101
1

Table of Contents

Executive Summary............................................................................................................ 3

Section One: Assessing TARP Strategy ............................................................................. 7

A. The Federal Government’s Current Strategy..................................................... 8

B. Historical Approaches and Lessons ................................................................ 35

C. Europe: Current Crises and Response............................................................. 60

D. Taking Stock: Options for Moving Forward.................................................. 70

Section Two: Additional Views........................................................................................ 88

A. Richard H. Neiman and John E. Sununu ......................................................... 88

B. John E. Sununu................................................................................................. 92

Section Three: Correspondence with Treasury Update .................................................... 94

Section Four: TARP Updates Since Last Report.............................................................. 96

Section Five: Oversight Activities.................................................................................... 98

Section Six: About the Congressional Oversight Panel.................................................. 100

Appendices:

APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY 

GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 

WARREN, DATED APRIL 2, 2009 .................................................................. 101

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................ 110

APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED MARCH 30, 2009 ................................................................................ 125

APPENDIX IV: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED MARCH 25, 2009 ................................................................................ 132
2

APPENDIX V: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED MARCH 24, 2009 ................................................................................ 135

APPENDIX VI: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED MARCH 20, 2009 ................................................................................ 139

APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED MARCH 5, 2009 .................................................................................. 145

APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, 

DATED JANUARY 28, 2009 ............................................................................ 148
3

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. 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 

 * 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.
4

on six historical experiences: (1) the U.S. Depression of the 1930s; (2) the bank run on and 

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

the late 1980s and establishment of the Resolution Trust Corporation; (4) the recapitalization of 

the FDIC bank insurance fund in 1991; (5) Sweden’s financial crisis of the early 1990s; and (6) 

what has become known as Japan’s “Lost Decade” of the 1990s. The report also surveys the 

approaches currently employed by Iceland, Ireland, the United Kingdom, and other European 

countries.

Experiences from other times and other countries illustrate the benefits and problems 

these basic approaches present to dealing with failing banks. In the 1980s savings and loan 

crisis, for example, the U.S. government liquidated unhealthy financial institutions by 

transferring depositors to another bank, selling off assets, writing down some debt and wiping 

out investors. There can be considerable political barriers to this approach, and a surprise or 

poorly-explained liquidation can reduce market confidence and heighten uncertainty about future 

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

open-ended commitment that accompany subsidization. It can restore market confidence in the 

surviving banks, and it can potentially accelerate recovery by offering decisive and clear 

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

Another option is government reorganization of troubled financial institutions using 

conservatorships, as in the case of Continental Illinois in the U.S. and the financial crisis in 

Sweden in the 1990s. This approach entails an in-place reorganization in which bad assets are 

removed, failed managers are replaced, and parts of the business are spun off. Depositors and 

some bondholders are protected, and institutions can emerge from government control with the 

same corporate identity but healthier balance sheets. This option also offers clarity to markets 

about the balance sheets of the reorganized financial institutions and encourages capital 

investment in the newly-reorganized entity. But reorganization can also tax government capacity 

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

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

interests and support public policy at the expense of the bank’s health, although there is no 

evidence that this has occurred in recent banking crises.

The third option is government subsidization of troubled institutions. Japan’s approach 

was characterized by a series of direct and indirect subsidizations. Subsidies may be direct, by 

providing banks with capital infusions, or indirect, by purchasing troubled assets at inflated 

prices or reducing prudential standards. Cash assistance can provide banks with bridge capital 

necessary to survive in tough economic times until growth begins again. But subsidies carry a 

risk of obscuring true valuations. They involve the added danger of distorting both specific 

markets and the larger economy. Subsidization also carries a risk that it will be open-ended, 

propping up insolvent banks for an extended period and delaying economic recovery. 
5

 A review of these historical precedents reveals that each successful resolution of a 

financial crisis involved four critical elements: 

• Transparency. Swift action to ensure the integrity of bank accounting, particularly with 

respect to the ability of regulators and investors to ascertain the value of bank assets and 

hence assess bank solvency

• Assertiveness. Willingness to take aggressive action to address failing financial 

institutions by (1) taking early aggressive action to improve capital ratios of banks that 

can be rescued, and (2) shutting down those banks that are irreparably insolvent. 

• Accountability. Willingness to hold management accountable by replacing – and, in 

cases of criminal conduct, prosecuting – failed managers. 

• Clarity. Transparency in the government response with forthright measurement and 

reporting of all forms of assistance being provided and clearly explained criteria for the 

use of public sector funds.

Historical precedents always involve some differences from the current crises. Nonetheless, 

experience can provide an important comparison against which current approaches can be tested. 

One key assumption that underlies Treasury’s approach is its belief that the system-wide 

deleveraging resulting from the decline in asset values, leading to an accompanying drop in net 

wealth across the country, is in large part the product of temporary liquidity constraints resulting 

from nonfunctioning markets for troubled assets. The debate turns on whether current prices, 

particularly for mortgage-related assets, reflect fundamental values or whether prices are 

artificially depressed by a liquidity discount due to frozen markets – or some combination of the 

two. 

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

response to the current crisis. Current prices may, in fact, prove not to be explainable without 

the liquidity factor. Even in areas of the country where home prices have declined precipitously, 

the collateral behind mortgage-related assets still retains substantial value. In a liquid market, 

even under-collateralized assets should not be trading at pennies on the dollar. Prices are being 

partially subjected to a downward self-reinforcing cycle. It is this notion of a liquidity discount 

that supports the potential of future gain for taxpayers and makes transactions under the CAP and 

the PPIP viable mechanisms for recovery of asset values while recouping a gain for taxpayers.

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

of the current downturn and the degree to which the low valuation of troubled assets accurately 

reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the 

FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that 

Treasury will need to take very different actions in order to restore financial stability. 
6

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.
7

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

 1 The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343, passed on October 3, 

2008.

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 
8

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.

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.
9

• Directly Address the Foreclosure Crisis. The Administration’s housing plan, examined 

in the Panel’s March oversight report,2

• 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.

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.

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

 2 Congressional Oversight Panel, Foreclosure Crisis: Working Toward a Solution (Mar. 6, 2009) 

(hereinafter “Panel March Oversight Report”).

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.”).

4 See Congressional Oversight Panel, Questions About the $700 Billion Emergency Economic Stabilization 

Funds, at 4-8 (Dec. 10, 2008) (hereinafter “Panel December Oversight Report”).

 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 
10

January report and in a pair of letters sent to Secretary Geithner.5

 The findings of the Panel’s 

February Valuation report, which revealed that Treasury provided the top ten TARP recipients 

with a subsidy of $78 billion over the market value of the preferred shares purchased,

6 despite 

Treasury’s representations of these purchases as being made “at par,”7

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.”

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

8

 5 See Congressional Oversight Panel, Accountability for the Troubled Asset Relief Program, at 5 (Jan. 9, 

2009) (hereinafter “Panel January Oversight Report”); Appendix VIII infra, Letter from Elizabeth Warren, 

Chairperson, Congressional Oversight Panel to Timothy Geithner, Secretary of the Treasury (Jan. 28, 2009) 

(requesting that Secretary Geithner respond to unanswered questions remaining from the previous two reports); 

Appendix VI infra, Letter from Elizabeth Warren, Chairperson, Congressional Oversight Panel to Timothy Geithner, 

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

respond to three specific questions about strategy).

6 See Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions (Feb. 6, 

2009) (hereinafter “Panel February Oversight Report”).

7 U.S. Department of the Treasury, Responses to Questions of the First Report of the Congressional 

Oversight Panel for Economic Stabilization, at 8 (Dec. 30, 2008) (hereinafter “Treasury December Response to 

Panel”) (“When measured on an accrual basis, the value of the preferred stock is at or near par.”).

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”).

 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 
11

borrowing and not enough worrying. Today, however, our problem is exactly the opposite.”9

 

This diagnosis of the financial crisis is driving the Administration’s aggressive interagency effort 

to revive credit markets and strengthen the balance sheets of financial institutions through capital 

injections and the removal of toxic assets. Yet this approach assumes that the decline in asset 

values and the accompanying drop in net wealth across the country are in large part the products

of temporary liquidity discounts due to nonfunctioning markets for these assets and, thus, are

reversible once market confidence is restored. While critics of this approach warn against a 

more fundamental solvency problem plaguing the financial institutions holding onto these toxic 

assets,10 Treasury and key policymakers in the Administration argue that the recently-passed 

fiscal stimulus passage, Treasury’s foreclosure mitigation plan, and the public-private program to 

revive markets for toxic assets will strengthen the fundamental value of these assets.11

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

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 

 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. 

 9 Brookings Institution, Lawrence Summers on the Economic Crisis and Recovery (Mar. 13, 2009) (online 

at www.brookings.edu/~/media/Files/events/2009/0313_summers/0313_summers_remarks.pdf) (hereinafter 

“Summers, Economic Crisis and Recovery”).

10 See, e.g., Desmond Lachman, Obama Policies Have the U.S. on the Road to Deflation, American Banker 

(Apr. 1, 2009) (“Particularly striking is the fact that instead of addressing the bank insolvency issue head on, the 

Administration is choosing to continue the charade that the banks’ problems are largely those of liquidity rather than 

those of solvency.”); Ian Bremmer and Nouriel Roubini, Expect the World Economy to Suffer Through 2009, Wall 

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

2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are 

leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial 

firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.”).

11 Council on Foreign Relations, A Conversation with Timothy F. Geithner (Mar. 25, 2009) (online at 

www.cfr.org/publication/18925/conversation_with_timothy_f_geithner.html) (“So we’re not treating, have never 

treated, this as a liquidity crisis. It has those two core dimensions. And as you can see, in the president’s broad 

agenda... you’re not going to be able to fix the financial system without very strong, sustained support from 

monetary and fiscal policy. And that broad package together has the best chance of getting us... more quickly to the 

path of recovery.”); Timothy Geithner, My Plan for Bad Bank Assets, Wall Street Journal (Mar. 23, 2009) (“By 

providing a market for these assets that does not now exist, this program will help improve asset values, increase 

lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to 

sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to 

replace the capital investments provided by the Treasury.”).

12 These hearings can be viewed in their entirety at the Panel website: www.COP.Senate.gov. 
12

with most forecasts by predicting economic contraction continuing into mid-2009 with recovery 

commencing in the second half of the year.13 This projection is consistent with forecasts issued 

by the Congressional Budget Office (CBO) and Blue Chip Economic Indicators, though the latter 

has been steadily downgrading its forecasts each month. As of late February, the Obama 

Administration projected an annual decline in real Gross Domestic Product (GDP) of 1.2 

percent, a slightly more optimistic forecast than the 1.5 percent contraction recently projected by 

the CBO.14 The Blue Chip Economic Indicators survey, which offered a projection of a 1.9 

percent contraction in its January report, recently downgraded this projection to a 2.6 percent 

contraction in March.

15 Another economic projection that may be guiding Treasury policy is 

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

originated credit assets of $2.1 trillion.16 Another projection comes from the International 

Monetary Fund, which expects U.S. credit losses of $2.2 trillion.17 For both of these projections, 

half or less of these losses will take place in the U.S. because a portion of the risks was

transferred to foreign investors. While these losses will likely require additional capital infusions 

from public and private sources, the road to recovery for the banking system will be shorter 

based on these projections than it would be if the projections of some of the leading pessimists 

(see below) are borne out.18

 13 White House Council of Economic Advisors, Economic Report of the President, at 53 (Jan. 2009) (“The 

contraction is projected to continue into the first half of 2009, followed by a recovery in the second half of 2009 that 

is expected to be led by the interest-sensitive sectors of the economy. The overall decline, from the second-quarter 

level of GDP to the quarter with the lowest real GDP, is projected to slightly exceed the depth of the average postWorld War II recession. This pattern translates into a small decline during the four quarters of 2008, followed by a 

small increase during 2009.”).

14 Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s 

Budget and Economic Outlook, at 19 (Mar. 2009) (“In CBO’s forecast, on a fourth-quarter-to-fourth-quarter basis, 

real (inflation-adjusted) gross domestic product falls by 1.5 percent in 2009 before growing by 4.1 percent in both 

2010 and 2011.”); Office of Management and Budget, A New Era of Responsibility: Renewing America’s Promise, 

at 132 (Feb. 26, 2009).

15 Sickly U.S. Economy Set for 2nd Half Rebound: Survey, Reuters (Mar. 10, 2009) (citing Randell E. 

Moore, Blue Chip Economic Indicators: Top Analysts’ Forecasts of the U.S. Economic Outlook for the Year Ahead

(Mar. 10, 2009)).

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

Options, Goldman Sachs Global ECS Research, at 14 (Jan. 13, 2009) (Global Economics Paper No. 177) (online at 

garygreene.mediaroom.com/file.php/216/Global+Paper+No++177.pdf).

17 International Monetary Fund, Global Financial Stability Report Market Update, at 2 (Jan. 28, 2009) 

(“The worsening credit conditions affecting a broader range of markets have raised our estimate of the potential 

deterioration in U.S.- originated credit assets held by banks and others from $1.4 trillion in the October 2008 GFSR 

to $2.2 trillion.”).

18 See Douglas J. Elliott, Bank Nationalization: What is it? Should we do it?, at 10 (Feb. 25, 2009) (“In 

sum, the banking system can be restored to the capital levels that held prior to this recession, which were considered 

more than adequate at the time, if the economy and credit losses perform as the IMF or Goldman Sachs expects. 

These forecasts are roughly in line with the consensus economic view.”).

 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 
13

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 percent19 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 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 

 19 Roubini Global Economics, RGE Monitor 2009 Global Economic Outlook, at 1-2 (Jan. 2009) (online at 

www.rgemonitor.com/redir.php?cid=316328&sid=1&tgid=10000).

20 Nouriel Roubini and Elisa Parisi-Capone, Total $3.6T Projected Loans and Securities Losses, $1.8T of 

Which at U.S. Banks/Brokers: The Specter of Technical Insolvency, RGE Analysts’ EconoMonitor (Jan. 21, 2009) 

(online at 

www.rgemonitor.com/blog/economonitor/255236/total_36t_projected_loans_and_securities_losses_18t_of_which_a

t_us_banksbrokers_the_specter_of_technical_insolvency).

21 Standard & Poor’s, S&P/Case-Shiller Home Price Indices (online at 

www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_033114.xls) (accessed Apr. 3, 2009)

(hereinafter “Case-Shiller Indices”).

22 Standard & Poor’s, The New Year Didn’t Change the Downward Spiral of Residential Real Estate Prices 

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

www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_033114.pdf) (hereinafter “Case-Shiller Press 

Release”).

23 Id.
14

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

 24 Geithner Financial Stability Statement, supra note 

 The central component of Treasury’s plan is the Capital Assistance 

Program (CAP), which consists of a two-step program. The first step is a supervisory 

exercise, the “stress test,” in which the 19 U.S. banking organizations with over $100 

billion in assets are evaluated for their ability to absorb losses in worse-than-expected 

economic conditions. While the 19 largest banks will be required to undergo stress tests, 

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

cushion will receive a six month window to raise that capital privately or access it 

through the CAP. The second component of the CAP will consist of government 

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

8.
15

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

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.”

 

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.

27

Another major component of Treasury’s financial stabilization program is its use of

TARP funds in coordination with the Federal Reserve Board’s use of its balance sheet to inject 

over two trillion dollars of financing into credit markets and public-private investment facilities. 

 

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

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

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

26 The illiquidity of the asset-backed securities market is obviously closely tied to this economic cycle. As 

prices have declined, those who hold the assets have been increasingly unwilling to sell.

27 Summers, Economic Crisis and Recovery, supra note 9.
16

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

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.

 

TALF and PPIP have some fundamental differences. TALF seeks to revive asset 

securitization markets by having the Federal Reserve Board encourage issuance of new highquality 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.

30

 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).

 Of course, reforming securitization markets, as the Panel 

29 Summers, Economic Crisis and Recovery, supra note 9.

30 See, e.g., Paul Krugman, The Market Mystique, New York Times (Mar. 26, 2009) (“Above all, the key 

promise of securitization – that it would make the financial system more robust by spreading risk more widely –

turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the 

economy more, not less, vulnerable to financial disruption.”); Robert Kuttner, Slouching Towards Solvency, 

American Prospect (Mar. 23, 2009) (online at www.prospect.org/cs/articles?article=slouching_towards_solvency) 

(“At the heart of this entire mess is the system of securitization, which dates only to the 1970s. In principle, it 

usefully allowed banks to sell off loans and thereby replenish cash to make other loans. But in practice, the system 

turned into an unsupervised doomsday machine. Not only did the system invite lenders to relax underwriting 

standards because some sucker down the line was absorbing the risk; more seriously it led to an aftermath that has 
17

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

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.

 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

32

 

proven impossible to unwind without having government temporarily take the big banks into receivership to sort out 

what’s really on their books.”).

31 See, e.g., Jeffrey Sachs, Obama’s Bank Plan Could Rob the Taxpayer, Financial Times (Mar. 25, 2009) 

(“It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more 

of the funds and the ‘price discovery’ process is not genuine. It is no surprise that stock market capitalisation of the 

banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on 

the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the 

beneficiaries.”).

32 Treasury states that the consensus baseline assumptions for real GDP growth are those found in the 

February projections published by Consensus Forecasts, the Blue Chip survey, and the Survey of Professional 

Forecasters. U.S. Department of the Treasury, FAQs: Supervisory Capital Assessment Program (online at 

files.ots.treas.gov/482033.pdf) (accessed Apr. 2, 2009).

 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 
18

insufficiently rigorous to give regulators a true picture of the health of financial institutions. 

Even if the tests are adequate, regulators may lack the will to act on what they learn. In either 

case, the stress tests would not produce the desired results. 

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

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 coinvestments 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-

 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. 

 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”).
19

investments could be profitable if the mortgage loans and mortgage-backed securities in these 

funds appreciate in value. On the other hand, insolvency of financial institutions that are funded 

by the TARP, or poor performance or pricing of PPIP equity investments, would result in a 

substantial amount of long-term losses to the federal government.

The $2.0391 trillion in loans almost exclusively represent an expansion of assets on the 

Federal Reserve Board’s balance sheet as a result of the creation of a variety of new programs. 

According to Federal Reserve Board Chairman Ben Bernanke, “the great majority of [the Federal 

Reserve Board’s] lending is extremely well secured.”34

Program 

(Dollars in billions)

 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

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

American International Group (AIG)

Outlays35

Guarantees

Loans 36

70 

7037

89.3 

0

0

0

89.338

0

0

0

0 0

159.3 

70 

89.3 

0

 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).

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 further change. The outlay concept used here is not the same as budget 

outlays, which under § 123 of EESA are recorded on a “credit reform” basis.

36 While many of the guarantees may never be exercised or exercised only partially, the guarantee figures 

included here represent the federal government’s maximum financial exposure.

37 Government Accountability Office, Troubled Asset Relief Program: March 2009 Status of Efforts to 

Address Transparency and Accountability Issues, at 9 (Mar. 31, 2009) (GAO09/504) (online at 

www.gao.gov/new.items/d09504.pdf) (hereinafter “March GAO Report”). This number includes a $40 billion 

investment made on November 25, 2008 under the Systemically Significant Failing Institutions (SSFI) Program and 

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

additional capital in exchange for additional preferred stock and warrants to be held by Treasury. U.S. Department 

of the Treasury, Office of Financial Stability, Troubled Asset Relief Program Transactions Report For Period 
20

Program 

(Dollars in billions)

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

Bank of America

Outlays

Loans

Guarantees

52.5 

4539

7.5

0 40

87.2 

0

0

87.241

2.5 

0

0

2.542

142.2 

45 

0

97.2 

Citigroup

Outlays

Loans

Guarantees

50 

4543

5

0

44

229.8 

0

0

229.845

10 

0

0

1046

289.8 

45 

0

244.8 

Capital Purchase Program (Other)

Outlays

Loans

Guarantees

168 

16847

0

0

0

0

0

0

0

0

0

0

168 

168 

0

0

 

Ending March 31, 2009 (Apr. 2, 2009) (online at www.financialstability.gov/docs/transactionreports/transaction_report_04-02-2009.pdf) (hereinafter “April 2 Transaction Report”); U.S. Department of the 

Treasury, Term Sheet (Mar. 2, 2009) (online at www.treas.gov/press/releases/reports/030209_aig_term_sheet.pdf).

38 Fed Balance Sheet April 2, supra note 33. This figure includes the AIG credit line as well as the Maiden 

Lane II LLC and Maiden Lane III LLC special purpose vehicles.

39 April 2 Transaction Report, supra note 37. This figure includes: (1) a $15 billion investment made by 

Treasury on October 28, 2008 under the Capital Purchase Program (CPP), (2) a $10 billion investment made by 

Treasury on January 9, 2009 also under the CPP, and (3) a $20 billion investment made by Treasury under the 

Targeted Investment Program (TIP) on January 16, 2009.

40 U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15, 2009) (online at 

www.treas.gov/press/releases/reports/011508bofatermsheet.pdf) (granting a $118 billion pool of Bank of America 

assets a 90 percent federal guarantee of all losses over $10 billion, the first $10 billion in federal liability to be split 

75/25 between Treasury and the FDIC and the remaining federal liability to be borne by the Federal Reserve). 

41 Id.

42 Id.

43 April 2 Transaction Report, supra note 37. This figure includes: (1) a $25 billion investment made by 

Treasury under the CPP on October 28, 2008 and (2) a $20 billion investment made by Treasury under the TIP on 

December 31, 2008.

44 U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online 

at www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf) (hereinafter “Citigroup Asset Guarantee”) 

(granting a 90 percent federal guarantee on all losses over $29 billion of a $306 billion pool of Citigroup assets, with 

the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 billion by FDIC, and the remainder 

by the Federal Reserve). See also U.S. Department of the Treasury, U.S. Government Finalizes Terms of Citi 

Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1358.htm) (reducing 

the size of the asset pool from $306 billion to $301 billion).

