Costs of Government Interventions in Response to the Financial Crisis: A R

"In August 2007, asset-backed securities (ABS), particularly those backed by subprime mortgages, suddenly became illiquid and fell sharply in value as an unprecedented housing boom turned into a housing bust. Losses on the many ABS held by financial firms depleted their capital. Uncertainty about future losses on illiquid and complex assets led to firms having reduced access to private liquidity, sometimes catastrophically. In September 2008, the financial crisis reached panic proportions, with some large financial firms failing or needing government assistance to prevent their failure.

Initially, the government approach was largely ad hoc, addressing the problems at individual institutions on a case-by-case basis. The panic in September 2008 convinced policy makers that a system-wide approach was needed, and Congress created the Troubled Asset Relief Program (TARP) in October 2008. In addition to TARP, the Treasury, Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC) implemented broad lending and guarantee programs. Because the crisis had many causes and symptoms, the response tackled a number of disparate problems and can be broadly categorized into programs that (1) increased financial institutions’ liquidity; (2) provided capital directly to financial institutions for them to recover from asset write-offs; (3) purchased illiquid assets from financial institutions to restore confidence in their balance sheets and thereby their continued solvency; (4) intervened in specific financial markets that had ceased to function smoothly; and (5) used public funds to prevent the failure of troubled institutions that were deemed systemically important, popularly referred to as “too big to fail.”.."
Financial crisis

Regulatory Reform 10 Years After the Financial Crisis: Systemic Risk Regulation of Non-Bank Financial Institutions

"When large, interconnected financial institutions become distressed, policymakers have historically faced a choice between (1) a taxpayer-funded bailout, and (2) the destabilization of the financial system—a dilemma that commentators have labeled the “too-big-to-fail” (TBTF) problem. The 2007-2009 financial crisis highlighted the significance of the TBTF problem. During the crisis, a number of large financial institutions experienced severe distress, and the federal government committed hundreds of billions of dollars in an effort to rescue the financial system. According to some commentators, the crisis underscored the inadequacy of existing prudential regulation of large financial institutions, and of the bankruptcy system for resolving the failure of such institutions.

In response to the crisis, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010. Titles I and II of Dodd-Frank are specifically directed at minimizing the systemic risk created by TBTF financial institutions. In order to minimize the risks that large financial institutions will fail, Title I of Dodd-Frank establishes an enhanced prudential regulatory regime for certain large bank holding companies and non-bank financial companies. In order to “resolve” (i.e., reorganize or liquidate) systemically important financial institutions, Title II establishes a new resolution regime available for such institutions outside of the Bankruptcy Code.."
Regulotory reform

Systemically Important or “Too Big to Fail” Financial Institutions

"Although “too big to fail” (TBTF) has been a long-standing policy issue, it was highlighted by the financial crisis, when the government intervened to prevent the near-collapse of several large financial firms in 2008. Financial firms are said to be TBTF when policymakers judge that their failure would cause unacceptable disruptions to the overall financial system. They can be TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail create moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm’s riskiness because they are shielded from the negative consequences of those risks. If so, TBTF firms could have a funding advantage compared with other banks, which some call an implicit subsidy..."
"Too big to fail"

Financial Crisis Five Years Later

The U.S. Department of the Treasury takes a look at the financial crisis after 5 years.
The Financial Crisis

The Effects of the Great Recession on Central Bank Doctrine and Practice

"The financial crisis of 2008 and 2009, together with the associated deep recession, was a historic event--historic in the sense that its severity and economic consequences were enormous, but also in the sense that, as the papers at this conference document, the crisis seems certain to have profound and long-lasting effects on our economy, our society, and our politics. More subtle, but of possibly great importance in the long run, will be the effects of the crisis on intellectual frameworks, including the ways in which economists analyze macroeconomic and financial phenomena..."

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
"Concluding a two-year bipartisan investigation, Senator Carl Levin, D-Mich., and Senator Tom Coburn M.D., R-Okla., Chairman and Ranking Republican on the Senate Permanent Subcommittee on Investigations, today released a 635-page final report on their inquiry into key causes of the financial crisis. The report catalogs conflicts of interest, heedless risk-taking and failures of federal oversight that helped push the country into the deepest recession since the Great Depression.

“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets,” said Levin. “High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets. Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them. Rampant conflicts of interest are the threads that run through every chapter of this sordid story.”..."
Read the full report.

