Oversight’’ reported during testimony before the Senate Finance Committee on March 31, 2009. Barofsky Testimony, supra note 51, at 12. SIGTARP’s accounting, designed to 

capture only those funds potentially under its oversight authority, is both less and more inclusive than, and thus not directly comparable to, 

the Panel’s. Among the many differences, SIGTARP does not account for Federal Reserve credit extensions outside of TALF or FDIC guarantees 

under the Temporary Liquidity Guarantee Program and sets the maximum Federal Reserve loan extensions under TALF at $1 trillion.

a. Treasury Programs 

Through an array of programs used to purchase preferred shares 

in financial institutions, offer loans to small businesses and auto 

companies, and leverage Federal Reserve Board loans for facilities 

designed to restart secondary securitization markets, Treasury has 

mstockstill on PROD1PC66 with HEARING

19 

66March GAO Report, supra note 37, at 9. 67March GAO Report, supra note 37, at 9. 68March GAO Report, supra note 37, at 9. Treasury also anticipates spending only $55 billion in TALF funding as opposed to the $100 billion initially reported. See Figure 1, supra, and accompanying notes. 69See, e.g., Alex Tanzi and Rebecca Christie, U.S. TARP Funding Remaining Estimated at 

$134.5 Billion, Bloomberg (Mar. 30, 2009). 70See, e.g., id. 71Maya Jackson Randall, Treasury Has $134.5 Billion Left in TARP, Wall Street Journal 

(Mar. 30, 2009) (online at online.wsj.com/article/SB123828522318566241.html) (quoting Secretary Geithner’s appearance on ABC’s This Week). 72March GAO Report, supra note 34, at 9; Barofsky Testimony, supra note 48, at 12. 73 Emergency Relief and Construction Act of 1932, Pub. L. No. 72–302, at § 210 (amending 

Federal Reserve Act, Pub. L. No. 63–43 (1913), at § 13) (codified as amended at 12 U.S.C. § 343). 

This power, commonly known as the Federal Reserve’s 13(3) power or lender of last resort 

power, enables the Board of Governors to authorize any regional Federal Reserve Bank to loan 

money to a nonbank financial institution. 12 U.S.C. § 343. Additional Depression-era legislation 

gave the Federal Reserve even broader power to lend outside the financial sector, but Congress 

revoked this power in 1958. David Fettig, The History of a Powerful Paragraph: Section 13(3) 

Enacted Fed Business Loans 76 Years Ago, Federal Reserve Bank of Minneapolis, The Region 

(June 2008) (online at www.minneapolisfed.org/publicationslpapers/publdisplay.cfm?id=3485). 

The Federal Reserve used the § 13(3) power in 1991 to loan money to the FDIC’s Bank Insurance Fund as a stopgap measure until Congress could recapitalize the fund; the recapitalization 

legislation subsequently granted the Federal Reserve broader § 13(3) power to lend to distressed 

securities firms and other financial institutions. Id. The Federal Reserve also used this authority to facilitate the merger of Bear Stearns and JPMorgan Chase. Id. See also David Fettig, 

Lender of More Than Last Resort: Recalling Section 13(b) and the Years When the Federal Reserve Banks Opened Their Discount Windows to District Businesses in Times of Economic Stress, 

Federal Reserve Bank of Minneapolis, The Region (Dec. 2002) (online at 

www.minneapolisfed.org/publicationslpapers/publdisplay.cfm?id=3392). 74Fed Balance Sheet April 2, supra note 33. 

spent or committed $590.4 billion.66 This figure is down from the $667.4 billion sum of the upper bounds of all Treasury commitments announced to date.67 The discrepancy results from Treasury 

revising its estimates of anticipated commitments down from the 

maximum announced program funding levels; for example, Treasury initially announced that it would commit $250 billion to CPP 

purchases but now only anticipates spending $218 billion.68 Treasury will also leverage billions more in public and private capital to 

facilitate large-scale asset purchases of legacy assets through the 

PPIP, expanding the total impact on the economy without extending more in outlays. Treasury estimates only $565.5 billion in commitments.69 The 

discrepancy between this figure and the numbers independently determined by the General Accountability Office (GAO), SIGTARP, 

and the Panel results from $25 billion in CPP investments that 

Treasury expects recipients to repay or liquidate.70 Although describing this estimate as ‘‘conservative,’’ 71 neither Secretary 

Geithner nor Treasury has identified the institutions who will supply these anticipated repayments or when they will supply these 

repayments. As a result, the Panel agrees with the GAO and 

SIGTARP estimates of $590.4 billion in TARP funds already committed.72

b. Federal Reserve Board Facilities 

The Federal Reserve Board is taking a similarly unprecedented 

set of steps to stabilize the financial system and restart credit markets under its emergency powers.73 As of April 1, 2009, the Federal Reserve Board has extended almost $1.5 trillion in credit to financial institutions independent of normal open market operations.74

These credit extensions, including special credit facilities established under its 13(3) emergency authority, enabled the Federal 

mstockstill on PROD1PC66 with HEARING

20 

75 U.S. Department of the Treasury, U.S. Treasury and Federal Reserve Board Announce 

Launch of Term Asset-Backed Securities Loan Facility (TALF) (Mar. 3, 2009) (online at 

treas.gov/press/releases/tg45.htm). 76March GAO Report, supra note 34; Michael R. Crittenden, Treasury Seeks to Free Up Funds 

by Shuffling Spending in TARP, Wall Street Journal (Apr. 2, 2009) (online at online.wsj.com/ article/SB123870719693083971.html) (setting Treasury commitment to TALF at $55 billion, 

which represents a reduction from the $100 billion Treasury initially committed to an expanded 

TALF). 77See Figure 1, supra, and accompanying notes. 78Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program: Debt Issuance under Guarantee Program (online at 

www.fdic.gov/regulations/resources/TLGP/totallissuance1-09.html) (accessed Apr. 2, 2009). 79Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program: Fees Assessed Under TLGP Debt Program (online at 

www.fdic.gov/regulations/resources/TLGP/fees.html) (accessed Apr. 2, 2009). 80Senate Subcommittee on Financial Institutions, Committee on Banking, Housing and Urban 

Affairs, Testimony of Arthur J. Murton, Director, Division of Insurance and Research, Federal 

Deposit Insurance Corporation, Current Issues in Deposit Insurance, 111th Cong. (March 19, 

2009) (online at www.fdic.gov/news/news/speeches/chairman/spmar1909l2.html) (hereinafter 

‘‘Murton Testimony’’). 

Reserve Board to use the asset side of its balance sheet to provide 

liquidity to banks and revive credit markets. These facilities include: the Term Securities Lending Facility, the Primary Dealer 

Credit Facility, the Asset-Backed Commercial Paper Money Market 

Fund Liquidity Facility, the Commercial Paper Funding Facility, 

the loan to Maiden Lane LLC to facilitate the acquisition of Bear 

Stearns by JPMorgan Chase, and the lending facilities and Maiden 

Lane II and III facilities established for AIG. 

In addition, the Federal Reserve Board will initially offer up to 

$200 billion in loans to participants and is open to expanding the 

program to up to $1 trillion.75 Assuming Treasury funds its guarantees of TALF loans at $55 billion,76 one can expect the Federal 

Reserve to ultimately extend up to $550 billion in loans.77

Off balance sheet vehicles such as the Maiden Lane entities and 

the entities contemplated by PPIP raise a number of serious issues. 

These entities trigger concerns about transparency and accountability, financial structure, and risk associated with high levels of 

leverage. 

c. FDIC Programs 

The FDIC supports the government’s financial stabilization efforts through the Temporary Liquidity Guarantee Program (TLGP) 

and the temporary increase in deposit insurance coverage to 

$250,000 per account. Banks that fail are also put into receivership 

by the FDIC, leading to additional costs for the Deposit Insurance 

Fund (DIF). The TLGP guarantees newly issued senior unsecured 

debt for banks, thrifts, and certain holding companies. The program also provides full coverage of non-interest bearing deposit 

transaction accounts, regardless of amount. As of January 31, 2009, 

65 financial institutions issued $252.6 billion 78 in debt under the 

TLGP and paid $4.5 billion in fees.79

The FDIC advances two strategies for covering its increasing 

costs under these programs. First, it has increased deposit insurance premiums paid by banks. Under the increased premiums, 

higher-risk banks will pay higher rates. The FDIC has also proposed a special one-time flat-rate assessment to be paid by banks 

this year.80 Second, it has requested increased borrowing authority. 

Under present law, the FDIC’s borrowing from Treasury is limited 

mstockstill on PROD1PC66 with HEARING

21 

81 12 U.S.C. § 1824(a) (2009). 82Murton Testimony, supra note 80. 83Depositor Protection Act of 2009, S. 541. 84 Id. 85Murton Testimony, supra note 80. 86Murton Testimony, supra note 80. 87Panel December Oversight Report, supra note 4, at 4. 88Panel January Oversight Report, supra note 5, at 9. Of course, credit default swap spreads 

for additional banks and other financial institutions may also provide insight into the effectiveness of the government’s program, but Treasury specifically limited its December response to 

the eight largest institutions. Treasury December Response to Panel, supra note 7, at 5. 89Treasury December Response to Panel, supra note 7, at 5. 90Panel January Oversight Report, supra note 5, at 9–10. 91The Panel also notes with appropriate caution the difficulty of disaggregating the economic 

effects of TARP from the effect of other government responses, including Federal Reserve lending and monetary policy, other Treasury actions, and fiscal stimulus, as well as nongovernment 

market pressures. Nevertheless, identifying and monitoring measures of success represents a 

crucial task for those charged with making policy as well as those charged with overseeing policy. 

to $30 billion.81 This limit has not changed since 1991.82 A bill currently before the Senate would increase the FDIC’s borrowing authority to $100 billion.83 The bill also allows temporary increases 

above that amount, to a maximum of $500 billion.84 Also, because 

of the large number and dollar amount of recent bank failures, the 

Fund’s reserve ratio had fallen below the statutory minimum.85

The FDIC has extended the period of time within which it intends 

to return to the statutorily mandated reserve ratio.86

4. MEASURES OF SUCCESS 

In its December report, the Panel asked Treasury ‘‘Is the Strategy Working to Stabilize Markets? What specific metrics can Treasury cite to show the effects of the $250B spent thus far on the financial markets, on credit availability, or, most importantly, on the 

economy? Have Treasury’s actions increased lending and unfrozen 

the credit markets or simply bolstered the banks’ books? How does 

Treasury expect to achieve the goal of price discovery for impaired 

assets? Why does Treasury believe that providing capital to all viable banks, regardless of business profile, is the most efficient use 

of funds?’’ 87

In its response to the Panel, Treasury identified two metrics: (1) 

the average credit default swap spread for the eight largest U.S. 

banks; and (2) the spread between the London Interbank Offered 

Rate (LIBOR) and Overnight Index Swap rates (OIS).88 According 

to Treasury, these measures’ retreat from the historic levels they 

reached in the fall of 2008 demonstrates that the government’s programs stemmed a series of financial institution failures and made 

the financial system fundamentally more stable than it was when 

Congress passed EESA.89

As the Panel noted in its January report, measuring the success 

of the government’s programs is more complicated. The metrics 

Treasury identified offer only a partial view of the effect that TARP 

expenditures have had on stabilizing the economy and accomplishing the goals set forth in the EESA.90 Of course, it is impossible to assess how well credit markets and the broader economy 

would have fared absent intervention, just as it is impossible to determine if markets responded to specific programs or merely the 

implicit guarantee inherent in the responses of Treasury, the Federal Reserve Board, and others in government.91 Nevertheless, the 

mstockstill on PROD1PC66 with HEARING

22 

92 V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe, Facts and Myths about the Financial Crisis of 2008 (Oct. 2008) (Federal Reserve Bank of Minneapolis Research Department 

Working Paper No. 666) (online at www.minneapolisfed.org/research/WP/WP666.pdf) (hereinafter ‘‘Minneapolis Fed Paper’’). The Minneapolis Fed Paper found little empirical evidence of 

paralyzed credit markets during the height of the perceived crisis in September and October 

2008. Id. at 1–3, 11. 93Financial Stability Oversight Board, First Quarterly Report to Congress Pursuant to Section 

104(g) of the Emergency Economic Stabilization Act of 2008, at 24–25 (Jan. 16, 2009) (hereinafter ‘‘FinSOB January Report’’). 94 Id. at 25. For example, credit default swap spreads on Merrill Lynch increased more than 

100 basis points after Bank of America CEO Ken Lewis made a comment seemingly endorsing 

separation of commercial and investment banking; he later clarified the statement to indicate 

no such endorsement. Andrew Edwards, Credit Markets: The Rally That Was, Wall Street Journal (Mar. 27, 2009) (online at online.wsj.com/article/BT-CO-20090327-714105.html); Lizzie 

O’Leary and Christine Harper, Bank of America CEO Says He Doesn’t Want Banks Split, 

Bloomberg (Mar. 27, 2009) (online at www.bloomberg.com/apps/news?pid= 

20601087&sid=aKlS8qNC2wZo). 

Panel’s review of a broader set of measures reveals a much more 

nuanced picture of the government strategy’s impact on the economy. 

Finally, these metrics reflect the shifting nature of the challenge 

facing the United States and the world economy. We have moved 

from an acute crisis of confidence in the financial markets and financial institutions as a whole to an apparently prolonged period 

of weakness in financial institutions and in the credit structures 

that directly support the real economy. So instead of the LIBOR 

spread being impossibly high, we see the repeated return of institutions like Citigroup and Bank of America for further capital injections, as well as rising overall corporate bond spreads. 

a. Improving Metrics (Good Signs) 

The programs initiated by Treasury, alongside those of the Federal Reserve Board and FDIC, merit praise for their ability to revive short-term credit markets that many perceived as in paralysis 

during the fall of 2008.92 By a number of measures, the terms on 

which capital is available have returned to non-crisis levels, and 

markets no longer regard the imminent collapse of many institutions as a real possibility. However, the volatility and upward 

trends in these measures indicate that credit markets still have 

questions about the health of financial institutions. As such, although Treasury is right to say that the panic atmosphere of October 2008 has subsided, interbank credit market indicators still reflect continued uncertainty and remain well above what had previously been very long-term stable levels. 

• Credit Default Swap Spreads. Higher spreads on credit default swaps indicate a willingness to pay more for insurance 

against default, so a higher spread on an institution’s credit default 

swap means that investors think it is more likely to default on its 

obligations. Treasury and the Financial Stability Oversight Board 

(FinSOB) have indicated that falling spreads on the credit default 

swaps of major financial institutions reflect the perception of a 

more stable financial sector in which investors are less fearful of 

such institutions collapsing.93 However, although these spreads 

have narrowed, they remain volatile.94

• LIBOR–OIS Spread. Again, both Treasury and the FinSOB 

have cited the peak of the spread between three-month LIBOR, a 

measure of quarterly borrowing costs, over OIS, a measure of exmstockstill on PROD1PC66 with HEARING

23 

95FinSOB January Report, supra note 93, at 24. 96 Bloomberg, 3 Mo LIBOR–OIS Spread (online at www.bloomberg.com/apps/ 

quote?ticker=.LOIS3:IND|) (accessed Apr. 3, 2009); Bloomberg, 1 Mo LIBOR–OIS Spread (online 

at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND|) (accessed Apr. 3, 2009). 97 Id. 98Government Accountability Office, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues, at 64 (Jan. 30, 2009) (GAO/09–296) (hereinafter 

‘‘January GAO Report’’). 99 Bloomberg, TED Spread (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) 

(accessed Apr. 2, 2009). 

ceedingly short-term borrowing costs, as an appropriate metric for 

evaluating the success of Treasury’s efforts on the broader economy.95 This figure peaked on October 10, 2008, the day before 

Treasury announced the CPP, and has substantially declined since. 

The Financial Stability Oversight Board indicated that this measure also indicates calmer markets that are less fearful of major institution failures. The 1-month LIBOR–OIS spread is below where 

it stood for most of 2008, and the 3-month LIBOR–OIS spread is 

only slightly above it.96 However, both figures are trending upwards in 2009 and remain well above levels that had been stable 

until late 2007. 

FIGURE 2: 3-YEAR LIBOR/OIS TREND 97

• TED Spread. The GAO highlights the TED spread, the difference between a LIBOR average and the interest rate on U.S. 

Treasuries of the same term, as a credit risk indicator: the higher 

the spread, the greater the perceived risk and the tighter the credit 

market.98 The TED spread hit its peak in October 2008 but has 

since declined to a level near the low for 2008, which was a year 

of great volatility in the spread.99


mstockstill on PROD1PC66 with HEARINGInsert offset folio 35 here 48565A.001
24 

99 Bloomberg, TED Spread (online at www.bloomberg.com/apps/quote?ticker=.TEDSP:IND) 

(accessed Apr. 2, 2009). 100See Panel March Oversight Report, supra note 2. See also RealtyTrac, Foreclosure Activity 

Increases 81 Percent in 2008 (Jan. 15, 2009) (online at www.realtytrac.com/ContentManagement/ 

pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847); January GAO Report, supra note 

98 at 71–73; FinSOB January Report, supra note 93, at 35–37. 101 January GAO Report, supra note 98, at 66; FinSOB January Report, supra note 93, at 26. 102 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release 

H.15: Selected Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned 

AAA, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weeklyl Fridayl/H15lAAAlNA.txt) (accessed Apr. 2, 2009) (hereinafter ‘‘Fed H.15 a’’); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest 

Rates: Historical Data (Instrument: Corporate Bonds/Moody’s Seasoned BAA, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylFridaylH15l BAAlNA.txt) 

(accessed Apr. 2, 2009) (hereinafter ‘‘Fed H.15 b’’); Board of Governors of the Federal Reserve 

System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal, Frequency: 

Weekly) (online at www.federalreserve.gov/releases/h15/data/WeeklylFridayl/H15l TCMNOMlY10.txt) (accessed Apr. 2, 2009) (hereinafter ‘‘Fed H.15 c’’). 103 January GAO Report, supra note 98, at 66. 

b. Worsening metrics (bad signs) 

Despite several measures that indicate that the government’s responses to the financial crisis relieved a panic atmosphere in October 2008, other measures indicate that there is an ongoing credit 

crisis despite extensive expenditures, loans, guarantees, and regulatory forbearance. Credit has become more expensive for both 

businesses and individuals, and loan value and volume has declined substantially. Although some contraction of borrowing naturally occurs during economic downturns, the current credit situation continues to inhibit recovery. 

• Mortgage Foreclosures/Defaults/Delinquencies. Foreclosure rates represent a key indicator of economic health as well as 

a barometer for the success of TARP efforts at meeting their statutory mandate of mitigating foreclosures. As measured by foreclosure initiations or completions, either as a rate or absolutely, or 

by delinquent mortgages, this problem continues to worsen.100

• Corporate Bond Spreads. Both GAO and FinSOB monitor 

the spread between corporate bonds of varying risk characteristics 

and U.S. Treasuries of the same term.101 These spreads have widened following the implementation of the TARP, narrowed during 

January and February, but are again widening.102 As GAO noted, 

the systematic underpricing of risk in corporate bonds leading up 

to the financial crisis may account for some of the widening of such 

spreads.103 Furthermore, declining yields on Treasuries may also 

artificially increase the spread. However, given that this spread 

continued to increase during March,104 the widening would appear 

to indicate that medium- and long-term corporate credit is harder 

to come by and requires borrowing on less favorable terms. 

• Housing Prices. Although largely inflated due to the boom 

period preceding the crisis, home values illustrate part of the picture of dire economic circumstances. Nationally, housing prices 

have fallen by 29.1 percent since peaking in the second quarter of 

2006.105 The S&P/Case-Shiller Composite 20 index showed a decline of 28.5 percent in January 2009 from its peak in May 2006.106

Although some of the drop in real estate value reflects a retreat 

from unsustainable bubble levels, the continued drop in housing 

prices is a leading contributor to bank asset write downs, recent 

mstockstill on PROD1PC66 with HEARING

25 

107 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1: 

Flow of Funds Accounts of the United States, Flows and Outstandings Fourth Quarter 2008, at 

105 (Mar. 12, 2009) (R.100 Change in Net Worth of Households and Nonprofit Organizations). 108 U.S. Department of the Treasury, Treasury Department January Monthly Lending And 

Intermediation Snapshot (Mar. 16, 2009) (hereinafter ‘‘January Treasury Snapshot’’); U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: 

Summary Analysis for October–December 2008, at 3 (Feb. 18, 2009) (hereinafter ‘‘2008 Treasury 

Snapshot’’). 109FinSOB January Report, supra note 93, at 27. 110 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: 

Commercial Paper Outstanding (online at www.federalreserve.gov/releases/cp/outstandings.htm) 

(accessed Apr. 3, 2009). 111 Id. 112 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1: 

Flow of Funds Accounts of the United States, Flows and Outstandings Fourth Quarter 2008, at 

41 (Mar. 12, 2009) (F.207 Federal Funds and Security Repurchase Agreements). 113FinSOB January Report, supra note 93, at 29–30. 114 January Treasury Snapshot, supra note 114; 2008 Treasury Snapshot, supra note 114, at 

3. 

declines in household net worth, and the weakening broader economy.107

• Commercial Real Estate Commitments. Like housing 

prices and mortgage measures, commercial real estate commitments illustrate the health of the commercial real estate sector. 

The Treasury Monthly Snapshot tracks this figure for the institutions it monitors. It recently reported a decrease in both renewals 

and new commitments, in contrast to rising renewal rates at the 

end of 2008.108

• Commercial Paper Outstanding. Commercial paper outstanding, a rough measure of short-term business debt, represents 

another indicator of the availability of credit for enterprises.109 Financial and asset backed commercial paper dipped to extreme lows 

in mid-October, largely recovered as of December 31, plunged again 

during February 2009, and recovered slightly during March.110

Nonfinancial commercial paper levels, largely stable until the end 

of February, were off more than 10 percent during March.111

• Security Repurchase Agreements. Like commercial paper, 

the volume of security repurchase agreements represents another 

measure of the availability of short-term credit for businesses. As 

measured by both assets and liabilities, total dollar volume 

dropped precipitously in Q4 2008.112

• Household/Business Debt Growth. The FinSOB noted that 

slowing growth of household and business debt has historically represented economic weakness.113 It reported substantial deceleration 

in debt growth between the last quarter of 2008 and the comparable period in 2007. This trend reflects the tightening of credit 

markets during the crisis. 

• Overall Loan Originations. The total volume of overall loan 

originations represents one key measure of the availability of credit. Treasury’s Monthly Snapshot report tracks this indicator for 

twenty of the largest CPP recipients, who collectively represent 

about 90 percent of the deposits in the banking system. In its most 

recent report, Treasury cited rising consumer lending, especially in 

mortgages and student loans; however, seasonal changes in student 

loan demand and increased refinancing demand largely explain 

this increase.114 Commercial and industrial lending both fell conmstockstill on PROD1PC66 with HEARING

26 

115 January Treasury Snapshot, supra note 114; 2008 Treasury Snapshot, supra note 114, at 

3. 116 January Treasury Snapshot, supra note 114; 2008 Treasury Snapshot, supra note 114, at 

3. The increase in mortgage originations is not inconsistent with falling residential loan balances in light of the ongoing foreclosure crisis. 117 January GAO Report, supra note 98, at 67–68. 118 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: 

Selected Interest Rates (Weekly) (online at www.federalreserve.gov/releases/h15/current/h15.htm) 

(accessed Apr. 2, 2009). 119 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release 

H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: 

Weekly (Thursday)) (online at www.federalreserve.gov/releases/h15/data/WeeklylThursdayl/ 

H15lMORTGlNA.txt) (accessed Apr. 2, 2009); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly (Friday)) (online at www.federalreserve.gov/ 

releases/h15/data/WeeklylFridayl/H15lMORTGlNA.txt) (accessed Apr. 2, 2009); Fed H.15c, 

supra note 102. 120 January GAO Report, supra note 98, at 69–70. 

siderably.115 The combination indicates that credit markets remain 

tight, especially in the business sector. 