45 Citigroup Asset Guarantee, supra note 44.

46 Citigroup Asset Guarantee, supra note 44.

47 March GAO Report, supra note 37. This figure represents the $218 billion Treasury reported 

anticipating spending under the CPP to GAO, minus the $50 billion CPP investments in Citigroup ($25 billion) and 

Bank of America ($25 billion) identified above. This figure does not account for anticipated repayments or 
21

Program 

(Dollars in billions)

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

Capital Assistance Program TBD TBD TBD TBD48

TALF

Outlays

Loans

Guarantees

55 

0

0

5549

495

0

49550

0

0

0

0 0

550 

0

495

55

PPIF (Loans)51 50 

50

0

0

Outlays

Loans

Guarantees

0

0

0

0

600 

0

0

60052

650 

50 

0

600 

 

redemptions of CPP investments, nor does it account for dividend payments from CPP investments. Treasury 

originally set CPP funding at $250 billion and has not officially revised that estimate.

48 Funding levels for the Capital Assistance Program (CAP) have not yet been announced but will likely 

include a significant portion of the remaining $109.6 billion of TARP funds.

49 March GAO Report, supra note 37. Treasury has committed $20 billion of TARP money to TALF 

already; Treasury later indicated it would expand to a $100 billion TARP commitment to TALF, but has recently 

pulled back to a $55 billion commitment. Michael R. Crittenden, Treasury Seeks to Free Up Funds by Shuffling 

Spending in TARP, Wall Street Journal (Apr. 2, 2009) (online at 

online.wsj.com/article/SB123870719693083971.html). The increase in funding has coincided with an increase in 

asset classes eligible for the facility, including allowing legacy securities access to the facility instead of limiting 

access only to new securitizations.

50 This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value 

of Federal Reserve loans under TALF. See U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan, 

at 2-3 (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion 

Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a $100 

billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is responsible for 

reimbursing the Federal Reserve for $55 billion of losses on its $550 billion in loans, the Federal Reserve’s 

maximum potential exposure under TALF is $495 billion.

51 Because the PPIP funding arrangements for loans and securities differ substantially, the Panel accounts 

for them separately. Treasury has not formally announced either total program funding level or the allocation of 

funding between PPIP Legacy Loans Program and Legacy Securities Program. Treasury initially provided a $75-

100 billion range for PPIP outlays. U.S. Department of the Treasury, Fact Sheet: Public-Private Investment 

Program, at 2 (Mar. 23, 2009) (online at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter 

“Treasury PPIP Fact Sheet”). While SIGTARP has estimated a $75 billion Treasury commitment, we adopt GAO’s 

higher estimate of $100 billion. See Senate Committee on Finance, Testimony of SIGTARP Neil Barofsky, TARP 

Oversight: A Six Month Update, 111th Cong. (Mar. 31, 2009) (hereinafter “Barofsky Testimony”); 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.
22

Program 

(Dollars in billions)

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

PPIF (Securities)

Outlays

Loans

Guarantees

50

2053

0

0

0

0

30

0

0

0

0

0

50

20

30

0

Commercial Paper Funding Facility

Outlays

Loans

Guarantees

0

0

0

0

249.7

0

249.754

0

0

0

0 0

249.7

0

249.7 

0

Asset-Backed Commercial Paper Money 

Market Mutual Fund Liquidity Facility

Outlays

Loans

Guarantees

0

0

0

0

6.1

0

6.155

0

0

0

0 0

6.1

0

6.1 

0

Homeowner Affordability and Stability 

Plan 

Outlays

Loans

Guarantees

50 

5056

0

0

0

0

0

0

0

0

0

0

5057

Automotive Industry Financing Plan 

Outlays

Loans

Guarantees

50 

0

0

24.9 

24.958

0

0

0

0

0

0

0

0

0

0

24.9

24.9 

0

0

Auto Supplier Support Program

Outlays

Loans

Guarantees

5 

559

0

0

0

0

0

0

0

0

0

0

5

5 

0

0

 53 Treasury PPIP Fact Sheet, supra note 51, at 4-5 (outlining that, for each $1 of private investment into a 

fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity to the investment 

fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). In the absence of further 

Treasury guidance, this analysis assumes that Treasury will allocate funds for equity co-investments and loans at a 

1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its discretion to provide additional 

financing.

54 Fed Balance Sheet April 2, supra note 33. The level of Federal Reserve lending under this facility will 

fluctuate in response to market conditions and independent of any federal policy decision. 

55 Fed Balance Sheet April 2, supra note 33. The level of Federal Reserve lending under this facility will 

fluctuate in response to market conditions and independent of any federal policy decision. 

56 March GAO Report, supra note 37, at 9. 

57 Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship 

of the Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the 

Homeowner Affordability and Stability Plan. See U.S. Department of the Treasury, Making Home Affordable: 

Updated Detailed Program Description (Mar. 4, 2009) (online at 

www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).

58 April 2 Transaction Report, supra note 37.
23

Program 

(Dollars in billions)

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

Unlocking Credit for Small Business

Outlays

Loans

Guarantees

15 

1560

0

0

0

0

0

0

0

0

0

0

15 

15 

0

0

Temporary Liquidity Guarantee Program

Outlays 

Loans

Guarantees

0

0

0

0

0

0

0

0

768.9 

0

0

768.961

768.9 

0

0

768.9 

Deposit Insurance Fund

Outlays

Loans

Guarantees

0

0

0

0

0

0

0

0

29.5 

29.562

29.5 

29.5 

0

0

0

0

Other Federal Reserve Board Credit 

Expansion Since September 1, 2008

Outlays 

Loans

Guarantees

0

0

0

0

1,169

0

1,16963

0

0

0

0 0

1,169

0

1,169

0

Uncommitted TARP Funds

Outlays 

Loans

Guarantees

109.664 0

0 

0

0

TBA 

TBA

TBA

0

0

0

0

109.6

TBA

TBA

TBA

 59 March GAO Report, supra note 37, at 9. 

60 March GAO Report, supra note 37, at 9. 

61 Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary 

Liquidity Guarantee Program: Debt Issuance under Guarantee Program (online at 

www.fdic.gov/regulations/resources/TLGP/total_issuance1-09.html) (accessed Apr. 1, 2009). This figure represents 

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

of the number and size of individual financial institutions participating. $252.6 billion of debt subject to the 

guarantee has been issued to date, which represents about 33 percent of the current cap. Id.

62 Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF 

Income Statement (Fourth Quarter 2008) (online at 

www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html) (provision for insurance losses of $17.6 

billion); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income 

Statement (Third Quarter 2008) (online at 

www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html) (provision for insurance losses of $11.9 

billion). Outlays reflect disbursements or potential disbursements in conjunction with failed bank resolutions.

63 This figure is derived from adding the total credit the Federal Reserve has extended as of April 1, 2009 

through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer 

Credit Facility (Primary Dealer and Other Credit), Central Bank Liquidity Swaps, Bear Stearns Assets (Maiden Lane 

I), GSE Debt (Federal Agency Debt Securities), and Mortgage Backed Securities Issued by GSEs. See Fed Balance 

Sheet April 2, supra note 33.

64 Committed TARP funds listed above total $590.4 billion; $109.6 billion remains uncommitted for the 

$700 billion authorization under EESA and is included in this accounting because it will almost certainly be 

allocated in the future. One potential use of uncommitted funds is Treasury’s obligation to reimburse the Exchange 
24

Program 

(Dollars in billions)

Treasury 

(TARP)

Federal 

Reserve

Board

FDIC Total

Total

Outlays

Loans

Guarantees

Uncommitted TARP Funds

700 

492.9 

30

67.5 

109.6 

2,326.1 

0

2,009.1

317 

0

1,410.9 

29.5 

0

1,381.4

0

4,43765

a. Treasury Programs

522.4 

2,039.1 

1,765.9 

109.6

Through an array of programs used to purchase preferred shares in financial institutions, 

offer loans to small businesses and auto companies, and leverage Federal Reserve Board loans 

for facilities designed to restart secondary securitization markets, Treasury has spent or 

committed $590.4 billion.66 This figure is down from the $667.4 billion sum of the upper 

bounds of all Treasury commitments announced to date.67 The discrepancy results from 

Treasury revising its estimates of anticipated commitments down from the maximum announced 

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

billion to CPP purchases but now only anticipates spending $218 billion.68

 

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 

 Treasury will also 

leverage billions more in public and private capital to facilitate large-scale asset purchases of 

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.

66 March GAO Report, supra note 37, at 9.

67 March GAO Report, supra note 37, at 9.

68 March GAO Report, supra note 37, at 9. Treasury also anticipates spending only $55 billion in TALF 

funding as opposed to the $100 billion initially reported. See Figure 1, supra, and accompanying notes.
25

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

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.

b. Federal Reserve Board Facilities

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

 69 See, e.g., Alex Tanzi and Rebecca Christie, U.S. TARP Funding Remaining Estimated at $134.5 Billion, 

Bloomberg (Mar. 30, 2009).

70 See, e.g., id.

71 Maya Jackson Randall, Treasury Has $134.5 Billion Left in TARP, Wall Street Journal (Mar. 30, 2009) 

(online at online.wsj.com/article/SB123828522318566241.html) (quoting Secretary Geithner’s appearance on 

ABC’s This Week).

 These credit extensions, including special 

credit facilities established under its § 13(3) emergency authority, enabled the Federal Reserve

Board to use the asset side of its balance sheet to provide liquidity to banks and revive credit 

markets. These facilities include: the Term Securities Lending Facility, the Primary Dealer 

Credit Facility, the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility, the 

72 March 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/publications_papers/pub_display.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/publications_papers/pub_display.cfm?id=3392).

74 Fed Balance Sheet April 2, supra note 33.
26

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

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

 

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

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-

 

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

Asset-Backed Securities Loan Facility (TALF) (Mar. 3, 2009) (online at treas.gov/press/releases/tg45.htm).

76 March GAO Report, supra note 34; Michael R. Crittenden, Treasury Seeks to Free Up Funds by 

Shuffling Spending in TARP, Wall Street Journal (Apr. 2, 2009) (online at 

online.wsj.com/article/SB123870719693083971.html) (setting Treasury commitment to TALF at $55 billion, which 

represents a reduction from the $100 billion Treasury initially committed to an expanded TALF ).

77 See Figure 1, supra, and accompanying notes.

78 Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary 

Liquidity Guarantee Program: Debt Issuance under Guarantee Program (online at 

www.fdic.gov/regulations/resources/TLGP/total_issuance1-09.html) (accessed Apr. 2, 2009).

79 Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary 

Liquidity Guarantee Program: Fees Assessed Under TLGP Debt Program (online at 

www.fdic.gov/regulations/resources/TLGP/fees.html) (accessed Apr. 2, 2009).
27

time flat-rate assessment to be paid by banks this year.80 Second, it has requested increased 

borrowing authority. Under present law, the FDIC’s borrowing from Treasury is limited to $30 

billion.81 This limit has not changed since 1991.82 A bill currently before the Senate would 

increase the FDIC’s borrowing authority to $100 billion.83 The bill also allows temporary 

increases above that amount, to a maximum of $500 billion.84 Also, because of the large number 

and dollar amount of recent bank failures, the Fund’s reserve ratio had fallen below the statutory 

minimum.85 The FDIC has extended the period of time within which it intends to return to the 

statutorily mandated reserve ratio.86

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?”

 

4. Measures of Success

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

 80 Senate Subcommittee on Financial Institutions, Committee on Banking, Housing and Urban Affairs, 

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

Corporation , Current Issues in Deposit Insurance, 111th Cong. (March 19, 2009) (online at 

www.fdic.gov/news/news/speeches/chairman/spmar1909_2.html) (hereinafter “Murton Testimony”).

81 12 U.S.C. § 1824(a) (2009). 

 According to Treasury, these 

measures’ retreat from the historic levels they reached in the fall of 2008 demonstrates that the 

82 Murton Testimony, supra note 80.

83 Depositor Protection Act of 2009, S. 541. 

84 Id.

85 Murton Testimony, supra note 80.

86 Murton Testimony, supra note 80.

87 Panel December Oversight Report, supra note 4, at 4.

88 Panel January Oversight Report, supra note 5, at 9. Of course, credit default swap spreads for additional 

banks and other financial institutions may also provide insight into the effectiveness of the government’s program, 

but Treasury specifically limited its December response to the eight largest institutions. Treasury December 

Response to Panel, supra note 7, at 5. 
28

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

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.

 Nevertheless, 

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

government strategy’s impact on the economy.

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)

92

 89 Treasury December Response to Panel, supra note 

 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 

7, at 5.

90 Panel January Oversight Report, supra note 5, at 9-10.

91 The Panel also notes with appropriate caution the difficulty of disaggregating the economic effects of 

TARP from the effect of other government responses, including Federal Reserve lending and monetary policy, other 

Treasury actions, and fiscal stimulus, as well as nongovernment market pressures. Nevertheless, identifying and 

monitoring measures of success represents a crucial task for those charged with making policy as well as those 

charged with overseeing policy.

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.
29

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

evaluating the success of Treasury’s efforts on the broader economy.95 This figure 

peaked on October 10, 2008, the day before Treasury announced the CPP, and has 

substantially declined since. The Financial Stability Oversight Board indicated that this 

measure also indicates calmer markets that are less fearful of major institution failures. 

The 1-month LIBOR-OIS spread is below where it stood for most of 2008, and the 3-

month LIBOR-OIS spread is only slightly above it.96 However, both figures are trending 

upwards in 2009 and remain well above levels that had been stable until late 2007.

 93 Financial Stability Oversight Board, First Quarterly Report to Congress Pursuant to Section 104(g) of 

the Emergency Economic Stabilization Act of 2008, at 24-25 (Jan. 16, 2009) (hereinafter “FinSOB January Report”).

94 Id. at 25. For example, credit default swap spreads on Merrill Lynch increased more than 100 basis 

points after Bank of America CEO Ken Lewis made a comment seemingly endorsing separation of commercial and 

investment banking; he later clarified the statement to indicate no such endorsement. Andrew Edwards, Credit 

Markets: The Rally That Was, Wall Street Journal (Mar. 27, 2009) (online at online.wsj.com/article/BT-CO20090327-714105.html); Lizzie O’Leary and Christine Harper, Bank of America CEO Says He Doesn’t Want Banks 

Split, Bloomberg (Mar. 27, 2009) (online at 

www.bloomberg.com/apps/news?pid=20601087&sid=aK_S8qNC2wZo).

95 FinSOB January Report, supra note 93, at 24.

96 Bloomberg, 3 Mo LIBOR – OIS Spread (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND|) 

(accessed Apr. 3, 2009); Bloomberg, 1 Mo LIBOR – OIS Spread (online at 

www.bloomberg.com/apps/quote?ticker=.LOIS1:IND|) (accessed Apr. 3, 2009).
30

Figure 2: 3-year LIBOR/OIS Trend97

• 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

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 

 97 Id.

98 Government Accountability Office, Troubled Asset Relief Program: Status of Efforts to Address 

Transparency and Accountability Issues, at 64 (Jan. 30, 2009) (GAO/09-296) (hereinafter “January GAO Report”).

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

Apr. 2, 2009).
31

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 longterm 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

 100 See Panel March Oversight Report, supra note 

 The S&P/Case-Shiller Composite 20 index showed a decline of 28.5 percent in 

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/Weekly_Friday_/H15_AAA_NA.txt) (accessed Apr. 2, 2009) 

(hereinafter “Fed H.15 a”); Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release 

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

Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_BAA_NA.txt) (accessed Apr. 

2, 2009) (hereinafter “Fed H.15 b”); Board of Governors of the Federal Reserve System, Federal Reserve Statistical 

Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant 

Maturities/Nominal, Frequency: Weekly) (online at 

www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Apr. 2, 2009) 

(hereinafter “Fed H.15 c”). 

103 January GAO Report, supra note 98, at 66.

104 Fed H.15 a, supra note 102; Fed H.15 b, supra note 102; Fed H.15c, supra note 102.

105 Case-Shiller Press Release, supra note 22.
32

January 2009 from its peak in May 2006.106 Although some of the drop in real estate 

value reflects a retreat from unsustainable bubble levels, the continued drop in housing 

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

net worth, and the weakening broader economy.

107

• 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

 106 Case-Shiller Indices, supra note 

 It 

21.

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

Funds Accounts of the United States, Flows and Outstandings Fourth Quarter 2008, at 105 (Mar. 12, 2009) (R.100 

Change in Net Worth of Households and Nonprofit Organizations).

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”).

109 FinSOB January Report, supra note 93, at 27.

110 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial 

Paper Outstanding (online at www.federalreserve.gov/releases/cp/outstandings.htm) (accessed Apr. 3, 2009).

111 Id.

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).

113 FinSOB January Report, supra note 93, at 29-30.
33

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 considerably.

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

 114 January Treasury Snapshot, supra note 

 The spread results from conventional mortgage rates, which hit their 

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

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

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).
34

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

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.

 The GAO 

has indicated a substantial drop in this figure, both as measured by originations and 

applications, since the first quarter of 2008. 

• 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 lowergrade paper remains high.121 It is not immediately clear whether these developments 

indicate an appropriate response to underpricing of risk in the run-up to the financial 

crisis or an overcorrection that indicates excessively tight credit inhibiting economic 

recovery.

• 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

 119 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected 

Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly (Thursday)) (online at 

www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (accessed Apr. 2, 2009); 

Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest 

Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly (Friday)) (online at 

www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_MORTG_NA.txt) (accessed Apr. 2, 2009); Fed 

H.15c, supra note 

 This measure may reflect increased household savings 

102.

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

121 FinSOB January Report, supra note 93, at 27.

122 January Treasury Snapshot, supra note 114; 2008 Treasury Snapshot, supra note 114, at 3.
35

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 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 

 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.
36

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 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 

 125 Christina D. Romer, The Great Crash and the Onset of the Great Depression, at ii (June 1988) (National 

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

papers.ssrn.com/sol3/papers.cfm?abstract_id=262094).

126 Randall Kroszner, The Political-Economy of the Reconstruction Finance Corporation’s Bail-Out of the 

U.S. Banking System during the Great Depression (Apr. 1994) (University of Chicago Working Paper).

127 Ben S. Bernanke, Essays on the Great Depression, at 7 (2000).

128 Christina Romer, Prepared Remarks to be Presented at the Brookings Institution, Washington, DC: 

Lessons from the Great Depression for Economic Recovery in 2009, at 5 (Mar. 9, 2009) (hereinafter “Romer 

Brookings Remarks”); Charles Calomiris and Joseph Mason, How to Restructure Failed Banking Systems: Lessons 

from the U.S. in the 1930s and Japan in the 1990s, at 17 (Apr. 2003) (National Bureau of Economic Research 

Working Paper No. 9624); Bernanke supra note 127.

129 Calomiris and Mason, supra note 128, at 17.

130 Romer Brookings Remarks, supra note 128, at 6.

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

(Feb. 12, 2009).

132 Congressional Oversight Panel, Testimony of Eugene White, Learning from the Past – Lessons from the 

Banking Crises of the 20th Century, at 3 (Mar. 19, 2009) (hereinafter “White Panel Testimony”).
37

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

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.

 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.

137 By the end of 1932, the RFC had authorized approximately $1.6

billion in loans, nearly $1.3 billion of which was provided in loans to banks.

138

 133 Robert J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to 

Do About It, at 14 (2008).

 However, the 

134 White Panel Testimony, supra note 132, at 8.

135 The debate over the creation of the FDIC was quite contentious. For years prior to the onset of the Great 

Depression, there was little support for nationwide deposit insurance, due in large part to lessons learned from prior 

failures of state-based deposit insurance systems, as well as concerns about moral hazard. However, in the 

aftermath of the calamitous bank runs of the early 1930s, proponents of Federal deposit insurance were able to pass 

a measure temporarily instituting a government deposit insurance program as part of the Banking Act of 1933 (the 

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

Caprio, Jr. and Dimitri Vittas, Reforming Financial Systems: Historical Implications for Policy, at 90-93 (1997).

136 Kroszner, supra note 126, at 3.

137 William Keeton, The Reconstruction Finance Corporation: Would It Work Today? Economic Review, 

at 38 (First Quarter 1992).

138 James S. Olson, Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-

1940, at 23 (1988).
38

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

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.

 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.

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 

 139 Calomiris and Mason, supra note 128, at 20.

140 Calomiris and Mason, supra note 128, at 21.

141 Kroszner, supra note 126, at 4.

142 Keeton, supra note 137, at 38.

143 Olson supra note 138, at 64.
39

and possibly being reorganized, or if they had to be liquidated.144 It is important to note that 

financial institutions that were allowed to re-open were nonetheless encouraged to participate in 

the government preferred stock program, in order to strengthen their capital position and to allow 

them to expand commercial credit.145 However, these banks were slow to participate in the 

preferred stock program, due in large part to the stringent conditions that were placed on banks 

that sold preferred stock to the government, including the provision that granted the government 

voting rights and the ability to elect directors in proportion to its stock ownership.146

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.

 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.

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

 144 Olson supra note 

 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 

138, at 70.

145 Olson supra note 138, at 82.

146 Kroszner, supra note 126, at 5.

147 The Banking Act of 1933 established the FDIC as a temporary government agency and insured up to 

$2,500. The Banking Act of 1935 ultimately made the FDIC permanent and insured commercial deposits up to 

$5,000.

148 Jesse Jones, Fifty Billion Dollars, at 25-26 (1951).

149 Federal Reserve Bank of Kansas City, Speech by President Thomas Hoenig: Too Big Has Failed (Mar. 

6, 2009) (online at www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf).