Financial Crisis Inquiry Commission Report
"...Conclusions
How did it come to pass that in 2008 our nation was forced to choose between two stark and painful alternatives — either risk the collapse of our financial system and economy, or commit trillions of taxpayer dollars to rescue major corporations and our financial markets, as millions of Americans still lost their jobs, their savings, and their homes?

The Commission concluded that this crisis was avoidable. It found widespread failures in financial regulation; dramatic breakdowns in corporate governance; excessive borrowing and risk-taking by households and Wall Street; policy makers who were ill prepared for the crisis; and systemic breaches in accountability and ethics at all levels. Here we present what we found so readers can reach their own conclusions, even as the comprehensive historical record of this crisis continues to be written..."
View full report

The European Union’s Response to the 2007-2009 Financial Crisis
"The purpose of this report is to assess the response of the European Union (EU) to the 2007-2009
financial crisis in terms of the financial regulatory changes the EU has made or is planning to
make. The financial crisis began in the United States during the second half of 2006 with a sharp
increase in U.S. bank losses due to subprime mortgage foreclosures. Because the U.S. and EU
banks were using a similar business model, the EU banks experienced similar distressed financial
conditions that U.S. banks faced. Large banks on both sides of the Atlantic found themselves
severely undercapitalized and holding insufficient liquidity. However, because in the European
Union financial regulations are enforced at the European level as well as the member country
level, finding and implementing effective remedies for the causes of the financial crisis have been
slower and different than the United States..."

U.S. Fiscal Policy after the Financial Crisis and Recession.
Presentation to the International Monetary Fiscal Forum by Douglass W, Elmendorf, CBO, Director, April 23, 2010.

The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century?
"Studying the experience of countries that have experienced great depressions during the
twentieth century teaches us that massive public interventions in the economy to maintain
employment and investment during a financial crisis can, if they distort incentives enough, lead
to a great depression."

Causes of the Financial Crisis
"The current financial crisis began in August 2007, when financial stability replaced inflation as the Federal Reserve’s chief concern. The roots of the crisis go back much further, and there are various views on the fundamental causes.

It is generally accepted that credit standards in U.S. mortgage lending were relaxed in the early 2000s, and that rising rates of delinquency and foreclosures delivered a sharp shock to a range of U.S. financial institutions. Beyond that point of agreement, however, there are many questions that will be debated by policymakers and academics for decades...

While some may insist that there is a single cause, and thus a simple remedy, the sheer number of causal factors that have been identified tends to suggest that the current financial situation is not yet fully understood in its full complexity. This report consists of a table that summarizes very briefly some of the arguments for particular causes, presents equally brief rejoinders, and includes a reference or two for further reading. It will be updated as required by market developments."

U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring
"...This report reviews the U.S. automotive industry at present, aspects of the
industry’s financial situation, and relief options. It includes an analysis of the
current situation in the U.S. automotive market, including efforts to address problems of long-term competitiveness and the impact of the industry on the broader U.S. economy. It focuses on financial issues, including credit questions, and legal and financial aspects of government-offered loans or loan guarantees. This further
includes consideration of legacy issues, specifically pension and health care
responsibilities of the Detroit 3. It also reviews potential solutions to the financial crisis, including options of government receivership and participation management, and various forms of bankruptcy. Finally, the report reviews stipulations that Congress might impose on auto manufacturers as conditions of providing assistance."

Auto Industry Financing and Restructuring Act.
"The purposes of this Act are—

(1) to immediately provide authority and facilities to restore liquidity and stability to the domestic 3 automobile industry in the United States; and
(2) to ensure that such authority and such facilities are used in a manner that—
(A)results in a viable and competitive domestic automobile industry that minimizes adverse effects on the environment;
(B) enhances the ability and the capacity of the domestic automobile industry to pursue the timely and aggressive production of energy efficient advanced technology vehicles;
(C) preserves and promotes the jobs of American workers employed directly by the
domestic automobile industry and in related industries;
(D) safeguards the ability of the domestic automobile industry to provide retirement and health care benefits for the industry’s retirees and their dependents; and
(E) stimulates manufacturing and sales of automobiles produced by automobile manufac
turers in the United States.