• Overall Loan Balances. Similarly, the overall volume of loan 

balances represents an important credit indicator. Treasury’s 

Monthly Snapshot report also tracks this measure for the same set 

of CPP recipients. Both residential and corporate loan balances 

dropped for the institutions Treasury monitors monthly, indicating 

that banks’ loan portfolios are shrinking across the board as what 

new lending does take place fails to replace loans coming off the 

books or defaulting.116

• Mortgage Rate Spread. Mortgage rates represent an obvious 

metric to determine the terms of credit available to qualified homebuyers, and the spread between such rates and comparable Treasuries indicates the risk premium associated with lending to homeowners versus lending to the federal government. GAO has reported that movement in this measure is associated more with the 

Federal Reserve Board’s decision to purchase mortgage-backed securities rather than with any TARP-related actions.117 The spread 

between conventional 30-year conforming mortgages and 10-year 

Treasuries peaked in December 2008; although it has since narrowed slightly, it is still well above historic levels.118 The spread 

results from conventional mortgage rates, which hit their lowest 

point since 1971 in March, nonetheless lagging behind the drop in 

Treasury rates.119 As with corporate bond spreads, although some 

of the spread reflects a correction from underpricing of risk leading 

up to the crisis, it still reflects problematically tight credit markets. 

• Mortgage Originations. Closely related to the risk premium 

associated with lending to homebuyers is the overall volume of 

such lending. A low risk premium coupled with low mortgage volume indicates substantial tightening of lending standards.120 The 

GAO has indicated a substantial drop in this figure, both as measured by originations and applications, since the first quarter of 

2008. 

c. Indeterminate Metrics (Too Early to Tell) 

Some measures of the health of both credit markets and the 

broader economy are difficult to evaluate as either improving or 

worsening, either because they are too volatile or because they are 

contradictory depending on how one examines them. 

mstockstill on PROD1PC66 with HEARING

27 

121FinSOB January Report, supra note 93, at 27. 122 January Treasury Snapshot, supra note 114; 2008 Treasury Snapshot, supra note 114, at 

3. 123 Board of Governors of the Federal Reserve System, The January 2009 Senior Loan Officer 

Opinion Survey on Bank Lending Practices, at 8–11 (Feb. 2, 2009) (online at 

www.federalreserve.gov/boarddocs/SnLoanSurvey/200902/fullreport.pdf). 124 Id. 

• Spreads on Overnight Commercial Paper. Like the 

amount outstanding on commercial paper, the yield associated with 

it as compared to the yield of other modes of short term borrowing 

constitutes another short-term commercial credit indicator. The 

FinSOB tracks this figure relative to the AA nonfinancial commercial paper rate. The spread for asset-backed paper has come down 

dramatically, but the spread for lower-grade paper remains 

high.121 It is not immediately clear whether these developments indicate an appropriate response to underpricing of risk in the runup to the financial crisis or an overcorrection that indicates excessively tight credit inhibiting economic recovery. 

• Credit Card Borrowing. The total balance outstanding on 

credit cards and the total unused credit available on credit cards 

marks another indicator of the availability of liquidity to consumers and small businesses. The Treasury Monthly Snapshot 

tracks this data for its institutions. Overall for these institutions, 

credit card lending has changed little since the end of 2008.122 This 

measure may reflect increased household savings rates and weakening consumer demand in response to the weakening economy, or 

it may indicate a lack of credit available on sufficiently favorable 

terms. 

• Perceptions of Lending Practices. The Board of Governors 

of the Federal Reserve Board conducts quarterly surveys of senior 

bank loan officers’ perceptions of their respective institution’s lending practices. Although these surveys ask for subjective evaluations, tracking their evolution over time illustrates how bankers’ 

personal views of the economy and credit markets have changed in 

response to market events. The Fed’s most recent survey, in January 2009, shows that, while the number of lenders tightening loan 

standards has declined from its October 2008 peak, the number remains above its historical average.123 Similarly, although the results indicate a small uptick in demand for loans and in willingness to make loans, the numbers still stand below their historical 

averages.124

These measures indicate that, although credit markets no longer 

face an acute systemic crisis in confidence that threatens the functioning of the economy, the underlying financial crisis is far from 

over and appears to be taking root in the larger economy. Furthermore, Treasury has yet to identify the metrics by which they will 

measure the ultimate success of the programs they have implemented and are implementing, making it difficult to assess performance. 

B. Historical Approaches and Lessons 

This report seeks to examine issues of strategy associated with 

the federal government’s use of the powers granted to it by the 

mstockstill on PROD1PC66 with HEARING

28 

125 Christina D. Romer, The Great Crash and the Onset of the Great Depression, at ii (June 

1988) (National Bureau of Economic Research Working Paper No. 2639) (online at 

papers.ssrn.com/sol3/papers.cfm?abstractlid=262094). 126 Randall Kroszner, The Political-Economy of the Reconstruction Finance Corporation’s BailOut of the U.S. Banking System during the Great Depression (Apr. 1994) (University of Chicago 

Working Paper). 127 Ben S. Bernanke, Essays on the Great Depression, at 7 (2000). 128 Christina Romer, Prepared Remarks to be Presented at the Brookings Institution, Washington, DC: Lessons from the Great Depression for Economic Recovery in 2009, at 5 (Mar. 9, 

2009) (hereinafter ‘‘Romer Brookings Remarks’’); Charles Calomiris and Joseph Mason, How to 

Restructure Failed Banking Systems: Lessons from the U.S. in the 1930s and Japan in the 1990s, 

at 17 (Apr. 2003) (National Bureau of Economic Research Working Paper No. 9624); Bernanke 

supra note 127. 129 Calomiris and Mason, supra note 128, at 17. 130 Romer Brookings Remarks, supra note 128, at 6. 

EESA. Part of that exercise must be to examine the experience of 

the United States and other countries that have faced similar financial crises in the modern era. In this section of this report, we 

will look at four major examples of public policy responses to financial crises: The Great Depression in the United States, the savings 

and loan collapse in the United States, the Swedish banking crisis 

of the early 1990s, and Japan’s banking crisis associated with the 

‘‘lost decade.’’ In addition, we will briefly survey several lesser 

banking problems that have arisen in the United States since 1980. 

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

The 1929 stock market crash, the ensuing collapse of production 

and wealth, and the continued volatility of the markets in the 

1930s led consumers and businesses to reduce spending dramatically, caused extraordinarily high bankruptcy rates, and brought 

about the failure or disappearance of nearly half of all American 

financial institutions.125 During the period between 1929 and 1933 

alone, the number of banks in the U.S. declined by one-third, from 

24,633 to 15,015, with three waves of crises—October 1930, March 

1931, and January 1933—rocking the financial system.126

The causes of the Great Depression and the corresponding crisis 

in the U.S. financial system were complex and numerous, with the 

debate among economists and economic historians focusing primarily on the extent to which monetary versus nonmonetary factors influenced the onset and worsening of the Depression.127

Nonetheless, there is a general consensus that the contractionary 

monetary policies that the Federal Reserve Board pursued at the 

time were a significant contributing factor to the banking crisis of 

the early 1930s.128 These monetary policies were a response to the 

return to the gold standard on the part of numerous countries during the 1920s, which led to a shrinking of the world’s money supply, as central banks around the world scrambled to hoard gold.129

The U.S. government’s insistence on maintaining the gold standard, coupled with the contractionary actions taken by the Federal 

Reserve Board, spurred dramatic deflation, with prices of goods 

falling approximately 25 percent between 1929 and 1933.130 The 

resultant debt deflation, a phenomenon by which the collateral underlying loans shrinks in value, causing the real burden of debt to 

rise, led the economy to spiral further downward, with consumers 

and businesses across the country oftentimes owing more than the 

collateral itself was worth, much as we have seen in recent months 

with a significant proportion of U.S. households owing more on 

mstockstill on PROD1PC66 with HEARING

29 

131 Calomiris and Mason, supra note 128, at 17; Irving Fisher: Out of Keynes’s Shadow, The 

Economist (Feb. 12, 2009). 132 Congressional Oversight Panel, Testimony of Eugene White, Learning from the Past—Lessons from the Banking Crises of the 20th Century, at 3 (Mar. 19, 2009) (hereinafter ‘‘White Panel 

Testimony’’). 133 Robert J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, 

and What to Do About It, at 14 (2008). 134White Panel Testimony, supra note 132, at 8. 135The debate over the creation of the FDIC was quite contentious. For years prior to the 

onset of the Great Depression, there was little support for nationwide deposit insurance, due 

in large part to lessons learned from prior failures of state-based deposit insurance systems, as 

well as concerns about moral hazard. However, in the aftermath of the calamitous bank runs 

of the early 1930s, proponents of Federal deposit insurance were able to pass a measure temporarily instituting a government deposit insurance program as part of the Banking Act of 1933 

(the Glass-Steagall Act). The system was made permanent in 1935. Eugene N. White, Deposit 

Insurance, in Gerard Caprio, Jr. and Dimitri Vittas, Reforming Financial Systems: Historical 

Implications for Policy, at 90–93 (1997). 136Kroszner, supra note 126, at 3. 137William Keeton, The Reconstruction Finance Corporation: Would It Work Today? Economic 

Review, at 38 (First Quarter 1992). 

their mortgages than their homes are worth.131 Further, high real 

rates of interest reduced consumption and investment throughout 

the economy.132

In a parallel that makes the Great Depression quite relevant to 

the current crisis, many economists also cite the collapse of the real 

estate bubble in the second half of the 1920s as a major contributing factor to the stock market crash, the collapse of the banks, 

and the Great Depression.133 Existing problems in the housing 

market were amplified by the debt deflation of 1929–1933, which 

increased the real value of repaying mortgage loans, and rising unemployment rates and falling incomes, which made it increasingly 

difficult for homeowners to repay their debts.134 Borrowers were 

unable to make their payments, the value of banks’ securities fell, 

many banks were unable to meet the needs of their depositors, and 

a lack of confidence in the remaining banks led to a general state 

of panic. The fact that consumer bank deposits were not insured at 

this time further contributed to the sense of uncertainty that pervaded the country, leading to historic levels of bank runs and magnifying the effects of those runs.135

In an initial effort to prevent banks from failing, President Hoover and Treasury Secretary Andrew Mellon organized a conference 

in the fall of 1931, at which prominent bankers agreed to form a 

private lending institution, the National Credit Corporation (NCC). 

The NCC was designed to serve as a supplement to the Federal Reserve Board by making loans to banks struggling to meet their obligations that did not have sufficient ‘‘eligible’’ securities to serve as 

collateral receive loans from the Fed.136 While this effort did lead 

to a short-term boost in confidence, by late 1931, it was clear to 

President Hoover that the NCC would be insufficient. In response, 

Hoover submitted a bill to Congress on December 7, 1931, that 

would create the Reconstruction Finance Corporation (RFC) to 

make loans to banks (as well as to railroads and state and local 

governments) and relax the collateral requirements for borrowing 

from the Fed. 

From its establishment in February 1932 until March 1933, the 

RFC was not authorized to make capital investments in troubled 

banks but rather provided support in the form of fully secured, 

short-term loans.137 By the end of 1932, the RFC had authorized 

mstockstill on PROD1PC66 with HEARING

30 

138 James S. Olson, Saving Capitalism: The Reconstruction Finance Corporation and the New 

Deal, 1933–1940, at 23 (1988). 139 Calomiris and Mason, supra note 128, at 20. 140 Calomiris and Mason, supra note 128, at 21. 141Kroszner, supra note 126, at 4. 142Keeton, supra note 137, at 38. 143Olson supra note 138, at 64. 144Olson supra note 138, at 70. 

approximately $1.6 billion in loans, nearly $1.3 billion of which was 

provided in loans to banks.138 However, the shortcomings of this 

approach quickly became clear, as these secured loans represented 

a senior claim on bank assets relative to depositors, effectively 

worsening the default risk faced by junior depositors and providing 

little help to unhealthy banks.139 Indeed, some scholars have contended that receiving a loan from the RFC may have actually increased the probability of bank failure (controlling for exogenous 

differences among banks).140 A complicating factor was that the 

names of banks receiving funds from the RFC often became public, 

which, in turn, led to a further drop in confidence in those banks. 

According to Jesse Jones, the Texas banker who became the Chairman of the RFC under Roosevelt, ‘‘[i]t became increasingly evident 

to us that loans were not an adequate medicine to fight the epidemic. What the ailing banks required was a stronger capital structure.’’ 141 The matter of determining whether liquidity or solvency 

represented the principal problem for struggling financial institutions and of using that determination to guide policy choices is one 

with distinct relevance to the current crisis. 

While President Hoover was hesitant to institute stronger programs, President Roosevelt took swift action upon becoming president in March 1933, instituting a nation-wide bank holiday on 

March 3 and signing into law the Emergency Banking Act on 

March 9. This Act legalized the banking holiday, authorized the 

RFC to make preferred stock investments in financial institutions, 

instituted procedures for reopening sound banks and resolving insolvent banks, and further broadened the range of assets that 

would be acceptable to the Fed.142 Critical to restoring confidence 

in the banking system was ensuring that only banks liquid enough 

to do business were re-opened when the banking holiday was lifted. 

Therefore, banks were separated into three categories, based on an 

independent valuation of assets conducted by teams of bank examiners from the RFC, Federal Reserve Banks, Treasury, and the 

Comptroller of the Currency: (1) Banks whose capital structures 

were unimpaired, which received licenses and re-opened when the 

holiday was lifted; (2) banks with impaired capital but with assets 

valuable enough to re-pay depositors, which remained closed until 

they could receive assistance from the RFC; and (3) banks whose 

assets were incapable of a full return to depositors and creditors, 

which were placed in the hands of conservators who could either 

reorganize them with RFC assistance or liquidate them.143

The banks that did not initially receive licenses to re-open were 

further scrutinized in order to determine if they could re-open at 

a later date without reorganization and without major assistance 

from the RFC, if they could re-open only after receiving significant 

aid from the RFC and possibly being reorganized, or if they had to 

be liquidated.144 It is important to note that financial institutions 

mstockstill on PROD1PC66 with HEARING

31 

145Olson supra note 138, at 82. 146Kroszner, supra note 126, at 5. 147The Banking Act of 1933 established the FDIC as a temporary government agency and in- sured up to $2,500. The Banking Act of 1935 ultimately made the FDIC permanent and insured 

commercial deposits up to $5,000. 148 Jesse Jones, Fifty Billion Dollars, at 25–26 (1951). 149Federal Reserve Bank of Kansas City, Speech by President Thomas Hoenig: Too Big Has 

Failed (Mar. 6, 2009) (online at www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf). 150 Calomiris and Mason, supra note 128, at 23. 151Walker F. Todd, History of and Rationales for the Reconstruction Finance Corporation, Federal Reserve Bank of Cleveland Economic Review, at 26 (Fourth Quarter 1992). 152 Calomiris and Mason, supra note 128, at 23. 153 Joseph R. Mason, Reconstruction Finance Corporation Assistance to Financial Intermediaries and Commercial & Industrial Enterprise in the U.S., 1932–1937, at 20 (Jan. 17, 2000) 

(online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1337171). 

that were allowed to re-open were nonetheless encouraged to participate in the government preferred stock program, in order to 

strengthen their capital position and to allow them to expand commercial credit.145 However, these banks were slow to participate in 

the preferred stock program, due in large part to the stringent conditions that were placed on banks that sold preferred stock to the 

government, including the provision that granted the government 

voting rights and the ability to elect directors in proportion to its 

stock ownership.146 Bankers also worried that news of the banks’ 

receipt of government aid would become public, worsening their 

solvency and liquidity problems rather than helping to cure them. 

In June 1933, Congress passed the Banking Act of 1933, which 

established the FDIC and restricted initial participation to solvent 

banks upon FDIC’s January 1, 1934 launch.147 Since many banks 

that had been allowed to re-open following the bank holiday were 

still in a precarious financial position, fears that they would be rejected from the FDIC, destroying market confidence in their institutions and leading to bank runs, coupled with cajoling on the part 

of RFC and administration officials likewise concerned that banks 

being rejected from the FDIC would worsen the crisis, led banks 

to begin applying at a much higher rate for the RFC preferred 

stock program. Ultimately, the RFC invested roughly $1.7 billion in 

6,104 banks through its preferred stock program.148 At one point 

in 1933, the RFC held capital in more than 40 percent of all banks, 

representing one-third of total bank capital according to some estimates.149

In exchange for this government support, the RFC exercised its 

control of the banks by replacing senior management at some 

banks and forcing a change in business practices when it determined that changes were needed.150 The RFC also used its power 

to negotiate and reduce the salaries of bank managers and executives.151 The RFC preferred stock had a senior claim on bank earnings and common stock dividend payments were strictly limited to 

a specified maximum until the government investment was repaid, 

with any remaining earnings going towards a preferred stock retirement fund.152 In fact, the RFC reserved the right to take virtually complete control of any bank that missed dividend payments 

on the preferred stock (payments that amounted to 6 percent initially but that were later reduced to 4 percent or as low as 3.5 percent).153 However, the goal of these government takeovers was to 

steer the banks back toward profitability—not to maintain longterm government control. As RFC head Jesse Jones noted at the 

mstockstill on PROD1PC66 with HEARING

32 

154Olson, supra note 138, at 125. 155Keeton, supra note 137, at 47. 156 Hoenig, supra note 149. 157Olson, supra note 138, at 80. 158Mason, supra note 153, at 1. 159 Calomiris and Mason, supra note 128, at 23. 

time, he had ‘‘no desire to control or manage the banks;’’ rather, 

he simply sought to protect the government’s (and, consequently, 

the taxpayer’s) investment as best as he could.154

While there were relapses and the Great Depression persisted for 

some time, it is generally agreed that the RFC played a major role 

in helping to restore the health of the American banking system.155

The key steps it followed in resolving failing banks are often cited 

as the model for dealing with such situations: (1) write down a 

bank’s bad assets to realistic economic values; (2) judge the character and capacity of bank management and make any needed and 

appropriate changes; (3) inject equity in the form of preferred stock 

(but, critically, not until the write-downs have taken place); and (4) 

receive the dividends and eventually recover the par value of the 

stock as the bank returns to profitability and full private ownership.156

It should be noted that the RFC valued banks’ assets varied over 

the life of the RFC. At the outset, RFC examiners evaluated assets 

at their fair market value, using this determination to guide them 

in deciding if an institution was viable, if it could re-open with RFC 

investment, or if it needed to be liquidated; however, toward the 

end of 1933, the RFC changed its valuation standards for the purposes of the preferred stock program, giving book value to the highest grade bonds, market value for bonds in default, face value for 

assets that were fundamentally sound but that could not be converted immediately into cash, and a reasonable valuation for doubtful assets, often including assets derived from real estate.157 How 

such a ‘‘reasonable valuation’’ for the banks’ ‘‘doubtful’’ or bad assets was made, however, is not well documented but appears to 

have relied heavily upon the experience and judgment of federal 

and state bank examiners. Consequently, scholars have noted that 

the underlying assumptions with regard to future market conditions that guided the RFCs’ valuations and decisions on banks’ solvency ‘‘were (and still are) difficult or impossible to quantify.’’ 158

Among the major reasons cited for the relative success of the 

RFC were that: (1) it required banks to submit their regulatory examinations for inspection and rejected hopelessly insolvent banks; 

(2) the RFC was a separately capitalized institution with financial 

and political independence to make decisions as it deemed them 

necessary; and (3) restrictions on recipients of RFC assistance reduced moral hazard and ensured that banks would not take advantage of the program. Among these restrictions were the voting 

rights that the government gained, the influence the RFC had over 

personnel matters, and the seniority of RFC dividends to all other 

stock dividends.159

Nonetheless, whether measured by the number of banks that 

failed, the losses suffered by bank investors and depositors, or the 

extent to which credit contracted, the Great Depression was the 

most significant crisis in the U.S. banking system at the time it occurred, and it remains a key point of reference for assessing the semstockstill on PROD1PC66 with HEARING

33 

160 Calomiris and Mason, supra note 128, at 8. 161White Panel Testimony, supra note 132, at 1. 162 Calomiris and Mason, supra note 128, at 16. 163White Panel Testimony, supra note 132, at 4; Keeton, supra note 137, at 38. 164Many sources have commented on this period. See, e.g., David Moss, An Ounce of Prevention: The Power of Sound Risk Management in Stabilizing the American Financial System (2009) 

(Harvard Business School Working Paper 09–087) (online at www.hbs.edu/economic-crisis/docs/ 

management-in-stabilizing-the-financial-system.pdf). 165 Congressional Oversight Panel, Special Report on Regulatory Reform: Modernizing the 

American Financial Regulatory System: Recommendations for Improving Oversight, Protecting 

Consumers, and Ensuring Stability (Jan. 29, 2009) (hereinafter ‘‘Panel Regulatory Reform Report’’). 166The FDIC authorized such expenditures under its ‘‘essentiality’’ authority granted in the 

Federal Deposit Insurance Act of 1950 (FDIA), Pub. L. No. 81–797. A bank whose operations 

the FDIC deemed ‘‘essential to the community’’ could continue to operate with direct infusions 

of capital rather than being liquidated. FDIA at 13(c). When the FDIC rescued institutions 

under this provision during the 1970s, it did so to avert unique problems rather than to stem 

systemic crises; the threat of urban riots hung over the rescue of minority-owned First Unity 

Bank of Boston, and a local municipal bond collapse looked imminent if Michigan’s Bank of the 

Commonwealth failed. See Irvine H. Sprague, Bailout: An Insider’s Account of Bank Failures 

and Rescues, at 35–76 (1986). 

verity of the current crisis.160 In this regard, it is important to emphasize that, while the RFC contributed to the stabilization of the 

financial system at a time of great crisis, it certainly did not prevent the failure of many financial institutions, nor did it necessarily preserve the deposits individuals had in these failed institutions in the pre-FDIC era. Indeed, considering that the RFC 

made a point not to invest in hopelessly insolvent banks and, likewise, the FDIC, when established in 1934, did not insure the deposits of insolvent banks, the result was that all stakeholders in 

failed banks—stockholders, bondholders, and depositors—shared in 

absorbing the losses.161 Equity in failed banks was wiped out and 

depositors and non-depository debt holders were paid on a pro rata 

basis as the liquidation of the assets of failed banks proceeded.162

Specifically, between 1930 and 1933, 10.7 percent of commercial 

banks in the U.S. failed outright, and, by 1933, debt and equity 

losses to private investors, bondholders, and depositors totaled $2.5 

billion (approximately 2.4 percent of GDP in 1933).163

2. CONTINENTAL ILLINOIS 

Following the banking reforms of the 1930s, including the institution of deposit insurance, the Glass-Steagall Act, and others, the 

financial sector entered into a long period of tranquility.164 Bank 

failures slowed to a trickle as bank regulatory policy focused 

strongly on maintaining regulatory safe zones of the kind discussed 

in the Panel’s Regulatory Reform Report.165 Moreover, when failure did happen, the automatic regulatory machinery worked as designed: either the regulators sold the bank successfully or they liquidated the institution, made good on deposit insurance promises, 

and wiped out the uninsured depositors and other creditors. 

Occasionally, bank failures were resolved using the FDIC’s ‘‘essentiality’’ authority, but, even then, these failures involved comparatively small investments. Into the 1970s, federal regulators 

wrung their hands over transactions as small as a $1.5 million loan 

to save a troubled $11 million institution.166 However, until the 

1980’s, the federal government did not rescue any bank out of a 

fear that the institution’s failure would pose systemic risk or that 

mstockstill on PROD1PC66 with HEARING

34 

167Sprague, supra note 166, at 86–91. The rescue of First Pennsylvania Bank constitutes regulators’ first recognition of what was then termed the ‘‘domino effect,’’ the phenomenon of one 

bank failure causing trouble at other institutions and touching off a banking crisis. However, 

in First Pennsylvania’s case, regulators feared at worst a regional crisis precipitated by the effect First Pennsylvania’s failure would have on the already weak mutual savings banks concentrated in the Northeast. See Sprague, supra note 166, at 77–106. 168Federal Deposit Insurance Corporation, History of the Eighties—Lessons for the Future: 

Volume I: An Examination of the Banking Crises of the 1980s and Early 1990s, at 241 (Dec. 