150 Calomiris and Mason, supra note 128, at 23.

151 Walker F. Todd, History of and Rationales for the Reconstruction Finance Corporation, Federal 

Reserve Bank of Cleveland Economic Review, at 26 (Fourth Quarter 1992).
40

towards a preferred stock retirement fund.152 In fact, the RFC reserved the right to take virtually 

complete control of any bank that missed dividend payments on the preferred stock (payments 

that amounted to 6 percent initially but that were later reduced to 4 percent or as low as 3.5 

percent).153 However, the goal of these government takeovers was to steer the banks back 

toward profitability – not to maintain long-term government control. As RFC head Jesse Jones 

noted at the time, he had “no desire to control or manage the banks;” rather, he simply sought to 

protect the government’s (and, consequently, the taxpayer’s) investment as best as he could.154

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

 152 Calomiris and Mason, supra note 128, at 23.

153 Joseph R. Mason, Reconstruction Finance Corporation Assistance to Financial Intermediaries and 

Commercial & Industrial Enterprise in the U.S., 1932-1937, at 20 (Jan. 17, 2000) (online at 

papers.ssrn.com/sol3/papers.cfm?abstract_id=1337171).

154 Olson, supra note 138, at 125.

155 Keeton, supra note 137, at 47.

156 Hoenig, supra note 149.

157 Olson, supra note 138, at 80.

158 Mason, supra note 153, at 1.
41

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 severity of the current crisis.

 

160 In this regard, it is important 

to emphasize that, while the RFC contributed to the stabilization of the financial system at a time 

of great crisis, it certainly did not prevent the failure of many financial institutions, nor did it 

necessarily preserve the deposits individuals had in these failed institutions in the pre-FDIC era. 

Indeed, considering that the RFC made a point not to invest in hopelessly insolvent banks and, 

likewise, the FDIC, when established in 1934, did not insure the deposits of insolvent banks, the 

result was that all stakeholders in failed banks – stockholders, bondholders, and depositors –

shared in absorbing the losses.161 Equity in failed banks was wiped out and depositors and nondepository 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

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.

 

2. Continental Illinois

164

 159 Calomiris and Mason, supra note 

 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 

128, at 23.

160 Calomiris and Mason, supra note 128, at 8.

161 White Panel Testimony, supra note 132, at 1.

162 Calomiris and Mason, supra note 128, at 16.

163 White Panel Testimony, supra note 132, at 4; Keeton, supra note 137, at 38.

164 Many sources have commented on this period. See, e.g., David Moss, An Ounce of Prevention: The 

Power of Sound Risk Management in Stabilizing the American Financial System (2009) (Harvard Business School 

Working Paper 09-087) (online at www.hbs.edu/economic-crisis/docs/management-in-stabilizing-the-financialsystem.pdf).
42

Report.

165

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.

 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. 

166 However, until the 1980’s, the federal government did not rescue any 

bank out of a fear that the institution’s failure would pose systemic risk or that the firm was “too 

big to fail.”167 During the 1982 failure of Penn Square Bank, N.A., federal regulators explicitly

chose to liquidate the bank rather than expend the funds necessary to protect some of the nation’s 

largest banks, which had sizeable claims against Penn Square.168

The bank run on Continental Illinois National Bank and Trust Company (Continental 

Illionois) 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

 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”).

166 The FDIC authorized such expenditures under its “essentiality” authority granted in the Federal Deposit 

Insurance Act of 1950 (FDIA), Pub L. No. 81-797. A bank whose operations the FDIC deemed “essential to the 

community” could continue to operate with direct infusions of capital rather than being liquidated. FDIA at § 13(c). 

When the FDIC rescued institutions under this provision during the 1970s, it did so to avert unique problems rather 

than to stem systemic crises; the threat of urban riots hung over the rescue of minority-owned First Unity Bank of 

Boston, and a local municipal bond collapse looked imminent if Michigan’s Bank of the Commonwealth failed. See

Irvine H. Sprague, Bailout: An Insider’s Account of Bank Failures and Rescues, at 35-76 (1986).

 Because of its substantial investments, 

Continental Illinois’s 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 

167 Sprague, supra note 166, at 86-91. The rescue of First Pennsylvania Bank constitutes regulators’ first 

recognition of what was then termed the “domino effect,” the phenomenon of one bank failure causing trouble at 

other institutions and touching off a banking crisis. However, in First Pennsylvania’s case, regulators feared at 

worst a regional crisis precipitated by the effect First Pennsylvania’s failure would have on the already weak mutual 

savings banks concentrated in the Northeast. See Sprague, supra note 166, at 77-106.

168 Federal Deposit Insurance Corporation, History of the Eighties – Lessons for the Future: Volume I: An 

Examination of the Banking Crises of the 1980s and Early 1990s, at 241 (Dec. 1997) (online at 

www.fdic.gov/bank/historical/history/vol1.html) (hereinafter “FDIC History: Volume I”). 

169 See, e.g., Banker of the Year, Euromoney, at 134 (Oct. 1981); Here Comes Continental, Dun’s Review, 

at 42-44 (1978) (Vol. 112, No. 6).

170 Sprague, supra note 166, at 150-51. 

171 Sprague, supra note 166, at 150-51.
43

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 assistance to stop the run.

 

179 Furthermore, the Federal 

Reserve Board promised to meet any liquidity needs, and the FDIC promised to protect all of 

Continental Illinois’s depositors and general creditors.180 Finally, a group of major financial 

institutions put up $5.3 billion in unsecured credit.181

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.

 With these guarantees, the run stopped and 

the crisis subsided.

182

 172 Sprague, supra note 

 Regardless of the outcome, Continental Illinois would 

166, at 150-51.

173 Sprague, supra note 166, at 151-52.

174 Sprague, supra note 166, at 152-56.

175 FDIC History: Volume 1, supra note 168, at 243. The speed of the run both surprised and troubled 

regulators; it represented the first run of such scope on a modern, technologically interconnected bank. Sprague, 

supra note 166, at 152-56.

176 FDIC History: Volume 1, supra note 168, at 243-44.

177 FDIC History: Volume 1, supra note 168, at 250.

178 A deposit payoff may not have been an option at all for Continental Illinois; after the fact, Comptroller 

of the Currency Todd Conover told Congress that the FDIC did not have the funds to conduct a deposit payoff for 

any one of the nation’s eleven largest banks should any of them fail. FDIC History: Volume 1, supra note 168, at 

251. Continental Illinois was the nation’s seventh largest bank in 1984. FDIC History: Volume 1, supra note 168, 

at 236.

179 Sprague, supra note 166, at 160.

180 FDIC History: Volume 1, supra note 168, at 244.

181 FDIC History: Volume 1, supra note 168, at 244.

182 Sprague, supra note 166, at 165-67, 170.
44

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

3. Savings and Loan Crisis/Resolution Trust Corporation

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. 

 183 Sprague, supra note 166, at 200-201.

184 Sprague, supra note 166, at 180-81. 

185 Sprague, supra note 166, at 209-10.

186 Sprague, supra note 166, at 209-10; FDIC History: Volume 1, supra note 168, at 244.

187 Sprague, supra note 166, at 209-10; FDIC History: Volume 1, supra note 168, at 247-48. These terms 

bear many similarities to the government’s present interest in AIG; Treasury does not have a similar equity stake in 

any of the over 500 recipients of TARP assistance.

188 Sprague, supra note 166, at 200-209.

189 Sprague, supra note 166, at 215-17.

190 Sprague, supra note 166, at 214.

191 The Wharton School Financial Institutions Center, University of Pennsylvania, The Collapse of 

Continental Illinois National Bank and Trust Company: The Implications for Risk Management and Regulation, at 3 

(online at fic.wharton.upenn.edu/fic/case%20studies/continental%20full.pdf) (accessed Apr. 2, 2009).
45

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 1960’s to combat the resulting inflation. High 

short-term interest rates undermined the thrift business model by forcing the thrift to pay out 

more on short-term deposits than it collected on long-term fixed-rate loans. The Federal Reserve

Board responded by imposing Regulation Q, a provision that capped the rate at which thrifts and 

banks could pay out interest on deposits.193 Because the federal government insured S&L 

deposits through the Federal Savings and Loan Insurance Corporation (FSLIC, the thrifts’

equivalent of the commercial banks’ FDIC), the interest rate cap did not result in mass deposit 

defection to higher yielding, uninsured investments.

194

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 diversification199

 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.

193 Lawrence J. White, The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation, at 62-65 

(1991).

and explicitly authorized further steps, 

194 White, supra note 193, at 62-65.

195 White, supra note 193, at 67-72.

196 White, supra note 193, at 67-72.

197 Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), Pub. L. No. 96-

221, at §§ 202-210.

198 White, supra note 193, at 72-73.

199 Federal Deposit Insurance Corporation, The S&L Crisis: A Chrono-Bibliography (online at 

www.fdic.gov/bank/historical/s&l/index.html) (accessed Apr. 2, 2009) (hereinafter “FDIC Bibliography”).
46

including greater involvement in consumer lending and commercial real estate.200 

Simultaneously, many states dramatically relaxed the rules that governed the investments their 

state-chartered thrifts could make, allowing the thrifts to get directly involved in similarly 

unfamiliar, risky investments.201

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

 200 DIDMCA at § 401, See also FDIC Bibliography, supra note 199.

201 FDIC Bibliography, supra note 199.

202 Many scholars have pointed to this failure as the critical moment that precipitated the S&L crisis. See, 

e.g., White, supra note 193, at 74-82.

203 White, supra note 193, at 82-84.

204 White, supra note 193, at 83.

205 White, supra note 193, at 84-87.

206 FDIC Bibliography, supra note 199.

207 White, supra note 193, at 88-90.

208 White, supra note 193, at 89-90. The southwest here refers to the FHLBB’s Ninth District, 

encompassing Arkansas, Louisiana, Mississippi, New Mexico, and Texas.

209 White, supra note 193, at 109-111; FDIC Bibliography, supra note 199.

210 White, supra note 193, at 89-90.
47

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 institutions in what came to be 

characterized as a “zombie” stage.

 

214 A zombie thrift, one which was insolvent but continued to 

operate because the FSLIC had not yet intervened to liquidate or sell it, posed a significant 

asymmetric risk problem. These thrifts had dramatic incentives to take on greater and greater 

risk in order to generate the returns they needed to reverse their fortunes. At the same time, they 

had little or no capital of their own left and faced the prospect of imminent closure.215 Hence, 

the taxpayer bore tremendous exposure to the risks undertaken by these zombie institutions.216

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.

 

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.

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

 211 White, supra note 

 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 

193, at 111.

212 White, supra note 193, at 109-111.

213 Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and Consequences, 

FDIC Banking Review, at 27 (Dec. 2000) (online at 

www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf).

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).
48

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 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 

 220 White, supra note 193, at 147-170.

221 Financial 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.

225 FIRREA, supra note 221, at § 501.

226 FIRREA, supra note 221, at §§ 511-12.

227 White, supra note 193, at 176-79.

228 Curry and Shibut, supra note 213, at 29. See also Lee Davison, The Resolution Trust Corporation and 

Congress, 1989-1993, Part II: 1991-1993, FDIC Banking Review (2006) (online at 

www.fdic.gov/bank/analytical/banking/2007apr/br18n3full.pdf).

229 Curry and Shibut, supra note 213, at 27.
49

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

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.

 Nobody knew if these assets were worth anything, much less if the RTC could 

successfully tap into what market might exist.

234 While a half-finished real estate development 

or office building, or a project funded by a loan in default represents a valuation challenge, 

especially when it involves other investors of varying financial health, it is a solvable one.235

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 sealedbid, 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

 230 See, e.g., Bert Ely, The Resolution Trust Corporation in Historical Perspective, Housing Policy Debate 

(1990) (online at www.mi.vt.edu/data/files/hpd_1_1/hpd_0101_ely.pdf).

231 Id. at 56-58.

232 Id. at 58-60.

233 Id. at 59-60.

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.

 Although 

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).

237 Kerry D. Vandell and Timothy J. Riddiough, On the Use of Auctions as a Disposition Strategy for RTC 

Real Estate Assets: A Policy Perspective, Housing Policy Debate, at 118-19 (1992) (online at 

www.mi.vt.edu/data/files/hpd%203(1)/hpd_0301_vandell.pdf).

238 Id. at 119 (citing a Wall Street Journal piece from October 3, 1991 that quotes RTC deputy director 

Thomas Horton as saying, “We think it’s the best thing in the world if someone makes money off us. Smart money 

follows smart money.”).
50

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

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.

4. Recapitalization of the FDIC Bank Insurance Fund / FDICIA

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 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 

 FDICIA 

allocated funds to recapitalize the FDIC’s Bank Insurance Fund (BIF) and implemented 

substantial regulatory and deposit insurance reforms.

 239 See, e.g,. id. at 117.

240 Mark Cassell, How Governments Privatize: The Politics of Divestment in the United States and 

Germany, at 4-8, 26-33 (2003).

241 See, e.g., id.; Markham, supra note 236, at 173 (describing the RTC as a “qualified success”).

242 George J. Benston and George G. Kaufman, FDICIA After Five Years: A Review and Evaluation, at 7-8 

(June 11, 1997) (Federal Reserve Bank of Chicago Working Paper Series, Issues in Financial Regulation WP-97-1) 

(online at www.chicagofed.org/publications/workingpapers/papers/wp97_1.pdf).

243 Federal Deposit Insurance Corporation, Failures and Assistance Transactions, Number of Institutions, 

United States and Other Areas: 1934 – 2009 (online at 

www2.fdic.gov/hsob/HSOBSummaryRpt.asp?BegYear=1934&EndYear=2009&State=1) (accessed Mar. 23, 2009).

244 George G. Kaufman, FDIC Losses in Bank Failures: Has FDICIA Made a Difference?, Federal Reserve 

Bank of Chicago Economic Perspectives, at 16 (Third Quarter 2004) (online at 

www.chicagofed.org/publications/economicperspectives/ep_3qtr2004_part2_Kaufman.pdf).

245 Benston and Kaufman, supra note 242, at 8.

246 Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), Pub. L. No. 102-242.
51

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

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.

 Although intended to reduce 

the specter of systemic risk by systematizing the conditions under which it could justify action, 

FDICIA did represent Congress’s endorsement of the concept as something which justified its 

own set of rules.

5. Sweden

254

 247 FDIC History: Volume 1, supra note 

 The prior decade of the 

168, at 103.

248 FDIC History: Volume 1, supra note 168, at 103. The Act mandated that the BIF meet its target within 

15 years, while allowing the SAIF an open-ended timeframe.

249 Lawrence H. White, Introduction, in The Crisis in American Banking, at 5 (Lawrence White, ed.) 

(1995).

250 FDIC History: Volume 1, supra note 168, at 103.

251 Benston and Kaufman, supra note 242, at 10-11.

252 FDIC History: Volume 1, supra note 168, at 104.

253 FDIC 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).
52

1980s was “marked by economic deregulation, the removal of cross-border restrictions on capital 

flows, financial innovation, and increased competition in financial services.”255 While Swedish 

banks had previously been required to invest more than half of their assets in low-interest bonds

and had been subject to interest rate caps, these regulations were lifted during the period between 

1983 and 1985. Lending subsequently increased by 73 percent in real terms.256 The household 

debt-to-assets ratio grew from 35.8 percent in December 1985 to 38 percent in December 

1988.257

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.”

 This was accompanied by a growth in the corporate debt-to-asset ratio from 65.5 

percent to 68.2 percent.

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 handsoff 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

 255 Burkhard Drees and Ceyla Pazarbasioglu, The Nordic Banking Crises, Pitfalls in Financial 

Liberalization? at 1 (Apr. 1998) (International Monetary Fund Working Paper Series, 95/61).

256 This number may slightly overstate the increase because it includes an unknown number of loans 

between private parties that were converted to bank loans. Peter Englund, The Swedish Banking Crisis: Roots and 

Consequences, Oxford Review of Economic Policy, at 84 (1999).

257 Id. at 85. 

258 Id. at 81. 

 By 1993, domestic non-performing loans had reached 11 percent of 

GDP.

259 Drees and Pazarbasioglu, supra note 255, at 4-8.

260 O. Emre Egrungor, On the Resolution of Financial Crises: The Swedish Experience, at 5 (June 2007) 

(Federal Reserve Bank of Cleveland Policy Discussion Paper Series, No. 21) (online at 

www.clevelandfed.org/research/PolicyDis/pdp21.pdf).

261 Englund, supra note 256, at 85.
53

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

• First, it audited the books of the banks to determine their health;

 

The government responded by taking full ownership of Nordbanken, the majority of 

which was already owned by the state, and Gota. A loan guarantee was provided to Forsta 

Sparbanken to help keep it afloat. The acquisitions of Nordbanken and Gota left the government 

holding 22 percent of the nation’s banking assets. These moves naturally shook the faith of 

foreign creditors in the Swedish economy. To restore confidence, the Riksbank, the Swedish 

central bank, issued a blanket guarantee to all creditors and depositors on all non-equity claims in 

Swedish banks in December 1992. The guarantee gave the Swedish parliament, the Riksdag, the 

breathing room it needed to devise an action program for removing the non-performing loans 

from the banks’ balance sheets. 

To ensure maximum transparency and independence, the Riksdag created the Bank 

Support Authority, an entity separate from the Ministry of Finance and Riksbank, and vested it 

with the authority to evaluate the financial condition of the struggling banks and recommend an 

appropriate course of action for each. The Bank Support Authority followed a three-part 

sequence:

• 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, 

 262 Citigroup Global Markets, Swedish Models: Banking Crisis and Recovery in the Early 1990s, at 12 

(Feb. 23, 2009); Drees and Pazarbasioglu, supra note 255, at 1.

263 This includes “reservations for future losses for loans that were still performing.” Englund, supra note 

256, at 90. 
54

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. savings and loan 

crisis. The two AMCs were deliberately over-capitalized, allowing them to perform their 

salvage operations autonomously without the need to return to the Riksdag for more funding, 

which would have exposed them to political pressures. In many cases, the AMCs had to take 

over defaulting companies and assume typical management responsibilities, including hiring and 

firing management, managing and rehabilitating property, and adjusting business strategies. The 

government originally estimated that the liquidation operations of the AMCs would take 10 to 15 

years to complete. However, better than expected macroeconomic conditions helped to expedite 

the process and, by 1997, the liquidation was complete.267 Initially, Sweden’s efforts to rescue 

the financial sector cost it approximately 65 billion kronor, the equivalent of slightly more than 

four percent of GDP at the time. Most of that expenditure was recovered via proceeds from 

Securum and Retriva and the partial privatization of Nordbanken. Estimates of the net cost of 

the government intervention range from zero to two percent of GDP.268

 264 Stefan Ingves and Goran Lind, The Management of the Bank Crisis – In Retrospect, Quarterly Review, 

at 12 (Jan. 1996).

 

265 Lundgren, supra note 254.

266 Hoenig, supra note 149, at 6.

267 Egrungor, supra note 260, at 6.

268 Thomas F. Cooley, Swedish Banking Lessons, Forbes (Jan. 28, 2009).
55

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

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.

 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.

270

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.

6. Japan

271

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).

 In the 1980s, financial deregulation, low interest rates, and the 

appreciation of the yen gave rise to a substantial excess of savings and liquidity in Japan. This, 

in turn, supported increased consumer spending and speculation in the stock and real estate 

markets, which then led to rapid run-up in asset values. 

272

 269 Lundgren, supra note 

 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 

254.

270 Daniela Klingebiel, The Use of Asset Management Companies in the Resolution of Banking Crises 

Cross-Country Experiences, at 9 (Feb. 2000) (World Bank Policy Research Working Paper Series, No. 2284) 

(online at papers.ssrn.com/sol3/papers.cfm?abstract_id=282518).

271 Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (2008).

272 Koyo Ozeki, Responding to Financial Crises: Lessons to Learn from Japan’s Experience, Japan Credit 

Perspectives (Aug. 2008) (online at 

europe.pimco.com/LeftNav/Global+Markets/Japan+Credit+Perspectives/2008/Japan+Credit+Perspectives+Koyo+O

zeki+Responding+to+Financial+Crises+August+2008.htm).
56

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

 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).

Regulators permitted lax accounting practices 

that allowed banks to book the value of their loan assets based on how much they could spare 

within the capital adequacy ratio. The real financial condition of the borrowers was seldom 

accurately reflected on the bank balance sheet. The same borrower could have different credit 

ratings from different banks depending on the level or risk each bank could sustain. Such 

accounting machinations were tolerated in part due to their political consequences. Leaders of 

Japan’s dominant Liberal-Democratic Party sought to protect their powerful construction, real 

estate, and farming constituencies that were on the other end of the problematic NPLs. As 

economist Adam Posen notes, “the ongoing political pressures for the rollover (evergreening) of 

loans to politically favored but bankrupt enterprises, in hopes of preserving jobs, and the near 

274 Ozeki, supra note 272

275 Japan’s Financial Crisis and its Parallels to US Experience, Institute for International Economics, at 6 

(Adam Posen and Ryoichi Mikitani, eds.) (Sept. 2000).

276 Id.

277 Richard Katz, Japan’s Phoenix Economy, Foreign Affairs (Jan./Feb. 2003) (online at 

www.foreignaffairs.com/articles/58624/richard-katz/japans-phoenix-economy).
57

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

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.

 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. 

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 of stability 

in financial markets.

 

282

 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).

279 Takeo Hoshi and Anil K. Kashyap, Will the U.S. Bank Recapitalization Succeed? Lessons from Japan

(Dec. 2008) (National Bureau of Economic Research Working Paper Series, No. 14401).

280 Id. at 13.

281 Id. at 14.

282 Heizo Takenaka, Lessons from Tokyo, Wall Street Journal (Oct. 22, 2008) (online at 

online.wsj.com/article/SB122462152605355599.html). 

 Thus, what became known as “Takenaka Plan” called for: (1) more 

rigorous evaluation of bank assets; (2) increased bank capital; and (3) strengthened governance 
58

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 anand 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

 283 Id.

284 Id.

285 Ken Belson, Persistence Pays: Japan’s Bank Regulator Makes Gains, New York Times (Sept. 30, 

2009).