The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy
"...The process for coping with the crisis by countries across the globe has been
manifest in four basic phases. The first has been intervention to contain the
contagion and restore confidence in the system. This has required extraordinary
measures both in scope, cost, and extent of government reach. The second has been
coping with the secondary effects of the crisis, particularly the slowdown in
economic activity and flight of capital from countries in emerging markets and
elsewhere who have been affected by the crisis. The third phase of this process is to
make changes in the financial system to reduce risk and prevent future crises. In
order to give these proposals political backing, world leaders have called for
international meetings to address changes in policy, regulations, oversight, and
enforcement. Some are characterizing these meetings as Bretton Woods II. On
November 15, 2008, a G-20 leaders’ summit recommended several measures to be
implemented by participating countries by March 31, 2009. The fourth phase of the
process is dealing with political and social effects of the financial turmoil."

The Global Financial Crisis: The Role of the International Monetary Fund (IMF)
"This report discusses two potential roles the International Monetary Fund (IMF)
may have in helping to resolve the current global financial crisis: (1) immediate crisis control through balance of payments lending to emerging market and less-developed countries and (2) increased surveillance of the global economy through better coordination with the international financial regulatory agencies. This report will be updated as events warrant."

EconomicRecovery.gov
A new resource from the U.S. Department of Commerce designed to help the "American people to find help to keep their homes, find jobs and protect their savings." Provides links to information at the White House, Treasury Department, Commerce Department, Agriculture Department, Labor Department, Department of Housing and Urban Development, Small Business Administration, and the Federal Deposit Insurance Corporation.

Auction Basics: Background for Assessing Proposed Treasury Purchases of Mortgage-
Backed Securities
"Stabilization Act (EESA; H.R. 1424, P.L. 110-343), enacted on October 3, 2008,
authorizes purchases of “troubled assets.” The act passed the Senate on October 1,
2008, passed the House on October 3, 2008, and was signed into law the same day.

The Administration proposed using reverse Dutch auctions to purchase troubled
assets — primarily mortgage-related securities from financial institutions. In reverse Dutch auctions, a buyer purchases multiple objects from private parties at a price set by the last accepted bid. The government has used reverse auctions since the Revolutionary War. Designing efficient reverse Dutch auctions may present some
tradeoffs between enhancing competition among bidders and overpaying for assets
relative to their quality. Careful auction design, however, can help minimize these
problems.

Auctions are especially useful for selling assets whose value to potential owners
is unknown to the seller. Reverse auctions are useful when a buyer does not know
what value sellers place on assets. Auction results could clarify the market value of
troubled assets. The price discovery properties of auctions could stimulate trading
by reducing private traders’ uncertainty about the value of troubled assets..."

Fact Sheet: Plan To Stabilize Financial System Is Limited In Size, Scope, And Duration
"Today, President Bush visited the United States Chamber of Commerce and discussed the actions that the Federal Government has taken in response to the financial crisis. The President explained that the government took swift action to protect the financial security of the American people. One important element, the equity purchase program, is designed with strong protections to ensure the government's involvement is limited in size, limited in scope, and limited in duration:

* The government's involvement is limited in size. The government's investment is capped for any individual firm that chooses to participate in this voluntary program, so that private investors retain control.
* The government's involvement is limited in scope. The government will not exercise control over any private firm. The shares owned by the government will have voting rights that can be used only to protect the taxpayer's investment – not to direct the firm's operations.
* The government's involvement is limited in duration. This program includes provisions to encourage banks to buy back their shares from the government when the markets stabilize and they can raise money from private investors..."

Hearing on Causes and Effects of the Lehman Brothers Bankruptcy, Committee on Oversight and Government Reform
"The Committee held a hearing to examine the regulatory mistakes and financial excesses that led to the bankruptcy filing by Lehman Brothers. The hearing was held at 10:00 a.m. on October 6, 2008, in Rayburn House Office Building room 2154."

Examining the Causes of the Credit Crisis of 2008, Minority Staff Analysis[Republicans]
"In the midst of the most serious financial crisis in a generation, some claim that deregulation is entirely to blame. This is simply not true and more importantly serves to grossly oversimplify a problem whose roots run deep and involve myriad actors and issues. The simple truth is that many share the blame, and pointing to just one person or organization does a disservice to the American people.

In a time of crisis, the American people cannot afford the same old partisan finger pointing; they need and deserve real, non-partisan oversight. We need a series of hearings that will focus on the root causes and how we can fix a system in order to avoid financial meltdowns in the future. This minority staff analysis attempts to objectively explore the causes of the financial crisis we are in and how companies like Lehman Brothers and AIG contributed to this crisis..."