1997) (online at www.fdic.gov/bank/historical/history/vol1.html) (hereinafter ‘‘FDIC History: Volume I’’). 169See, e.g., Banker of the Year, Euromoney, at 134 (Oct. 1981); Here Comes Continental, 

Dun’s Review, at 42–44 (1978) (Vol. 112, No. 6). 170Sprague, supra note 166, at 150–51. 171Sprague, supra note 166, at 150–51. 172Sprague, supra note 166, at 150–51. 173Sprague, supra note 166, at 151–52. 174Sprague, supra note 166, at 152–56. 175FDIC History: Volume 1, supra note 168, at 243. The speed of the run both surprised and 

troubled regulators; it represented the first run of such scope on a modern, technologically interconnected bank. Sprague, supra note 166, at 152–56. 176FDIC History: Volume 1, supra note 168, at 243–44. 177FDIC History: Volume 1, supra note 168, at 250. 178 A deposit payoff may not have been an option at all for Continental Illinois; after the fact, 

Comptroller of the Currency Todd Conover told Congress that the FDIC did not have the funds 

to conduct a deposit payoff for any one of the nation’s eleven largest banks should any of them 

fail. FDIC History: Volume 1, supra note 168, at 251. Continental Illinois was the nation’s seventh largest bank in 1984. FDIC History: Volume 1, supra note 168, at 236. 

the firm was ‘‘too big to fail.’’ 167 During the 1982 failure of Penn 

Square Bank, N.A., federal regulators explicitly chose to liquidate 

the bank rather than expend the funds necessary to protect some 

of the nation’s largest banks, which had sizeable claims against 

Penn Square.168

The bank run on Continental Illinois National Bank and Trust 

Company (Continental Illinois) was a watershed event that produced a major change in the federal government’s response to a 

failing bank. Continental Illinois enjoyed high growth and the envy 

of its competitors throughout the late 1970s and early 1980s.169

However, losses on non-performing loans concentrated in the energy sector and in less-developed-countries (LDC) soared from 1982 

through the first quarter of 1984.170 Continental Illinois had made 

many of these energy and LDC investments alongside or through 

Penn Square.171 Because of its substantial investments, Continental Illinois’ troubles began with the Penn Square failure, which 

almost singlehandedly halved its stock price, prompted downgraded 

credit ratings, and caused its sources of capital to dry up.172 Continental Illinois had to borrow on less and less favorable terms just 

to keep itself afloat.173

In May 1984, Continental Illinois’s situation became untenable 

and a potentially catastrophic bank run started.174 In two days, the 

bank needed to borrow $3.6 billion from the Federal Reserve 

Board’s discount window in order to meet its obligations on deposit 

withdrawals.175 The announcement of $4.5 billion in loans from 

other banks did not stop the bleeding.176

Regulators paid close attention to the run; more than two thousand banks had investments in Continental Illinois, and almost 

two hundred of them had more than half of their equity capital invested.177 There was serious concern that the bank’s failure could 

have left uninsured depositors and creditors exposed, causing many 

more failures in its wake and spawning a financial crisis.178

As a result, in order to stave off a systemic crisis, federal regulators acted quickly by announcing $2 billion in immediate assistmstockstill on PROD1PC66 with HEARING

35 

179Sprague, supra note 166, at 160. 180FDIC History: Volume 1, supra note 168, at 244. 181FDIC History: Volume 1, supra note 168, at 244. 182Sprague, supra note 166, at 165–67, 170. 183Sprague, supra note 166, at 200–201. 184Sprague, supra note 166, at 180–81. 185Sprague, supra note 166, at 209–10. 186Sprague, supra note 166, at 209–10; FDIC History: Volume 1, supra note 168, at 244. 187Sprague, supra note 166, at 209–10; FDIC History: Volume 1, supra note 168, at 247–48. 

These terms bear many similarities to the government’s present interest in AIG; Treasury does 

not have a similar equity stake in any of the over 500 recipients of TARP assistance. 188Sprague, supra note 166, at 200–209. 189Sprague, supra note 166, at 215–17. 190Sprague, supra note 166, at 214. 191The Wharton School Financial Institutions Center, University of Pennsylvania, The Collapse of Continental Illinois National Bank and Trust Company: The Implications for Risk Management and Regulation, at 3 (online at fic.wharton.upenn.edu/fic/case%20studies/ 

continental%20full.pdf) (accessed Apr. 2, 2009). 

ance to stop the run.179 Furthermore, the Federal Reserve Board 

promised to meet any liquidity needs, and the FDIC promised to 

protect all of Continental Illinois’s depositors and general creditors.180 Finally, a group of major financial institutions put up $5.3 

billion in unsecured credit.181 With these guarantees, the run 

stopped and the crisis subsided. 

However, having already determined that a deposit payoff would 

result in a systemic crisis, the government needed to merge the 

bank with another institution or bail out the bank and reconstitute 

it with new leadership.182 Regardless of the outcome, Continental 

Illinois would have new managers; either the acquirers or an 

FDIC-selected team would operate the bank going forward.183

After two months of searching for a merger partner and evaluating many proposals, no viable acquirer emerged.184 As a result, 

the FDIC instituted a good-bank-bad-bank restructuring of Continental Illinois. The FDIC took responsibility for $4.5 billion in bad 

loans at a price of $3.5 billion, paid by assuming Continental’s debt 

to the Federal Reserve Board.185 The FDIC offset the $1 billion 

write-off this transaction prompted with a $1 billion investment 

into Continental Illinois’s holding company, Continental Holding 

Corporation, and required the holding company to push the capital 

downstream to the bank.186 In exchange for its investment, the 

FDIC received an 80 percent stake, composed of junior preferred 

stock, in the holding company.187

The FDIC replaced top management, bringing in a new chairman, former Standard Oil of Indiana chairman John Swearingen, 

and a new CEO, former Chase CFO Bill Ogden.188 The FDIC also 

dismissed members of Continental Illinois’s board of directors who 

had come on before 1980 and had presided over the operations that 

got the bank in trouble.189 The bank’s remaining shareholders approved the plan in September 1984.190 Although Continental Illinois did return to viability, it remained closely watched by regulators; FDIC did not sell its last equity stake until 1991.191

Continental Illinois was the first rescue of the entire creditor 

class of a financial institution since the Depression. However, the 

stockholders of Continental Illinois were diluted when, in exchange 

for FDIC support, the FDIC took an 80 percent equity stake in the 

bank. This stake granted FDIC most of the upside potential and 

control of the governance of Continental Illinois. 

mstockstill on PROD1PC66 with HEARING

36 

192 Barbara Rudolph et al., Special Report: The Savings And Loan Crisis, Time (Feb. 20, 

1989). Savings and loan bankers were said to operate on the ‘‘3–6–3 rule’’: they could pay out 

3 percent on deposits, collect 6 percent on loans, and make it to the golf course by 3 every afternoon. Id. 193Lawrence J. White, The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation, at 62–65 (1991). 194White, supra note 193, at 62–65. 195White, supra note 193, at 67–72. 196White, supra note 193, at 67–72. 197Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), Pub. 

L. No. 96–221, at §§ 202–210. 198White, supra note 193, at 72–73. 199Federal Deposit Insurance Corporation, The S&L Crisis: A Chrono-Bibliography (online at 

www.fdic.gov/bank/historical/s&l/index.html) (accessed Apr. 2, 2009) (hereinafter ‘‘FDIC Bibliography’’). 200DIDMCA at § 401, See also FDIC Bibliography, supra note 199. 

3. SAVINGS AND LOAN CRISIS/RESOLUTION TRUST CORPORATION 

Unlike commercial banks, savings and loan associations (‘‘S&Ls’’ 

or ‘‘thrifts’’) faced increasingly difficult financial circumstances 

starting in the late 1960s. From the 1930s onward, thrifts made 

money by paying out on short-term deposits less than they collected on long-term loans, mostly 30-year fixed-rate mortgages. As 

long as short-term interest rates stayed low, this business model 

remained extremely profitable.192

However, the U.S. economy started to overheat and the Federal 

Reserve Board raised short-term interest rates beginning in the 

late 1960s to combat the resulting inflation. High short-term interest rates undermined the thrift business model by forcing the thrift 

to pay out more on short-term deposits than it collected on longterm fixed-rate loans. The Federal Reserve Board responded by imposing Regulation Q, a provision that capped the rate at which 

thrifts and banks could pay out interest on deposits.193 Because the 

federal government insured S&L deposits through the Federal Savings and Loan Insurance Corporation (FSLIC, the thrifts’ equivalent of the commercial banks’ FDIC), the interest rate cap did not 

result in mass deposit defection to higher yielding, uninsured investments.194

However, in the late 1970s the Federal Reserve Board took further action to combat inflation by sharply increasing short-term interest rates.195 As their customers accelerated their deposit withdrawals to pursue higher interest rates elsewhere through alternative investments, the thrifts clamored for the ability to pursue 

capital that fled to savings alternatives not affected by Regulation 

Q caps.196 Congress eventually responded by allowing S&Ls to pay 

much higher rates on deposits.197

While higher payouts stopped the problem of deposit flight, higher costs threatened to bleed the S&Ls to death unless they could 

find sources of income beyond the single-digit returns on traditional 30-year fixed-rate mortgages. As a result, authorities began 

stripping away the regulations that had governed thrifts’ operations since the Great Depression. The Federal Home Loan Bank 

Board (FHLBB) permitted the thrifts to begin issuing adjustable 

rate mortgages in 1979.198 Congress endorsed this diversification 199 and explicitly authorized further steps, including greater 

involvement in consumer lending and commercial real estate.200 Simultaneously, many states dramatically relaxed the rules that governed the investments their state-chartered thrifts could make, almstockstill on PROD1PC66 with HEARING

37 

201FDIC Bibliography, supra note 199. 202Many scholars have pointed to this failure as the critical moment that precipitated the 

S&L crisis. See, e.g., White, supra note 193, at 74–82. 203White, supra note 193, at 82–84. 204White, supra note 193, at 83. 205White, supra note 193, at 84–87. 206FDIC Bibliography, supra note 199. 207White, supra note 193, at 88–90. 208White, supra note 193, at 89–90. The southwest here refers to the FHLBB’s Ninth District, 

encompassing Arkansas, Louisiana, Mississippi, New Mexico, and Texas. 209White, supra note 193, at 109–111; FDIC Bibliography, supra note 199. 210White, supra note 193, at 89–90. 211White, supra note 193, at 111. 212White, supra note 193, at 109–111. 213Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and Consequences, FDIC Banking Review, at 27 (Dec. 2000) (online at www.fdic.gov/bank/analytical/ 

banking/2000dec/brv13n2l2.pdf). 

lowing the thrifts to get directly involved in similarly unfamiliar, 

risky investments.201

At the same time as thrift regulators began eliminating restrictions on the thrifts’ asset options, the regulators also relaxed safety 

and soundness regulation.202 Federal and state regulators stripped 

down the net worth requirements that S&Ls had to meet, allowing 

them to hold less and less capital to support the same amount in 

deposits.203 The new net worth guidelines permitted thrifts to substitute net worth certificates from the FSLIC for real capital in the 

regulator-mandated calculations.204 Changes in accounting rules 

made it even easier to meet the new lower net worth requirements.205 Finally, the FHLBB made it significantly easier for 

thrifts to expand through acquisitions by eliminating restrictive 

stock ownership regulations.206

At the same time that policymakers expanded thrifts’ investment 

options, they subjected the thrifts to reduced examination and oversight; thrift examinations fell nationwide during the early 1980s.207

Examinations and FHLBB activity fell even further in the southwest, the region that would become the epicenter of the S&L crisis.208

The combination of the need for greater returns on loans and assets in order to cover the higher deposit interest rates and the new 

regulatory freedom to undertake a much wider range of investments led to dramatic expansion of the thrift industry. Economic 

conditions, especially booms in oil prices and real estate created an 

environment in which high-yield investments constantly tempted 

the thrifts.209 This expansion was concentrated in the Sun Belt and 

in those states with fewer regulatory restrictions.210

However, as the 1980s wore on, the thrifts’ fortunes started to 

change. Oil prices began declining to levels that made boom-time 

investments unprofitable.211 Further, Congress eliminated many of 

the tax benefits for real estate that had led to the building spurt 

of the early part of the decade.212 As a result, by 1985, it became 

clear that the thrift industry faced serious trouble. Enough S&Ls 

had folded or were in danger of folding that the FSLIC was insolvent.213

Thrift failures increased during 1987 and into 1988, but the insolvency of the FSLIC meant that rescuing troubled thrifts would 

cost more than the FSLIC had available in its insurance fund. As 

a result, the regulators could not intervene in S&Ls that had more 

in liabilities than assets. This situation left hundreds of institumstockstill on PROD1PC66 with HEARING

38 

214 James R. Barth, Susanne Trimbath, Glenn Yago, The Savings and Loan Crisis: Lessons 

from a Regulatory Failure, at 117–18 (2004). 215 Id. 216 Id. 217 Competitive Equality Banking Act of 1987 (CEBA), Pub. L. No. 100–86. 218 Id. at § 302. 219 Id. at § 302(e). 220White, supra note 193, at 147–170. 221Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. 

No. 101–73. 222 Id. at §§ 401–403. 223 Id. at §§ 201–226. From the passage of FIRREA until 2004, FDIC maintained the Bank 

Insurance Fund (BIF) for commercial banks and the Savings Association Insurance Fund (SAIF) 

for thrifts. This arrangement ended with the Federal Deposit Insurance Reform Act of 2005, 

Pub. L. No. 109–171, and the creation of the Deposit Insurance Fund to replace the BIF and 

the SAIF. 224 Among these provisions were mandates for the percentage of lending devoted to housing 

investments, greater net worth requirements, a minimum regulatory floor that applied to state 

and federally chartered thrifts, and new criminal and civil enforcement mechanisms. See White, 

supra note 193, at 178–80. 

tions in what came to be characterized as a ‘‘zombie’’ stage.214 A 

zombie thrift, one which was insolvent but continued to operate because the FSLIC had not yet intervened to liquidate or sell it, 

posed a significant asymmetric risk problem. These thrifts had dramatic incentives to take on greater and greater risk in order to 

generate the returns they needed to reverse their fortunes. At the 

same time, they had little or no capital of their own left and faced 

the prospect of imminent closure.215 Hence, the taxpayer bore tremendous exposure to the risks undertaken by these zombie institutions.216 Thrifts continued to pursue risky strategies long after the 

need to take them over became apparent and this ultimately added 

to the total cleanup costs. 

Although the FSLIC fund was almost $10 billion underwater in 

1985, when the scope of the crisis had still not become apparent, 

Congress waited until 1987 to pass the initial recapitalization legislation.217 The new law permitted the FSLIC to borrow against its 

future deposit insurance premium revenue in order to resolve insolvent thrifts immediately.218 However, it limited the funds the 

FSLIC could raise through this authority during any given year.219

Nonetheless, the FSLIC began using its newfound borrowing authority to start disposing of the most problematic thrifts by liquidating or forcing them into mergers, paying out insured deposits, 

and trying to find new buyers for problematic assets. In these 

transactions, only the insured depositors had full protection. Bondholders and equity holders took losses that depended on the value 

that the thrift itself or its disaggregated assets demanded on the 

open market; in some cases, debt and equity holders saw their investments wiped out entirely.220

The FSLIC resolutions cost a great deal of money, and reporting 

about the scandal increased dramatically. Pressure on legislators 

increased as well, and Congress passed the Financial Institutions 

Reform Recovery and Enforcement Act (FIRREA) in 1989.221

FIRREA abolished the FHLBB and shifted regulation of S&Ls to 

the Office of Thrift Supervision (OTS),222 transferred the thrifts’ 

deposit insurance function from the FSLIC to the FDIC,223 and reinstituted many of the regulatory provisions that had been weakened during the previous decade.224 Finally, FIRREA created the 

mstockstill on PROD1PC66 with HEARING

39 

225FIRREA, supra note 221, at § 501. 226FIRREA, supra note 221, at §§ 511–12. 227White, supra note 193, at 176–79. 228 Curry and Shibut, supra note 213, at 29. See also Lee Davison, The Resolution Trust Corporation and Congress, 1989–1993, Part II: 1991–1993, FDIC Banking Review (2006) (online at 

www.fdic.gov/bank/analytical/banking/2007apr/br18n3full.pdf). 229 Curry and Shibut, supra note 213, at 27. 230See, e.g., Bert Ely, The Resolution Trust Corporation in Historical Perspective, Housing Policy Debate (1990) (online at www.mi.vt.edu/data/files/hpdl1l1/hpdl0101lely.pdf). 231 Id. at 56–58. 232 Id. at 58–60. 233 Id. at 59–60. 234 In this respect, the resolution of troubled assets in the present crisis represents a much 

greater challenge. Not only do the underlying assets face similar valuation problems to what 

the RTC had to address, but because each step removed from the underlying asset compounds 

the valuation problem, pooling and securitization make valuation dramatically harder. 

Resolution Trust Corporation (RTC) to address the insolvent 

S&Ls.225

The RTC fell under the control of the FDIC and was funded by 

$20 billion worth of taxpayer funds and $30 billion borrowed 

through a new entity, the Resolution Finance Corporation 

(REFCORP).226 FIRREA also mandated that thrifts contribute substantial upfront funding to REFCORP and pay greater deposit insurance premiums.227 Three subsequent pieces of legislation increased the total funding available to the RTC to $105 billion, of 

which it received $91 billion.228 Using this funding, by the time its 

statutory authorization finally ran out, the RTC resolved 747 

thrifts at a total cost of over $150 billion, over $120 billion of which 

came from the federal treasury.229

The failed thrifts themselves were subject to the FDIC resolution 

process, which universally wiped out the equity holders and put 

creditors other than insured depositors through a bankruptcy-like 

process in which there was no guarantee of full recovery. Obviously, this process involved the FDIC taking full control of failed 

institutions until the institutions’ assets or businesses were sold 

off. 

The RTC had responsibility for all the assets of insolvent thrifts. 

Good assets, loans, and investments which were sound and held 

their value found buyers relatively quickly. But the RTC also inherited a diverse set of troubled assets, and experts expressed 

great skepticism about the agency’s ability to liquidate them.230

First, the RTC would have to confront an enormous volume of assets, the troubled investments of hundreds of failing thrifts.231 Second, the RTC would have to dispose of an enormous variety of assets, including complex commercial ventures and projects where 

other viable investors remained.232 Finally, and most problematically, many of the assets were in serious financial trouble, having 

already defaulted or requiring credit restructuring.233 Nobody 

knew if these assets were worth anything, much less if the RTC 

could successfully tap into what market might exist. 

But despite the challenges it faced, the RTC disposed of the 

thrifts’ bad assets with far less fanfare than many observers had 

anticipated. In this effort, the RTC benefitted from most thrifts 

holding tangible, albeit troubled, assets.234 While a half-finished 

real estate development or office building, or a project funded by 

a loan in default represents a valuation challenge, especially when 

mstockstill on PROD1PC66 with HEARING

40 

235 Ely, supra note 230, at 71–74. 236 Jerry W. Markham, A Financial History of the United States, Volume III: From the Age 

of Derivatives into the New Millennium (1970–2001), at 172–73 (2002). 237Kerry D. Vandell and Timothy J. Riddiough, On the Use of Auctions as a Disposition Strategy for RTC Real Estate Assets: A Policy Perspective, Housing Policy Debate, at 118–19 (1992) 

(online at www.mi.vt.edu/data/files/hpd%203(1)/hpdl0301lvandell.pdf). 238 Id. at 119 (citing a Wall Street Journal piece from October 3, 1991 that quotes RTC deputy 

director Thomas Horton as saying, ‘‘We think it’s the best thing in the world if someone makes 

money off us. Smart money follows smart money.’’). 239See, e.g,. id. at 117. 240Mark Cassell, How Governments Privatize: The Politics of Divestment in the United States 

and Germany, at 4–8, 26–33 (2003). 241See, e.g., id.; Markham, supra note 236, at 173 (describing the RTC as a ‘‘qualified success’’). 242George J. Benston and George G. Kaufman, FDICIA After Five Years: A Review and Evaluation, at 7–8 (June 11, 1997) (Federal Reserve Bank of Chicago Working Paper Series, Issues 

in Financial Regulation WP–97–1) (online at www.chicagofed.org/publications/workingpapers/ 

papers/wp97l1.pdf). 243Federal Deposit Insurance Corporation, Failures and Assistance Transactions, Number of 

Institutions, United States and Other Areas: 1934–2009 (online at www2.fdic.gov/hsob/ 

HSOBSummaryRpt.asp?BegYear=1934&EndYear=2009&State=1) (accessed Mar. 23, 2009). 244George G. Kaufman, FDIC Losses in Bank Failures: Has FDICIA Made a Difference?, Federal Reserve Bank of Chicago Economic Perspectives, at 16 (Third Quarter 2004) (online at 

www.chicagofed.org/publications/economicperspectives/epl3qtr2004lpart2lKaufman.pdf). 245 Benston and Kaufman, supra note 242, at 8. 246Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), Pub. L. No. 

102–242. 

it involves other investors of varying financial health, it is a solvable one.235

Other innovations and strategies helped the RTC. It discovered 

a new market for problematic loans securitized into more palatable 

chunks.236 It also found that employing sealed-bid, bulk auctions to 

dispose of its immense inherited real estate holdings attracted investors looking for bargain-basement prices.237 The RTC promoted 

the stories of buyers who made money from purchases of their assets in the hope that more investors would follow.238 Although commentators largely panned this strategy,239 buyers quickly materialized and the RTC managed to dispose of the questionable assets 

under its control quicker and at less cost to the taxpayer than 

many anticipated.240 As a result, most modern commentators regard the RTC as a successful enterprise.241

4. RECAPITALIZATION OF THE FDIC BANK INSURANCE FUND/FDICIA 

Although insulated from the interest rate shocks that created 

problems for the thrift industry, commercial banks also faced problems during the 1980s. The same economic conditions that so 

threatened the S&Ls, namely the end of the real estate boom and 

the collapse of the price of energy, impacted many viable commercial bank investments as well.242 FDIC interventions in commercial 

banks topped 250 each year from 1987 to 1989.243 In all, over 1500 

commercial banks failed between 1980 and 1992.244 As a result, 

the FDIC’s Bank Insurance Fund, like the FSLIC before it, did not 

have the resources to resolve all the troubled institutions.245

In the wake of the Continental Illinois bailout, where the FDIC 

had to take an equity stake in the institution because it lacked the 

funds to resolve it, and the S&L crisis, where the FSLIC’s insolvency increased the debacle’s ultimate costs, pressure mounted to 

create greater bank rescue authority that would avoid future taxpayer expense. As such, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).246

FDICIA allocated funds to recapitalize the FDIC’s Bank Insurance 

mstockstill on PROD1PC66 with HEARING

41 

247FDIC History: Volume 1, supra note 168, at 103. 248FDIC History: Volume 1, supra note 168, at 103. The Act mandated that the BIF meet 

its target within 15 years, while allowing the SAIF an open-ended timeframe. 249Lawrence H. White, Introduction, in The Crisis in American Banking, at 5 (Lawrence 

White, ed.) (1995). 250FDIC History: Volume 1, supra note 168, at 103. 251 Benston and Kaufman, supra note 242, at 10–11. 252FDIC History: Volume 1, supra note 168, at 104. 253FDIC History: Volume 1, supra note 168, at 104. 254 Congressional Oversight Panel, Testimony of Bo Lundgren, Learning from the Past: Lessons from the Banking Crises of the 20th Century (Mar. 19, 2009). In 1994, there were 91 savings banks and 23 commercial banks in the country. Sweden: Economic Infrastructure, The 

Economist (1996). 

Fund (BIF) and implemented substantial regulatory and deposit insurance reforms. 

FDICIA significantly altered the FDIC’s ability to borrow and 

raise capital in order to address problem institutions. The Act substantially increased the FDIC’s borrowing authority to up to $30 

billion and allowed for it to raise emergency funds by borrowing 

against the proceeds from selling the assets of failed banks.247

FDICIA also set a target and a timeline for the FDIC’s insurance 

funds to meet designated capital ratios.248 These provisions, taken 

together, substantially increased the resources which FDIC could 

use to step in and close zombie institutions instead of allowing 

them to continue pursuing risky strategies.249

The legislation also established a set of new regulatory frameworks centered around capital requirements. Congress required the 

FDIC to classify banks according to their capitalization status; a 

decrease in a bank’s capitalization status would increase the regulatory tools available to the FDIC to address the situation.250 This 

policy, dubbed the Structured Early Intervention and Resolution 

(SEIR) framework, aimed to resolve institutions before they become 

problematic.251 The legislation also sought to make deposit insurance act more like insurance by charging institutions variable premiums based on the likelihood that the FDIC would have to spend 

money to honor their depository obligations.252

Finally, FDICIA explicitly endorsed the concept of systemic risk 

as a justification for taking extraordinary actions. Although mandating that the FDIC, under ordinary circumstances, had to resolve 

an institution using the least costly method, be it sale, liquidation, 

receivership, or some other means, FDICIA permitted a waiver of 

this provision if federal banking regulators reached the conclusion 

that the institution posed a systemic risk.253 Although intended to 

reduce the specter of systemic risk by systematizing the conditions 

under which it could justify action, FDICIA did represent Congress’ 

endorsement of the concept as something which justified its own 

set of rules. 