 The 

recapitalization efforts that the government did initiate were insufficient and still failed to require 

banks to write-down losses on non-performing loans. The only objective pursued forcefully in 

the recapitalization efforts was increasing loan volumes. However, this only served to keep bad 

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.
59

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-marketdetermined 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 open-market 

by FSLIC, FDIC, or 

RTC.
60

Shareholder 

Protection

Bondholder 

Protection

Depositor 

Protection

Method of Asset 

Valuation

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. 

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.
61

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 wide-spread access to 

credit with extraordinarily low interest rates, which has been linked to the Irish economy’s 

current difficulties.

Although the U.S. is not plagued by the same currency issues as many European 

countries, Americans and Europeans alike are struggling with the same problems of mounting 

debt and mounting unemployment while property values are down throughout both the U.S. and 

Europe. A newly burst housing bubble has a central place in almost every troubled economy’s 

crisis. And the ubiquitous easy access to cheap credit is likewise at the center of each bubble. 

Certain economies became housing-focused in part because a rising tide of workers, either 

foreigners arriving for the first time or native-born citizens returning from abroad, flooded the 

then-lush job market and needed homes. But the influx of workers in those areas merely seems 

to have exacerbated, not caused, the bubble, which, in most cases, was a response to easy 

availability of credit. 

Although the British economy is suffering from its own burst housing bubble, its 

experience is somewhat different from its neighbors’. Unlike Ireland and Iceland, where ready 

access to mortgage credit led to overbuilding, UK builders failed to keep pace with the housing 

demand fueled by cheap credit. The combination of high demand and lagging supply soon led 

housing prices to outstrip wage increases. Subsequently, as credit contracted worldwide, the UK 

housing bubble burst. 

The UK, as home to a global financial center in London, also suffered from economic 

downturns among its business partners overseas. The sub-prime housing crisis in the U.S. 

quickly triggered aftershocks in the UK markets as banks such as the Royal Bank of Scotland 

stumbled under the weight of the U.S. asset-backed securities still on their books.

Finally, the Europeans must contend not only with the issues arising out of linked 

currencies, but also with the issues arising out of their linked economies. Germany has been the 

most vocal regarding concerns that they will be asked not only to provide rescue packages for 

their own financial services industry, but for those of their poorer neighbors as well.

1. Iceland
62

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 

króna 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 krónur.

 

292 Additionally, principal payments 

on local currency mortgages are indexed to inflation, which is projected to rise to 20 percent this 

year. The combination of devaluation and inflation has doubled the amount of debt many 

Icelandic families are carrying.293

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

 289 U.S. Central Intelligence Agency, CIA World Fact Book (online at 

www.cia.gov/library/publications/the-world-factbook/geos/ic.html) (accessed Apr. 2, 2009).

290 Id.

291 Tracy McVeigh, The Party’s Over for Iceland, the Island That Tried to Buy the World, The Observer 

(Oct. 5, 2008) (online at www.guardian.co.uk/world/2008/oct/05/iceland.creditcrunch).

292 Cracks in the Crust: Iceland’s Banking Collapse Is the Biggest, Relative to the Size of an Economy, 

That Any Country Has Ever Suffered. There Are Lessons to Be Learnt Beyond Its Shores, The Economist (Dec. 11, 

2008) (online at www.economist.com/world/europe/displayStory.cfm?story_id=12762027) (hereinafter “Cracks in 

the Crust”).

293 Id.

294 Id.

295 See Sarah Lyall, Icelanders Struggle After a Banking Boom Ended with a Thud, New York Times (Nov. 

9, 2008).

296 Id.

 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 króna, 

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 
63

independence from Denmark in 1944) and because of the impact some believe it would have on 

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, government-owned entities 

(“new banks”) that assumed each bank’s domestic operations. The result was equity dilution and 

assumption of government control similar to that in Continental Illinois, but tougher treatment of 

non-priority creditors. Domestic customers, employees, and bondholders were not to be affected 

by the acquisition.301

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

 297 Derek Scally, Iceland Attempts to Avoid Financial Meltdown, Irish Times (Oct. 24, 2008) (online at 

www.irishtimes.com/newspaper/finance/2008/1024/1224715113228.html).

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).

299 On March 9, 2009, Straumur, Iceland’s only pure investment bank, was also put into receivership. It is 

currently closed as the receivership committee unwinds its assets.

300 The FSA is an independent state authority charged with regulating and supervising Iceland’s credit, 

insurance, securities, and pension markets.

301 Glinir, The Government of Iceland Acquires 75 percent Share in Glitnir Bank (online at 

www.islandsbanki.is/english/aboutislandsbanki/news/detail/item14983/The_government_of_Iceland_acquires_75_percent_share_in_Glitnir_Bank/) 

(accessed Mar. 30, 2009).

 

302 Landsbankinn, New Landsbanki Islands hf. Established (online at 

www.landsbanki.is/english/aboutlandsbanki/pressreleases/?GroupID=720&NewsID=13358&y=0&p=1) (accessed 

Mar. 30, 2009); Islandskani, Glitnir’s Operations Continued (online at www.islandsbanki.is/english/about-
64

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

A minority of analysts sounded the alarm early, noting that credit-default swap rates for 

Icelandic banks were rising steadily, signaling instability.

 Crossborder 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.

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

 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.

 While some investors pulled their funds out before the crisis, most did not. 

307 Negotiations 

for the IMF loan stalled late last year as Iceland ironed out disagreements with the Dutch, 

British, and other European governments over the status of savings accounts in Icelandic banks 

held by those countries’ citizens.308 The stand-off over the IMF loan was ultimately resolved 

when several governments loaned money to Iceland to provide payment to these depositors, 

opening the door to Iceland’s receipt of the IMF funds.309

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 

 There has been no clear discussion of 

how or when Iceland will repay the loans to the individual governments.

 

islandsbanki/news/detail/item15927/Glitnir's_Operations_Continued/) (accessed Mar. 30, 2009); Kaupthing, New 

Kaupthing Bank Takes Over Domestic Operations of Kaupthing banki hf. (online at 

www.kaupthing.com/pages/164?path=K/133944/PR/200810/1262007.xml) (accessed Mar. 30, 2009). See also 

Icelandic Financial Supervisory Authority, Based on New Legislation, the Icelandic Financial Supervisory Authority 

(IFSA) Proceeds to Take Control of Landsbanki to Ensure Continued Commercial Bank Operations in Iceland

(online at www.landsbanki.is/Uploads/Documents/Frettir/fme_announcement.pdf) (accessed Mar. 30, 2009).

303 Id.; Icelandic Saga; Cash and Local Councils, The Economist (Nov. 15, 2008).

304 David Jolly, Bailout of Iceland Held Up by Disputes Over Compensating Foreign Savers, New York 

Times (Nov. 13, 2008).

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.

309 David Jolly, Concession By Iceland Clears Path for I.M.F. Aid, New York Times (Nov. 17, 2008).
65

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 highlyeducated, 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 consumers and 

businesses.315

 310 Tiger, Tiger Burning Bright, The Economist (Oct. 14, 2004) (online at 

www.economist.com/surveys/displaystory.cfm?story_id=E1_PNGTDQS).

311 Paul Cullen, Developer Says Ireland Risks Iceland-like Financial Crisis, Irish Times (Dec. 1, 2008) 

(online at www.irishtimes.com/newspaper/ireland/2008/1201/1227910421590.html). Despite a local joke predicting 

that Ireland will become the next Iceland, Ireland has the advantage over its Scandinavian neighbor in that its 

currency is the Euro and therefore is unlikely to suffer the extreme devaluation that the krona has seen, and, despite 

the crisis in the Irish banking system, Irish banks are still not nearly as exposed as the Icelandic banks. 

312 Landon Thomas, Jr., The Irish Miracle Fizzles, New York Times (Jan. 4, 2009).

313 On October 9, 2008, the government announced it would extend the program to cover an additional five 

banks. Ultimately, however, those banks opted out of the program.

314 National Treasury Management Agency, Bank Guarantee Scheme & Recapitalisation (online at 

www.ntma.ie/IrishEconomy/bankGuaranteeScheme.php) (accessed Apr. 2, 2009).

 On December 21, 2008, the government released a detailed plan naming specific 

315 Id.
66

banks and the terms on which those banks would receive funds.316 The two banks that received 

funding through the plan were Bank of Ireland and Allied Irish Bank. 317 Each institution issued 

€2 billion in perpetual (non-converting) preferred stock with fixed annual dividends of 8 percent. 

The shares carried all voting rights on questions of change of control or change in capital 

structure, and 25 percent of voting rights on appointment of directors, including the right to 

appoint 25 percent of board members. The banks were permitted to redeem their preference 

shares within five years at the issue price, or at 125 percent of the issue price any time after five 

years had passed. The recapitalization was accomplished through purchase of preferred stock. 

Banks receiving capital were required to implement various programs including: (1) restrictions 

on executive pay, (2) forbearance on foreclosures of primary residences, and (3) increasing 

lending to consumers and small businesses.318

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

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.

 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. 

321

 316 Id.

317 Although the release included the terms of a complex plan for providing capital to Anglo Irish Bank, 

including a €1.5 billion infusion via purchase of preferred shares with certain attached voting rights, the plan was 

never implemented as the bank was nationalized less than a month later. 

318 National Treasury Management Agency, Government Announcement on Recapitalisation (Dec. 21, 

2008) (online at www.ntma.ie/Publications/2008/govt_recap_plan_dec08.PDF).

319 National Treasury Management Agency, Minister’s Statement Regarding Anglo Irish Bank (Jan. 15, 

2009) (online at www.ntma.ie/Publications/2009/Minister_Statement_Anglo_Irish_Bank.pdf).

320 See Landon Thomas, Jr., As Iceland Goes, So Goes Ireland?, New York Times (Feb. 28, 2009).

321 Anglo-Irish Bank, General Information on the Nationalisation, (online at 

www.angloirishbank.us/Your_Questions_Answered/General_Information_on_the_Nationalisation.html) (accessed 

Mar. 22, 2009). As of April 1, 2009, no assessor had been appointed. 

 The bank’s recently-appointed 

chairman was kept on, but the CEO and Finance Director were replaced and the board itself 
67

restructured. The bank’s board and management retain day-to-day control of the bank, but the 

overall business model is determined by the board and management in consultation with the 

Minister of Finance and the Financial Regulator.322 The bank has continued as a “covered 

institution” under the Credit Institutions (Financial Support) Scheme 2008, meaning that 

“covered liabilities” remain guaranteed by the Irish government until September 29, 2010.323 

The bank’s “covered liabilities” are: (1) all retail and corporate deposits, (2) interbank deposits; 

(3) senior unsecured debt, (4) covered bonds (including asset covered securities), and (5) dated 

subordinated debt.324

First, a Special Liquidity Scheme was announced on April 21, 2008. Under this program, 

the government made £200 billion available in short term loans for financial institutions to use in 

swapping out illiquid assets (mostly UK or EU mortgage-backed securities) for UK Treasury 

bills.

 

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: 

325

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.

The plan was slated to last six months but was extended in September 2008.

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

 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/press_105_08.htm).

 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. 
68

In order to secure the assistance of the UK government in purchasing common equity, the 

banks were required to agree to certain covenants mandating, inter alia, that the banks maintain 

lending to the mortgage and small business markets at 2007 levels, submit restructuring plans to 

the government, and refrain from paying dividends on ordinary shares. To the extent the 

government received preferred stock from any banks, the covenants accompanying those 

transactions provided for the stockholder (i.e., the government) to have the right to appoint a 

certain number of directors and to receive certain voting rights if the shares did not pay dividends 

for a number of quarterly periods.328

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

 328 See Panel February Oversight Report, supra note 

 The British 

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.

331 The Go-Between: Can a New Agency Put the Banks Back on Track?, The Economist (Mar. 5, 2009) 

(online at www.economist.com/world/britain/displaystory.cfm?story_id=13248185) (hereinafter “Go Between”).

332 Graeme Wearden, Bank Bailout: Key Points of the Government’s Statement, The Guardian (Jan. 19, 

2009) (online at www.guardian.co.uk/business/2009/jan/19/credit-crunch-bank-bailout).

333 Good Sport: Banks Are Getting By; a Pity About the Customers, The Economist (Mar. 12, 2009) (online 

at www.economist.com/world/britain/displaystory.cfm?story_id=13278900) (hereinafter “Good Sport”).

334 HM Treasury, New Scheme to Help People at Risk of Repossession (Dec. 3, 2008) (online at www.hmtreasury.gov.uk/press_132_08.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 
69

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

Several other European countries, including Spain, Germany, and Italy, have 

implemented measures to address weaknesses in their banking systems and loosen the 

stranglehold that has persisted on credit markets worldwide. For example, Spain has committed 

up to €200 billion to guarantee interbank lending

 

4. Other European Countries

339 and has created a Financial Asset 

Acquisition Fund to purchase high-quality asset-backed securities.340 At this point, Spain has 

stated it sees no need for recapitalization of any financial institutions. Italy has provided €40 

billion to buy bank debt and has guaranteed individual bank deposits up to €103,000.341 Italy has 

also said that it is prepared to provide capital to banks through the purchase of preferred (nonvoting) stock.342 And Germany has announced a €500 billion plan that includes guarantees for 

private savings and debt guarantees for two of Germany’s largest banks, IKB and NordLB.343

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 

 

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-reportdpvaluation-legal.pdf).

336 Good Sport, supra note 333.

337 Go-Between, supra note 331.

338 The Spiral of Ignorance: Lack of Understanding of the Credit Crunch Is Magnifying Its Damage, The 

Economist (Feb. 19, 2009) (online at www.economist.com/world/britain/displaystory.cfm?story_id=13144829).

339 Sharon Smyth, Spain Said to Plan Savings Bank Bailout to Aid Merger, Bloomberg (Mar. 6, 2009) 

(online at www.bloomberg.com/apps/news?pid=20601085&sid=a2NQavmsRt7Y#).

340 Paul Day, Spain Bank Rescue Fund to Include All Big Lenders, Reuters (Oct. 22, 2008) (online at 

www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLM8371720081022).

341 Raf Casert, EU Approves Bank Rescue Packages, Associated Press (Dec. 23, 2008).

342 Id.

343 Jann Bettinga and Oliver Suess, Commerzbank Gets Fresh Bailout as Germany Takes Stake, Bloomberg 

(Jan. 8, 2009) (online at www.bloomberg.com/apps/news?pid=newsarchive&sid=aEmWlKXc8q4c).
70

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 Steinbrück 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.

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.

 344Mark Thoma, Should the EU Let a Member Government Default? RGE Monitor (Feb. 21, 2009) (online 

at www.rgemonitor.com/euro-monitor/255676/should_the_eu_let_a_member_government_default).

345 Europe’s Reluctant Paymaster: The German Government May Have to Concede, Through Gritted 

Teeth, That it Cannot Avoid Helping Financially Strapped Governments in Europe, The Economist (Feb. 26, 2009) 

(online at www.economist.com/world/europe/displaystory.cfm?story_id=13184821).

346 Ben Hall, French Protesters Take to the Streets, Financial Times (Mar. 19, 2009).
71

• 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

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 third step was recapitalization, which, of course, cannot be accomplished without 

confidence in bank asset valuations. The wide range of approaches to the treatment of debt 

holders in recapitalizations indicates the importance of careful attention to the particular 

circumstances of a given crisis in determining government policies toward debt holders. By 

contrast, in every case the Panel looked at, equity holders were either eliminated entirely or 

heavily diluted by ratios of 3-1 or more.

The process of recapitalization of banks contributes to the restoration of investor 

confidence through clear identification of which institutions are healthy and which are not. The 

absence of such reliable determinations can imperil even healthy institutions in a crisis. The U.S. 

government and the RFC closed all banks during the Great Depression and permitted only the 

certified-healthy banks to reopen. While aggressive, this tactic proved successful in restoring 

much-needed confidence that the banking system was sound and that new investments would not 

be lost in insolvent banks.

 347 U.S. Department of Treasury, Public-Private Investment Program (updated Mar. 30, 2009) (online at 

www.financialstability.gov/roadtostability/publicprivatefund.html).
72

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 nonhealthy banks. In this respect, it is distinctly different from the approach taken by the Bush 

Administration, which obscured such distinctions through decisions such as the choice to sell 

preferred stock on the same terms to banks of greatly varying creditworthiness. The latter 

strategy led to the Panel’s discovering that the taxpayers received stock worth 33 percent less 

than what they paid for it. 

In this regard, it is noteworthy that success in Japan did not result from loosely-targeted 

capital infusions or from deferring to the incumbent management of troubled banks about key 

decisions such as asset valuation, but occurred when banking authorities did their own valuation 

of bank assets and forced balance sheet restructurings reflecting the real value of those assets.

Clear guidelines about the scope, scale, conditionality, and duration of government 

intervention in the economy are also critical to promoting private sector long-term investment 

planning and restoring stability to capital markets. The Japanese case demonstrates the hazards 

of open-ended government assistance. Without predictable limits or a known exit strategy, 

investors suspected, rightly, that they could continue to rely on capital infusions to large, 

powerful institutions indefinitely. Important economic actors lacked the incentive to accept their 

losses, accurately value assets, and put the assets back into their most productive use. Notably, 

the Japanese system began to recover only after reporting requirements, stricter valuation

methods, and other conditions accompanied capital injections. 

Finally, the ultimate cost to the public of resolving bank crises depends to a very large 

degree on the amount of upside the public obtains either in the banks themselves or in the assets 

of failed banks. The RTC attempted to recover as much as possible for the public and other 

creditors on the assets the RTC held. In Sweden, the government took all of the upside on the 

two banks that were nationalized; if the banks survived, the benefits would go entirely to the 

taxpayers that had rescued them. The result was that net costs for the Swedish government were 

no more than 2 percent of GDP. By comparison, our valuation report estimated a net subsidy to 

shareholders of TARP banks in the initial round of TARP transactions as 0.5 percent of GDP.

TARP outlays, actual and expected, to date are approximately 4 percent of GDP, and total 

resources provided by all government agencies in conjunction with the current financial rescue 

plan could potentially amount to approximately 25 percent of GDP. As our valuation report 

showed, it is difficult to secure fair treatment for the public as an investor in sick banks without 

insisting on the public receiving a substantial portion of the upside in the rescued firm in the 

form of common stock, warrants on common stock, or other equity appreciation rights.

While history provides important lessons, every situation is different from its historical 

precedents and judgment is always required in applying any lessons. In this particular case, 
73

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 Approach348

Behind these capital market developments lay the bursting of the real estate bubble and a 

tidal wave of residential mortgage foreclosures unheard of in the United States since the Great 

Depression.

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. 

349 Congress subsequently passed EESA350

 348 An overview of “An Examination of Treasury’s Strategy” and “Federal Government Efforts” appear in 

Parts A2 and A3 of Section One, supra.

349 As the Panel noted in its last report, over a million homes entered foreclosure in 2007 and another 1.7 

million in the first three quarters of 2008. Over half a million homes were actually sold in foreclosure or otherwise 

surrendered to lenders in 2007, and over 700,000 were sold in foreclosure in the first three quarters of 2008 alone. 

At the end of the third quarter of 2008, one in ten homeowners was either past due or in foreclosure, the highest 

levels on record. RealtyTrac, U.S. Foreclosure Activity Increases 75 Percent In 2007 (Jan. 29, 2008) (online at 

www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847); HOPE 

NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales, July 2007-November 2008 

(online at www.hopenow.com/upload/data/files/HOPE%20NOW%20Loss%20Mitigation%20National%20Data% 

20July%2007%20to%20November%2008.pdf). See also Chris Mayer et al., The Rise in Mortgage Defaults, Journal 

of Economic Perspectives (2009) (forthcoming) (reporting 1.2 million foreclosure starts in first half of 2008); HOPE 

NOW, supra note 13; Adam J. Levitin, Resolving the Foreclosure Crisis: Modification of Mortgages in Bankruptcy, 

Wisconsin Law Review (2009)(online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1071931).

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 

350 EESA, supra note 1.
74

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 asset-backed securities (ABSs)

or collateralized debt obligations (CDOs).

352 The day before the Paulson statement, British 

Prime Minister Gordon Brown had announced that the UK would commit up to £50 billion to 

rescue British banks. In some quarters, the Paulson reversal was seen as a reaction to the Brown 

decision, made to prevent U.S. capital from flowing to the UK.

353

The new capital infusion program involved the transfer of funds to financial institutions 

in exchange for preferred stock, and warrants to purchase common stock, of the institution 

involved.

 

354 In its third report, the Panel commissioned a valuation of these securities by the 

independent valuation firm of Duff and Phelps, in consultation with Professors William N. 

Goetzmann and Deborah J. Lucas and Managing General Partner of Blue Wolf Capital 

Management and former First Deputy Comptroller of the City of New York, Adam Blumenthal. 

Duff and Phelps found that the average discount for securities issued under other programs was 

69 percent, for an overall average discount of about 31 percent.355

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. 

 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.

 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).

353 Landon Thomas, Jr. and Julia Werdigier, Britain Takes a Different Route to Rescue Its Banks, New 

York Times (Oct. 8, 2008) (online at www.nytimes.com/2008/10/09/business/worldbusiness/09pound.html) (“In a 

bold move to restore confidence, Britain announced an unprecedented £50 billion government lifeline for the 

nation’s banks Wednesday that it hailed as a quicker solution to the credit crisis than a $700 billion American plan 

to buy impaired mortgage assets from troubled financial institutions”); Parmy Olson, Brown Resurgent: The Credit 

Crisis Has Galvanized British Prime Minister Gordon Brown As He Urges the World To Follow His Bank Bailout, 

Forbes (Oct. 12, 2008) (online at www.forbes.com/2008/10/12/brown-bailout-credit-biz-cx_po_1012brown.html)

(“The recapitalization package that Brown and his finance minister, Alistair Darling, announced last Wednesday... 

puts Britain ahead of the U.S. on dealing with the crisis. The United States Treasury has since said that it will mimic 

the British approach and buy stakes in banks.”)