5. SWEDEN 

Like the savings and loan and subprime mortgage crises in the 

United States, the Swedish banking crisis of the early 1990s arose 

from a real estate bubble that was brought on principally by deregulation in the financial markets. Sweden’s banking system was 

highly concentrated, with the seven largest banks accounting for 90 

percent of the market.254 The prior decade of the 1980s was 

‘‘marked by economic deregulation, the removal of cross-border restrictions on capital flows, financial innovation, and increased commstockstill on PROD1PC66 with HEARING

42 

255 Burkhard Drees and Ceyla Pazarbasioglu, The Nordic Banking Crises, Pitfalls in Financial 

Liberalization? at 1 (Apr. 1998) (International Monetary Fund Working Paper Series, 95/61). 256This number may slightly overstate the increase because it includes an unknown number 

of loans between private parties that were converted to bank loans. Peter Englund, The Swedish 

Banking Crisis: Roots and Consequences, Oxford Review of Economic Policy, at 84 (1999). 257 Id. at 85. 258 Id. at 81. 259Drees and Pazarbasioglu, supra note 255, at 4–8. 260O. Emre Egrungor, On the Resolution of Financial Crises: The Swedish Experience, at 5 

(June 2007) (Federal Reserve Bank of Cleveland Policy Discussion Paper Series, No. 21) (online 

at www.clevelandfed.org/research/PolicyDis/pdp21.pdf). 261 Englund, supra note 256, at 85. 262 Citigroup Global Markets, Swedish Models: Banking Crisis and Recovery in the Early 

1990s, at 12 (Feb. 23, 2009); Drees and Pazarbasioglu, supra note 255, at 1. 263This includes ‘‘reservations for future losses for loans that were still performing.’’ Englund, 

supra note 256, at 90. 

petition in financial services.’’ 255 While Swedish banks had previously been required to invest more than half of their assets in 

low-interest bonds and had been subject to interest rate caps, these 

regulations were lifted during the period between 1983 and 1985. 

Lending subsequently increased by 73 percent in real terms.256 The 

household debt-to-assets ratio grew from 35.8 percent in December 

1985 to 38 percent in December 1988.257 This was accompanied by 

a growth in the corporate debt-to-asset ratio from 65.5 percent to 

68.2 percent. 

Tax and exchange rate policies also appear to have contributed 

to the boom. In the late 1980s, ‘‘[h]igh inflation interacted with a 

nominal tax system with full deductibility of interest payments 

* * * making real after-tax interest rates low or even negative.’’ 258

With such low interest rates and restrictions on lending and capital 

flows removed, borrowers took on unaffordable amounts of debt. 

Banks lacked sufficient internal controls to counteract the borrowers’ and lenders’ newfound appetite for risk. Government regulators facilitated the bubble with a hands-off approach to real estate and foreign currency lending.259

The danger of these factors was fully exposed when the fixed exchange rate forced Sweden to increase its real interest rates following German re-unification. High interest rates curtailed the demand for real estate and the bubble burst. Between 1990 and 1995, 

residential real estate values dropped 25 percent and commercial 

real estate values dropped 42 percent.260 Matters were made worse 

when the krona was taken off the fixed exchange rate. Its value 

plummeted 20 percent between November 19 and December 31, 

1992. Many Swedish debtors found themselves unable to meet their 

obligations since 47.5 percent of loans made in 1990 were in foreign 

currency.261 By 1993, domestic non-performing loans had reached 

11 percent of GDP. 

The impact of the economic downturn was already in evidence in 

the financial sector in 1991 when one of Sweden’s largest banks, 

Nordbanken, announced that it could no longer meet its eight percent capital requirement. Two other major institutions, Forsta 

Sparbanken and Gota soon found themselves in similar situations. 

In total, Sweden’s banks faced bad debt charges averaging 6.3 percent of total loans in 1992 and 5.6 percent the following year, up 

from only 0.3 percent in 1989.262 From 1990 through 1993, loan 

losses were close to 17 percent of total lending.263

The government responded by taking full ownership of 

Nordbanken, the majority of which was already owned by the state, 

mstockstill on PROD1PC66 with HEARING

43 

264Stefan Ingves and Goran Lind, The Management of the Bank Crisis—In Retrospect, Quarterly Review, at 12 (Jan. 1996). 265Lundgren, supra note 254. 266 Hoenig, supra note 149, at 6. 

and Gota. A loan guarantee was provided to Forsta Sparbanken to 

help keep it afloat. The acquisitions of Nordbanken and Gota left 

the government holding 22 percent of the nation’s banking assets. 

These moves naturally shook the faith of foreign creditors in the 

Swedish economy. To restore confidence, the Riksbank, the Swedish central bank, issued a blanket guarantee to all creditors and 

depositors on all non-equity claims in Swedish banks in December 

1992. The guarantee gave the Swedish parliament, the Riksdag, 

the breathing room it needed to devise an action program for removing the non-performing loans from the banks’ balance sheets. 

To ensure maximum transparency and independence, the 

Riksdag created the Bank Support Authority, an entity separate 

from the Ministry of Finance and Riksbank, and vested it with the 

authority to evaluate the financial condition of the struggling 

banks and recommend an appropriate course of action for each. 

The Bank Support Authority followed a three-part sequence: 

• First, it audited the books of the banks to determine their 

health; 

• Second, it installed state representatives on the boards of 

banks that required new capital and replaced top management 

of banks that were nationalized; 

• Third, it provided capital injections to banks that were 

undercapitalized. 

In the spring of 1993, the Bank Support Authority set about 

triaging Swedish banks into three categories. The approach was 

grounded in the central principle that all capital losses, regardless 

of size, had to be covered to revive the banking sector.264 The three 

categories included: 265

• ‘‘Category A.’’ These banks were the healthiest, with capital adequacy of at least eight percent. These banks were expected to require minimal public assistance, such as temporary 

guarantees; 

• ‘‘Category B.’’ These banks were those that might fall 

below eight percent capital but were expected to survive with 

the help of public capital contributions (in exchange for preferred stock) or loans. Banks in this category were also required to raise private capital.266 ‘‘B’’ banks were required to 

comply with rules on capital use; 

• ‘‘Category C.’’ These banks were those that were not expected to survive in their current form. Banks in this category, 

which included Nordbanken and Gota, were nationalized and 

their assets were divided between good and bad (legally separate work-out units) by the Valuation Board, a body of expert 

auditors set up by the Bank Support Authority. 

The good assets of the ‘‘C’’ banks were consolidated under the 

Nordbanken name. The bad assets were transferred to two asset 

management companies (AMCs): Securum and Retriva. This model 

was derived from the Resolution Trust Corporation of the U.S. savmstockstill on PROD1PC66 with HEARING

44 

267 Egrungor, supra note 260, at 6. 268Thomas F. Cooley, Swedish Banking Lessons, Forbes (Jan. 28, 2009). 269Lundgren, supra note 254. 270Daniela Klingebiel, The Use of Asset Management Companies in the Resolution of Banking 

Crises Cross-Country Experiences, at 9 (Feb. 2000) (World Bank Policy Research Working Paper 

Series, No. 2284) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=282518). 271Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (2008). 

ings and loan crisis. The two AMCs were deliberately over-capitalized, allowing them to perform their salvage operations autonomously without the need to return to the Riksdag for more funding, 

which would have exposed them to political pressures. In many 

cases, the AMCs had to take over defaulting companies and assume typical management responsibilities, including hiring and firing management, managing and rehabilitating property, and adjusting business strategies. The government originally estimated 

that the liquidation operations of the AMCs would take 10 to 15 

years to complete. However, better than expected macroeconomic 

conditions helped to expedite the process and, by 1997, the liquidation was complete.267 Initially, Sweden’s efforts to rescue the financial sector cost it approximately 65 billion kronor, the equivalent 

of slightly more than four percent of GDP at the time. Most of that 

expenditure was recovered via proceeds from Securum and Retriva 

and the partial privatization of Nordbanken. Estimates of the net 

cost of the government intervention range from zero to two percent 

of GDP.268

Two features of the Swedish strategy are particularly noteworthy. The first is transparency. As Bo Lundgren noted in his testimony before the Panel, a ‘‘key objective was to ensure that our 

crisis management would be characterized by the greatest possible 

transparency’’ in order to bolster confidence in the financial sector.269 Sweden effectively accomplished this by requiring banks to 

open their books, reveal all potential write-downs, and isolate them 

via separate good and bad aggregator banks. In addition, the blanket guarantee on all bank liabilities helped calm investors while 

this program was in progress. The Swedes complemented these 

policies with a public relations campaign that sent officials from 

the financial agencies to the world’s various financial centers to explain the strategy and instill confidence in investors. 

Second, the Swedes made an effort to ensure that the executors 

of the program enjoyed political and financial independence. The 

creation of the Bank Support Authority was a necessary step to 

avoid any potential conflicts of interest. It begat the Valuation 

Board and the AMCs, which managed to successfully absorb 7.7 

percent of the assets of the financial system (equal to eight percent 

of GDP) and dispose of them in much less time that had been initially projected.270

6. JAPAN 

In the decades after the Second World War, the Japanese economy underwent an unprecedented economic recovery. By the mid– 

1970s, it had become the world’s largest exporter of steel and automobiles. Japan’s remarkable post-war growth was guided by government protection of emerging domestic industries, which led to 

their becoming highly competitive in global markets.271 In the 

1980s, financial deregulation, low interest rates, and the appreciamstockstill on PROD1PC66 with HEARING

45 

272Koyo Ozeki, Responding to Financial Crises: Lessons to Learn from Japan’s Experience, 

Japan Credit Perspectives (Aug. 2008) (online at europe.pimco.com/LeftNav/Global+Markets/ 

Japan+Credit+Perspectives/2008/Japan+Credit+Perspectives+Koyo+Ozeki+Responding+to+ 

Financial+Crises+August+2008.htm). 273 Charles Yuji Horioka, The Causes of Japan’s ‘‘Lost Decade’’: The Role of Household Consumption, (Nov. 2006) (National Bureau of Economic Research Working Paper No. 12142). 274Ozeki, supra note 272. 275Japan’s Financial Crisis and its Parallels to US Experience, Institute for International Economics, at 6 (Adam Posen and Ryoichi Mikitani, eds.) (Sept. 2000). 276 Id. 277 Richard Katz, Japan’s Phoenix Economy, Foreign Affairs (Jan./Feb. 2003) (online at 

www.foreignaffairs.com/articles/58624/richard-katz/japans-phoenix-economy). 

tion of the yen gave rise to a substantial excess of savings and liquidity in Japan. This, in turn, supported increased consumer 

spending and speculation in the stock and real estate markets, 

which then led to rapid run-up in asset values. 

The bubble finally burst in 1991 as real estate values dropped by 500 trillion yen (US$4.5 trillion) and the total value of shares lost 

300 trillion yen (US$2.7 trillion).272 This helped set Japan on 

course for a decade-long ‘‘growth recession’’ that came to be known 

as the ‘‘Lost Decade.’’ During this period—which actually spanned 

at least a dozen years—the economy experienced only two years of 

negative growth. But the protracted economic stagnation was a 

dramatic reversal from the previous decade, when annual GDP 

growth averaged almost 4 percent. From 1991 to 2003, GDP grew 

at an annual average of just over 1 percent, well below the growth 

rates of every other major industrialized country during this period.273

Japanese policymakers failed to appreciate early on just how significant the impact of the asset devaluation would be on the financial sector. Bank lending had doubled between 1985 and the first 

half of the 1990s, with most loans geared toward the real estate 

market.274 Deregulation had eased restrictions on corporate access 

to capital markets, giving large businesses new alternatives to the 

banks as sources of capital. Banks were forced to seek new customers, particularly in small business and real estate, which 

proved to be far riskier business partners than Japan’s established 

corporations.275 As real estate values continued to slide in the mid1990s, non-performing loans (NPLs) became a growing problem for 

Japan’s banks. According to one estimate, Japan’s banks were holding 50 trillion yen (US$450 billion) in non-performing loans immediately after the burst of the bubble in 1993, which rose to nearly 

100 trillion yen (US$910 billion) by 1996.276

At the outset of the crisis, the Ministry of Finance lacked the 

legal authority to take banks facing bankruptcy into receivership. 

Thus, its initial response was to create stability by orchestrating 

mergers or asset takeovers by other banks. This included the establishment of both private and public asset management companies 

to help banks clear their balance sheets. But Japanese authorities 

pinned their hopes on a macroeconomic recovery that would restore 

the full value of assets and avoid costly writedowns.277 Regulators 

permitted lax accounting practices that allowed banks to book the 

value of their loan assets based on how much they could spare 

within the capital adequacy ratio. The real financial condition of 

the borrowers was seldom accurately reflected on the bank balance 

sheet. The same borrower could have different credit ratings from 

different banks depending on the level or risk each bank could susmstockstill on PROD1PC66 with HEARING

46 

278 Adam Posen, What Went Right in Japan, at 6 (Nov. 2004) (Peterson Institute for International Economics: Policy Briefs in International Economics, No. PB4–6). 279Takeo Hoshi and Anil K. Kashyap, Will the U.S. Bank Recapitalization Succeed? Lessons 

from Japan (Dec. 2008) (National Bureau of Economic Research Working Paper Series, No. 

14401). 280 Id. at 13. 281 Id. at 14. 

tain. Such accounting machinations were tolerated in part due to 

their political consequences. Leaders of Japan’s dominant LiberalDemocratic Party sought to protect their powerful construction, 

real estate, and farming constituencies that were on the other end 

of the problematic NPLs. As economist Adam Posen notes, ‘‘the ongoing political pressures for the rollover (evergreening) of loans to 

politically favored but bankrupt enterprises, in hopes of preserving 

jobs, and the near total erosion of bank capital between loan and 

equity losses created incentives for the problem to keep growing.’’ 278

In late 1997, with the failure of a major bank, Hokkaido 

Tokushoku, and a major securities firm, Yamaichi Securities, the 

problems in the financial sector reached the level of systemic risk. 

There were indications in the interbank loan market that a number 

of other major banks were in trouble as well.279 In February 1998, 

the Japanese parliament or Diet passed the Financial Function 

Stabilization Act which provided for capital injections in major 

banks. The government then purchased 1.8 trillion yen (US$16 billion) in subordinated debt and preferred shares in 21 major banks 

that were undercapitalized but officially classified as solvent. 

These efforts failed to stabilize the situation and bank lending 

remained stagnant. Under new authorities granted by the Financial Function Stabilization Act, the Financial Services Authority 

(FSA) was created and vested with the power to temporarily nationalize banks. In late-1998, the FSA exercised this authority for 

the first time and nationalized two major banks, Long-Term Credit 

Bank of Japan (LTCB) and Nippon Credit Bank (NCB), fully guaranteeing their debt to all creditors. This was followed by a second 

recapitalization effort in March 1999 that injected 7.5 trillion yen 

(US$71 billion) into 15 banks. The trend of small-scale recapitalization programs continued for the next several years, but the problem of chronic capital shortage persisted, in part because the size 

of the recapitalizations was simply insufficient. According to an 

analysis by economist Mitsuhiro Fukao, as late as March 2002, 

Japanese banks collectively had only 29.3 trillion yen of core capital to buffer the risks associated with assets of 744.8 trillion and 

loans of 440.6 trillion, meaning that stated capital was only 3.9 

percent of assets and 6.7 percent of loans.280 Furthermore, FSA’s 

apparent weak enforcement of the conditions attached to participation in the program ensured that the balance sheet problems would 

persist. Even after LCTB and NCB were nationalized, FSA permitted banks to continue to operate with large amounts of non-performing loans on their books.281

Japan’s financial sector did not turn the corner until the introduction of the Financial Revitalization Program in late 2002, under 

financial services minister Heizo Takenaka. Takenaka believed 

that honesty in bank balance sheets was the most important source 

mstockstill on PROD1PC66 with HEARING

47 

282 Heizo Takenaka, Lessons from Tokyo, Wall Street Journal (Oct. 22, 2008) (online at 

online.wsj.com/article/SB122462152605355599.html). 283 Id. 284 Id. 285Ken Belson, Persistence Pays: Japan’s Bank Regulator Makes Gains, New York Times 

(Sept. 30, 2009). 286 Hoshi and Kashyap, supra note 279, at 16. 287 Hoshi and Kashyap, supra note 279, at 16. 288 Hoshi and Kashyap, supra note 279. 

of stability in financial markets.282 Thus, what became known as 

‘‘Takenaka Plan’’ called for: (1) more rigorous evaluation of bank 

assets; (2) increased bank capital; and (3) strengthened governance 

for recapitalized banks.283 Takenaka’s predecessor, Hakuo 

Yanagisawa, had initiated a program of special inspections of major 

banks aimed at uncovering the true health of the financial institutions and their debtors in 2001. Yet this commitment to transparency was not accompanied by rigorous enforcement until 

Takenaka took the helm at FSA. Under Takenaka, the special inspections resumed but with more rigorous enforcement of the auditing rules: assets were evaluated using discounted expected cash 

flows for NPLs; borrowers were investigated to ensure consistent 

and reliable classifications across all major bank balance sheets; 

and deferred tax assets were prohibited from being counted toward 

tier-I capital. Discrepancies between the banks’ self-evaluations 

and FSA’s evaluations were released to the public. Where these 

special inspections identified a need for capital, it was injected on 

the condition that the banks abide by business improvement orders.284

Within a year, signs of progress were already evident. The 

Takenaka Plan was forcing banks to aggressively cut costs, write 

off non-performing loans and sell their stockholdings.285 In March 

2003, Resona Bank was prohibited from counting five years’ worth 

of tax deferred assets as capital, an accounting tactic many banks 

had previously used to avoid exposure of their vulnerable capital 

positions. The government rescued the bank with a public capital 

injection and used its new majority interest to install new management.286 In August, FSA issued ‘‘business improvement orders’’ to 

15 recapitalized financial institutions for failing to meet their profit 

goals for the first quarter of 2003. These orders required the institutions to file business improvement plans and to report their 

progress to the FSA on a quarterly basis. Those institutions that 

failed to reform and meet their profit goals were forced to reduce 

the compensation of top management. One conglomerate, UFJ 

Holdings, was forced to remove three of its CEOs. Japan was finally holding banks accountable after more than a decade of avoiding the problems in its financial sector.287

In retrospect, most informed observers believe that Japan’s 

greatest mistake was its excessive regulatory forbearance—allowing banks to carry NPLs rather than demanding write-downs. 

Economists Takeo Hoshi and Anil Kashyap contend that the Japanese officials were in denial about the extent of the problems in the 

financial sector for most of the 1990s.288 The recapitalization efforts that the government did initiate were insufficient and still 

failed to require banks to write-down losses on non-performing 

loans. The only objective pursued forcefully in the recapitalization 

efforts was increasing loan volumes. However, this only served to 

mstockstill on PROD1PC66 with HEARING

48 

keep bad debtors and ‘‘zombie’’ banks alive to throw good money 

after bad. The consensus view among economists who have studied 

Japan’s economy during this period is that Japan simply kept 

banks in business for far too long with insufficient capital. The unwillingness to acknowledge the harsh reality of the asset bubble 

burst in the short-term contributed to the very sluggish growth 

rate of the Japanese economy that lasted for more than a decade. 

FIGURE 3: COMPARATIVE ANALYSIS OF GOVERNMENT RESOLUTION OF NATIONALIZED ENTITIES 

Shareholder protection Bondholder protection Depositor protection Method of asset 

valuation 

Great Depression and 

Reconstruction Finance Corporation 

1930s.

Unsecured. Bank failures wiped out 

shareholders, and 

state laws often 

imposed double liability. Shareholders at banks 

that received RFC 

investment saw 

their shares diluted. 

Unsecured. Bondholders suffered 

substantial losses; 

no consistent policy 

existed for dealing 

with bondholders 

when reorganizing 

or liquidating 

banks. 

Unsecured. Paid on a 

pro rata basis as 

the liquidation of 

failed banks proceeded. The FDIC, 

when created in 

1933, insured deposits at solvent 

banks up to $2,500 

(this increased to 

$5,000 with the 

passage of the 

Banking Act of 

1935) 

Administrative valuation. Bank examiners from the RFC, 

Federal Reserve 

Banks, Treasury, 

and the Comptroller of the Currency conducted 

valuation of seized 

assets. 

Continental Illinois ..... Unsecured. Equity 

stake diluted by 80 

percent FDIC stake 

resulting from $1 

billion investment 

in Continental Illinois’ holding company. 

Although unsecured, 

the FDIC rescue 

plan prevented default on outstanding obligations, thus protecting creditors. 

Secured. Fully insured 

by FDIC. 

Administrative valuation. FDIC took 

control of bad assets at non-market-determined 

prices. 

Savings and Loan Crisis/Resolution Trust 

Corporation.

Unsecured. Received 

equity remaining 

after sale of thrift 

operations or, in 

liquidation, sale of 

thrift’s remaining 

assets. Substantial 

losses incurred. 

Unsecured. Received 

debt payments remaining after sale 

of thrift operations 

or, in liquidation, 

sale of thrift’s remaining assets. 

Substantial losses 

incurred. 

Secured. Fully insured 

by FSLIC. 

Market valuation. 

Thrifts or 

disaggregated assets sold on openmarket by FSLIC, 

FDIC, or RTC. 

Sweden 1990s ............. At the two banks that 

were nationalized, 

some shareholders 

were wiped out (at 

Gota) and others 

(at Nordbanken) 

were bought out at 

the price of the 

previous rights 

issue. At banks 

that recapitalized 

privately, owners 

saw their shares 

diluted. 

Secured. Creditors 

were covered by a 

government guarantee. 

Secured. Depositors 

were protected by a 

government guarantee. 

Administrative valuation. The Bank 

Supervisory Authority established an 

independent Valuation Board comprised of real estate experts to assign asset values. 

mstockstill on PROD1PC66 with HEARING

49 

FIGURE 3: COMPARATIVE ANALYSIS OF GOVERNMENT RESOLUTION OF NATIONALIZED ENTITIES— 

Continued 

Shareholder protection Bondholder protection Depositor protection Method of asset valuation 

Japan 1990s ................ Unsecured. Shareholder capital was 

drawn on first before using deposit 

insurance funds. 

Thus, most shareholder equity in 

nationalized banks 

was wiped out. 

Secured. Creditors 

were covered by a 

government guarantee. 

Secured. A temporary 

guarantee was instituted in 1996. In 

2005, a cap of 10 

million yen per depositor was reinstituted. 

Administrative valuation. Financial 

Service Authority 

conducted inspections of bank balance sheets. 

C. Europe: Current Crises and Response 

Late 2008 saw many of Europe’s largest and fastest-growing 

economies scrambling to implement bank rescue plans. While each 

country’s plan has its own unique features, most included plans to 

guarantee bank deposits and provide some type of cash infusion for 

financial institutions. Nationalization of all or select banks often 

followed but was almost uniformly viewed as an option of last resort and often was confined to only those institutions whose failure 

was likely to have serious ramifications for the entire economy. As 

may be anticipated, the aggressiveness of the plan usually tracked 

the intensity of the country’s crisis, which, in turn, was often directly proportional to that country’s economic climb over the last 

decade—i.e., the highest climbers had the sharpest falls. 

While the effects of the current downturn are widespread, there 

are certain differences between the American and European experiences that make some comparisons inapplicable. Most notably, 

many European countries are struggling with currency issues. As 

banking across borders has become increasingly feasible even for 

the average worker, cheap credit and lax lending standards in one 

part of Europe provides cheap and easy credit for almost any part 

of Europe. Many Europeans and European institutions, especially 

those in non-Eurozone countries, took out loans in foreign currencies. Now that the borrowers’ home economies and currencies 

are faltering, the loans have become increasingly difficult to repay. 

The result is that both borrowers and lenders are damaged. 

Iceland, which is among the countries hardest hit by the current 

downturn, has been deeply impacted by such foreign currency exposure; however, its problems can also be attributed to the ease with 

which its relatively youthful financial institutions entered these 

cross-border markets despite a lack of reserves to backstop the nation’s banking sector. Ireland, another country that has been profoundly affected by the crisis, has meanwhile avoided vulnerability 

to cross-market currency fluctuations by adopting the Euro. Adoption of the Euro was not without cost, however, as having the Euro 

as its currency provided the Irish with widespread access to credit 

with extraordinarily low interest rates, which has been linked to 

the Irish economy’s current difficulties. 

Although the U.S. is not plagued by the same currency issues as 

many European countries, Americans and Europeans alike are 

struggling with the same problems of mounting debt and mounting 

mstockstill on PROD1PC66 with HEARING

50 

289 U.S. Central Intelligence Agency, CIA World Fact Book (online at www.cia.gov/library/ 

publications/the-world-factbook/geos/ic.html) (accessed Apr. 2, 2009). 290 Id. 291Tracy McVeigh, The Party’s Over for Iceland, the Island That Tried to Buy the World, The 

Observer (Oct. 5, 2008) (online at www.guardian.co.uk/world/2008/oct/05/iceland.creditcrunch). 292 Cracks in the Crust: Iceland’s Banking Collapse Is the Biggest, Relative to the Size of an 

Economy, That Any Country Has Ever Suffered. There Are Lessons to Be Learnt Beyond Its 

Shores, The Economist (Dec. 11, 2008) (online at www.economist.com/world/europe/ 

displayStory.cfm?storylid=12762027) (hereinafter ‘‘Cracks in the Crust’’). 

unemployment while property values are down throughout both the 

U.S. and Europe. A newly burst housing bubble has a central place 

in almost every troubled economy’s crisis. And the ubiquitous easy 

access to cheap credit is likewise at the center of each bubble. Certain economies became housing-focused in part because a rising 

tide of workers, either foreigners arriving for the first time or native-born citizens returning from abroad, flooded the then-lush job 

market and needed homes. But the influx of workers in those areas 

merely seems to have exacerbated, not caused, the bubble, which, 

in most cases, was a response to easy availability of credit. 

Although the British economy is suffering from its own burst 

housing bubble, its experience is somewhat different from its neighbors’. Unlike Ireland and Iceland, where ready access to mortgage 

credit led to overbuilding, UK builders failed to keep pace with the 

housing demand fueled by cheap credit. The combination of high 

demand and lagging supply soon led housing prices to outstrip 

wage increases. Subsequently, as credit contracted worldwide, the 

UK housing bubble burst. 

The UK, as home to a global financial center in London, also suffered from economic downturns among its business partners overseas. The sub-prime housing crisis in the U.S. quickly triggered 

aftershocks in the UK markets as banks such as the Royal Bank 

of Scotland stumbled under the weight of the U.S. asset-backed securities still on their books. 

Finally, the Europeans must contend not only with the issues 

arising out of linked currencies, but also with the issues arising out 

of their linked economies. Germany has been the most vocal regarding concerns that they will be asked not only to provide rescue 

packages for their own financial services industry, but for those of 

their poorer neighbors as well. 

1. ICELAND 

Iceland has experienced both rapid economic expansion and 

sharp economic contraction. Following de-regulation in the early 

2000s, the Icelandic banking sector expanded quickly, investing 

heavily in foreign currency loans.289 As a result, the foreign exposure of its major banks totaled 10 times the country’s GDP as of 

the end of 2008.290 With the downturn in the financial markets 

worldwide, Iceland’s three largest banks collapsed in late 2008. The 

Icelandic kro ́na plummeted, ranking just above the Zimbabwean 

dollar as of October 2008.291

The devaluation had harsh implications for any institution, or 

household, with foreign currency exposure, and many Icelandic 

households had such exposure. The relative cheapness of credit in 

Japanese Yen or Swiss Francs led many average Icelanders to finance their homes and cars in foreign currency instead of their native kro ́nur.292 Additionally, principal payments on local currency 

mstockstill on PROD1PC66 with HEARING

51 

293 Id. 294 Id. 295See Sarah Lyall, Icelanders Struggle After a Banking Boom Ended with a Thud, New York 

Times (Nov. 9, 2008). 296 Id. 297Derek Scally, Iceland Attempts to Avoid Financial Meltdown, Irish Times (Oct. 24, 2008) 

(online at www.irishtimes.com/newspaper/finance/2008/1024/1224715113228.html). 298 Jon Danielsson, Why Raising Interest Rates Won’t Work, BBC (Oct. 28, 2008) (online at 

news.bbc.co.uk/2/hi/business/7658908.stm) (noting that Iceland is the first industrialized country 

to request IMF assistance in more than 30 years). 299On March 9, 2009, Straumur, Iceland’s only pure investment bank, was also put into receivership. It is currently closed as the receivership committee unwinds its assets. 300The FSA is an independent state authority charged with regulating and supervising Iceland’s credit, insurance, securities, and pension markets. 

mortgages are indexed to inflation, which is projected to rise to 20 

percent this year. The combination of devaluation and inflation has 

doubled the amount of debt many Icelandic families are carrying.293

The economic crisis has prompted demonstrations and other 

types of protest that are typically alien to the country.294 Some Icelanders have expressed frustration with the banks for soliciting foreign depositors to whom the whole country is now liable.295 Others 

have expressed anger with their government for the way it has 

handled the crisis, successfully calling for the resignation of the 

head of Iceland’s central bank, David Oddsson, through continued 

protests in downtown Reykjavik late last year.296 While some believe Iceland would have better weathered the last few months if 

it had adopted the very durable Euro instead of relying on its own 

kro ́na, there is still some hostility toward the notion of joining the 

E.U., both because of the cultural implications of such integration 

with continental Europe (Iceland only just obtained its full independence from Denmark in 1944) and because of the impact some 

believe it would have an Iceland’s fishing quotas.297

The Icelandic bank rescue plan has included nationalization of 

its major banks and, in an unusual move for an industrialized 

country, negotiating $10 billion in loans from the International 

Monetary Fund (IMF).298

In nationalizing the banks, Reykjavik used its newly granted 

power under an act providing authority reserved for ‘‘Unusual Financial Market Circumstances’’ to purchase a 75 percent stake in 

each of its three major banking groups, Landsbanki, Glitnir, and 

Kaupthing (the ‘‘banks’’).299 Under the new act, Iceland’s treasury 

may inject up to 20 percent of the book value of a bank’s equity 

in return for voting shares in the bank that are equal in value to 

the treasury’s capital contribution. The act also granted authority 

to the Financial Services Authority (FSA) 300 to assume the power 

vested in each institution’s shareholders’ meeting and to appoint 

receivership committees to take over the functions of the firms’ 

boards of directors. These committees immediately stopped payment on claims other than priority claims at each institution. The 

banks’ receivership committees then created new, governmentowned entities (‘‘new banks’’) that assumed each bank’s domestic 

operations. The result was equity dilution and assumption of government control similar to that in Continental Illinois, but tougher 

mstockstill on PROD1PC66 with HEARING

52 

301Glinir, The Government of Iceland Acquires 75 Percent Share in Glitnir Bank (online at 

www.islandsbanki.is/english/about=islandsbanki/news/detail/item14983/Thelgovernmentlofl 

Icelandlacquiresl75lpercentlsharelinlGlitnirlBank/) (accessed Mar. 30, 2009). 302Landsbankinn, New Landsbanki Islands hf. Established (online at www.landsbanki.is/ 

english/aboutlandsbanki/pressreleases/?GroupID=720&NewsID=13358&y=0&p=1) (accessed 

Mar. 30, 2009); Islandskani, Glitnir’s Operations Continued (online at www.islandsbanki.is/ 

english/about-islandsbanki/news/detail/item15927/Glitnir’slOperationslContinued/) (accessed 

Mar. 30, 2009); Kaupthing, New Kaupthing Bank Takes Over Domestic Operations of Kaupthing 

banki hf. (online at www.kaupthing.com/pages/164?path=K/133944/PR/200810/1262007.xml) 

(accessed Mar. 30, 2009). See also Icelandic Financial Supervisory Authority, Based on New Legislation, the Icelandic Financial Supervisory Authority (IFSA) Proceeds to Take Control of 

Landsbanki to Ensure Continued Commercial Bank Operations in Iceland (online at 

www.landsbanki.is/Uploads/Documents/Frettir/fmelannouncement.pdf) (accessed Mar. 30, 

2009). 303 Id.; Icelandic Saga; Cash and Local Councils, The Economist (Nov. 15, 2008). 304David Jolly, Bailout of Iceland Held Up by Disputes Over Compensating Foreign Savers, 

New York Times (Nov. 13, 2008). 305 Icelandic Saga; Cash and Local Councils, supra note 303. 306 Cracks in the Crust; Iceland, supra note 292. 307 Certain other liabilities also remain in the old banks. These are: certain securities issues; 

subordinated debt; income tax liabilities; and derivative contracts. 308 Jolly, Bailout of Iceland Held Up, supra note 304. 

treatment of non-priority creditors. Domestic customers, employees, 

and bondholders were not to be affected by the acquisition.301

Key to the nationalization of the banks was the intent to keep 

domestic operations functioning. The banks’ web-sites reassured 

customers that business would continue as usual, with access to 

online accounts, ATM service, and debit card functionality available without interruption.302

The plans did not, however, provide for continued access to deposits for foreign depositors. In the years leading up to the banking 

crisis, Icelandic banks offered highly attractive interest rates for 

savings accounts, prompting many Europeans and European entities, such as municipalities, to keep their cash in Icelandic accounts.303 The accounts were typically set up and managed online, 

with the savings in overhead used to improve the interest rates.304

Cross-border banking has become increasingly common in Europe 

and worldwide. As in the case of the Icelandic banks, a bank in a 

relatively small country can hold funds of hundreds of thousands 

of depositors worldwide, creating a considerable problem for the 

country if that bank fails. 

A minority of analysts sounded the alarm early, noting that credit-default swap rates for Icelandic banks were rising steadily, signaling instability.305 In addition to instability caused by the weakening global economy, there was a greater issue—the Icelandic central bank did not have sufficient reserves to serve as a credible 

lender of last resort in the event of a run on the banks.306 While 

some investors pulled their funds out before the crisis, most did 

not. 

When the new bank entities were created by the receivership 

committee, the banks’ foreign subsidiaries and foreign branches 

were not merged into the new entities.307 Negotiations for the IMF 

loan stalled late last year as Iceland ironed out disagreements with 

the Dutch, British, and other European governments over the status of savings accounts in Icelandic banks held by those countries’ 

citizens.308 The stand-off over the IMF loan was ultimately resolved when several governments loaned money to Iceland to provide payment to these depositors, opening the door to Iceland’s remstockstill on PROD1PC66 with HEARING

53 

309David Jolly, Concession by Iceland Clears Path for I.M.F. Aid, New York Times (Nov. 17, 

2008). 310Tiger, Tiger Burning Bright, The Economist (Oct. 14, 2004) (online at www.economist.com/ 

surveys/displaystory.cfm?storylid=E1lPNGTDQS). 311Paul Cullen, Developer Says Ireland Risks Iceland-like Financial Crisis, Irish Times (Dec. 

1, 2008) (online at www.irishtimes.com/newspaper/ireland/2008/1201/1227910421590.html). Despite a local joke predicting that Ireland will become the next Iceland, Ireland has the advantage over its Scandinavian neighbor in that its currency is the Euro and therefore is unlikely 

to suffer the extreme devaluation that the krona has seen, and, despite the crisis in the Irish 

banking system, Irish banks are still not nearly as exposed as the Icelandic banks. 312Landon Thomas, Jr., The Irish Miracle Fizzles, New York Times (Jan. 4, 2009). 313On October 9, 2008, the government announced it would extend the program to cover an 

additional five banks. Ultimately, however, those banks opted out of the program. 314 National Treasury Management Agency, Bank Guarantee Scheme & Recapitalisation (online at www.ntma.ie/IrishEconomy/bankGuaranteeScheme.php) (accessed Apr. 2, 2009). 

ceipt of the IMF funds.309 There has been no clear discussion of 

how or when Iceland will repay the loans to the individual governments. 

Additionally, as part of its stand-by agreement with the IMF, the 

creditors of the Icelandic banks have agreed to delay the sale of 

any of the banks’ assets, essentially placing a moratorium on payments to creditors. Under the FSA’s plan, the receivership committee of each bank has appointed an appraiser to determine the 

value of each banks’ assets. This process has taken longer than expected and many creditors have disagreed with the appraisers’ 

valuations, creating further delays. Once the process has been completed, the plan contemplates a settlement under which the new 

banks will provide ‘‘market value’’ compensation to the old banks 

for the assets that have been transferred. 

2. IRELAND 

Ireland similarly experienced an economic expansion in the 

1990s and early 2000s. Nicknamed the ‘‘Celtic Tiger’’ in reference 

to its ability to attract technology giants such as Dell, Microsoft, 

and Intel through the promise of low taxes, relatively low wages, 

and a highly-educated, English-speaking workforce, Ireland’s GDP 

grew at an average of 6 percent during the years between 1995 and 

2007, changing the country from one of Western Europe’s poorest 

into one of its richest.310 By December 2008, however, the global 

economic crisis had many worried that Ireland would soon take Iceland’s path.311 Unlike American banks, Irish banks are in trouble 

not because of loans to individuals, but because of massive growth 

in lending to property developers spurred into rapid expansion by 

substantial tax incentives.312

The Irish government has taken a three-pronged approach to addressing its crisis. First, on September 29, 2008, the government 

became the first in Europe to guarantee all bank deposits, announcing that it had entered agreements with six major banks to 

guarantee all deposits, covered bonds, senior debt, and dated subordinated debt in exchange for a fee (of undisclosed value) from the 

banks.313 The plan is estimated to cover approximately (485 billion 

in liabilities.314

Second, the government provided a capital infusion to certain financial institutions. On December 14, 2008, the government announced that it would provide Core Tier 1 capital infusions into 

several banks as a means of ensuring access to credit for conmstockstill on PROD1PC66 with HEARING

54 

315 Id. 316 Id. 317 Although the release included the terms of a complex plan for providing capital to Anglo 

Irish Bank, including a (1.5 billion infusion via purchase of preferred shares with certain attached voting rights, the plan was never implemented as the bank was nationalized less than 

a month later. 318 National Treasury Management Agency, Government Announcement on Recapitalisation 

(Dec. 21, 2008) (online at www.ntma.ie/Publications/2008/govtlrecaplplanldec08PDF. 319 National Treasury Management Agency, Minister’s Statement Regarding Anglo Irish Bank 

(Jan. 15, 2009) (online at www.ntma.ie/Publications/2009/MinisterlStatementl -AnglolIrishlBank.pdf). 320See Landon Thomas, Jr., As Iceland Goes, So Goes Ireland?, New York Times (Feb. 28, 

2009). 321 Anglo-Irish Bank, General Information on the Nationalisation, (online at 

www.angloirishbank.us/YourlQuestionslAnswered/GenerallInformationlonlthel 

Nationalisation.html) (accessed Mar. 22, 2009). As of April 1, 2009, no assessor had been appointed. 

sumers and businesses.315 On December 21, 2008, the government 

released a detailed plan naming specific banks and the terms on 

which those banks would receive funds.316 The two banks that received funding through the plan were Bank of Ireland and Allied 

Irish Bank.317 Each institution issued (2 billion in perpetual (nonconverting) preferred stock with fixed annual dividends of 8 percent. The shares carried all voting rights on questions of change of 

control or change in capital structure, and 25 percent of voting 

rights on appointment of directors, including the right to appoint 

25 percent of board members. The banks were permitted to redeem 

their preference shares within five years at the issue price, or at 

125 percent of the issue price any time after five years had passed. 

The recapitalization was accomplished through purchase of preferred stock. Banks receiving capital were required to implement 

various programs including: (1) restrictions on executive pay, (2) 

forbearance on foreclosures of primary residences, and (3) increasing lending to consumers and small businesses.318

Finally, the government nationalized the bank that posed the 

greatest threat to the stability of the Irish economy. On January 

15, 2009, the government determined that recapitalization was no 

longer appropriate for Anglo Irish Bank.319 The decision to nationalize Anglo Irish Bank seems to have stemmed from the interplay 

between the fact that the bank had been determined to be systemically significant (i.e., too big to fail) and the revelation that the 

bank’s chief executive and chairman had enabled the bank to provide (400 million in undisclosed loans to certain hand-picked developers, leading to a crisis of confidence in the bank.320 That is, absent the (400 million scandal, it is not clear that the Irish government would have made the decision to nationalize the bank. And, 

obviously, had the bank posed a smaller risk to the economy as a 

whole, it is also unlikely the government would have seen the need 

to step in. 

The government effected the nationalization by mandating the 

transfer of 100 percent of the bank’s stock to the minister of finance or his nominee. The government also stated that an assessor 

would be appointed to assess whether compensation should be paid 

to shareholders and, if so, what the amount of that compensation 

should be.321 The bank’s recently-appointed chairman was kept on, 

but the CEO and Finance Director were replaced and the board 

itself restructured. The bank’s board and management retain dayto-day control of the bank, but the overall business model is determstockstill on PROD1PC66 with HEARING

55 

322 Id. 323 Id. 324 Id. 325 Bank of England, Special Liquidity Scheme (Apr. 21, 2008) (online at 

www.bankofengland.co.uk/publications/news/2008/029.htm). 326 Bank of England, Recapitalisation of the UK Banking System (Oct. 8, 2008) (online at 

www.bankofengland.co.uk/publications/news/2008/066.htm). 327 HM Treasury, Treasury Statement on Financial Support to the Banking Industry (Oct.13, 

2008) (online at www.hm-treasury.gov.uk/pressl105l08.htm). 

mined by the board and management in consultation with the Minister of Finance and the Financial Regulator.322 The bank has continued as a ‘‘covered institution’’ under the Credit Institutions (Financial Support) Scheme 2008, meaning that ‘‘covered liabilities’’ 

remain guaranteed by the Irish government until September 29, 

2010.323 The bank’s ‘‘covered liabilities’’ are: (1) all retail and corporate deposits, (2) interbank deposits; (3) senior unsecured debt, 

(4) covered bonds (including asset covered securities), and (5) dated 

subordinated debt.324

3. UNITED KINGDOM 

While not in the same position as either Iceland or Ireland, the 

United Kingdom has also implemented a substantial economic rescue plan to respond to its own credit crunch. 

The UK Bank Rescue Plan has a number of key pieces: 

First, a Special Liquidity Scheme was announced on April 21, 

2008. Under this program, the government made λ200 billion available in short term loans for financial institutions to use in swapping out illiquid assets (mostly UK or EU mortgage-backed securities) for UK Treasury bills.325 The plan was slated to last six 

months but was extended in September 2008. 

Second, in October 2008, the government announced a number of 

initiatives. On October 8, 2008, it was announced that the government would purchase £50 billion in preferred stock (non-voting, 

first paying) from eight major UK banks, and that it would provide 

£250 to guarantee bank debts.326 Later that month, on October 13, 

the government provided an additional cash infusion of £37 billion 

to purchase ordinary shares in the Royal Bank of Scotland and 

Lloyds TSB–HBOS.327 The process by which the UK government 

acquired an interest in the banks began with the banks’ open offers 

to their existing shareholders to purchase additional stock. The 

government agreed in advance to purchase any shares that were 

not purchased by the shareholders. In fact, very few shareholders 

showed any interest in purchasing the stock and the British government purchased almost all of the ordinary shares offered. As a 

result of these transactions, the UK government owns 57.9 percent 

of one bank and 43.4 percent of the other. 

In order to secure the assistance of the UK government in purchasing common equity, the banks were required to agree to certain covenants mandating, inter alia, that the banks maintain 

lending to the mortgage and small business markets at 2007 levels, 

submit restructuring plans to the government, and refrain from 

paying dividends on ordinary shares. To the extent the government 

received preferred stock from any banks, the covenants accompanying those transactions provided for the stockholder (i.e., the 

government) to have the right to appoint a certain number of direcmstockstill on PROD1PC66 with HEARING

56 

328See Panel February Oversight Report, supra note 6. 329 Bank of England, Operational Standing Lending and Deposit Facilities; Discount Window 

Facility (Oct. 20, 2008) (online at www.bankofengland.co.uk/markets/marketnotice081020.pdf). 330 Id. 331The Go-Between: Can a New Agency Put the Banks Back on Track?, The Economist (Mar. 

5, 2009) (online at www.economist.com/world/britain/displaystory.cfm?storylid=13248185) 

(hereinafter ‘‘Go Between’’). 332Graeme Wearden, Bank Bailout: Key Points of the Government’s Statement, The Guardian 

(Jan. 19, 2009) (online at www.guardian.co.uk/business/2009/jan/19/credit-crunch-bank-bailout). 333Good Sport: Banks Are Getting By; a Pity About the Customers, The Economist (Mar. 12, 

2009) (online at www.economist.com/world/britain/displaystory.cfm?storylid=13278900) (hereinafter ‘‘Good Sport’’). 334 HM Treasury, New Scheme to Help People at Risk of Repossession (Dec. 3, 2008) (online 

at www.hm-treasury.gov.uk/pressl132l08.htm). 335 As the legal analysis accompanying the Panel February Oversight Report noted, ‘‘[t]here 

are differences in government policies and political environments, regulatory structures and corporate law and practice, among other things,’’ which have shaped the UK’s approach thus far 

and that therefore make comparisons between U.S. and UK government actions of somewhat 

limited use. Notably, the British government’s decisions may have been impacted by the need 

to comply with certain European Commission requirements regarding the provision of state aid 

to private entities, a concern that obviously is inapplicable to the American decision-making 

process. Timothy G. Massad, Legal Analysis of the Investments by the U.S. Department of the 

Treasury in Financial Institutions under the Troubled Asset Relief Program (Feb. 4, 2009) (online at cop.senate.gov/documents/cop-020609-report-dpvaluation-legal.pdf). 336Good Sport, supra note 333. 337Go-Between, supra note 331. 338The Spiral of Ignorance: Lack of Understanding of the Credit Crunch Is Magnifying Its 

Damage, The Economist (Feb. 19, 2009) (online at www.economist.com/world/britain/ 

displaystory.cfm?storylid=13144829). 

tors and to receive certain voting rights if the shares did not pay 

dividends for a number of quarterly periods.328

On October 16, the UK’s central bank, the Bank of England, announced it would change certain disclosure rules to enable banks 

to borrow funds without having to disclose the loan.329 The Bank 

of England also created a Discount Window Facility that allows 

distressed banks to swap illiquid assets at a discount.330

In November 2008, the government created a new agency, UK Financial Investments, to manage the government’s stakes in RBS 

and Lloyds, and in any other banks the government subsequently 

purchases.331

In January 2009, a second bank rescue was announced. This 

Asset Protection Scheme would provide insurance to banks for future credit risk and would provide a £50 billion infusion for purchase of private sector assets.332 The Enterprise-Finance Guarantee (EFG) scheme, launched January 14, provides a guarantee 

for up to 75 percent of a bank loan to a business with up to £25 

million in revenue.333 The UK has also announced a Homeowner 

Mortgage Guarantee Scheme to provide a bridge for homeowners 

who are in danger of foreclosure due to a temporary loss of income.334

Thus far, Britain’s multi-faceted plan of attack closely mirrors 

that of the U.S., and the UK is facing many of the same challenges 

that have dogged the American plan.335 The British have taken 

steps to encourage banks to resume lending through the EFG, but 

have had only limited success in encouraging banks to actually 

make use of the plan, even in the case of banks in which the government owns a controlling stake.336 The UK has also had its 

share of bank bonuses scandalizing the public,337 and it has had 

difficulty making sense of many of the more complex components 

of the current financial system, stymieing efforts to unwind the 

most troublesome sectors.338

mstockstill on PROD1PC66 with HEARING

57 

339Sharon Smyth, Spain Said to Plan Savings Bank Bailout to Aid Merger, Bloomberg (Mar. 