354 Panel December Oversight Report, supra note 4, at 6. Government Accountability Office, Troubled 

Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, at 15-16 (Dec. 2008) (GAO/09-161) 

(online at www.gao.gov/new.items/d09161.pdf); U.S. Department of the Treasury, Statement by Secretary Henry M. 

Paulson, Jr., on Actions to Protect the U.S. Economy (Oct. 14, 2008) (online at 

www.treasury.gov/press/releases/hp1205.htm).

355 See Panel February Oversight Report, supra note 6. 
75

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

 356 U.S. Department of the Treasury, White Paper: Public-Private Investment Program (Mar. 23, 2009) 

(online at www.treas.gov/press/releases/reports/ppip_whitepaper_032309.pdf) (“This program should facilitate price 

discovery and should help, over time, to reduce the excessive liquidity discounts embedded in current legacy asset 

prices. This in turn should free up capital and allow U.S. financial institutions to engage in new credit formation. 

Furthermore, enhanced clarity about the value of legacy assets should increase investor confidence and enhance the 

ability of financial institutions to raise new capital from private investors.”); Treasury has also not explained its 

assumptions that (i) a number of years are available in which to accomplish these goals without simply transferring 

losses to the taxpayer, and (ii) it is unnecessary or inappropriate to require that common shareholders (except for 

dilution) and bondholders accept losses on their stakes in bank capital structures.

357 See Ricardo J. Caballero, Nationalisation Without Prices: A Recipe for Disaster, Financial Times (Feb. 

17, 2009); Charles W. Calomiris, The U.S. Government Must Take Risks, Financial Times (Feb. 19, 2009); Douglas 

J. Elliott, The Public-Private Investment Program: An Assessment, Brookings Institution (March 23, 2009) (online 

at 

www.brookings.edu/~/media/Files/rc/papers/2009/0323_investment_program_elliott/0323_investment_program_ell

iott.pdf); Matthew Richardson, The Case for and Against Bank Nationalization (February 26, 2009) (online at 

http://www.voxeu.org/index.php?q=node/3143).

the issue of asset 

valuation is now as critical to the recovery of the financial system as the precise strategy the 

federal government follows. There is another reason why this is so. A great part of the financing 

done in the markets today either flows through the banking system directly to investors or 

bypasses banks altogether through the same mechanisms of securitization used for mortgage 

lending. As the TALF program indicates, securitization is especially important for the financing 

of credit card, automobile, small business, and student loans. Markets for those pools of loans 
76

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 mortgagerelated assets still retains substantial value. In a liquid market, even under-collateralized assets 

should not be untradable or trading at pennies on the dollar. Prices are being partially subjected 

to a downward self-reinforcing cycle.

In the view of some, it is this notion of a liquidity discount that supports the potential of 

future gain for taxpayers and makes transactions under the CAP and the PPIP investments, and

not subsidies in the usual sense. This is an issue that will continue to divide observers of 

Treasury’s actions, and ultimately events will bear out whether this approach will work. The 

Panel notes that Treasury’s approach may prove to be a viable and successful strategy, and offers 

historical context and the discussion of alternate approaches in the event that changes to 

Treasury’s current plans become necessary. The Panel has not reached agreement as to whether 

a change in strategy is currently needed.

3. Options for Future Action
77

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

The accounts that are insured by the FDIC are guaranteed up to as specified limit

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.

360

Historically, only banks, not investment banks like Bear Stearns and Lehman Brothers,

have been rescued by the federal government. The failure to rescue Lehman Brothers is only 

anomalous against this backdrop of extensive government interventions in failing non-deposit 

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. 

 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.
78

taking institutions. Government non-intervention in the collapse of Lehman Brothers was 

consistent with 70 years of government policy.

 However the failure to rescue Lehman Brothers was not consistent with the involvement 

of Treasury and the Federal Reserve Board in the rescue of Bear Stearns and its acquisition by JP 

Morgan Chase in March 2008; the Bear Stearns action marked a new degree of public 

governmental involvement in the rescue of a non-depository institution. But even if the Bear 

Stearns rescue was unprecedented (because Bear Stearns was not a bank), the economic result 

resembled the economic result of the rescue of Continental Illinois in the mid-1980s – in both 

cases the shareholders of the company received relatively little and the focus was on ensuring 

that the institution (in the latter case, Bear Stearns) met its fixed obligations.

Subsequent government interventions in Wachovia and AIG followed this pattern. At the 

same time, the liquidations of the truly insured thrifts – Washington Mutual and IndyMac – by 

the FDIC followed the same pattern of protecting depositors and wiping out investors.

It is helpful to keep the structure and history of the U.S. banking industry in mind as a 

backdrop against which to assess the options for dealing with distressed banks.

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

Rather than subsidizing large distressed banks as going concerns through government 

investment under the TARP, critically undercapitalized banks could be selected for effective 

liquidation by being placed into the receivership of the FDIC. Then the FDIC would help 

resolve the failure, as it has done more than a dozen times already this year.361

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 

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. 

 361 See Congressional Research Service, The Federal Deposit Insurance Corporation (FDIC): Summary of 

Actions in Support of Housing and Financial Markets (Mar. 5, 2009) (CRS/7-5700) (hereinafter “CRS FDIC 

Report”).
79

interests of the BHC’s 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

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.

 

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. 

365

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 

 The preservation of the interests of existing 

shareholders is not a constraint on the FDIC’s exercise of its authority.

 362 While only bankruptcy courts have the authority to wind down bank-holding companies and non-bank 

institutions, Congress could provide that authority to the FDIC or another agency moving forward. See Panel 

Regulatory Reform Report, supra note 164.

363 See generally Federal Deposit Insurance Corporation, Temporary Liquidity Guarantee Program (online 

at www.fdic.gov/regulations/resources/tlgp/index.html) (accessed Mar. 22, 2009); CRS FDIC Report, supra note 

361, at 5-6.

364 See Part A of Section One, supra, for a discussion of the FDIC’s financial condition. 

365 Simon Johnson, The Quiet Coup, The Atlantic (May 2009) (online at 

www.theatlantic.com/doc/200905/imf-advice).
80

also similar to the approach of the Reconstruction Finance Corporation during the New Deal. 

The only successful cases noted in Part B of this section of the report that do not effectively fall 

into the conservatorship category was the RTC experience, which, of course, involved numerous 

smaller insolvent institutions that disappeared during the crisis.

Treasury could obtain FDIC-type powers over institutions that received TARP funds, 

similar to the powers the UK government has exercised over some banks. Simply by insisting on 

voting control as the price for further capital infusions, Treasury would be in a position to 

exercise more control and to guard the interests of taxpayers.

Option C: Subsidization of Distressed Banks

A third option is that, as the crisis spreads and financial institutions are at risk of 

becoming insolvent, the government can provide financial resources to keep those institutions 

afloat (which some may view as “subsidization”). In most cases, before government aid is 

delivered to a sick bank, the BHC must first support the bank itself, but, again, it is likely that, by 

the time a crisis is reached, a distressed bank will have already exhausted available assets of its 

BHC.

Government financial support may be in the form of a loan, a guarantee, or a direct 

infusion of capital, all of which are among the tools available to Treasury as part of its authority 

under the TARP. In addition, asset purchases from banks arranged with government 

involvement and guarantees can be vehicles for government subsidies. In each case, this 

assistance means transferring value from the taxpayer to the financial institution. Such transfer 

may be temporary (i.e., when the subsidy must be repaid) or permanent. Subsidization might be 

provided to all banks that request it or just the banks that threaten systemic risk. The amounts 

and kinds of subsidization are open-ended. 

In most cases, the assistance flows to the bank through the BHC, although some forms of 

FDIC assistance can flow directly to the bank. This structure is used because often only the 

BHC can issue preferred stock. By funding the corporation that holds the bank as opposed 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 
81

“bad banks”) created specifically to hold and ultimately to sell those assets for the highest 

amounts possible. In that case, banks stripped of their toxic assets would emerge from 

receivership as healthier institutions and the separated, bad assets, could be held until their value 

increased as the markets recovered.

4. Assessing the Options 

The overall objective of the TARP and related actions by the FDIC and the Federal 

Reserve Board is to stabilize the financial system and promote the return of economic growth.

The choice of which route to pursue among the options discussed above would appear to depend 

upon the relative weight that policymakers assign to several other important considerations.

a. Time – Is it on Our Side or Not?

Assuming the most immediate goal is to have functioning major financial institutions, the 

question is how to achieve that goal as quickly as possible, at the lowest cost to the taxpayers, 

and with minimal risk to the public interest and the financial system. If, with the passage of 

time, assets will be restored to their earlier, true values and banks will come back to life on their 

own accord, then time is on our side. In such a case, the risks of action likely outweigh the risks 

of inaction. 

On the other hand, if the economy is unlikely to recover quickly, so that the banks cannot 

rely on a rising economy to restore their balance sheets, time is not on our side. The banking 

system itself creates a possible timing problem. The existence of weak institutions that are 

sustained only by taxpayer guarantees and infusions of cash threatens the health of all banks, 

drawing off depositors and undermining public support. Continued operation of systemically 

significant but weakened institutions at the heart of a nation’s financial system may prevent a 

robust economic recovery of the sort that would cause time 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 
82

taxpayer is minimal where assets are adequate to cover deposits and, as necessary, guaranteed 

debt. The total cost of each of these strategies also depends on their effectiveness at thawing 

credit markets and restoring economic growth. An ineffective strategy is likely to prolong the 

crisis and require further investment of taxpayer funds. 

With regard to subsidization, capital infusions generally come to mean equity (or 

“common stock”) investments that increase the cost to the taxpayer if banks fail or produce gains 

if the market recovers. Of course, that assumes that the government is focused on capturing 

upside opportunities through equity ownership. In the case of the transactions with shaky 

financial firms under TARP to date, with the exception of AIG, Treasury has taken only small 

amounts of equity upside in relation to the large risks Treasury has assumed through its preferred 

stock investments and asset guarantees.

In the case of asset purchases, the bad assets could fail to increase in value, leaving the 

taxpayers with similar, if not larger, losses. On the other hand, a very successful government 

asset purchase program would provide the government with 100 percent of the upside in those 

assets. These assets could gain in value as the market turns around, producing gains to the 

government upon ultimate disposition. While Swedish authorities were aided by the rapid 

recovery of the economy both nationally and globally as they sought to dispose assets, such 

economic recovery is uncertain today, as it was uncertain ex ante in Sweden. Similarly, with 

regard to liquidation and reorganization, the disposal of assets in the current environment may 

require steep discounts and thus greater taxpayer cost, depending on whether the government, as 

opposed to the FDIC, is guaranteeing any particular class of investors in the firm.

While the total cost of the various options is open to doubt, liquidation provides clarity 

relatively quickly. In that sense, allowing institutions to fail in a structured manner supervised 

by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift 

into government control piecemeal.366

 366 See Hoenig, supra note 

 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. 

149.
83

Thus, while liquidation can offer a clear exit strategy, FDIC’s experience with 

Continental Illinois suggests that reorganization may not offer quite such a clear ending if the 

government is committed both to minimizing the expenditure of government funds and to 

making all creditors whole. Unable to find an acquirer, unwilling to pay bondholders less than 

the value of the bond, and either unwilling or unable to infuse sufficient capital to bring 

Continental Illinois back to life, the government was forced to own and operate the bank for a 

prolonged period, retaining an equity stake in that institution for seven years. On the other hand, 

where there is a willingness to fund losses or to discount payments made to investors, 

reorganization has been relatively quick.

Finally, liquidation raises concerns related to enterprise value. Liquidation typically 

breaks up the firm. In some cases, that could involve significant destruction of going concern 

value. A large multinational institution’s franchise value created by the web of consumer, 

corporate, and international banking relationships may be lost as a result of government seizure 

and reorganization, a cost that is not imposed on the economy under open bank assistance 

But liquidation forms are not so limited. Liquidation can mean a sale of the whole entity

to a buyer capable of absorbing and benefiting from the business as a whole. Going concern 

sales occur with some frequency outside the banking world, even among very complex 

institutions. Enterprise value might be more easily preserved in a conservatorship. By 

restructuring their balance sheets, writing down liabilities, and eliminating old equity, such firms 

might continue in operation and attract significant new capital. It may be true that some firms 

are systemically significant, but that does not mean every slice of their capital structure is 

systemically significant. In fact, it may be that a restructuring represents the best way to bring 

the franchise value back to full life.

c. Government Capacity and Expertise

All successful efforts to address bank crises have involved the combination of moving 

aside failed management and getting control of the process of valuing bank balance sheets. 

There are two models for the independent balance sheet valuation: mark to market (Sweden, 

RTC), and independent administrative pricing overseen by new management (RFC, ultimately 

Japan). Reorganization and subsidization without effective assessment of asset values does not 

work, as it can easily lead to the perpetuation of banks in a weakened condition or to significant 

government subsidies to private parties.367

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, 

 

 History offers no examples in which subsidization of 

existing shareholders and management produced effective assessment of asset values.

 367 See Ricardo J. Caballero, Nationalisation Without Prices: A Recipe for Disaster, Financial Times (Feb. 

17, 2009).
84

it has never seized an institution as complex as a systemically significant banking institution 

would necessarily be. The fact that most such institutions operate in dozens of countries makes

their seizure particularly complex. The government’s capacity to dispose of bad assets could be 

overwhelmed by the amount and complexity of the assets held by those institutions. 

Some recent large FDIC takeovers may not offer relevant examples. While the FDIC has 

recent experience acting as the conservator of major financial institutions, that experience does 

not necessarily translate directly into the complex processes involved in seizing large, complex 

holding companies with operations spanning many countries. In July 2008, for example, the 

Office of Thrift Supervision closed IndyMac and placed it under an FDIC conservatorship.368 

While IndyMac was the one of the largest mortgage originators in the nation, its day-to-day 

operations were relatively simple; at the time of seizure, the thrift had only 33 branches, all of 

which were located in California.369 Similarly, when regulators closed Washington Mutual last 

September and put it under FDIC conservatorship, the FDIC was able to facilitate the purchase 

of the thrift by JP Morgan immediately, seamlessly, and with relatively minimal effort.370

 368 Federal Deposit Insurance Corporation, Failed Bank Information: Information for IndyMac Bank, 

F.S.B., Pasadena, CA (online at www.fdic.gov/bank/individual/failed/IndyMac.html) (accessed Apr. 6, 2009); 

Federal Deposit Insurance Corporation, FDIC Establishes IndyMac Federal Bank, FSB as Successor to IndyMac 

Bank, F.S.B., Pasadena, California (July 11, 2008) (online at www.fdic.gov/news/news/press/2008/pr08056.html).

369 Federal Deposit Insurance Corporation, FDIC Establishes IndyMac Federal Bank, FSB as Successor to 

IndyMac Bank, F.S.B., Pasadena, California (July 11, 2008) (online at 

www.fdic.gov/news/news/press/2008/pr08056.html).

370 Federal Deposit Insurance Corporation, Bank Acquisition Information: Information for Washington 

Mutual Bank, Henderson NV and Washington Mutual Bank, FSB, Park City UT (online at 

www.fdic.gov/bank/individual/failed/wamu.html) (accessed Apr. 6, 2009).

 While 

that experience demonstrates how quickly the FDIC can cleanse the balance sheets of a troubled 

institution and return that institutions 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.
85

Several further observations on the subject of complexity and liquidation are relevant. 

First, Treasury and the Federal Reserve Bank of New York appear to be pursuing a liquidation 

strategy with AIG. They appear to be selling off the pieces of that gigantic conglomerate while 

making whole all its creditors. It is less clear what the Administration’s strategy is with Fannie 

Mae and Freddie Mac, but it does not appear to be a short-term liquidation strategy. In neither 

case does the government’s role appear to be beyond its organizational capacity, though it 

appears in all those cases to be a politically challenging task. In addition, the government would 

not be limited to current personnel. Among the many retired banking professionals and those 

currently operating smaller banks, there may be substantial talent available to assist in the 

management of banks under conservatorships.

d. Competitive Impact on Financial Institutions

Subsidization can have a substantial negative impact on the functioning of competitive 

markets. It undoes market discipline for financial institution investors, particularly equity 

investors, and it effectively puts the financial power of the government behind some “private”

firms and not behind others. While some institutions – like Lehman Brothers – are left to fail 

without government assistance, others remain solvent and benefit from increased stock values 

that take public subsidization into account. 

Perhaps the most pernicious impact of subsidization is its effect on prudent banks. 

Institutions that were conservative in their risk profiles and remained solvent during tough times 

lose the comparative advantage of that prudence when the government subsidizes imprudent 

actors. Although liquidation and reorganization can be costly and painful, those processes do not 

raise the same risks of moral hazard or market distortion that accompany government 

subsidization. 

While systemically significant institutions will have competitive advantages over others 

because of government financial assistance, if the special protection available to them is not 

accompanied by heightened regulatory requirements (relatively stringent capital and liquidity 

requirements, an overall maximum leverage ratio, etc.), then the comparative advantages of size 

will promote severe market distortions – and impose growing risks on the taxpayer.

371

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.

 

e. Impact on Investors and Capital Markets

 371 See Panel Regulatory Reform Report, supra note 164, at 23-24.
86

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 higherincome families, which means that protection of investors involves wealth transfers from all 

taxpayers to a wealthier minority.

372

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 

 This is particularly true for very low valued stocks and junk 

bonds, which are typically held by long-term broadly representative investors but which are 

shifted in a time of crisis to specialty, risk-friendly investors like vulture funds.

It is also possible that a more aggressive approach toward seizures may further 

undermine the efforts of banks to attract critical private capital. On the other hand, with 

subsidization, private capital must also factor deep uncertainty about how long the subsidies will 

last, the underlying value of the assets, and whether taxpayers will eventually insist that banks be 

liquidated. The post-reorganization bank has a cleaned up balance sheet that would pose almost 

no risk and would likely be very attractive to investors bringing new capital.

f. Asset Price Transparency

Attempting to ensure that the securities issued by an institution in exchange for a capital 

infusion are equal in value to that infusion is difficult at best, and some pricing mechanisms are 

designed to create hidden subsidies. Valuation issues are even more extreme when the 

government purchases bad assets. While the shares of many larger banks are publicly traded, 

providing a market price that can be referenced in setting the terms for capital infusions, the 

banks’ assets often have no readily ascertainable market value. If the government pays for the 

assets at a distress price, reflecting the assets’ current market value, the selling institution may be 

demonstrably insolvent. But if the government pays more for the assets than their current market 

value, it will simply provide a subsidy to the bank at taxpayer cost. These considerations led to 

decisions on the one hand to have government initially absorb the losses associated with markto- 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.

 372 Frank Ackerman et. al., The Political Economy of Inequality (2000).
87

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 pubic can understand – will continue to be critical to sustained 

support for the current efforts from American taxpayers.
88

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 
89

these two approaches provides a more comprehensive strategy than either capital infusions or 

asset purchases alone. The Treasury has further allocated funds to directly address mortgage 

modification and foreclosure mitigation efforts for homeowners.

Taken together, these programs comprise a strategy that aligns with the Congressional 

intent in passing the TARP legislation. They return to the original concept of asset purchases and 

address the housing crisis. Furthermore, they embody a preference for maintaining a private 

banking system via temporary public support or partnership, which is consistent with this 

country’s tradition of private rather than government control of business. Congress passed the 

EESA to protect the American public from financial chaos, and preventing collapse also avoids 

the subsequent need for more extensive forms of government intervention in the markets- forms 

less consistent with our American experience of democratic capitalism.

3. The Current Treasury Strategy is Reasonable and Viable

Much of the Panel’s report is premised upon the tension between subsidization and 

reorganization through nationalization, in considering which options are preferable. Embedded 

within this tension are profound differences in assumptions, both on the origins of the crisis and 

on the optimal shape of the financial services industry that emerges post-crisis.

Some still question the viability of any plan involving public support that does not first 

divest private ownership; however, less drastic options such as public-private sector solutions are 

based on very reasonable assumptions. 

The debate turns on whether current prices, particularly for mortgage-related assets, 

reflect fundamental values or whether prices are being artificially depressed by a liquidity 

discount due to the market strain. As stated in the report, one school of thought focuses on the 

liquidity factor:

“If the liquidity discount is real, approaches such as Treasury’s Public Private 

Investment Partnership (PPIP) are more likely to succeed. Current prices may, in fact, 

prove not to be explainable without the liquidity factor. Even in areas of the country 

where home prices have declined precipitously, the collateral behind mortgage-related 

assets still retains substantial value.”

We affirm that it is entirely reasonable to assume that a liquidity discount is impairing 

these assets, and thus that the Treasury has adopted a viable plan based on this valid assumption. 

Further, we believe that a viable plan should be given the opportunity to work. Speculation on 

alternatives runs the risk of distracting our energy from implementation of a viable plan and 

needlessly eroding market confidence. Market prices are being partially subjected to a downward 

self-reinforcing cycle that could be exacerbated by unwarranted consideration of more radical 

solutions such as nationalization. 
90

This positive assessment of Treasury’s view on the underlying causes of the financial 

crisis is not meant to suggest that the housing bubble should be re-inflated. But we do admit to 

being confident that the long-term values of mortgage-related assets secured by American homes 

remain a good investment.

4. Restoring Financial Stability During an Emergency Takes Precedence over Other 

Policy Goals

In thinking long-term, other issues remain to be considered. The financial crisis has 

revealed underlying weaknesses in our regulatory system, and a reform effort will contribute to 

preventing future crises. Regulatory reform is a process, however, and we should not withhold 

access to existing tools for restoring financial stability while that reform process is in progress. 

Two examples of broader issues that should be addressed in the context of financial 

stability are 1) the role of securitization in reviving markets, and 2) the need for prudence in 

setting the degree of transparency for stress-testing of the major banks in connection with the 

CAP.

Reforms are certainly necessary in securitization and secondary markets, as the Panel has 

noted on previous occasions. We need to improve the credit quality of securities issued and 

better manage risk going forward, but this does not mean that securitization should be abandoned 

in the interim.