6, 2009) (online at www.bloomberg.com/apps/news?pid=20601085&sid=a2NQavmsRt7Y#). 340Paul Day, Spain Bank Rescue Fund to Include All Big Lenders, Reuters (Oct. 22, 2008) 

(online at www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/ 

idUSLM8371720081022). 341 Raf Casert, EU Approves Bank Rescue Packages, Associated Press (Dec. 23, 2008). 342 Id. 343 Jann Bettinga and Oliver Suess, Commerzbank Gets Fresh Bailout as Germany Takes 

Stake, Bloomberg (Jan. 8, 2009) (online at www.bloomberg.com/apps/news?pid= 

newsarchive&sid=aEmWlKXc8q4c). 344Mark Thoma, Should the EU Let a Member Government Default? RGE Monitor (Feb. 21, 

2009) (online at www.rgemonitor.com/euro-monitor/255676/shouldltheleulletlalmemberl 

governmentldefault). 345 Europe’s Reluctant Paymaster: The German Government May Have to Concede, Through 

Gritted Teeth, That it Cannot Avoid Helping Financially Strapped Governments in Europe, The 

Economist (Feb. 26, 2009) (online at www.economist.com/world/europe/ 

displaystory.cfm?storylid=13184821). 346 Ben Hall, French Protesters Take to the Streets, Financial Times (Mar. 19, 2009). 

4. OTHER EUROPEAN COUNTRIES 

Several other European countries, including Spain, Germany, 

and Italy, have implemented measures to address weaknesses in 

their banking systems and loosen the stranglehold that has persisted on credit markets worldwide. For example, Spain has committed up to Ö200 billion to guarantee interbank lending 339 and 

has created a Financial Asset Acquisition Fund to purchase highquality asset-backed securities.340 At this point, Spain has stated 

it sees no need for recapitalization of any financial institutions. 

Italy has provided Ö40 billion to buy bank debt and has guaranteed 

individual bank deposits up to Ö103,000.341 Italy has also said that 

it is prepared to provide capital to banks through the purchase of 

preferred (non-voting) stock.342 And Germany has announced a 

Ö500 billion plan that includes guarantees for private savings and 

debt guarantees for two of Germany’s largest banks, IKB and 

NordLB.343

Germany, however, has been more reluctant than other nations 

to provide capital infusions or similar aid to its or other European 

institutions due in large part to concerns regarding the so-called 

‘‘no bailout rule’’ of the Treaty of Maastricht, which provides that 

EU Member States are not to be held liable for the debts of other 

Member States.344 Nonetheless, despite previously dismissing 

France’s proposed bank rescue fund, German Finance Minister 

Peer Steinbru ̈ ck now concedes that if one of the seriously troubled 

member nations were to default, ‘‘the collective would have to 

help.’’ 345 France has been similarly cautious, although there are indications that this stance is not widely popular among the French 

people, as evidenced by a national strike by the trade unions on 

March 19, protesting French President Nicolas Sarkozy’s current 

fiscal policies.346

D. Taking Stock: Options for Moving Forward 

Disagreement exists among Panel members regarding the need 

for, and appropriateness of, discussing potential alternative courses 

for Treasury to take to restore financial stability. This section of 

the report is nevertheless offered to provide context to Treasury’s 

current efforts and to highlight the considerations involved in 

choosing potential alternative paths. 

mstockstill on PROD1PC66 with HEARING

58 

347 U.S. Department of Treasury, Public-Private Investment Program (updated Mar. 30, 2009) 

(online at www.financialstability.gov/roadtostability/publicprivatefund.html). 

1. LESSONS LEARNED 

Although diverse in cause, scope, and solution, previous financial 

crises provide important insights for contemporary policymakers. 

In particular, past experience suggests that effective solutions for 

banking crises often have in common certain characteristics without which a bank crisis may well persist or worsen: 

• Transparency. Swift action to ensure the integrity of bank 

accounting, particularly with respect to the ability of regulators to 

ascertain the value of bank assets and hence assess bank solvency. • Assertiveness. Willingness to take aggressive action to address failing financial institutions by (1) taking early aggressive action to improve capital ratios of banks with declining performance 

and (2) shutting down those banks that are irreparably insolvent. • Accountability. Willingness to hold management accountable 

and to prevent excessive risk-taking in the future; also, to build 

public trust that any taxpayer support is designed to protect the 

system by replacing—and, in cases of criminal conduct, prosecuting—failed managers. Accountability for managers appears 

critical both in terms of public support and in terms of facilitating 

an accurate assessment of the financial status of sick financial institutions. • Clarity. Build support by providing a clear roadmap for the 

government response with forthright measurement and reporting of 

all forms of assistance being provided, and clear criteria for the use 

of public sector funds. This clarity will provide investors, businesses and households with the predictability of government action 

needed to return to healthy levels of spending and investment. 

The successful financial recovery programs on which we focused 

involved the following steps: 

The first step was to assume a level of bank oversight robust 

enough to hold failed management accountable and to ensure an 

objective process for valuing bank assets. 

The second step was to provide an objective valuation. In the 

cases we have reviewed, valuations were either conducted on an 

administrative basis, as in the RTC and, ultimately, in Japan, or 

through genuine market processes, as in the case of Sweden and 

the RTC; either way, confidence in the accuracy of the valuation 

was critical to restarting normal credit functioning. The current 

crisis in the United States has become protracted at least in part 

because both the markets and public sector regulators are unable 

or unwilling to value such assets, which were ultimately financed 

by complex financial instruments. Treasury views PPIP as an effort 

to promote price discovery. Some would argue that an effective 

price discovery process cannot be achieved when some participants 

are being subsidized by the government.347

The third step was recapitalization, which, of course, cannot be 

accomplished without confidence in bank asset valuations. The 

wide range of approaches to the treatment of debt holders in recapitalizations indicates the importance of careful attention to the 

particular circumstances of a given crisis in determining government policies toward debt holders. By contrast, in every case the 

mstockstill on PROD1PC66 with HEARING

59 

Panel looked at, equity holders were either eliminated entirely or 

heavily diluted by ratios of 3–1 or more. 

The process of recapitalization of banks contributes to the restoration of investor confidence through clear identification of which 

institutions are healthy and which are not. The absence of such reliable determinations can imperil even healthy institutions in a crisis. The U.S. government and the RFC closed all banks during the 

Great Depression and permitted only the certified-healthy banks to 

reopen. While aggressive, this tactic proved successful in restoring 

much-needed confidence that the banking system was sound and 

that new investments would not be lost in insolvent banks. 

Actions such as the establishment of the FDIC/RTC and the creation of the bad banks Securum and Retriva in Sweden had a 

somewhat different purpose, which was to separate the management of bad assets from those banks that had the capacity to prosper after restructuring. The goal was not financial but managerial—ensuring that the management of reorganized banks focused 

on their institutions’ ongoing business. 

Treasury’s stress-testing appears motivated by the desire to sort 

out healthy from non-healthy banks. In this respect, it is distinctly 

different from the approach taken by the Bush Administration, 

which obscured such distinctions through decisions such as the 

choice to sell preferred stock on the same terms to banks of greatly 

varying creditworthiness. The latter strategy led to the Panel’s discovering that the taxpayers received stock worth 33 percent less 

than what they paid for it. 

In this regard, it is noteworthy that success in Japan did not result from loosely-targeted capital infusions or from deferring to the 

incumbent management of troubled banks about key decisions such 

as asset valuation, but occurred when banking authorities did their 

own valuation of bank assets and forced balance sheet restructurings reflecting the real value of those assets. 

Clear guidelines about the scope, scale, conditionality, and duration of government intervention in the economy are also critical to 

promoting private sector long-term investment planning and restoring stability to capital markets. The Japanese case demonstrates 

the hazards of open-ended government assistance. Without predictable limits or a known exit strategy, investors suspected, rightly, 

that they could continue to rely on capital infusions to large, powerful institutions indefinitely. Important economic actors lacked the 

incentive to accept their losses, accurately value assets, and put the 

assets back into their most productive use. Notably, the Japanese 

system began to recover only after reporting requirements, stricter 

valuation methods, and other conditions accompanied capital injections. 

Finally, the ultimate cost to the public of resolving bank crises 

depends to a very large degree on the amount of upside the public 

obtains either in the banks themselves or in the assets of failed 

banks. The RTC attempted to recover as much as possible for the 

public and other creditors on the assets the RTC held. In Sweden, 

the government took all of the upside on the two banks that were 

nationalized; if the banks survived, the benefits would go entirely 

to the taxpayers that had rescued them. The result was that net 

costs for the Swedish government were no more than 2 percent of 

mstockstill on PROD1PC66 with HEARING

60 

348 An overview of ‘‘An Examination of Treasury’s Strategy’’ and ‘‘Federal Government Efforts’’ 

appear in Parts A2 and A3 of Section One, supra. 

GDP. By comparison, our valuation report estimated a net subsidy 

to shareholders of TARP banks in the initial round of TARP transactions as 0.5 percent of GDP. TARP outlays, actual and expected, 

to date are approximately 4 percent of GDP, and total resources 

provided by all government agencies in conjunction with the current financial rescue plan could potentially amount to approximately 25 percent of GDP. As our valuation report showed, it is difficult to secure fair treatment for the public as an investor in sick 

banks without insisting on the public receiving a substantial portion of the upside in the rescued firm in the form of common stock, 

warrants on common stock, or other equity appreciation rights. 

While history provides important lessons, every situation is different from its historical precedents and judgment is always required in applying any lessons. In this particular case, consolidation among the nation’s money-center banks makes that critical 

part of the system look more like the concentrated systems in Sweden and Japan than the decentralized U.S. system of the Depression era or even the late 1980s. Of course, the U.S. system nonetheless differs considerably from those nations as well. The U.S., 

for example, can borrow cheaply in a manner that was not available to Sweden during its banking crisis. At the same time, we cannot rely on someone else’s consumer demand to rescue us—as to 

some extent it seems both Japan and Sweden were able to rely on 

U.S. consumers to rescue them. The implication of this point is that 

we may in fact be more economically vulnerable to a weakened financial system than either Sweden and Japan were because we 

cannot rely on some larger economy to generate consumer demand 

for our goods and services. 

2. TREASURY’S APPROACH 348

Uncertainty in the credit markets intensified with the failure of 

Bear Stearns and Lehman Brothers. The equity markets subsequently reflected accelerating uneasiness for some time. Between 

the beginning of January 2008 and September 18 of that year, the 

Dow Jones Industrial Average declined by 15.22 percent (or 1,985 

points), the NASDAQ National Market declined by 15.4 percent (or 

401.7 points) and the S&P 500 declined by 16.2 percent (or 233.6 

points). While public attention during this period was focused on 

the equity markets, financial policy makers rightly focused on the 

status of the much larger global debt markets. 

Behind these capital market developments lay the bursting of the 

real estate bubble and a tidal wave of residential mortgage foreclosures unheard of in the United States since the Great Depresmstockstill on PROD1PC66 with HEARING

61 

349 As the Panel noted in its last report, over a million homes entered foreclosure in 2007 and 

another 1.7 million in the first three quarters of 2008. Over half a million homes were actually 

sold in foreclosure or otherwise surrendered to lenders in 2007, and over 700,000 were sold in 

foreclosure in the first three quarters of 2008 alone. At the end of the third quarter of 2008, 

one in ten homeowners was either past due or in foreclosure, the highest levels on record. 

RealtyTrac, U.S. Foreclosure Activity Increases 75 Percent In 2007 (Jan. 29, 2008) (online at 

www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt= 

64847); HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales, July 2007–November 2008 (online at www.hopenow.com/upload/data/files/ 

HOPE%20NOW%20Loss%20Mitigation%20National%20Data% 

20July%2007%20to%20November%2008.pdf). See also Chris Mayer et al., The Rise in Mortgage 

Defaults, Journal of Economic Perspectives (2009) (forthcoming) (reporting 1.2 million foreclosure starts in first half of 2008); HOPE NOW, supra note 13; Adam J. Levitin, Resolving the 

Foreclosure Crisis: Modification of Mortgages in Bankruptcy, Wisconsin Law Review (2009) (online at papers.ssrn.com/sol3/papers.cfm?abstractlid=1071931). 350 EESA, supra note 1. 351 EESA, supra note 1. 352 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Financial Markets Update (Oct. 8, 2008) (online at www.treas.gov/press/releases/hp1189.htm). 353Landon Thomas, Jr. and Julia Werdigier, Britain Takes a Different Route to Rescue Its 

Banks, New York Times (Oct. 8, 2008) (online at www.nytimes.com/2008/10/09/business/ 

worldbusiness/09pound.html) (‘‘In a bold move to restore confidence, Britain announced an unprecedented £50 billion government lifeline for the nation’s banks Wednesday that it hailed as a quicker solution to the credit crisis than a $700 billion American plan to buy impaired mortgage assets from troubled financial institutions’’); Parmy Olson, Brown Resurgent: The Credit 

Crisis Has Galvanized British Prime Minister Gordon Brown As He Urges the World To Follow 

His Bank Bailout, Forbes (Oct. 12, 2008) (online at www.forbes.com/2008/10/12/brown-bailoutcredit-biz-cxlpol1012brown.html) (‘‘The recapitalization package that Brown and his finance 

minister, Alistair Darling, announced last Wednesday * * * puts Britain ahead of the U.S. on 

dealing with the crisis. The United States Treasury has since said that it will mimic the British 

approach and buy stakes in banks.’’) 354Panel December Oversight Report, supra note 4, at 6. Government Accountability Office, 

Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, at 15–16 

(Dec. 2008) (GAO/09–161) (online at www.gao.gov/new.items/d09161.pdf); U.S. Department of 

the Treasury, Statement by Secretary Henry M. Paulson, Jr., on Actions to Protect the U.S. Economy (Oct. 14, 2008) (online at www.treasury.gov/press/releases/hp1205.htm). 

sion.349 Congress subsequently passed EESA 350 in an attempt to 

alleviate these issues. That Act gave Secretary Paulson the authority he had sought to buy ‘‘troubled assets.’’ But it also gave the Secretary of the Treasury more sweeping general authority to purchase (after consultation with the Chairman of the Federal Reserve 

Board) ‘‘any other financial instrument * * * the purchase of 

which is necessary to promote financial market stability.’’ 351

The EESA became law on October 3, 2008. Five days later, however, Secretary Paulson indicated his intention to use the more 

general EESA authority to make capital infusions directly into financial institutions without purging their balance sheets of assetbacked securities (ABSs) or collateralized debt obligations 

(CDOs).352 The day before the Paulson statement, British Prime 

Minister Gordon Brown had announced that the UK would commit 

up to £50 billion to rescue British banks. In some quarters, the 

Paulson reversal was seen as a reaction to the Brown decision, 

made to prevent U.S. capital from flowing to the UK.353

The new capital infusion program involved the transfer of funds 

to financial institutions in exchange for preferred stock, and warrants to purchase common stock, of the institution involved.354 In 

its third report, the Panel commissioned a valuation of these securities by the independent valuation firm of Duff and Phelps, in consultation with Professors William N. Goetzmann and Deborah J. 

Lucas and Managing General Partner of Blue Wolf Capital Management and former First Deputy Comptroller of the City of New 

York, Adam Blumenthal. Duff and Phelps found that the average 

discount for securities issued under other programs was 69 percent, 

mstockstill on PROD1PC66 with HEARING

62 

355See Panel February Oversight Report, supra note 6. 356 U.S. Department of the Treasury, White Paper: Public-Private Investment Program (Mar. 

23, 2009) (online at www.treas.gov/press/releases/reports/ppiplwhitepaperl032309.pdf) (‘‘This 

program should facilitate price discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset prices. This in turn should free up capital 

and allow U.S. financial institutions to engage in new credit formation. Furthermore, enhanced 

clarity about the value of legacy assets should increase investor confidence and enhance the ability of financial institutions to raise new capital from private investors.’’); Treasury has also not 

explained its assumptions that (i) a number of years are available in which to accomplish these 

goals without simply transferring losses to the taxpayer, and (ii) it is unnecessary or inappropriate to require that common shareholders (except for dilution) and bondholders accept losses 

on their stakes in bank capital structures. 357See Ricardo J. Caballero, Nationalisation Without Prices: A Recipe for Disaster, Financial 

Times (Feb. 17, 2009); Charles W. Calomiris, The U.S. Government Must Take Risks, Financial 

Times (Feb. 19, 2009); Douglas J. Elliott, The Public-Private Investment Program: An Assessment, Brookings Institution (March 23, 2009) (online at www.brookings.edu//media/Files/rc/papers/2009/0323linvestmentlprogramlelliott/0323linvestmentlprogramlelliott.pdf); Matthew Richardson, The Case for and Against Bank Nationalization (February 26, 2009) (online 

at http://www.voxeu.org/index.php?q=node/3143). 

for an overall average discount of about 31 percent.355 This means, 

in effect, that for every $100 dollars invested in the combined programs, the market valuation of the securities purchased was only 

$66 dollars. 

Since October, approximately $280 billion of capital infusions 

have been made with TARP funds. Nonetheless, losses on impaired 

assets have continued to weaken the balance sheets of banks and 

foster uncertainty in the financial markets. 

There is no question that the public is well served by effective 

government strategies for addressing financial crises. The historical 

case studies reviewed in Part B of this section of the report demonstrate that proposition clearly. Inaction in the face of systemic financial crisis can be enormously costly—economically, politically 

and socially. But failed action can be equally costly. Wrong steps 

not only cost time and money, but they also deprive policy makers 

of the sustained public support necessary to carry out a successful 

stabilization program. 

As discussed in Part A of this section of the report, Treasury’s 

current approach aims to both restore credit market activity broadly and stabilize particular financial institutions, especially the few 

institutions that it deems systemically significant. The recently announced Public-Private Investment Fund focuses directly on the 

problem of impaired assets; that initiative reflects the working 

premise that it is possible through government-subsidized, highly 

leveraged asset purchase vehicles to obtain valuations for non-performing or otherwise troubled assets, sell those assets at those values to willing buyers, and perhaps avoid the need for the reorganization or even the break-up of systemically significant financial 

institutions.356 Treasury has not explained its assumption that the 

proper values for these assets are their book values—in the case, 

for example, of land or whole mortgages—and more than their 

‘‘mark-to-market’’ value in the case of ABSs, CDOs, and like securities; if values fall below those floors, the banks involved may be insolvent in any event. Treasury has also failed to explain its assumptions about the economic events that would cause investors to 

default or how long it believes assets will have to be held to 

produce a reasonable return for private investors. Without non-subsidized buyers, market functioning is an illusion. As some observers have indicated,357 the issue of asset valuation is now as critical 

to the recovery of the financial system as the precise strategy the 

mstockstill on PROD1PC66 with HEARING

63 

federal government follows. There is another reason why this is so. 

A great part of the financing done in the markets today either 

flows through the banking system directly to investors or bypasses 

banks altogether through the same mechanisms of securitization 

used for mortgage lending. As the TALF program indicates, 

securitization is especially important for the financing of credit 

card, automobile, small business, and student loans. Markets for 

those pools of loans have also dried up because of fears that unexpected default rates will deflate and freeze at a deflated level the 

value of those pools. If Treasury’s initiative can show that the problems with the ABS markets were liquidity rather than inherent 

value issues, it would be possible to restore the other markets without the need for the overwhelming commitment of taxpayer funds 

that the TALF contemplates. While the Panel has previously argued for reform of the securitization process, the Panel has not 

reached a consensus as to whether it is necessary to revive 

securitization markets in the interim in order to restart lending in 

the short-term future. 

On the other hand, the frozen ABS markets raise several issues 

discussed earlier in this report. First, to what degree is the freeze 

a rational reaction to the problems of over-leverage, opacity, and 

lack of intermediaries’ money being truly at risk that were endemic 

in these markets during the bubble years? Second, should government seek to restart these markets before reforms necessary to 

solve those problems (for example, increased capital requirements, 

increased transparency, and reasonable controls on the structure 

and economics of securitization vehicles) can be implemented? 

Third, how critical will the securitization system continue to be in 

financing our economy? Treasury must address these questions in 

the coming weeks as it discusses its program for modernizing financial regulation to assure markets that it recognizes the importance of such reforms to preventing future crises. 

The debate over the ultimate effectiveness of efforts designed to 

utilize market mechanisms to restore the values of impaired assets 

turns on whether current prices, particularly for mortgage-related 

assets, reflect fundamental values or whether prices are artificially 

depressed by a liquidity discount due to the market strain. If the 

liquidity discount is real, public-private sector solutions are not 

only viable but preferable, as they avoid creating new and unpredictable risks that arise from preemptive government seizure of 

private interests. It is reasonable to assume that a liquidity discount is impairing these assets, for which there is limited trading. 

Current prices cannot be fully explained without the liquidity factor. Even in areas of the country where home prices have declined 

precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even undercollateralized assets should not be untradable or trading at pennies 

on the dollar. Prices are being partially subjected to a downward 

self-reinforcing cycle. 

In the view of some, it is this notion of a liquidity discount that 

supports the potential of future gain for taxpayers and makes 

transactions under the CAP and the PPIP investments, and not 

subsidies in the usual sense. This is an issue that will continue to 

divide observers of Treasury’s actions, and ultimately events will 

mstockstill on PROD1PC66 with HEARING

64 

358 In this discussion, the term ‘‘bank’’ includes all insured depository institutions. Treasury 

is now proposing to give the FDIC ‘‘resolution authority’’ of the type described in this part of 

the report covering systemically significant non-bank financial institutions. Geithner Financial 

Services Committee Testimony, supra note 3. 359 Although the power of the FDIC is not limited to seizure of systemically significant institutions, the FDIC may be able to define the terms for such failure on a different basis than for 

other institutions, or additional legislation may clarify its authority to do so. 360 Currently, individual accounts are insured up to $250,000. This ceiling is temporary; on 

January 1, 2010 it will revert back to the previous limit of $100,000 other than for retirement 

accounts, which will continue to be insured up to $250,000. Business accounts are also insured 

up to the $250,000 limit. 

bear out whether this approach will work. The Panel notes that 

Treasury’s approach may prove to be a viable and successful strategy, and offers historical context and the discussion of alternate approaches in the event that changes to Treasury’s current plans become necessary. The Panel has not reached agreement as to whether a change in strategy is currently needed. 

3. OPTIONS FOR FUTURE ACTION 

Lessons from this report’s historical examination of previous efforts at addressing banking crises highlight several paths Treasury 

can take if future course changes become necessary. 

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

When faced with a distressed bank in the current regulatory system,358 the federal government has several options. The options 

can be characterized as liquidation (after the FDIC has become the 

bank’s receiver); reorganization (after the FDIC has become the 

bank’s conservator); or subsidization either through the FDIC or 

from taxpayer funds.359

Most large banks are owned by bank holding companies or 

‘‘BHCs.’’ The BHC issues stock and debt obligations to investors to 

raise money for the bank and other companies that the BHC owns. 

For the most part, only the banks are subject to supervisory and 

regulatory authority by the FDIC and other federal financial supervisors; the Federal Reserve Board regulates BHCs, although as a 

practical matter few important decisions are taken about banks 

owned by holding companies without the concurrence of the Federal Reserve Board. The FDIC ensures bank deposits and, when 

necessary, takes over those banks that fail. The FDIC’s takeover 

powers relate to banks, not to their parent bank holding companies. When the FDIC has taken over sick banks, it has done so 

with an eye toward assuring that depositors’ money is safe and 

that the FDIC’s own insurance fund will remain solvent. 

The accounts that are insured by the FDIC are guaranteed up 

to a specified limit 360 without using general taxpayer revenues (except possibly in extreme cases caused by an overwhelming financial 

collapse or the distress of a single massive institution). The FDIC 

can place insured deposit accounts with other institutions. In some 

cases, it can transfer both accounts and branch operations over a 

weekend. 

Historically, only banks, not investment banks like Bear Stearns 

and Lehman Brothers, have been rescued by the federal government. The failure to rescue Lehman Brothers is only anomalous 

mstockstill on PROD1PC66 with HEARING

65 

361See Congressional Research Service, The Federal Deposit Insurance Corporation (FDIC): 

Summary of Actions in Support of Housing and Financial Markets (Mar. 5, 2009) (CRS/7–5700) 

(hereinafter ‘‘CRS FDIC Report’’). 

against this backdrop of extensive government interventions in failing non-deposit taking institutions. Government non-intervention 

in the collapse of Lehman Brothers was consistent with 70 years 

of government policy. 