The Panel’s report presents a variety of views on the role of securitization both in a 

reformed regulatory structure and as a potential tool in reviving markets. We agree with the 

perspective which acknowledges that economic recovery depends upon the existence of a 

functioning secondary market, to re-cycle capital and support credit access for consumers and 

businesses. 

That is why the Federal Reserve has developed the Term Asset-Backed Securities Loan 

Facility (TALF), in which the Treasury has chosen to invest limited TARP funds. The secondary 

market has been largely frozen for a wide class of assets, including student loans, auto loans, 

credit cards, and small businesses credit. An added safeguard is that the TALF will not accept the 

more exotic forms of securitized structures. 

On the issue of transparency, specifically in the stress-testing that federal banking 

regulators will be performing under the CAP, results should be held confidential. We believe that 

government agencies and officials who monitor the industry have a public trust and should be 

held accountable for their oversight. But there is also a critical difference between public 

information and confidential information, and respecting this distinction is in our national 

interest. Regulatory examination findings for banks are confidential, and this rule should extend 

to the results of stress-tests to prevent misuse of information and rumors that could place 

depositors’ funds at risk. 
91

5. The Panel’s Mission Remains of Critical Importance

There is much serious and constructive work for the Panel to contribute in evaluating the 

Treasury’s existing initiatives, including the structure of both the TALF and PPIP, and we should 

be zealous in pursuit of our mission. Open issues that need to be addressed in-depth in future

Panel reports include:

• Treasury’s decision to limit the number of fund managers for the PPIP, and the eligibility 

criteria for fund managers;

• The impact of new FASB rules on mark-to-market accounting;

• The implications of redemptions of TARP funds on the design and goals of the program; 

and,

• Additional metrics to quantify the health of the financial system.

Congress would be much better served by those lines of inquiry, which we believe will 

identify ways in which to maximize the opportunities for success.

And success is achievable. We have the wherewithal not only to restore financial 

stability, but to emerge from this crisis in an even stronger position. Prosperity is not a zero-sum 

game. It is not the case that one person or group necessarily prospers at another’s expense. If we 

stand together in investing in our common future, as individual and as corporate citizens, we 

continue in our country’s tradition of pragmatic optimism and lay the most enduring foundation 

of all for our lasting economic stability.
92

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

• How much lending and what type of lending has been done by firms receiving funding 

under the Bank Capital Program (CPP)?

 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:

• 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, 

 373 Part B of Section 2 of this report, supra.
93

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.
94

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, 2009374, 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

In a letter to Secretary Geithner dated March 25, 2009, the Panel Chair expressed her 

concerns on these issues.

 

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.

376

TALF Inquiry. Recently, the Oversight Board opened an inquiry into the TALF.

 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. 

377

 374 See Appendix VII, infra.

375 See Appendix VIII, infra.

376 See Appendix IV, infra.

377 See Appendix VI, infra.

 

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. 
95

To clarify the questions surrounding TALF, the Panel Chair asked Treasury for more 

information in her March 20, 2009, letter. Generally, the Panel is seeking information on a 

number of points to better understand what Treasury intends to accomplish with TALF and why 

the TALF structure is the most effective way to accomplish that goal. A reply was requested by 

March 27, 2009, and was received as part of the April 2, 2009, letter. The Panel is currently 

reviewing the letter.

AIG Inquiry. The Panel has also initiated an inquiry into Treasury and Federal Reserve 

Bank actions to provide continued capital infusions and other assistance to AIG.

378

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.

 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. 

379

 378 See Appendix V, infra.

379 See Appendix III, infra.

 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. 
96

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 
97

designates several asset managers as “Fund Managers” and creates partnerships between 

Treasury and Fund Managers whose purpose is to buy up mortgage-backed securities including 

those issued prior to 2009. 

Framework for Regulatory Reform. On March 26, 2009, through a press release and 

testimony by Secretary Geithner before the House Financial Services Committee, Treasury 

announced a proposed framework for reforming financial regulation. The proposal focused on 

identifying and addressing those institutions that pose a systemic risk to the U.S. economy, 

providing protections for consumers and investors, eliminating gaps in the regulatory structure 

by means such as requiring hedge funds to register, and coordinating with other nations to 

improve international regulation. Additional details are to be forthcoming.
98

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, 2009380 to the Panel in response to 

letters from Elizabeth Warren sent on March 5381 and 20382, 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, 

2009383, 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

Upcoming Reports and Hearings

The Panel is currently reviewing the specific responses 

contained in the letter and expects to provide further analysis in the next report.

• On Tuesday, April 21, Secretary Geithner will make his first appearance before the Panel 

at a hearing in Washington, DC.

 380 See Appendix I, infra.

381 See Appendix VII, infra.

382 See Appendix VI, infra.

383 See id.

384 See Appendix II, infra.
99

• 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.
100

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.
101

APPENDIX I: LETTER FROM TREASURY SECRETARY MR. TIMOTHY 

GEITHNER TO CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 

WARREN, DATED APRIL 2, 2009








110

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
Board of Governors of the Federal Reserve System

Federal Reserve Bank of New York

April 1,2009

Ms. Elizabeth Warren

Chair

Congressional Oversight Panel

732 North Capitol Street, N.W.

Rooms C-320 and C-617

Washington, D.C. 20401

Dear Madam Chair:

We are responding to the letters you sent to us on March 20, 2009. We appreciate

the opportunity to respond to your questions. Our answers are provided in the enclosed

document.

We hope this informatiOn is helpful. Our staffs are available to meet with you or

your staff in person to provide additional information.

Sincerely,

Be.Bern e,Ch

Board of Governors of the

Federal Reserve System

Enclosure

cc: Rep. Jeb Hensarling

Sen. John E. Sununu

Mr. Richard H. Neiman

Mr. Damon A. Silvers

William C. Dudle3Presidf

Federal Reserve Bank of New Yod
Page 1 of 13

Congressional Oversight Panel 

Responses to March 20 Inquiry 

1. Please explain in detail why the Treasury and the Federal Reserve Board believe 

it is wise to commit billions of dollars to rebuild the market for collateralized 

debt obligations and the redistribution and subdivision of interest in asset pools, 

in light of the risks posed for the financial system by these arrangements. 

Asset-backed securities (ABS) markets historically have funded a substantial share of 

consumer and small business credit, including receivables from credit card loans, auto 

loans and leases, student loans, small business and dealer floorplan loans, business 

equipment loans, and mortgage servicing advances. The disruption in the supply of 

credit for these routine purposes has magnified the adverse impact of the downturn in the 

housing cycle, and a continued dislocation in credit availability could contribute to 

further weakening of U.S. economic activity. 

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility through 

which the Federal Reserve Bank of New York (FRBNY) extends three-year loans 

collateralized by certain types of ABS that are, in turn, backed by loans to consumers and 

small businesses. The facility is designed to help market participants meet the credit 

needs of households and small businesses by supporting the issuance of those ABS. 

Any U.S. company that owns eligible collateral may borrow from the TALF provided the 

company maintains an account relationship with a primary dealer. A broad base of 

investor demand should lower the cost of funding for new TALF-eligible ABS issues and 

bring additional liquidity into the market. This greater demand should increase the flow 

of credit to and reduce the borrowing rates experienced by consumers and small 

businesses. In fact, results from the TALF’s first subscription showed a substantial 

decline in funding costs for the auto and credit card issuers that came to market. If 

sustained, this should translate to lower credit card and auto loan rates for consumers. 

The term “collateralized debt obligation” is not precisely defined, but the TALF does not 

accept ABS collateral that might be regarded as complex CDOs--that is, where the 

underlying credit exposures are themselves cash ABS or synthetic ABS. These types of 

cash and synthetic collateralized debt obligations, known as structured-finance CDOs, 

contributed to the current financial crisis by obscuring the risk of the underlying ABS 

collateral to the investor and are not eligible. 

The Wall Street Journal article cited in your letter asserts that market participants’ 

establishment of special purpose vehicles (SPVs) to function as investors and borrowers 

in the TALF program can be viewed as the creation of collateralized debt obligations. In 

our view, this analogy is misleading. The creation of SPVs facilitates broad participation 

in the program, which is essential for its success. It has been our long standing goal to 

make TALF financing available to a broad range of borrowers that meet standard 
Page 2 of 13

eligibility criteria. Currently, any U.S. company that owns eligible collateral may borrow 

from the TALF provided the company maintains an account relationship with a primary 

dealer. U.S. organized and managed investment funds--such as hedge funds, private 

equity funds, pension funds, mutual funds and other pooled investment vehicles holding 

eligible collateral--are considered to be eligible entities. All borrowers are subject to 

certain legal and compliance standards, outlined in our Master Loan and Security 

Agreement and our Conflict of Interest and Borrower Eligibility and Due Diligence

Policies. 

2. The thrust of the TALF appears to be to attract investors with large enough 

pools of capital, such as hedge funds, to the ABS market by allowing them to 

purchase ABS on a highly leveraged basis with risk of loss largely transferred to 

the taxpayer directly or, through the Federal Reserve System, indirectly, in a 

manner that confers substantial benefits on these private investors who have 

little at stake. Please explain in detail the rationale for such a transfer of risk to 

the taxpayer with so much of the benefit transferred to private investors and 

please provide the facts and figures that support this rationale.

The TALF is designed to improve credit conditions for consumer and small business 

loans by including a wide range of eligible participants, across a broad investor base. 

Any U.S. company that owns eligible collateral may borrow from the TALF provided the 

company maintains an account relationship with a primary dealer. Ultimately, the 

inclusive nature of the program helps improve access to and lowers the cost of credit to 

consumers and small businesses through the issuance of ABS. 

Each investor bears substantial risk in the form of the equity investment needed to 

finance the “haircuts” that are assessed to the collateral backing the TALF loan. 

Moreover, investors compensate the government for the risk protection they receive by 

paying a premium rate charged for TALF loans. 

The TALF program includes these and a number of other safeguards that protect taxpayer 

interests and ensure that investors bear appropriate levels of risk. 

 The TALF is a collateralized lending program that uses risk-based haircuts, 

ranging from 5 to 16 percent, to help protect the taxpayer against losses. Thus, 

for every $100 in pledged collateral, borrowers commit $5 to $16 of their own 

capital. These haircuts represent TALF borrowers’ equity interest in the 

arrangement, and serve as an additional buffer that is forfeited, along with the 

collateral, in the event the loan is not repaid. The haircuts vary across asset types 

depending on an assessment of the riskiness of the ABS and the average maturity 

of the underlying credits. Please see Appendix 1 for the current schedule of 

haircuts. 

 Further protection is provided by the risk premium included in the TALF loan 

rate. TALF loans will be extended at 100 basis points over one-month Libor for 
Page 3 of 13

most floating rate ABS or 100 basis points above the three-year swap rate for 

most fixed rate ABS.1

 The Federal Reserve will claim some of the income as its 

cost for providing liquidity, but the remainder, which represents a large portion of 

the interest, will accumulate in the TALF facility in order to absorb any losses. 

This interest rate spread will provide a substantial buffer for taxpayers, paid for by 

the private sector, in the event that the ABS is surrendered in lieu of repayment. 

 The current economic situation is extraordinary and the outlook is therefore 

especially uncertain. We accounted for that uncertainty by making very 

conservative assumptions when calibrating the haircuts. The haircuts are 

designed so that, even if the economy evolves in a manner significantly worse 

than we currently expect, all credit costs will be more than covered by the haircuts 

and the excess interest rate spread paid by investors, resulting in no credit losses 

for the Treasury or Federal Reserve. 

 The interest rates on TALF loans are set with a view to providing borrowers with 

an incentive to purchase eligible ABS at yield spreads higher than in more normal 

market conditions but lower than in the highly illiquid market conditions that have 

prevailed during the recent credit market turmoil. In doing so, TALF loan rates 

encourage the flow of credit, but provide the private sector with an incentive to 

borrow only selectively from taxpayer resources. 

 The TALF relies on specific collateral eligibility requirements in order to ensure 

that taxpayer funds are used to finance targeted asset classes whose probability of 

loss has been assessed by credit rating agencies. Given the important role that 

credit ratings play in our eligibility criteria, Federal Reserve economists have 

conducted due diligence on rating agency methodologies for various ABS sectors. 

Moreover, each issuer must hire an external auditor that must provide an opinion, 

using examination standards, that management’s assertions concerning key 

collateral eligibility requirements are fairly stated in all material respects. The 

auditor’s attestation provides a high level of assurance concerning TALF 

collateral eligibility requirements. 

While TALF is designed with robust and conservative measures to protect taxpayer 

interests, no lending program is without risk. Nonetheless, we remain confident that we 

have designed a program that will manage these risks, and that the TALF will be a 

benefit to U.S. consumers and businesses, providing critical access to loans at lower cost. 

3. Is the report in the Wall Street Journal substantially correct? If so, please 

explain in detail how the final terms, details, and structure of the financing 

 

1

 The interest rate spread on TALF loans backed by collateral benefitting from a government guarantee-- 

that is, FFELP ABS, SBA 7(a) ABS, and SBA 504 ABS--will be 50 basis points, and different reference 

benchmarks may apply. Please refer to the schedule of haircuts for details. 
Page 4 of 13

vehicles that are treated as eligible for the TALF will reflect the investment 

vehicles and packaging and repackaging of ABS described in the Wall Street 

Journal article, and, as part of that explanation, please explain in detail the 

extent to which the new financing structures differ from those involved in the 

mortgage-backed securities markets before March 2008. If not, please explain 

why not, citing specific provisions in the TALF Documents. 

From the outset of the program, the TALF Terms and Conditions have indicated that 

“investment funds” that meet certain conditions are included among the broad range of 

entities that would be eligible to borrow from the TALF. This inclusion reflects a long 

standing objective to democratize the program by making it available to a wide range of 

investors. Thus, the Wall Street Journal’s assertion that the inclusion of such funds was 

an “eleventh hour” concession to attract participants in the program was inaccurate. 

As with other potential borrowers, investment funds are subject to certain legal and 

compliance standards, outlined in our Master Loan and Security Agreement and our 

Conflict of Interest and Borrower Eligibility and Due Diligence Policies. The Federal 

Reserve has not relaxed its borrowing standards with respect to investment funds. To the 

contrary, our guidance to date has strengthened the requirements associated with 

investment funds. The Conflict of Interest Policy and Borrower Eligibility & Due 

Diligence Policy both impose a set of responsibilities with regard to vehicles created by 

primary dealers. 

The Federal Reserve expects to release guidance shortly that will clarify the legal and 

compliance standards applicable to investment funds, with the aim of ensuring that all 

borrowers in the program, regardless of investor type, meet a common set of eligibility 

standards. 

4. To the extent that the TALF Documents will permit the financing and 

investment structures reported in the Wall Street Journal, when will Treasury 

make public revised TALF Documents to reflect such structures? Given the 

Administration’s expressed commitment to transparency about the terms and 

implementation of the TARP, please explain why it is appropriate to make 

changes in the terms of the TALF without making those changes public 

sufficiently in advance of the effective date of the changes to permit 

Congressional and public response? 

The Federal Reserve and Treasury are committed to transparency regarding the terms and 

implementation of the TALF. In an effort to better support the TALF program and its 

various constituents, the Federal Reserve has provided a significant amount of 

information through our website, and has periodically updated the Frequently Asked 

Questions associated with the TALF. 

In establishing the TALF program, the Federal Reserve and the Treasury needed to 

balance the need for public consultation with the need to make the program operational 
Page 5 of 13

on a sufficiently timely basis for it to be effective in addressing the ongoing financial 

crisis, which is imposing severe costs on U.S. households and businesses. Despite this 

tradeoff, the Federal Reserve has consulted actively with the public and with the 

Congress. Federal Reserve and Treasury staff have frequently briefed Congressional 

staff on the progress of the design of the facility. And with the goal of fostering better 

public dialogue concerning the TALF, we hosted a series of interactive conference calls 

with the primary dealer community, including their bankers, operations personnel, 

compliance and legal representatives. With support from the American Securitization 

Forum, we hosted an issuer and a second primary dealer legal and compliance call where 

we fielded questions. We also hosted an investor call that was publicly announced and 

open to the general public. The call was oversubscribed beyond the one thousand 

available lines we had scheduled, and a replay of the presentation was made available for 

those who were not able to join the original broadcast. In conjunction with all of these 

efforts, Federal Reserve staff continued to engage with market participants by answering 

questions posted to TALF email inboxes or voice mail inboxes or inquiries that were 

personally directed to the staff. Input gathered through all of these channels has been 

constructive in shaping the direction of the TALF program and has contributed to 

subsequent revisions in the program’s terms and supporting documentation. 

The Wall Street Journal provided an inaccurate portrayal of our position with respect to 

the reported proposals of certain dealers as they regard “vehicles [created] to participate 

in TALF that would allow investors in the program to circumvent many of the restrictions 

laid out by the Fed.” The Federal Reserve expects to release guidance shortly that will 

clarify the legal and compliance standards applicable to investment funds, with the aim of 

ensuring that all borrowers in the program, regardless of investor type, meet a common 

set of eligibility standards. The guidance will be published on our website. 

5. Two conditions of eligibility described in the TALF Documents appear to have 

been directed against specific abuses of the mortgage-backed securities market. 

These are the bar against third-party guarantees (such as, presumably, credit 

default swaps) of ABS to obtain TALF financing and the ban on such financing 

for ABS composed of loans originated or securitized by the borrower or an 

affiliate of the borrower. According to the Wall Street Journal, those conditions 

have recently been weakened or abandoned. Please explain if this is accurate 

and, if it is, why Treasury would take such steps. 

The Wall Street Journal report that the conditions noted in your question have been 

weakened or abandoned is inaccurate. Neither of these provisions has been altered in any 

way since the outset of the program. 

Under the Terms and Conditions of the TALF, eligible collateral may not be backed by 

loans originated or securitized by the borrower or an affiliate of the borrower. Primary 

dealers are required to agree under the Master Loan and Securities Agreement that 

neither the primary dealer nor its affiliates will enter into any agreement with the 

intended effect of reducing or eliminating any loss that a TALF borrower would realize 
Page 6 of 13

on the sale of TALF collateral in a fair market value transaction. The Terms and 

Conditions also assert that eligible collateral will not include ABS that obtain credit 

ratings based on the benefit of a third-party guarantee. 

6. According to the TALF Documents made available online, the TALF is 

“intended to make credit available to consumers and small businesses on more 

favorable terms by facilitating the issuance of asset-backed securities (ABS) and 

improving the market conditions for ABS more generally.” Please provide a 

detailed description of the “current market conditions for ABS.” In addition, 

please provide detailed data indicating the dollar levels of securitization, on a 

month-by-month basis from January 2007 through January 2009, for each of the 

categories of loans whose ABS may be purchased with TALF financing. 

Market participants often look to the spread between ABS yields and an underlying 

reference benchmark rate as a broad indicator of market conditions and risk appetite.2 As 

an example, AAA-rated consumer ABS historically traded at a spread of only several 

basis points above relevant benchmark rates. Spreads began to widen gradually in the 

summer of 2007, when dislocations in funding markets became apparent. This trend 

accelerated in March 2008 following the demise of Bear Stearns, and spreads spiked to 

historically wide levels of between 500 and 600 basis points in the fourth quarter as the 

severity of the economic downturn became increasingly apparent. 

Since the TALF program was announced in November 2008, ABS spreads in the 

secondary market for TALF-eligible asset classes have narrowed significantly, although 

they still remain well above their historic norms. Five-year spreads on AAA-rated credit 

card ABS tightened to 300 basis points above Libor in early February 2009, down from 

550 to 600 basis points in December; 3-year AAA-rated auto ABS spreads tightened to 

350 basis points above swaps in March, down from 600 basis points in early January; and 

FFELP student loans of similar tenors and ratings fell to 175 basis points in February, 

down from 350 basis points in early January. Market participants noted that spreads on 

each of these asset classes benefitted from inclusion in the original TALF design, even 

before the first subscription date. 

With the onset of the severe dislocation in the credit markets, new issuance of consumer 

ABS declined precipitously in the third quarter of 2008 before coming to a virtual halt in 

October. From October 2008 to the TALF’s launch in March 2009, a total of $5.7 billion 

in consumer ABS was issued. Only $550 million of this was student loan ABS, and the 

rest was auto ABS; no credit card ABS had been issued. This cumulative issuance 

volume over the past five months compares to average consumer ABS issuance volumes 

of $20 billion, $18 billion and $6 billion per month during 2007, the first half of 2008 and 

the third quarter of 2008, respectively. For detailed data on ABS issuance, and some 

charts showing recent trends ABS prices and issuance, please see Appendixes 2 and 3, 

respectively. 

 

2

 Reference rates are generally measured against Libor for floating rate collateral and the Libor swap rate 

for fixed-rate collateral. 
Page 7 of 13

It is encouraging that $8.3 billion of credit card and auto ABS was issued coincident with 

the initial TALF subscription in March, more than doubling the amount of credit card and 

auto ABS that had been issued since last October. Moreover, as discussed in Question 1, 

ABS associated with the initial TALF subscription priced at spreads between 100 and 

200 basis points lower than previously issued ABS, marking a substantial decline in 

interest rates for these instruments. The narrowing of spreads has reportedly generated a 

renewed enthusiasm for ABS following the program’s initial success, with more issuance 

being developed. 

7. The TALF Documents indicate that only the purchase of AAA-rated ABS will be 

eligible for TALF financing. To what extent does the assignment of an AAA 

rating to such ABS mean that the ABS should be priced at their face value 

(minus the amount of any discount or the effect of any other collateral or 

financing requirement or financing cost)? To the extent that such assets are 

priced as described in the preceding sentence, please explain in detail why the 

provision of non-recourse financing by the New York Fed and the Treasury is 

necessary to stimulate the market for the loans involved. 

When they are issued, most ABS, regardless of rating, are priced at or near face value, or 

“par.” Some do not issue at par; for example, ABS issued under the Small Business 

Association 7(a) program are issued at prices well above par. Over time, the market 

values of the ABS, including AAA ABS, will move above or below par with variations in 

other market interest rates and variations in the perceived credit risk of the securities. 

The non-recourse nature of the TALF loans allows the borrower to elect to surrender the 

collateral in lieu of repaying the loan. That option limits the downside risk to the 

borrower to the loss of the funds invested to finance the haircut. Even though, as 

explained in the answer to Question 2, the haircuts have been chosen to exceed the losses 

in value likely in nearly all future outcomes, providing investors a limit on potential 

losses is an important means by which the program stimulates investor demand, even for 

AAA-rated securities. The provision of non-recourse loans through the TALF program 

was therefore intended to attract broad investor interest, thus allowing issuers to bring 

new securities to market at lower spreads. While the nature of this arrangement has a 

clear value to the investor and issuer, competitive primary markets also ensure that U.S. 

consumers and small businesses, the ultimate beneficiaries of the program, are able to 

obtain credit at lower costs. 

The success seen from the TALF’s first subscription in stimulating new demand and 

issuance for these types of ABS, of which there had been little to no activity since 

September, seems to reinforce the program’s value. If these results are sustained, this 

should translate to lower credit rates for households and businesses. 

8. Consistent failures of the credit rating agencies were a significant factor in the 

sales of risky mortgage-backed securities that helped produce the current 
Page 8 of 13

financial crisis. In light of these failures, please explain why reliance on credit 

ratings for the TALF is a reasonable basis on which to protect the taxpayers, 

regardless of the number of credit-ratings agencies whose opinions are required. 

Credit rating agencies (CRAs) continue to play a critical role in ABS markets, and are 

essential to their effective functioning and recovery. Regulators and industry 

participants, including the CRAs themselves, are working hard to address the CRArelated failures that contributed to the current financial crisis. These efforts have 

contributed to tighter underwriting standards and stricter ratings criteria. It is also worth 

noting that the CRAs’ performance has shown a more stable track record with regard to 

consumer ABS credit ratings. 

The TALF program employs a number of safeguards to protect taxpayers, including CRA 

ratings of eligible collateral. Given this important function, Federal Reserve economists 

have conducted due diligence on rating agency methodologies for eligible ABS sectors. 

Moreover, each issuer must hire an external auditor that must provide an opinion, using 

examination standards, that management’s assertions concerning key collateral eligibility 

requirements are fairly stated in all material respects. The auditor’s attestation provides a 

high level of assurance concerning TALF collateral eligibility requirements. 

TALF investors also serve an important ongoing role in price discovery and assessing 

risk through their ability to demand greater credit enhancements or price concessions. In 

particular, the sale of securities through TALF in an arms-length transaction is an 

independent check not only on the underwriting practices of the issuer, but also of the 

efficacy of rating agency methodologies. 

In addition to agency ratings, the TALF program employs other safeguards to protect 

taxpayer interests, including interest rate premiums and risk-based collateral haircuts. In 

recognition that the current economic situation is extraordinary and the outlook is 

especially uncertain, our economists made very conservative assumptions in calibrating 

the program’s haircuts, which together with the interest premiums described in 

Question 2, provide critical first-loss buffers that shield taxpayers from credit risk should 

the current outlook prove inaccurate. 

9. There is no indication in the TALF Documents that Treasury has imposed any 

substantive requirements on any class of loans that may be securitized and 

financed through the TALF. For example, there are no limits on credit card or 

student loan interest rates or fees, and no consumer protections against 

predatory practices of various kinds. What is the rationale for committing 

taxpayer dollars without conditioning use of those funds on fair treatment of 

taxpayers? Please explain your answer in detail. 

The Federal Reserve is deeply committed to consumer protection and the Board of 

Governors has promulgated Regulation Z, designed to promote the informed use of 

consumer credit as well as significant other protections to consumers associated with 
Page 9 of 13

installment credit. We believe that consumer interests are best served under the 

protections provided by a regulatory regime rather than through the terms of a lending 

program. 

10. Please explain why the Treasury and the Federal Reserve Board decided to use 

the TALF mechanism to stimulate lending for the classes of assets involved, 

rather than infusing additional funds into financial institutions for such lending. 

The TALF program supports the provision of loans to consumers and small businesses. 

Although these loans traditionally have been financed through securitization, funding for 

such activities has dissipated in the current crisis. The TALF fills this liquidity gap. 

The TALF is just one of many programs undertaken by the Federal Reserve, Treasury, 

and other agencies to strengthen financial institutions and encourage lending, including 

efforts to recapitalize financial institutions and to provide an abundant supply of liquidity. 

For example, the Federal Reserve’s decisions to lower rates on and lengthen the maturity 

of primary credit loans, and to create the Term Auction Facility, have helped to relieve 

short-term liquidity strains for individual institutions and the banking system as a whole. 

Nevertheless, ongoing stress on financial institutions arising from their residential and 

commercial real estate exposures continues to constrain their ability to intermediate credit 

across the broader markets. 

The TALF complements other policy initiatives by re-opening channels of funding for 

assets that had traditionally been securitized. 

 

11. What is the rationale for financing sale of securitized debt issued by U.S. 

subsidiaries of non-U.S. companies under TALF? 

The U.S. subsidiaries of non-U.S. companies supply credit to U.S. consumers and 

businesses and employ U.S. workers. Moreover, at least 95 percent of the loans backing 

the ABS accepted as collateral for the TALF program must be loans to U.S domiciled 

borrowers, i.e., U.S. domiciled students, car purchasers, small businesses and credit card 

customers. Consequently, financing the sale of these entities’ securitized debt, provided 

the debt meets all other eligibility criteria outlined in the program’s documentation, 

further advances the core policy objective of re-opening the flow of credit to U.S. 

households and businesses. 

Note: A list of URLs for official program documentation referenced throughout this 

response can be found in Appendix 4. 
Page 10 of 13

APPENDIX 1 

Schedule of Haircuts 

Effective March 19, 2009 

 ABS Expected Life (years) 

Sector Subsector 0-1 >1-2 >2-3 >3-4 >4-5 >5-6 >6-7 

Auto Prime retail lease 10% 11% 12% 13% 14% 

Auto Prime retail loan 6% 7% 8% 9% 10% 

Auto Subprime retail loan 9% 10% 11% 12% 13% 

Auto Motorcycle/other recreational 

vehicles 

7% 8% 9% 10% 11% 

Auto Commercial and government fleets 9% 10% 11% 12% 13% 

Auto Rental fleets 12% 13% 14% 15% 16% 

Credit Card Prime 5% 5% 6% 7% 8% 

Credit Card Subprime 6% 7% 8% 9% 10% 

Equipment Loans and leases 5% 6% 7% 8% 9% 

Floorplan Auto 12% 13% 14% 15% 16% 

Floorplan Non-auto 11% 12% 13% 14% 15% 

Small Business SBA loans 5% 5% 5% 5% 5% 6% 6% 

Student Loan Private 8% 9% 10% 11% 12% 13% 14% 

Student Loan Gov’t guaranteed 5% 5% 5% 5% 5% 6% 6% 

Servicing 

Advances 

Residential mortgages 12% 13% 14% 15% 16% 
Page 11 of 13

APPENDIX 2 

Monthly Consumer ABS Issuance (in millions): January 2007 to March 2009 

Credit Cards Auto Student Loan SBA 7(a) SBA 504

Year Month Total Total Total Total Total

2007 Jan 5,025 3,469 4,704 387 361

Feb 10,549 7,996 6,571 349 310

Mar 8,747 2,305 12,182 195 387

Apr 6,474 5,277 312 378

May 8,790 9,307 4,336 188 449

Jun 7,255 8,878 4,871 194 386

Jul 8,483 2,915 5,591 353 381

Aug 6,250 4,915 1,500 408 466

Sept 7,868 6,414 3,548 318 452

Oct 15,633 7,580 3,918 527 414

Nov 3,225 4,437 5,343 191 421

Dec 1,700 2,380 740 395

2007 Total 89,998 65,873 52,564 4,162 4,801

2008 Jan 13,388 6,647 3,814 421 429

Feb 3,660 1,876 982 231 311

Mar 10,079 1,915 3,311 161 418

Apr 8,594 3,446 6,531 321 492

May 8,758 10,791 1,310 384 443

Jun 5,909 5,814 6,516 312 412

Jul 4,484 2,104 1,570 408 491

Aug 3,978 4,086 214 367

Sept 6,129 1,094 225 454

Oct 376 136 312

Nov 500 142 389

Dec 1,897 102 397

2008 Total 64,980 36,460 28,120 3,060 4,916

2009 Jan 3,500 1,300 130 283

Feb 1,073 547 280 235

Mar 3,425 5,115 1,498 150 319

2009 Total 6,925 7,488 2,045 560 837

2007-2009 Total 161,903 109,820 82,729 7,782 10,554

Source: JPMC, Colson Services
Page 12 of 13

APPENDIX 3 

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

AAA ABS spreads

Autos

Credit cards

Basis points 1     2  3 4

1 ‐ Aug 2007: "Market dislocations"

2 ‐ Mar 2008: Bear Stearns

3 ‐ Sep 2008: Lehman Brothers

4 ‐ Nov 2008: TALF announced

0

20

40

60

80

100

120

2000 2002 2004 2006 Q1‐Q2 Q3 Q4

ABS issuance volume

2008 (annual rate)

Autos

Credit

cards

Student

loans

$ Billions
Page 13 of 13

Appendix 4 

TALF program documentation referenced throughout this response can be found on the Federal 

Reserve Bank of New York’s website at the following URLs: 

Terms and Conditions 

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

Frequently Asked Questions (FAQs) 

 http://www.newyorkfed.org/markets/talf_faq.html 

Master Loan and Security Agreement 

 http://www.newyorkfed.org/markets/mlsa_032709.pdf 

Auditor Attestation Form 

 http://www.newyorkfed.org/markets/TALFAuditorAttestationForm.pdf 

Conflict of Interest Policy 

 http://www.newyorkfed.org/markets/TALF_Conflict_of_Interest.pdf 

Borrower Eligibility and Due Diligence Policy 

 http://www.newyorkfed.org/markets/TALF_FRBNY_Due_Diligence_Policy.pdf 
125

APPENDIX III: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 

GEITHNER, DATED MARCH 30, 2009
March 30, 2009

The Honorable Timothy F. Geithner

Secretary of the Treasury

United States Department of the Treasury

Room 3330

1500 Pennsylvania Avenue, N.W.

Washington, D.C. 20222

Dear Secretary Geithner:

The announcement of the Capital Assistance Program, on February 25, 2009, described 

the Program's objectives as "[restoring] . . . confidence in the strength and viability of our 

financial institutions."

1

 1

Treasury White Paper “The Capital Assistance Program and its role in the Financial Stability Plan,” (February 25, 

2009), page 1. 

 The announcement emphasizes a "one-time forward looking supervisory 

assessment" designed to test the ability of each of the nation's 19 largest bank holding companies

to absorb the losses generated by a worse-than-expected decline in economic activity. As the 

Treasury recognizes, the ability of such institutions to maintain adequate capital under current 

conditions is essential to the efforts to stabilize the financial system. 

Because of their importance, the Congressional Oversight Panel has undertaken a study 

of the theories underlying and details of the assessment. The Panel is being assisted in 

conducting its study by Professors Eric Talley and Johan Walden. Professor Talley is a member 

of the faculty of the UC Berkeley School of Law (where he is co-director of the Berkeley Center 

for Law, Business, and the Economy), and a visiting member of the faculty of the Harvard Law 

School. Professor Walden is a member of the faculty of the UC Berkeley Haas School of 

Business. 

I am writing to you, in my capacity as Chair of the Congressional Oversight Panel (the 

“Panel”) to obtain the information specified below (the “Specified Information”) and to arrange a 

series of meetings (the “Meetings”) to discuss the Specified Information and related topics. The 

Specified Information and the Meetings are necessary for the Panel to carry out section 125 of 

the Emergency Economic Stabilization Act of 2008, and the Panel is seeking the Specified 

Information and the Meetings pursuant to section 125(e)(3) of that Act.
2

The Specified Information is:

1. all memoranda concerning, and written descriptions of, any risk management, bank 

capital, economic, regulatory, legal, or statistical model or theory underlying or contributing to 

the Assessment;

2. all memoranda concerning, and written descriptions of, what the Assessment will 

attempt to measure, including, but not by way of limitation, the manner in which the Program 

proposes to measure cataclysmic risk;

3. all memoranda concerning, written descriptions of, and simulations pertaining to, the 

distributional and any other assumptions on which the Assessment rests, and the theories 

underlying and content of the projections it will employ, both in general terms and with respect 

to specific institutions;

4. all memoranda concerning, written descriptions of, and simulations pertaining to, the 

theories underlying and content of all economic assumptions that may be incorporated in, or used 

as part of, the Assessment, both in general terms and with respect to specific institutions;

5. all memoranda concerning, written descriptions of, and simulations pertaining to, the 

thresholds, terms, and manner in which the Assessment will be applied to specific institutions, 

including, but not by way of limitation, the ranges of outcomes within which any judgments 

about capital adequacy or the need for infusion of additional capital will be made, whether in 

general terms or with respect to any specific institution; and

6. all information obtained during, or contained in notes or recordings of, the Meetings.

The Meetings. The Meetings will be one or more gatherings to discuss all or part of the 

Specified Information, attended by (i) officials of the Treasury, including, but not by way of 

limitation, the senior officials of the Office of the Comptroller of the Currency (the "OCC") and 

of the Office of Thrift Supervision ("OTS") who are responsible for the Assessment, (ii) 

members or staff of the Panel, or both, and (iii) Professor Talley, Professor Walden, or both.

* * * *

Capitalized terms in this letter that are not defined above are defined in a document 

entitled "Congressional Oversight Panel – Supervisory Assessment Request, Definitions and 

Protocol for Document Production and Protection, dated March 30, 2009," enclosed with this 

letter.

I would be happy to answer any questions about this letter that you may have. If you 

would prefer, a member of your staff can contact the Panel's Executive Director, Naomi Baum, 

to discuss any such questions. Ms. Baum's telephone number is XXX-XXX-XXXX.

Kindly respond to the requests for information, and for the meetings, described within 

twenty-one (21) calendar days from the date of this letter. In that connection, please provide the 
3

Panel with the names of one or more individuals who will be responsible for responding to this 

letter within seven (7) days from the date of this letter. 

Very truly yours,

Elizabeth Warren

Chair

Congressional Oversight Panel 

Enclosure
4

Congressional Oversight Panel – Supervisory Assessment Request

Definitions and Protocol for Document Production and Protection, dated March 30, 2009

Documents defined in the letter, dated March 30, 2009 (the "Letter"), from Elizabeth 

Warren, Chair of the Congressional Oversight Panel (the "Panel"), to Hon. Timothy F. Geithner, 

Secretary of the Treasury, to which this document relates, shall have the same meaning in this 

document as they have in the Letter. 

Definitions. 

As used in the Letter:

1. Any reference to "assessment" means the one-time forward looking supervisory 

assessment described in the Treasury White Paper entitled “The Capital Assistance Program and 

its Role in the Financial Stability Plan,” (February 25, 2009), appearing at 

http://www.ustreas.gov/press/releases/reports/tg40_capwhitepaper.pdf, as such supervisory 

assessment has been defined, designed, and implemented, and applied both generally and to all 

relevant bank holding companies and their subsidiaries, by staff of one or more of the 

Department of the Treasury, the OCC, OTS, the Board of Governors of the Federal Reserve 

System (including, but not by way of limitation, the Federal Reserve Banks), the Federal Deposit 

Insurance Corporation, and the National Credit Union Administration.

2. Any reference to "information" means any writings, drawings, graphs, charts, 

photographs, sound recordings, images, and other data or data compilations, by whomever 

prepared, whether in “hard copy” (i.e., paper) form or stored in any medium from which 

information can be obtained either directly or, if necessary, after translation by the responding 

party into a reasonably usable form, as well as the identity of any person employed by or serving 

as an agent or consultant for the Government, or with whom any employee or agent or consultant 

of the Government may have communicated, who may have knowledge relevant to the requested 

information and information sufficient for the Panel to contact such person including but not 

limited to such person’s name, title, telephone number, and electronic mail address.

3. Any reference to the "Department of the Treasury," or to any other department, 

agency, or instrumentality of government, shall include a reference to any bureau, office, or 

instrumentality thereof. 

Document Production.

1. The specified information is limited to any and all information described in the nine 

paragraphs of the Letter that is in the possession of the Treasury (directly or subject to physical 

or electronic storage on behalf of Treasury), or to which the Treasury has access, or the right 

(whether via existing agreement or under the law) to obtain access. Information is subject to the 

terms of this request regardless of the source of such information, the person or persons by or on 

behalf of whom such information was prepared or generated, and the person or persons by whom 

such information is now held.

2. To the extent that the Treasury is aware of any information that is not in Treasury’s 

possession, custody, or control that would otherwise constitute specified information, please 
5

provide information sufficient to identify and locate that information and to request its 

production to the Panel.

3. In the event that specified information is withheld on any basis, please provide to the 

Panel a written description of (i) the type of information that is being withheld; (ii) the general 

subject matter to which the information relates; (iii) the reason such information is being 

withheld, including, but not by way of limitation, the statute or regulation under which such 

information is being withheld and the application of such statute or regulation to such 

information (described with sufficient detail that the Panel can determine the applicability of 

such statute or regulation to the information); (iv) the date, author, and addressee, if applicable; 

and (v) the relationship of the author and addressee, if applicable.

4. This request is continuing in nature and applies to any newly discovered information 

or to information generated or received after the date of the Letter. To the extent that any 

information is not provided to the Panel because it has not been located or discovered as of the 

return date or is generated or received after the return date, please produce such information to 

the Panel as soon as possible after its discovery or, if the information will not be produced for 

any reason, please provide the Panel with the information requested in the immediately 

preceding paragraph of this letter.

Document Protection.

1. Any individual hired or retained by the Panel under section 125(d)(2) of the 

Emergency Economic Stabilization Act of 2008 will execute a confidentiality agreement with the 

Panel prior to obtaining access to any portion of the specified information provided to the Panel 

by the Treasury. The agreement will provide that such individual is subject to the ethical and 

non-disclosure obligations of an employee of the United States Senate and of the Panel. Any 

issues relating to such obligations may be directed to, and will be addressed by, the Panel's 

Ethics Counsel.

2. The Panel will not provide any of the specified information directly to the public. 

Instead, it will refer those who request such specified information to the Treasury.

3. The Panel will not disclose the text of any of the specified information in any 

document originated by the Panel, without notifying Treasury and providing a reasonable time 

for Treasury to state its objections. Notwithstanding the immediately preceding sentence, the 

Panel may include a general description or descriptions, analysis, or analyses of any such 

information in any such document. Any draft of any such documents prepared by any consultant 

to the Panel will be reviewed by senior staff of the Panel to assure that no improper disclosure 

has occurred.

4. The Panel does not intend to disclose to the public any trade secret and commercial or 

financial information that is contained within or as part of any specified information and that is 

privileged or confidential such that it is subject to the terms of 18 U.S.C. § 1905. 

5. We believe that the Panel is generally not authorized to withhold information from 

Congress, see 31 U.S.C. § 716(e)(3), or from a court. Should the Panel receive a congressional 

request or court order that would require the Panel to produce any portion of the specified

information, the Panel will notify the Treasury of the request prior to disclosure and provide the 

Treasury with the opportunity to express any concerns it may have about such production to the 

requester or to the court. In addition, the Panel will notify the recipient of the records of the 
6

proprietary nature of the material, including using a legend advising that further release may be 

prohibited by 18 U.S.C § 1905.

6. To ensure the confidentiality and security of the specified information, the Panel will 

store such information in locked cabinets in a locked room on the Panel's premises, to which 

only the Panel's Executive Director, Deputy Director, and Chief Clerk have keys. A log will be 

kept of any person who is granted access to that room.

Except as provided in the next paragraph, electronic data will be stored on a single 

computer in encrypted form; such computer will be placed in the locked room described in the 

preceding paragraph. The computer will be password-protected and will not be connected to any

other computer or network; the USB ports that would otherwise permit copying from that 

computer will be disabled. Logs will be kept of any document printed from the computer and 

such document will be numbered to permit its identification; any such documents will be subject 

to the same controls as those described above for documents originally in paper form. 

With the approval of the Treasury (and, where applicable, any other department, agency, 

or instrumentality of the government that originated such Specified Information) Specified 

Information may be stored on a secure computer to which Professors Talley and Walden shall 

have Internet access on an encrypted basis or on a secure computer located at the Federal 

Reserve Banks of Boston and San Francisco.
132

APPENDIX IV: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 

GEITHNER, DATED MARCH 25, 2009
March 25, 2009

The Honorable Timothy F. Geithner

Secretary of the Treasury

United States Department of the Treasury

Room 3330

1500 Pennsylvania Avenue, N.W.

Washington, D.C. 20220

Dear Mr. Secretary:

As you are aware, the Congressional Oversight Panel (the Panel) was established by 

section 125 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 (EESA), 

to conduct oversight of the Troubled Asset Relief Program (TARP). We are charged with 

reporting our findings directly to Congress.

In discharging our duties, we have sent information requests to you and requested that 

you appear for a public hearing. We understand that you have been dealing with many important 

issues, and we have tried to be flexible to accommodate those other demands. Despite repeated 

promises from your staff that the information we requested will be furnished shortly, we still do 

not have substantive responses to any of our inquiries. And despite repeated promises from your 

office, we have not received any dates on which you will be available for a hearing.

We have also requested more details about the economic programs Treasury has 

advanced. Despite our requests, we discovered that the Public-Private Investment Fund Program 

announced Monday explicitly required access to information about the program for the Special 

Inspector General and the Government Accountability Office, while omitting access to such 

information for the Congressional Oversight Panel. As our requests make clear, we require 

access to detailed program information in order to fulfill our statutory mandate. 