However the failure to rescue Lehman Brothers was not consistent with the involvement of Treasury and the Federal Reserve 

Board in the rescue of Bear Stearns and its acquisition by JP Morgan Chase in March 2008; the Bear Stearns action marked a new 

degree of public governmental involvement in the rescue of a nondepository institution. But even if the Bear Stearns rescue was unprecedented (because Bear Stearns was not a bank), the economic 

result resembled the economic result of the rescue of Continental 

Illinois in the mid-1980s—in both cases the shareholders of the 

company received relatively little and the focus was on ensuring 

that the institution (in the latter case, Bear Stearns) met its fixed 

obligations. 

Subsequent government interventions in Wachovia and AIG followed this pattern. At the same time, the liquidations of the truly 

insured thrifts—Washington Mutual and IndyMac—by the FDIC 

followed the same pattern of protecting depositors and wiping out 

investors. 

It is helpful to keep the structure and history of the U.S. banking 

industry in mind as a backdrop against which to assess the options 

for dealing with distressed banks. 

Option A: Liquidation: Receivership and Breakup or Sale 

of Distressed Banks. 

Rather than subsidizing large distressed banks as going concerns 

through government investment under the TARP, critically undercapitalized banks could be selected for effective liquidation by being 

placed into the receivership of the FDIC. Then the FDIC would 

help resolve the failure, as it has done more than a dozen times 

already this year.361

As receiver, the FDIC could place the bank in liquidation—sell 

any or all of the bank’s assets, organize a new bank containing assets of the bank, merge all or part of the bank into another bank, 

or transfer assets or liabilities of the bank to another bank. As it 

did in the savings and loan crisis of the late 1980s and as it has 

done when individual banks have failed in the past, the government would continue to protect savings and checking account holders by moving those accounts to another bank or by paying 

amounts in FDIC-insured accounts directly to the account-holders. 

At the same time, the BHC that owns the large bank would almost certainly enter bankruptcy under Chapter 7 or 11 of the federal Bankruptcy Code. (The bankruptcy proceeding would determine the fate of the securities firms and other financial companies 

owned by the BHC). The result of the receivership and bankruptcy 

proceedings would likely be to wipe out the interests of the BHC’s 

mstockstill on PROD1PC66 with HEARING

66 

362While only bankruptcy courts have the authority to wind down bank-holding companies 

and non-bank institutions, Congress could provide that authority to the FDIC or another agency 

moving forward. See Panel Regulatory Reform Report, supra note 164. 363See generally Federal Deposit Insurance Corporation, Temporary Liquidity Guarantee Program (online at www.fdic.gov/regulations/resources/tlgp/index.html) (accessed Mar. 22, 2009); 

CRS FDIC Report, supra note 361, at 5–6. 364See Part A of Section One, supra, for a discussion of the FDIC’s financial condition. 365Simon Johnson, The Quiet Coup, The Atlantic (May 2009) (online at www.theatlantic.com/ 

doc/200905/imf-advice). 

stockholders; in some cases the holders of debt obligations in the 

BHC could recover part of their investment.362

The FDIC’s Temporary Liquidity Guarantee Program would soften the negative impact of increased liquidations on BHC bondholders.363 By guaranteeing senior unsecured bonds (including 

some bonds that are convertible into common stock), the FDIC 

agreed to treat these bonds more like deposits. This has reduced 

the likelihood that liquidations will chill investment or have spillover effects on other banks. The fees that bond-issuers pay under 

the program would also mitigate the costs of its operation, although 

it is unclear to what extent the FDIC will have the resources to 

deal with liquidations of large institutions.364

Treasury could supplement this approach for systemic reasons 

with broader protection for bondholders. This was the approach of 

the Swedish government, which guaranteed all fixed obligations. 

Such a guarantee would be extremely expensive. However, the reason to expand the existing FDIC Guarantee Program would be to 

reassure credit markets generally, or, specifically, to avoid a chain 

of defaults set off by the consequences of credit default swap obligations coming due as a result of a bond default. 

Option B: Receivership. 

As an alternative to a windup, the government could place a distressed bank into conservatorship. As conservator, the FDIC would 

try to restore the bank’s safe and sound condition (leaving insured 

and hopefully other deposit holders in place) and carry on the 

bank’s business in the meantime. 

In either a receivership or conservatorship, the FDIC can remove 

failed managers. It can also sell assets at their current market 

value both to raise funds and to remove the bad assets from the 

bank’s balance sheet, and it can sell off parts of its business. The 

FDIC could also conceivably use this authority to break up one or 

more large, systemically significant institutions into several smaller, more manageable banks.365 The preservation of the interests of 

existing shareholders is not a constraint on the FDIC’s exercise of 

its authority. 

This approach is similar to the steps that were taken in countries with crises in relatively concentrated banking sectors in the 

recent past, including the United Kingdom currently. It is also 

similar to the approach of the Reconstruction Finance Corporation 

during the New Deal. The only successful cases noted in Part B of 

this section of the report that do not effectively fall into the conservatorship category was the RTC experience, which, of course, involved numerous smaller insolvent institutions that disappeared 

during the crisis. 

Treasury could obtain FDIC-type powers over institutions that 

received TARP funds, similar to the powers the UK government 

mstockstill on PROD1PC66 with HEARING

67 

has exercised over some banks. Simply by insisting on voting control as the price for further capital infusions, Treasury would be in 

a position to exercise more control and to guard the interests of 

taxpayers. 

Option C: Subsidization of Distressed Banks. 

A third option is that, as the crisis spreads and financial institutions are at risk of becoming insolvent, the government can provide 

financial resources to keep those institutions afloat (which some 

may view as ‘‘subsidization’’). In most cases, before government aid 

is delivered to a sick bank, the BHC must first support the bank 

itself, but, again, it is likely that, by the time a crisis is reached, 

a distressed bank will have already exhausted available assets of 

its BHC. 

Government financial support may be in the form of a loan, a 

guarantee, or a direct infusion of capital, all of which are among 

the tools available to Treasury as part of its authority under the 

TARP. In addition, asset purchases from banks arranged with government involvement and guarantees can be vehicles for government subsidies. In each case, this assistance means transferring 

value from the taxpayer to the financial institution. Such transfer 

may be temporary (i.e., when the subsidy must be repaid) or permanent. Subsidization might be provided to all banks that request 

it or just the banks that threaten systemic risk. The amounts and 

kinds of subsidization are open-ended. 

In most cases, the assistance flows to the bank through the BHC, 

although some forms of FDIC assistance can flow directly to the 

bank. This structure is used because often only the BHC can issue 

preferred stock. By funding the corporation that holds the bank as 

opposed to the bank itself, the government does not achieve a legal 

claim as a bank creditor that could be senior to other creditors. Instead, the government holds senior preferred equity in the BHC, 

and is thus at a higher risk of losing its investment in a liquidation 

proceeding than other creditors. By lending to BHCs, the government increases the risk of taxpayer non-payment. At present, the 

TARP involves two approaches. The first is the provision of capital 

for a distressed bank to help it maintain solvency, lending volume, 

and financial operations during the current crisis. The second is 

purchase of bad (so-called ‘‘toxic’’) assets—as Secretary Paulson initially recommended—to remove the threat those assets pose to 

bank solvency. Under this approach, the government could purchase the assets outright or it could purchase the assets as part of 

a general restructuring. One restructuring that is widely described 

involves placing institutions in conservatorship with the FDIC 

transferring the toxic assets to one or more institutions (so-called 

‘‘bad banks’’) created specifically to hold and ultimately to sell 

those assets for the highest amounts possible. In that case, banks 

stripped of their toxic assets would emerge from receivership as 

healthier institutions and the separated, bad assets, could be held 

until their value increased as the markets recovered. 

4. ASSESSING THE OPTIONS 

The overall objective of the TARP and related actions by the 

FDIC and the Federal Reserve Board is to stabilize the financial 

system and promote the return of economic growth. The choice of 

mstockstill on PROD1PC66 with HEARING

68 

which route to pursue among the options discussed above would 

appear to depend upon the relative weight that policymakers assign to several other important considerations. 

a. Time—Is it on Our Side or Not? 

Assuming the most immediate goal is to have functioning major 

financial institutions, the question is how to achieve that goal as 

quickly as possible, at the lowest cost to the taxpayers, and with 

minimal risk to the public interest and the financial system. If, 

with the passage of time, assets will be restored to their earlier, 

true values and banks will come back to life on their own accord, 

then time is on our side. In such a case, the risks of action likely 

outweigh the risks of inaction. 

On the other hand, if the economy is unlikely to recover quickly, 

so that the banks cannot rely on a rising economy to restore their 

balance sheets, time is not on our side. The banking system itself 

creates a possible timing problem. The existence of weak institutions that are sustained only by taxpayer guarantees and infusions 

of cash threatens the health of all banks, drawing off depositors 

and undermining public support. Continued operation of systemically significant but weakened institutions at the heart of a nation’s financial system may prevent a robust economic recovery of 

the sort that would cause time to be on our side. In such a case, 

delay and half steps would seem to be the main enemy. 

b. Taxpayer Exposure and Exit Strategy 

Subsidization, liquidation, and reorganization all require upfront 

outlays by the government, and the greater the desire to protect 

one or another class of otherwise uninsured investors, the greater 

that initial outlay will be. If Treasury policy was to only protect insured depositors, the costs of either liquidation or reorganization 

would be quite low. Ensuring all bondholders is costly, and keeping 

equity holders alive is the most expensive of all, because: (1) protecting equity means you must protect all debt holders as well as 

the equity holders; and (2) doing so prohibits the public from capturing the upside of a recovered bank. 

Under any of the three strategies, the cost to the taxpayer depends not only on which classes of capital policymakers want to 

support, but also on precisely how insolvent the applicable institutions may be. In the case of liquidation or reorganization, the cost 

to the taxpayer is minimal where assets are adequate to cover deposits and, as necessary, guaranteed debt. The total cost of each of 

these strategies also depends on their effectiveness at thawing 

credit markets and restoring economic growth. An ineffective strategy is likely to prolong the crisis and require further investment 

of taxpayer funds. 

With regard to subsidization, capital infusions generally come to 

mean equity (or ‘‘common stock’’) investments that increase the 

cost to the taxpayer if banks fail or produce gains if the market recovers. Of course, that assumes that the government is focused on 

capturing upside opportunities through equity ownership. In the 

case of the transactions with shaky financial firms under TARP to 

date, with the exception of AIG, Treasury has taken only small 

amounts of equity upside in relation to the large risks Treasury 

mstockstill on PROD1PC66 with HEARING

69 

366See Hoenig, supra note 149. 

has assumed through its preferred stock investments and asset 

guarantees. 

In the case of asset purchases, the bad assets could fail to increase in value, leaving the taxpayers with similar, if not larger, 

losses. On the other hand, a very successful government asset purchase program would provide the government with 100 percent of 

the upside in those assets. These assets could gain in value as the 

market turns around, producing gains to the government upon ultimate disposition. While Swedish authorities were aided by the 

rapid recovery of the economy both nationally and globally as they 

sought to dispose assets, such economic recovery is uncertain today, 

as it was uncertain ex ante in Sweden. Similarly, with regard to 

liquidation and reorganization, the disposal of assets in the current 

environment may require steep discounts and thus greater taxpayer cost, depending on whether the government, as opposed to 

the FDIC, is guaranteeing any particular class of investors in the 

firm. 

While the total cost of the various options is open to doubt, liquidation provides clarity relatively quickly. In that sense, allowing 

institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those 

institutions to drift into government control piecemeal.366 Liquidation is less likely to be open-ended and stretch over years, as subsidization did in Japan. 

Liquidation is also the option least likely to sap the patience of 

taxpayers. It is noteworthy how little controversy has been associated with the FDIC’s windup of numerous banks and thrifts over 

the last year. The process for liquidating thrifts such as Washington Mutual and IndyMac has been executed without public 

alarm. The confidence in this system seems to be related in part 

to the FDIC’s long established role as conservator and, in part, to 

the clear rules and purposes the FDIC has in place for its functioning as conservator. By contrast, taxpayers become particularly 

impatient when subsidies are used to help banks acquire other 

banks, stave off losses by bank shareholders, or serve existing management. 

Thus, while liquidation can offer a clear exit strategy, FDIC’s experience with Continental Illinois suggests that reorganization may 

not offer quite such a clear ending if the government is committed 

both to minimizing the expenditure of government funds and to 

making all creditors whole. Unable to find an acquirer, unwilling 

to pay bondholders less than the value of the bond, and either unwilling or unable to infuse sufficient capital to bring Continental Illinois back to life, the government was forced to own and operate 

the bank for a prolonged period, retaining an equity stake in that 

institution for seven years. On the other hand, where there is a 

willingness to fund losses or to discount payments made to investors, reorganization has been relatively quick. 

Finally, liquidation raises concerns related to enterprise value. 

Liquidation typically breaks up the firm. In some cases, that could 

involve significant destruction of going concern value. A large multinational institution’s franchise value created by the web of conmstockstill on PROD1PC66 with HEARING

70 

367See Ricardo J. Caballero, Nationalisation Without Prices: A Recipe for Disaster, Financial 

Times (Feb. 17, 2009). 368Federal Deposit Insurance Corporation, Failed Bank Information: Information for IndyMac 

Bank, F.S.B., Pasadena, CA (online at www.fdic.gov/bank/individual/failed/IndyMac.html) 

(accessed Apr. 6, 2009); Federal Deposit Insurance Corporation, FDIC Establishes IndyMac Federal Bank, FSB as Successor to IndyMac Bank, F.S.B., Pasadena, California (July 11, 2008) (online at www.fdic.gov/news/news/press/2008/pr08056.html). 

sumer, corporate, and international banking relationships may be 

lost as a result of government seizure and reorganization, a cost 

that is not imposed on the economy under open bank assistance. 

But liquidation forms are not so limited. Liquidation can mean 

a sale of the whole entity to a buyer capable of absorbing and benefiting from the business as a whole. Going concern sales occur with 

some frequency outside the banking world, even among very complex institutions. Enterprise value might be more easily preserved 

in a conservatorship. By restructuring their balance sheets, writing 

down liabilities, and eliminating old equity, such firms might continue in operation and attract significant new capital. It may be 

true that some firms are systemically significant, but that does not 

mean every slice of their capital structure is systemically significant. In fact, it may be that a restructuring represents the best 

way to bring the franchise value back to full life. 

c. Government Capacity and Expertise 

All successful efforts to address bank crises have involved the 

combination of moving aside failed management and getting control of the process of valuing bank balance sheets. There are two 

models for the independent balance sheet valuation: mark to market (Sweden, RTC), and independent administrative pricing overseen by new management (RFC, ultimately Japan). Reorganization 

and subsidization without effective assessment of asset values does 

not work, as it can easily lead to the perpetuation of banks in a 

weakened condition or to significant government subsidies to private parties.367 History offers no examples in which subsidization 

of existing shareholders and management produced effective assessment of asset values. 

The prospect of conservatorships at large U.S. banks raises 

issues of government capacity to manage such processes at one or 

more systemically significant financial institutions. Although the 

FDIC has shown skill and professionalism in dealing with failed 

banks in the past, it has never seized an institution as complex as 

a systemically significant banking institution would necessarily be. 

The fact that most such institutions operate in dozens of countries 

makes their seizure particularly complex. The government’s capacity to dispose of bad assets could be overwhelmed by the amount 

and complexity of the assets held by those institutions. 

Some recent large FDIC takeovers may not offer relevant examples. While the FDIC has recent experience acting as the conservator of major financial institutions, that experience does not necessarily translate directly into the complex processes involved in 

seizing large, complex holding companies with operations spanning 

many countries. In July 2008, for example, the Office of Thrift Supervision closed IndyMac and placed it under an FDIC conservatorship.368 While IndyMac was the one of the largest mortgage originators in the nation, its day-to-day operations were relatively simmstockstill on PROD1PC66 with HEARING

71 

369Federal Deposit Insurance Corporation, FDIC Establishes IndyMac Federal Bank, FSB as 

Successor to IndyMac Bank, F.S.B., Pasadena, California (July 11, 2008) (online at 

www.fdic.gov/news/news/press/2008/pr08056.html). 370Federal Deposit Insurance Corporation, Bank Acquisition Information: Information for 

Washington Mutual Bank, Henderson NV and Washington Mutual Bank, FSB, Park City UT 

(online at www.fdic.gov/bank/individual/failed/wamu.html) (accessed Apr. 6, 2009). 

ple; at the time of seizure, the thrift had only 33 branches, all of 

which were located in California.369 Similarly, when regulators 

closed Washington Mutual last September and put it under FDIC 

conservatorship, the FDIC was able to facilitate the purchase of the 

thrift by JP Morgan immediately, seamlessly, and with relatively 

minimal effort.370 While that experience demonstrates how quickly 

the FDIC can cleanse the balance sheets of a troubled institution 

and return that institution to private hands, Washington Mutual’s 

operations were considerably simpler than those of large bank 

holding companies. The seizure of a large, systemically significant 

institution—let alone of multiple ones at the same time—may create additional and complex policy challenges. 

On the other hand, it is not clear whether (1) the resources of 

the United States government, including its global reach, are any 

less in relationship to its largest banks than the resources of the 

Swedish government were to its largest banks, (2) whether the 

complexity of a small number of systemically significant financial 

institutions is actually greater than the complexity involved in a 

massively multi-institution enterprise like the RTC, and (3) whether these concerns suggest that the preferred approach for large institutions is to look to restructure balance sheets in short order 

through investor concessions, rather than trying to manage institutions over time to fund complete guarantees for bondholders, which 

was the approach in Continental Illinois and in Sweden. 

Several further observations on the subject of complexity and liquidation are relevant. First, Treasury and the Federal Reserve 

Bank of New York appear to be pursuing a liquidation strategy 

with AIG. They appear to be selling off the pieces of that gigantic 

conglomerate while making whole all its creditors. It is less clear 

what the Administration’s strategy is with Fannie Mae and 

Freddie Mac, but it does not appear to be a short-term liquidation 

strategy. In neither case does the government’s role appear to be 

beyond its organizational capacity, though it appears in all those 

cases to be a politically challenging task. In addition, the government would not be limited to current personnel. Among the many 

retired banking professionals and those currently operating smaller 

banks, there may be substantial talent available to assist in the 

management of banks under conservatorships. 

d. Competitive Impact on Financial Institutions 

Subsidization can have a substantial negative impact on the 

functioning of competitive markets. It undoes market discipline for 

financial institution investors, particularly equity investors, and it 

effectively puts the financial power of the government behind some 

‘‘private’’ firms and not behind others. While some institutions— 

like Lehman Brothers—are left to fail without government assistance, others remain solvent and benefit from increased stock values 

that take public subsidization into account. 

mstockstill on PROD1PC66 with HEARING

72 

371See Panel Regulatory Reform Report, supra note 164, at 23–24. 372Frank Ackerman et al., The Political Economy of Inequality (2000). 

Perhaps the most pernicious impact of subsidization is its effect 

on prudent banks. Institutions that were conservative in their risk 

profiles and remained solvent during tough times lose the comparative advantage of that prudence when the government subsidizes 

imprudent actors. Although liquidation and reorganization can be 

costly and painful, those processes do not raise the same risks of 

moral hazard or market distortion that accompany government 

subsidization. 

While systemically significant institutions will have competitive 

advantages over others because of government financial assistance, 

if the special protection available to them is not accompanied by 

heightened regulatory requirements (relatively stringent capital 

and liquidity requirements, an overall maximum leverage ratio, 

etc.), then the comparative advantages of size will promote severe 

market distortions—and impose growing risks on the taxpayer.371

e. Impact on Investors and Capital Markets 

Some investors would nearly always be wiped out under liquidation or reorganization strategies. This is a harsh outcome, but the 

investors also reaped profits during the good times, for which they 

agreed to take the losses when things went sour. This is the nature 

of a market economy, and it certainly is the fate of most business 

people who take risks in a market economy. It is also the market 

discipline that the leaders of the financial community have urged 

on their fellow citizens for decades. 

Some concern has been expressed that shareholders may include 

pension funds and municipal governments, which would spread the 

public costs of liquidation. On the other hand, it would undoubtedly 

be less expensive to assist the subset of investors that might deserve protections (such as pension funds or municipal governments), than to continue to support all investors in the hopes that 

some portion of the assistance would flow to these groups. In fact, 

even when accounting for pension funds, stock ownership is concentrated heavily among higher-income families, which means that 

protection of investors involves wealth transfers from all taxpayers 

to a wealthier minority.372 This is particularly true for very low 

valued stocks and junk bonds, which are typically held by longterm broadly representative investors but which are shifted in a 

time of crisis to specialty, risk-friendly investors like vulture funds. 

It is also possible that a more aggressive approach toward seizures may further undermine the efforts of banks to attract critical 

private capital. On the other hand, with subsidization, private capital must also factor deep uncertainty about how long the subsidies 

will last, the underlying value of the assets, and whether taxpayers 

will eventually insist that banks be liquidated. The post-reorganization bank has a cleaned up balance sheet that would pose almost no risk and would likely be very attractive to investors bringing new capital. 

mstockstill on PROD1PC66 with HEARING

73 

f. Asset Price Transparency 

Attempting to ensure that the securities issued by an institution 

in exchange for a capital infusion are equal in value to that infusion is difficult at best, and some pricing mechanisms are designed 

to create hidden subsidies. Valuation issues are even more extreme 

when the government purchases bad assets. While the shares of 

many larger banks are publicly traded, providing a market price 

that can be referenced in setting the terms for capital infusions, 

the banks’ assets often have no readily ascertainable market value. 

If the government pays for the assets at a distress price, reflecting 

the assets’ current market value, the selling institution may be demonstrably insolvent. But if the government pays more for the assets than their current market value, it will simply provide a subsidy to the bank at taxpayer cost. These considerations led to decisions on the one hand to have government initially absorb the 

losses associated with mark-to-market accounting for distressed assets, as was the case with the RTC and Sweden, and on the other 

hand, to engage in independent administrative valuation of distressed assets, as was the case in the RFC and in the eventual Japanese approach to the crisis. 

Liquidation presents its own valuation challenges. If the government takes over a failed bank, it will eventually sell the assets. It 

will have to make the decision about how long to hold them and 

what price to offer initially. By ‘‘dumping’’ assets too quickly, 

Treasury could depress prices and indirectly impose losses upon 

other financial institutions, and by holding too long, the taxpayer 

could take unnecessary risks. This was the challenge facing the 

RTC when it liquidated the assets of failed institutions in the late 

1980s and early 1990s. But, as David Cooke testified to the Panel, 

the RTC experience is generally viewed as providing lessons in how 

to sell off assets effectively and efficiently. Ultimately, the RTC was 

able to restore functioning markets for the kinds of assets (defaulted construction loans, mortgages, and real estate) that typically comprise a large portion of the bad assets of even the largest 

institutions. 

Historical precedents always involve some differences from the 

current crises and the turmoil in the global financial system over 

the last nearly two years has produced challenges not faced in prior 

banking crises. Nevertheless, our review of prior episodes strongly 

underscores the importance of reliable asset values, an assertive 

government response to failing financial institutions and a willingness to hold management accountable, including replacement of 

key officials when necessary. And perhaps most important of all, 

clear, consistent communications to the public of the government’s 

goals, strategy and progress in achieving its objectives—expressed 

in terms the broad public can understand—will continue to be critical to sustained support for the current efforts from American taxpayers. 

mstockstill on PROD1PC66 with HEARING

74 

SECTION TWO: ADDITIONAL VIEWS 

A. Richard H. Neiman and John E. Sununu 

The report issued today by the Congressional Oversight Panel 

identifies central issues that should frame the public policy debate 

on financial stability, including the importance of asset valuation, 

the extent to which the current crisis is being driven by liquidity 

as well as credit factors, and the proper relationship between the 

public and private sectors. 

These issues are complex, however, and the Panel did not reach 

an agreement on either the economic assumptions underlying strategic choices or on the optimal strategy to pursue. Further, we are 

concerned that the prominence of alternate approaches presented 

in the report, particularly reorganization through nationalization, 

could incorrectly imply both that the banking system is insolvent 

and that the new Administration does not have a workable plan. 

The stakes for the American people are too high to permit any such 

misapprehensions to develop and intrude on successful outcomes 

that affect our national financial security. 

Therefore, we have issued this Statement of Separate Views, to 

highlight what we consider to be the key points and to provide 

Congress and the public with a fuller context in which to consider 

the Panel’s report. 

1. THE PRIMARY MISSION OF THE PANEL IS TO EVALUATE THE 

EFFECTIVENESS OF TREASURY’S ACTIONS 

First and foremost, the Panel is charged with evaluating the effectiveness of Treasury’s use of the new authority granted it under 

the Emergency Economic Stabilization Act. It is not our role to design or approve Treasury’s strategy, nor should the Panel’s mission 

be expanded to encroach on that authority. 

Advocating an alternative strategy comes within the scope of our 

mission only if Treasury either offers no plan, or attempts to proceed with a plan that the Panel determines cannot reasonably be 

expected to succeed. As we will describe, neither of these conditions 

exists at present. Therefore, to the extent that the Panel report focuses more on alternatives and less on evaluation of current activities through objective metrics, we have missed an opportunity to 

closely engage with our primary task. 

2. THE CURRENT TREASURY STRATEGY ALIGNS WITH 

CONGRESSIONAL INTENT 

The new Administration has set forth a comprehensive plan, in 

particular through the Capital Assistance Program (CAP) and the 

Public-Private Investment Program (PPIP). Collectively, these programs deal with the need for banks to engage in controlled 

deleveraging by addressing both the equity and the asset challenges to the balance sheet. The combination of these two approaches provides a more comprehensive strategy than either capital infusions or asset purchases alone. The Treasury has further 

allocated funds to directly address mortgage modification and foreclosure mitigation efforts for homeowners. 

Taken together, these programs comprise a strategy that aligns 

with the Congressional intent in passing the TARP legislation. 

mstockstill on PROD1PC66 with HEARING

75 

They return to the original concept of asset purchases and address 

the housing crisis. Furthermore, they embody a preference for 

maintaining a private banking system via temporary public support or partnership, which is consistent with this country’s tradition of private rather than government control of business. Congress passed the EESA to protect the American public from financial chaos, and preventing collapse also avoids the subsequent need 

for more extensive forms of government intervention in the markets—forms less consistent with our American experience of democratic capitalism. 

3. THE CURRENT TREASURY STRATEGY IS REASONABLE AND VIABLE 

Much of the Panel’s report is premised upon the tension between 

subsidization and reorganization through nationalization, in considering which options are preferable. Embedded within this tension 

are profound differences in assumptions, both on the origins of the 

crisis and on the optimal shape of the financial services industry 

that emerges post-crisis. 

Some still question the viability of any plan involving public support that does not first divest private ownership; however, less 

drastic options such as public-private sector solutions are based on 

very reasonable assumptions. 

The debate turns on whether current prices, particularly for 

mortgage-related assets, reflect fundamental values or whether 

prices are being artificially depressed by a liquidity discount due to 

the market strain. As stated in the report, one school of thought 

focuses on the liquidity factor: 

‘‘If the liquidity discount is real, approaches such 

as Treasury’s Public Private Investment Partnership (PPIP) are more likely to succeed. Current 

prices may, in fact, prove not to be explainable 

without the liquidity factor. Even in areas of the 

country where home prices have declined precipitously, the collateral behind mortgage-related assets still retains substantial value.’’ 

We affirm that it is entirely reasonable to assume that a liquidity discount is impairing these assets, and thus that the Treasury 

has adopted a viable plan based on this valid assumption. Further, 

we believe that a viable plan should be given the opportunity to 

work. Speculation on alternatives runs the risk of distracting our 

energy from implementation of a viable plan and needlessly eroding market confidence. Market prices are being partially subjected 

to a downward self-reinforcing cycle that could be exacerbated by 

unwarranted consideration of more radical solutions such as nationalization. 

This positive assessment of Treasury’s view on the underlying 

causes of the financial crisis is not meant to suggest that the housing bubble should be re-inflated. But we do admit to being confident that the long-term values of mortgage-related assets secured 

by American homes remain a good investment. 

mstockstill on PROD1PC66 with HEARING

76 

4. RESTORING FINANCIAL STABILITY DURING AN EMERGENCY TAKES 

PRECEDENCE OVER OTHER POLICY GOALS 

In thinking long-term, other issues remain to be considered. The 

financial crisis has revealed underlying weaknesses in our regulatory system, and a reform effort will contribute to preventing future crises. Regulatory reform is a process, however, and we should 

not withhold access to existing tools for restoring financial stability 

while that reform process is in progress. 

Two examples of broader issues that should be addressed in the 

context of financial stability are (1) the role of securitization in reviving markets, and (2) the need for prudence in setting the degree 

of transparency for stress-testing of the major banks in connection 

with the CAP. 

Reforms are certainly necessary in securitization and secondary 

markets, as the Panel has noted on previous occasions. We need to 

improve the credit quality of securities issued and better manage 

risk going forward, but this does not mean that securitization 

should be abandoned in the interim. 

The Panel’s report presents a variety of views on the role of 

securitization both in a reformed regulatory structure and as a potential tool in reviving markets. We agree with the perspective 

which acknowledges that economic recovery depends upon the existence of a functioning secondary market, to re-cycle capital and 

support credit access for consumers and businesses. 

That is why the Federal Reserve has developed the Term AssetBacked Securities Loan Facility (TALF), in which the Treasury has 

chosen to invest limited TARP funds. The secondary market has 

been largely frozen for a wide class of assets, including student 

loans, auto loans, credit cards, and small businesses credit. An 

added safeguard is that the TALF will not accept the more exotic 

forms of securitized structures. 

On the issue of transparency, specifically in the stress-testing 

that federal banking regulators will be performing under the CAP, 

results should be held confidential. We believe that government 

agencies and officials who monitor the industry have a public trust 

and should be held accountable for their oversight. But there is 

also a critical difference between public information and confidential information, and respecting this distinction is in our national 

interest. Regulatory examination findings for banks are confidential, and this rule should extend to the results of stress-tests to prevent misuse of information and rumors that could place depositors’ 

funds at risk. 

5. THE PANEL’S MISSION REMAINS OF CRITICAL IMPORTANCE 

There is much serious and constructive work for the Panel to 

contribute in evaluating the Treasury’s existing initiatives, including the structure of both the TALF and PPIP, and we should be 

zealous in pursuit of our mission. Open issues that need to be addressed in-depth in future Panel reports include: 

• Treasury’s decision to limit the number of fund managers 

for the PPIP, and the eligibility criteria for fund managers; 

• The impact of new FASB rules on mark-to-market accounting; 

mstockstill on PROD1PC66 with HEARING

77 

373Part B of Section 2 of this report, infra. 

• The implications of redemptions of TARP funds on the design and goals of the program; and, 

• Additional metrics to quantify the health of the financial 

system. 

Congress would be much better served by those lines of inquiry, 

which we believe will identify ways in which to maximize the opportunities for success. 

And success is achievable. We have the wherewithal not only to 

restore financial stability, but to emerge from this crisis in an even 

stronger position. Prosperity is not a zero-sum game. It is not the 

case that one person or group necessarily prospers at another’s expense. If we stand together in investing in our common future, as 

individual and as corporate citizens, we continue in our country’s 

tradition of pragmatic optimism and lay the most enduring foundation of all for our lasting economic stability. 

B. John E. Sununu 

In producing monthly reports assessing the performance of programs under the Troubled Asset Relief Program (TARP), the Congressional Oversight Panel has worked effectively to build consensus among panel members. While it is unusual that any single 

panel member would fully agree with every sentence and statement 

in a comprehensive oversight report, in each previous case, I have 

found broad agreement with the sentiment and priorities pursued, 

and as a result, voted to support their release. 

In reviewing the drafting of the April Oversight Report, however, 

it became clear that much of the content pursued topics which 

strayed far from the Panel’s core mission. Moreover, the April Report engages in a premature discussion of dramatic changes in 

Treasury’s chosen approach to supporting stabilization in the US financial markets. These and other concerns are more fully discussed 

in the joint additional views which I have submitted with Richard 

Neiman.373 Given the magnitude of these differences, I am unable 

to support the full April Oversight Report. 

In addition to the concerns expressed in the joint additional 

views, I wish to briefly highlight two significant areas of disagreement with the Report’s choice of content and prioritization. In the 

end, these differences were simply too great to overcome through 

the submission of supplemental views alone. 

1. The main element of the April Report, a discussion of alternatives to the programs Treasury has established under the TARP, 

takes the Panel too far from its core mission of monitoring and assessing the performance of existing programs and making recommendations for improvement. In utilizing resources to pursue 

this lengthy discussion (pp. 70–87), the Panel has lost the opportunity to develop a more in depth assessment of key questions including: 

• How much lending and what type of lending has been done 

by firms receiving funding under the Bank Capital Program 

(CPP)? 

mstockstill on PROD1PC66 with HEARING

78 

• What factors have driven roughly 200 financial institutions to decline CPP funding after their applications had been 

approved, and what implications does this have for the success 

of the program? • How successful have the initial TALF auctions been, and 

what implications does this have for the structure and price 

discovery mechanism of the PPIP? • To what extent has the recent debate and proposed legislation regarding taxation and limitation of executive compensation discouraged firms from participating in CAP, TALF, and 

the PPIP? 

2. The April Report contains a lengthy discussion (pp. 60–70) of 

the unfolding financial crisis in Ireland, Iceland, the United Kingdom, and other European Countries. While a short description of 

the steps each nation has taken may be appropriate to the context 

of the Report, attempting a detailed analysis of the economic—and 

political—response is well outside the core mission of the Congressional Oversight Panel. Given the very dynamic nature of the current crisis, and the relative proximity of recent decisions taken in 

these countries, it is of little use to employ these examples to guide 

our oversight of the Treasury Programs. 

In summary, the central parts of the April Report of the Congressional Oversight Panel is consumed with discussion which, although interesting to many readers, is at the edge of—and outside—the core mission of the Panel. Expending resources to develop 

this analysis has precluded a more detailed assessment of the performance of TARP programs to date. Furthermore, the prominence 

of alternate approaches could be used incorrectly to suggest that 

the Panel believes that existing programs have failed, or that it has 

concluded that the Administration Plan is not viable. 

Given the weight of these concerns, I am unable to support the 

release of the April Oversight Report. 

mstockstill on PROD1PC66 with HEARING

79 

374See Appendix VII, infra. 375See Appendix VIII, infra. 376See Appendix IV, infra. 377See Appendix VI, infra. 

SECTION THREE: CORRESPONDENCE WITH TREASURY 

UPDATE 

As Treasury continues to announce new initiatives, the Panel 

continues to review and investigate different aspects of the financial crisis and the related programs. Since its first report, the Panel 

has requested clarification on Treasury’s strategy. On March 5, 

2009,374 Chair Elizabeth Warren replied to Secretary Geithner’s 

letter of February 23, 2009, with a request for a direct response to 

the Panel’s outstanding questions regarding Treasury’s overall 

strategy for combating the financial crisis. The letter requested a 

reply by March 20, 2009. On April 2, 2009, Secretary Geithner replied.375

Despite months of requests, the Panel was unable to secure a 

commitment from Secretary Geithner to testify at a Panel hearing 

regarding Treasury’s strategy. In recent days, a date was finally 

set for April 21. The Panel appreciates the commitment, but it is 

concerned about the prolonged process. 

The Panel was also quite surprised to discover it was excluded 

from the PPIP term sheet providing information access to GAO and 

SIGTARP. Thus far, Treasury has offered no explanation for why 

it would attempt to exclude the Panel from access to this information. 

In a letter to Secretary Geithner dated March 25, 2009, the 

Panel Chair expressed her concerns on these issues.376 While the 

Panel understands the many demands on Treasury at this time, 

this delayed response is deeply worrisome. In his April 2 letter, 

Secretary Geithner promised regular meetings and briefings before 

major announcements. This would be a significant improvement. A 

productive working relationship with Treasury would provide 

greater transparency to Congress and the public. 

TALF Inquiry. Recently, the Oversight Board opened an inquiry 

into the TALF.377 Specifically, the Panel is concerned that the 

TALF appears to involve substantial downside risk and high costs 

for the American taxpayer, while offering substantial rewards to a 

small number of private parties. Equally important, the TALF appears to subsidize the continuation of financial instruments and arrangements whose failure was a primary cause of the current economic crisis. The Panel is further concerned because the documents 

posted on Treasury’s website describing the terms of operation of 

the TALF and press reports about the content of those terms as 

they are to be implemented by the Federal Reserve Bank of New 

York are contradictory. 

To clarify the questions surrounding TALF, the Panel Chair 

asked Treasury for more information in her March 20, 2009, letter. 

Generally, the Panel is seeking information on a number of points 

to better understand what Treasury intends to accomplish with 

TALF and why the TALF structure is the most effective way to accomplish that goal. A reply was requested by March 27, 2009, and 

mstockstill on PROD1PC66 with HEARING

80 

378See Appendix V, infra. 379See Appendix III, infra. 

was received as part of the April 2, 2009, letter. The Panel is currently reviewing the letter. 

AIG Inquiry. The Panel has also initiated an inquiry into Treasury and Federal Reserve Bank actions to provide continued capital 

infusions and other assistance to AIG.378 The Panel has raised a 

number of important questions. These include the basis for deciding that AIG posed systemic risk, the economic consequences of the 

assistance provided to AIG, the identity of the ultimate beneficiaries of this assistance, and the manner in which Treasury and 

the Board have monitored the recipients of taxpayer dollars. The 

Panel is particularly concerned that the opaque nature of the relationship among AIG, its counterparties, Treasury, and the Federal 

Reserve Banks, particularly the Federal Reserve Bank of New 

York, has substantially hampered oversight of the TARP program 

by Congress and, equally important, has impaired the understanding of that program by the American people. 

In a letter dated March 24, 2009, the Panel Chair requested information from Treasury and the Federal Reserve Board on a number of points related to AIG, including how the assistance was requested and need was analyzed, the assessment of risk to the national and international financial system, any conditions placed on 

the assistance, and information about counterparties and credit default swaps. The Panel awaits the requested information from 

Treasury. 

Capital Assistance Program Inquiry. Most recently, on 

March 30, 2009, Chair Elizabeth Warren sent a request to Secretary Geithner regarding the Capital Assistance Program’s stress 

tests.379 Because the stress tests represent a key component of the 

program, the Panel has undertaken a study of the theories underlying and details of the assessment. 

The Panel is hopeful that Treasury will provide a prompt, substantive response to outstanding inquiries. In addition, the Panel 

would find it helpful to have a single point of contact within Treasury charged with providing information requested by the Panel. 

Without detailed and accurate information, the Panel cannot perform its oversight function as effectively as it should. The Panel is 

encouraged by Secretary Geithner’s recent letter, and the Panel 

will continue to work with Treasury in the hopes of restoring public 

confidence in the recovery process. 

mstockstill on PROD1PC66 with HEARING

81 

SECTION FOUR: TARP UPDATES SINCE LAST REPORT 

Since the last report, Treasury, the Federal Reserve Board, and 

the FDIC have released details on several programs that were initially announced as part of Treasury’s Financial Stability Plan 

(FSP). Additionally, Treasury has begun discussions regarding regulatory reforms to provide a more stable economic system going forward. 

Restructuring of Assistance to AIG. On March 2, 2009, the 

Federal Reserve Board and Treasury announced that they would be 

restricting AIG’s government aid to speed the process of returning 

full ownership of the company to the private sector. The restructuring included exchanging the preferred stock the government 

held for stock that had characteristics closer to common equity 

stock as a means of improving the company’s equity and financial 

leverage. Second, Treasury would create a new equity capital facility that would allow AIG to draw down up to $30 billion as another 

means to improve the company’s leverage, and to raise its capital 

levels. Finally, the Federal Reserve Board announced it would 

make certain changes to the $60 billion revolving credit facility 

that had been established by the Federal Reserve Bank of New 

York, most significantly by reducing the size of the facility to $25 

billion. 

Term Asset-Backed Securities Loan Facility (TALF). On 

March 3, 2009, the Federal Reserve Board and Treasury announced details of a facility, the purpose of which, according to the 

White Paper issued by the Federal Reserve Board, is to ‘‘improve 

credit market conditions by addressing the securitization markets’’ 

by stimulating demand for asset-backed securities. Under the 

TALF, $200 billion in non-recourse collateralized debt will be made 

available through the New York Federal Reserve Bank for the purchase of new, highly-rated asset-backed securities. The smallest 

available TALF loans are $10 million; there is no upper limit. The 

loans will be collateralized by the securities purchased. 

Details for the Making Home Affordable Loan Modification Program. On March 4, 2009, detailed guidelines and instructions were provided to loan servicers to enable them to modify 

mortgages under the terms of the Homeowner Affordability and 

Stability Plan that was announced as part of FSP in February. On 

March 19, 2009, Treasury and the Department of Housing and 

Urban Affairs launched a web site, MakingHomeAffordable.gov, to 

provide additional guidance and information. 

Public-Private Investment Program (PPIP). On March 23, 

2009, Treasury and the FDIC announced details of a program intended to target the so-called ‘‘toxic assets,’’ called ‘‘legacy assets’’ 

in program documents, that remain on many banks’ and other institutions’ books. The PPIP has two parts: (1) the Legacy Loan Program, intended to help banks sell troubled real estate loans by providing buyer assistance in the form of equity contributions from 

Treasury and financing through FDIC-guaranteed loans; and (2) 

the Legacy Security Program, which designates several asset managers as ‘‘Fund Managers’’ and creates partnerships between 

mstockstill on PROD1PC66 with HEARING

82 

Treasury and Fund Managers whose purpose is to buy up mortgage-backed securities including those issued prior to 2009. 

Framework for Regulatory Reform. On March 26, 2009, 

through a press release and testimony by Secretary Geithner before 

the House Financial Services Committee, Treasury announced a 

proposed framework for reforming financial regulation. The proposal focused on identifying and addressing those institutions that 

pose a systemic risk to the U.S. economy, providing protections for 

consumers and investors, eliminating gaps in the regulatory structure by means such as requiring hedge funds to register, and coordinating with other nations to improve international regulation. 

Additional details are to be forthcoming. 

mstockstill on PROD1PC66 with HEARING

83 

380See Appendix I, infra. 381See Appendix VII, infra. 382See Appendix VI, infra. 383See id. 384See Appendix II, infra. 

SECTION FIVE: OVERSIGHT ACTIVITIES 

The Congressional Oversight Panel was established as part of 

EESA and formed on November 26, 2008. Since then the Panel has 

issued four oversight reports, as well as a special report on regulatory reform which came out on January 29, 2009. 

Since the release of the Panel’s March oversight report, the following developments pertaining to the Panel’s oversight of the 

TARP took place: 

• The Panel held a hearing in Washington, DC on March 19, entitled, ‘‘Learning from the Past: Lessons from the Banking Crises 

of the 20th Century.’’ At the hearing, the Panel heard testimony 

from experts on the banking crises in Japan and Sweden during 

the early 1990s, the savings and loan collapse in the 1980s, and the 

Great Depression of the 1930s. The historical lessons captured in 

this testimony played an important role in the Panel’s evaluation 

of Treasury’s current strategy, as reflected in this report. 

• Secretary Geithner sent a response letter on April 2, 2009 380

to the Panel in response to letters from Elizabeth Warren sent on 

March 5 381 and 20,382 2009. Treasury’s letter provided the Panel 

with answers to questions posed in the March 5 letter and directed 

the Panel to examine a letter from the New York Federal Reserve 

for answers to its TALF questions in the March 20 letter. 

• On behalf of the Panel, Elizabeth Warren sent a letter to Secretary Geithner on March 20, 2009,383 requesting clarification on 

several aspects of the TALF. Copies of the same letter were also 

sent to Chairman of the Federal Reserve Board Ben Bernanke, and 

President of the New York Federal Reserve William Dudley, asking 

for their comments on the issues raised in the letter. Chairman 

Bernanke and Mr. Dudley responded in a joint letter on April 1, 

2009.384 The Panel is currently reviewing the specific responses 

contained in the letter and expects to provide further analysis in 

the next report. 

Upcoming Reports and Hearings 

• On Tuesday, April 21, Secretary Geithner will make his first 

appearance before the Panel at a hearing in Washington, DC. 

• On Wednesday, April 29, the Panel will hold a field hearing in 

Milwaukee, WI. The purpose of the field hearing will be to explore 

the impact of TARP on credit access for small businesses. The 

Panel will announce more details in the coming weeks. 

• The Panel will release its next oversight report in May, which 

will examine the effects of TARP on small business and household 

lending. The Panel will continue to release oversight reports every 

30 days. 

mstockstill on PROD1PC66 with HEARING

84 

SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT 

PANEL 

In response to the escalating crisis, on October 3, 2008, Congress 

provided the U.S. Department of the Treasury with the authority 

to spend $700 billion to stabilize the U.S. economy, preserve home 

ownership, and promote economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement 

a Troubled Asset Relief Program. At the same time, Congress created the Congressional Oversight Panel to ‘‘review the current 

state of financial markets and the regulatory system.’’ The Panel 

is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and 

their effect on the economy. Through regular reports, the Panel 

must oversee Treasury’s actions, assess the impact of spending to 

stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s 

actions are in the best interests of the American people. In addition, Congress has instructed the Panel to produce a special report 

on regulatory reform that will analyze ‘‘the current state of the regulatory system and its effectiveness at overseeing the participants 

in the financial system and protecting consumers.’’ 

On November 14, 2008, Senate Majority Leader Harry Reid and 

the Speaker of the House Nancy Pelosi appointed Richard H. 

Neiman, Superintendent of Banks for the State of New York, 

Damon Silvers, Associate General Counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL–CIO), 

and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard 

Law School to the Panel. With the appointment on November 19 

of Congressman Jeb Hensarling to the Panel by House Minority 

Leader John Boehner, the Panel had a quorum and met for the 

first time on November 26, 2008, electing Professor Warren as its 

chair. On December 16, 2008, Senate Minority Leader Mitch 

McConnell named Senator John E. Sununu to the Panel, completing the Panel’s membership. 

mstockstill on PROD1PC66 with HEARING

85 

APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN, DATED APRIL 2, 2009 

mstockstill on PROD1PC66 with HEARING

86 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 108 48565A.002
87 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 109 48565A.003
88 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 110 48565A.004
89 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 111 48565A.005
90 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 112 48565A.006
91 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 113 48565A.007
92 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 114 48565A.008
93 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 115 48565A.009
94 

APPENDIX II: LETTER FROM CHAIRMAN OF 

THE FEDERAL RESERVE BOARD OF GOVERNORS MR. BEN BERNANKE TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN, DATED APRIL 1, 2009 

mstockstill on PROD1PC66 with HEARING

95 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 117 48565A.010
96 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 118 48565A.011
97 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 119 48565A.012
98 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 120 48565A.013
99 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 121 48565A.014
100 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 122 48565A.015
101 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 123 48565A.016
102 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 124 48565A.017
103 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 125 48565A.018
104 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 126 48565A.019
105 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 127 48565A.020
106 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 128 48565A.021
107 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 129 48565A.022
108 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 130 48565A.023
109 

APPENDIX III: LETTER FROM CONGRESSIONAL 

OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 30, 2009 

mstockstill on PROD1PC66 with HEARING

110 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 132 48565A.024
111 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 133 48565A.025
112 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 134 48565A.026
113 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 135 48565A.027
114 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 136 48565A.028
115 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 137 48565A.029
116 

APPENDIX IV: LETTER FROM CONGRESSIONAL 

OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 25, 2009 

mstockstill on PROD1PC66 with HEARING

117 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 139 48565A.030
118 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 140 48565A.031
119 

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

MARCH 24, 2009 

mstockstill on PROD1PC66 with HEARING

120 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 142 48565A.032
121 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 143 48565A.033
122 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 144 48565A.034
123 

APPENDIX VI: LETTER FROM CONGRESSIONAL 

OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED MARCH 20, 2009 

mstockstill on PROD1PC66 with HEARING

124 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 146 48565A.035
125 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 147 48565A.036
126 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 148 48565A.037
127 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 149 48565A.038
128 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 150 48565A.039
129 

APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED MARCH 5, 

2009 

mstockstill on PROD1PC66 with HEARING

130 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 152 48565A.040
131 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 153 48565A.041
132 

APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY 

MR. TIMOTHY GEITHNER, DATED JANUARY 

28, 2009 

mstockstill on PROD1PC66 with HEARING

133 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 155 48565A.042
134 


mstockstill on PROD1PC66 with HEARINGInsert graphic folio 156 48565A.043