This lack of responsiveness impairs our ability to conduct effective oversight. It is 

unacceptable. Section 125(e)(3) of EESA clearly spells out Congress’ intent for a productive 

relationship between Federal departments and agencies and the Panel. Information from the 

Treasury Department and from the Secretary of the Treasury should be readily available to the 
Congressional Oversight Panel, and your failure to cooperate jeopardizes the credibility of the 

recovery process. 

We share a common goal of transparency; therefore we look forward to your prompt 

attention to these matters.

Sincerely,

Elizabeth Warren

Chair

Congressional Oversight Panel 
135

APPENDIX V: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 

GEITHNER, DATED MARCH 24, 2009
March 24, 2009

The Honorable Timothy F. Geithner

Secretary of the Treasury

United States Department of the Treasury

Room 3330

1500 Pennsylvania Avenue, N.W.

Washington, D.C. 20220

Dear Mr. Secretary:

The actions of the Department of the Treasury, and the Federal Reserve Board, in 

providing continued capital infusions and other assistance to the American International 

Group, Inc., have raised a number of important questions. These include the economic 

consequences of such assistance, the ultimate beneficiaries of the assistance, and the 

manner in which the objectives of the assistance have been defined, and their fulfillment 

monitored, by Treasury and the Board. The Congressional Oversight Panel is concerned 

about these issues. It is particularly concerned that the opaque nature of the relationship 

among AIG, its counterparties, the Treasury, the Board, and the Federal Reserve Banks, 

particularly the Federal Reserve Bank of New York, have substantially hampered 

oversight of the Troubled Assets Relief Program by Congress and, equally important, 

have impaired the understanding of that Program by the American people. 

I am writing to you, as Chair of the Panel, to secure from the Department of the 

Treasury (the "Treasury") the information specified below (the “specified information”). 

The specified information is necessary for the Panel to carry out section 125 of the 

Emergency Economic Stabilization Act, and this information request is made pursuant to 

section 125(e)(3) of that Act.

The specified information is as follows:

1. All information relating to any request for, or any analysis of the need for, the 

provision of any financial assistance to the American International Group, Inc. ("AIG"), 

to whomever such request was made or by whomever such analysis was undertaken.

2. All information about the risk to the national and international financial 

systems, and any part of those systems, or to the financial condition of any financial 

institution or institutions in the United States, other countries, or both, if the financial 
2

condition of AIG were to deteriorate or if AIG were to become insolvent or forced to 

enter receivership or bankruptcy reorganization.

3. All information relating to the nature and provision by the Government1

 1 Capitalized terms in this letter that are not defined herein are defined in a document entitled 

"Congressional Oversight Panel – AIG Request, Definitions and Protocol for Document Production and 

Protection, Dated March 23, 2009,"and attached to this letter.

of any 

financial assistance to AIG, any conditions placed by the Government on any such 

assistance, and the use by AIG of such assistance, including, but not by way of limitation, 

any conditions placed on the grant or use of such assistance, and any use of such 

assistance to satisfy any obligation or liability of AIG to any person, including, but not by 

way of limitation, any non-United States person. 

4. All information relating to (i) the identity of any counterparties of AIG (an 

"AIG counterparty") on any credit default swap or similar instrument written, sold, or 

held, by AIG and any loan of securities or similar transaction entered into between AIG 

and any AIG counterparty, outstanding on or after January 1, 2008 (ii) the amount of the 

monetary exposure of AIG to such counterparty, (iii) the amount of the monetary 

exposure of such AIG counterparty to AIG, including, but not by way of limitation, the 

amount of collateral due from, and potential loss faced by, each counterparty of AIG, 

both absolutely and as a percentage of the total dollar amount of all transactions 

outstanding between AIG and such counterparty, in the event that the credit rating of AIG 

was downgraded, AIG sought bankruptcy or similar protection, or both, and (iv) any 

other relationships, economic or otherwise, between AIG and any such AIG counterparty. 

5. All information relating to value of any credit default swap, similar 

instrument, or securities loan as shown on the financial statements of AIG filed with 

United States Securities and Exchange Commission (the "SEC") Form 10K for 2007, 

including, but not by way of limitation, (i) the accounting and valuation methods and 

conventions used to arrive at such value, (ii) whether such methods were in accordance 

with "generally accepted accounting principles" as defined by the Financial Accounting 

Standards Board for purposes of the reporting of financial results to the SEC, and (iii)

the Government's assessment of the accuracy of such valuation, at all relevant periods 

comprehended by the questions contained in this letter.

6. All information relating to any counterparties of any counterparties listed in 

response to paragraph (4) (that is, counterparties of AIG counterparties) and the amount 

of the exposure of each AIG counterparty to such additional counterparty that reflected 

AIG's liability to such AIG counterparties, and the extent of the ability of each AIG 

counterparty to satisfy its obligations to such additional counterparty without the use of 

assets derived from the financial assistance provided to AIG.

7. All information relating to the facts described in an article entitled “Goldman 

Insists It Would Have Lost Little if A.I.G. Had Failed,” which was published on page B5 

of The New York Times for Saturday, March 21, 2009.
3

8. All information relating to the creation by the Federal Reserve Bank of New 

York of the lending facilities Maiden Lane II LLC, established to fund the purchase of 

residential-MBS from AIG’s securities lending portfolio, and Maiden Lane III LLC, 

established to purchase collateralized debt obligations on which AIG had written credit 

default swaps. Such information shall include, but not by way of limitation, the identity 

of each counterparty or other person from whom purchases were made by either Maiden 

Lane II LLC, Maiden Lane III LLC, or both, amount of each such purchase, the current 

value of the assets of Maiden Lane II LLC and Maiden Lane III LLC, the consequences 

of such transactions for the financial condition of AIG, and the accounting and valuation 

methods and conventions used to value any such assets either at the time of purchase or 

for purposes of determining their value on the balance sheets of either such limited 

liability company and for determining the consequences of such transactions for the 

financial condition of AIG. 

9. All information relating to the terms of and guidelines for the executive 

compensation and retention programs of AIG, including, but not by way of limitation, 

any reports to AIG by external compensation or other consultants concerning the same.

* * * *

I would be happy to answer any questions about this letter that you may have. If 

you would prefer, a member of your staff can contact the Panel's Executive Director, 

Naomi Baum, to discuss any such questions. Ms. Baum's telephone number is 

XXX-XXX-XXXX.

Kindly respond to the request for information contained in this letter within 

twenty-one (21) calendar days from the date of this letter.

Very truly yours,

Elizabeth Warren

Chair

Congressional Oversight Panel 

Enclosure
139

APPENDIX VI: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR 

ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY 

GEITHNER, DATED MARCH 20, 2009
March 20, 2009

The Honorable Timothy F. Geithner

Secretary of the Treasury

United States Department of the Treasury

Room 3330

1500 Pennsylvania Avenue, N.W.

Washington, D.C. 20220

Dear Mr. Secretary:

I am writing to you because the Congressional Oversight Panel (the “Panel”), is 

concerned about the terms and operation of the Term Asset-Backed Loan Facility (the 

"TALF").

1

The operation of the TALF is explained in documents (the “TALF Documents”) 

issued on March 3, and March 17, 2009, by one or more of the Federal Reserve Bank of 

 More specifically, the Panel is concerned that the TALF appears to involve 

substantial downside risk and high costs for the American taxpayer. Equally important, 

the TALF appears potentially to subsidize the continuation of financial instruments and 

arrangements whose failure was a primary cause of the current economic crisis. In 

addition, the Panel is concerned because documents currently posted on the 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 

(the "New York Fed") contradict each other.

I am therefore requesting that you answer the questions posed in this letter so that 

the Panel may fulfill its Congressionally-mandated oversight function. The Panel was 

established by section 125 of the Emergency Economic Stabilization Act of 2008, Pub. L. 

No. 110-343 (“EESA”). The information sought by this letter is necessary for the Panel 

to carry out section 125 of EESA, and this information request is made pursuant to 

section 125(e)(3) of EESA. Your prompt response to the Panel's requests is greatly 

appreciated. 

 1 The launch of the TALF was announced jointly by the Board of Governors of the Federal 

Reserve System (the “Federal Reserve Board”) and the Department of the Treasury (the "Treasury") on 

March 3, 2009. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Joint 

Press Release (Mar. 3, 2009) (online at www.federalreserve.gov/newsevents/press/monetary/

20090303a.htm). 
2

New York (the “New York Fed”), the Federal Reserve Board, and the Treasury.2

“Wall Street dealers, including 

The 

TALF Documents describe a mechanism for “facilitating the issuance of asset-backed 

securities” (“ABS”) involving pools of, inter alia, credit card, automobile, student, and 

small business loans. The Documents explain that the TALF will provide 90 per cent 

non-recourse financing, through one or more special purpose vehicles established by the 

New York Fed and funded by the New York Fed and the Treasury, for the direct 

purchase of ABS by investors. The TALF Terms impose several conditions on eligibility 

that are seemingly designed to avoid some of the abuses of the securitization process that 

helped produce the financial meltdown.

Notwithstanding the TALF Documents on the official website, the Wall Street 

Journal reported on March 14, 2009, that the New York Fed has agreed to what appears 

to be a fundamental alteration in the TALF and delayed the start of TALF auctions for 

several days for that reason. According to the Journal:

J.P. Morgan Chase & Co. and Barclays PLC's 

Barclays Capital, have created vehicles to participate in the TALF that would 

allow investors in the program to circumvent many of the restrictions laid out by 

the Fed. The vehicles resemble collateralized debt obligations, or CDOs, and 

use some of the financial engineering that was partially responsible for the 

collapse of the credit markets. (Emphasis supplied.)

. . . .

“Under the new proposal, a bank such as Barclays or J.P. Morgan would set up a 

trust to buy securities with money borrowed from the Fed. The trust would then 

sell investors securities in the trust. Those securities would give returns similar 

to the TALF loan, but without the strings attached.

 2 The TALF Documents are: (i) Federal Reserve Bank of New York, Term Asset-Backed 

Securities Loan Facility: Terms and Conditions (Effective Mar. 3, 2009) (the “TALF Terms”) (online at 

www.newyorkfed.org/markets/talf_terms.html); (ii) Federal Reserve Bank of New York, Term AssetBacked Securities Loan Facility (TALF) Frequently Asked Questions, Effective March 17, 2009, (the 

“TALF FAQs”) (online at www.newyorkfed.org/markets/talf_faq.htm); (iii) U.S. Department of the 

Treasury, The Consumer and Business Lending Initiative, A Note on Efforts to Address Securitization 

Markets and Increase Lending (Mar. 3, 2009) (online at www.treasury.gov/press/releases/reports 

/talf_white_paper.pdf); and (iv) U.S. Department of the Treasury, Guidelines for the Consumer and 

Business Lending Initiative (CBLI) Program (Mar. 3, 2009) (online at 

www.treasury.gov/press/releases/reports/talf_white_paper.pdf).

 
3

“The dealers say they could create markets for these derivative securities to 

trade, and a presentation by Barclays says they may be rated by credit-ratings 

companies and listed on the Irish Stock Exchange, a home for many CDOs.”3

5. Two conditions of eligibility described in the TALF Documents appear to 

have been directed against specific abuses of the mortgages-backed securities market. 

These are the bar against third party guarantees (such as, presumably, credit default 

swaps) of ABS to obtain TALF financing and the ban on such financing for ABS 

composed of loans originated or securitized by the borrower or an affiliate of the 

borrower. According to the Wall Street Journal, those conditions have recently been 

Questions.

1. Please explain in detail why the Treasury and the Federal Reserve Board 

believe it is wise to commit billions of dollars to rebuild the market for collateralized debt 

obligations and the redistribution and subdivision of interests in asset pools, in light of 

the risks posed for the financial system by these arrangements." 

2. The thrust of the TALF appears to be to attract investors with large pools of 

capital, such as hedge funds, to the ABS market by allowing them to purchase ABS on a 

highly leveraged basis with risk of loss largely transferred to the taxpayer directly or, 

through the Federal Reserve System, indirectly, in a manner that confers substantial 

benefits on these private investors who have little at stake. Please explain in detail the 

rationale for such a transfer of risk to the taxpayers with so much of the benefit 

transferred to private investors and please provide the facts and figures that support this 

rationale.

3. Is the report in the Wall Street Journal substantially correct? If so, please 

explain in detail how the final terms, details, and structure of the financing vehicles that 

are treated as eligible for the TALF will reflect the investment vehicles and packaging 

and repackaging of ABS described in the Wall Street Journal article, and, as part of that 

explanation, please explain in detail the extent to which the new financing structures 

differ from those involved in the mortgage-backed securities markets before March 2008. 

If not, please explain why not, citing specific provisions of the TALF Documents.

4. To the extent that the TALF Documents will permit the financing and 

investment structures reported in the Wall Street Journal, when will Treasury make 

public revised TALF Documents to reflect such structures? Given the Administration's 

expressed commitment to transparency about the terms and implementation of the TARP, 

please explain why it is appropriate to make changes in the terms of the TALF without 

making those changes public sufficiently in advance of the effective date of the changes 

to permit Congressional and public response?

 3 Liz Rappaport, TALF is Reworked After Investors Balk, The Wall Street Journal, at B4 (Mar. 14, 

2009) (the "Wall Street Journal Article").
4

weakened or abandoned. Please explain if this report is accurate and, if it is, why 

Treasury would take such steps. 

6. According to the TALF Documents made available online, the TALF is 

“intended to make credit available to consumers and small businesses on more favorable 

terms by facilitating the issuance of asset-backed securities (ABS) and improving the 

market conditions for ABS more generally.”4

 4 TALF Terms, at 1.

 Please provide a detailed description of the 

"current market conditions for ABS." In addition, please provide detailed data indicating

the dollar levels of securitization, on a month-by-month basis from January 2007 through 

January 2009, for each of the categories of loans whose ABS may be purchased with 

TALF financing.

7. The TALF Documents indicate that only the purchase of AAA-rated ABS will 

be eligible for TALF financing. To what extent does the assignment of an AAA rating to 

such ABS mean that the ABS should be priced at their face value (minus the amount of 

any discount or the effect of any other collateral or financing requirement or financing 

cost)? To the extent that such assets are priced as described in the preceding sentence, 

please explain in detail why the provision of non-recourse financing by the New York 

Fed and the Treasury is necessary to stimulate the market for the loans involved. 

8. Consistent failures of the credit rating agencies were a significant factor in the 

sales of mortgage-backed securities that helped produce the financial meltdown. In light 

of these failures, please explain why reliance on credit ratings for the TALF is a 

reasonable basis on which to protect the taxpayers, regardless of the number of creditratings agencies whose opinions are required.

9. There is no indication in the TALF Documents that Treasury has imposed any 

substantive requirements on any class of loans that may be securitized and financed 

through the TALF. For example, there are no limits on credit card or student loan interest 

rates or fees, and no consumer protections against predatory practices of various kinds. 

What is the rationale for committing taxpayer dollars without conditioning use of those 

funds on fair treatment of taxpayers? Please explain your answer in detail.

10. Please explain why the Treasury and the Federal Reserve Board decided to 

use the TALF mechanism to stimulate lending for the classes of assets involved, rather 

than infusing additional funds into financial institutions for such lending.

11. What is the rationale for financing sale of securitized debt issued by U.S. 

subsidiaries of non-U.S. companies under the TALF?
5

I would be happy to answer any questions that you may have about this letter. If 

you would prefer, a member of your staff can contact the Panel's Executive Director, 

Naomi Baum, at XXXXXXXXXX.

Kindly respond to the request for information contained in this letter within seven 

(7) calendar days from the date of this letter

Sincerely,

Elizabeth Warren

Chair

Congressional Oversight Panel 
145

APPENDIX VII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL 

CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. 

TIMOTHY GEITHNER, DATED MARCH 5, 2009
Congressional Oversight Panel

732 North Capitol Street, NW

Rooms C-320 and C-617

Mailstop: COP

Washington, DC 20401

March 5, 2009

Hon. Mr. Timothy F. Geithner

Secretary of the Treasury

U. S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Dear Secretary Geithner:

Thank you for your February 23, 2009 letter. During your brief tenure, Treasury has 

taken important steps towards improving accountability and increasing transparency in its 

financial stabilization programs, and starting to implement a plan of relief for struggling home 

owners. 

Your letter and, more important, your actions as Secretary of the Treasury, have 

addressed many of the Congressional Oversight Panel’s concerns. I am writing, however, as part 

of our ongoing oversight obligations under the Emergency Economic Stabilization Act of 2008 

because of the Panel’s concern that many of the questions we raised remain unanswered. The 

Panel cannot fulfill its obligations to the Congress unless it can obtain complete and candid 

answers to its questions in a timely fashion. We understand that you and your staff face many 

immediate challenges, and we are willing to work with you to set a reasonable timetable for a 

response to the Panel’s open questions. But meaningful answers are essential. 

There are many questions that we believe must be addressed in coming weeks, but we ask 

you to focus your attention on one immediate issue. Treasury has not explained how its financial 

stabilization programs fit together to address the problems that caused this crisis. This failure to 

connect specific programs to a clear strategy aimed at the root causes of the crisis has produced 

uncertainty and drained your work of public support. Financial institutions, businesses, and 

consumers will not return to healthy investment in the economy if they fear that the federal 

government is careening from one crisis to another without an intelligible road map. 

For these reasons, we ask that you provide answers to the following questions about 

Treasury’s current views and the approach outlined in the Administration’s recently-issued 
Mr. Timothy F. Geithner

March 5, 2009

Page 2

Financial Stability Plan. Please answer each question in detail and please indicate the economic 

or other evidence on which your each answer rests:

1. What do you believe the primary causes of the financial crisis to have been? Are 

those causes continuing? How does your overall strategy for using Treasury

authority and taxpayer funds address those causes?

2. What is the best way to recapitalize the banking system? How does your answer 

relate to your assessment of the causes of the financial crisis?

3. What is your view of the economic status of the American consumer and the 

amount that constitutes a healthy debt burden for the consumer? The Consumer 

and Business Lending Initiative and elements of the Homeowner Affordability 

and Stability Plan are designed to restart consumer purchases of homes and 

automobiles, but the success of these programs depends on the ability of 

consumers to absorb more debt. Has Treasury developed any data to determine 

whether consumers can shoulder the additional debt to power these initiatives? 

In order to advance our understanding of Treasury’s strategic plan, I request that, in 

addition to providing the Panel with written answers by March 20, you share the core of those

answers in a Panel hearing on Financial Stability Program strategy on March 12 or March 19, 

2009. 

The Panel looks forward to working with you in its oversight capacity as you address the 

economic crisis. If we can be of any assistance, please do not hesitate to contact me or have a 

member of your staff contact the Panel’s Executive Director, Naomi Baum, at 

XXXXXXXXXXXXXX or XXXXXXXXXX.

Sincerely,

Elizabeth Warren

Chair 

Congressional Oversight Panel

cc: Sen. John E. Sununu

cc: Rep. Jeb Hensarling 

cc: Mr. Richard H. Neiman

cc: Mr. Damon A. Silvers 
148

APPENDIX VIII: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL 

CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. 

TIMOTHY GEITHNER, DATED JANUARY 28, 2009
Congressional Oversight Panel

732 North Capitol Street, NW

Rooms C-320 and C-617

Mailstop: COP

Washington, DC 20401

January 28, 2009

Mr. Timothy F. Geithner

Secretary of the Treasury

U. S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Dear Secretary Geithner:

Congratulations on your successful confirmation as Treasury Secretary. I am writing as 

Chair of the Congressional Oversight Panel to affirm the Panel’s commitment to working with 

you as we carry out the duties assigned to us by Congress in Section 125 of the Emergency 

Economic Stabilization Act of 2008, Public Law 110-343. 

In your opening statement to the Senate Finance Committee during your confirmation 

hearing on January 21, 2009, you committed to ensuring that Troubled Asset Relief Program 

(TARP) funding be allocated “with tough conditions to protect the taxpayer and the necessary 

transparency to allow the American people to see how and where their money is being spent and 

the results those investments are delivering.” The Panel was encouraged by this statement and by 

your emphasis on transparency and accountability in your answers to the written follow-up 

questions you received from the Finance Committee after the hearing. Many of your proposed 

changes to TARP reflect the concerns we have expressed in both of our oversight reports. 

In our first oversight report, we sent your predecessor ten questions consisting of fortysix sub-questions, seeking more information on behalf of the American public on Treasury’s 

strategy, the selection process for TARP recipients, the uses to which this funding is being put, 

Treasury’s plan to help families through this crisis, and any metrics Treasury may have as 

evidence of TARP’s effectiveness. Your predecessor replied, but twenty-six of those subquestions had no response. Among the nineteen remaining sub-questions, some open questions 

remain as well. 

Our second report addressed your predecessor’s response to our original questions, and 

identified four key areas of critical concern for Treasury to implement TARP in accordance with 

the will of Congress. We focus particularly on: 1) more bank accountability for the use of funds, 

2) increased transparency, 3) a plan for foreclosure mitigation, and 4) the articulation of a clear 

overall strategy. 

While we understand that this is a time of transition for your department, economic 

events are unfolding rapidly. We ask that you address these key areas of concern by Wednesday, 
Mr. Timothy F. Geithner

January 28, 2009

Page 2

February 18, 2009. We also urge you to keep the American public informed on the uses and 

effects of TARP money and the steps being taken to safeguard the taxpayers’ investments in 

financial institutions. 

We look forward to working with you to meet the challenges posed by this crisis. If I can 

be of any assistance, please do not hesitate to contact me or have a member of your staff contact 

the Panel’s Executive Director, Naomi Baum, at ndkdkdkddkkkdkdkdkdv or (2dddjdjdj11ddd).

Sincerely,

Elizabeth Warren

Chair 

Congressional Oversight Panel

cc: Rep. Jeb Hensarling 

Sen. John E. Sununu

Mr. Richard H. Neiman

Mr. Damon A. Silvers