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CONGRESSIONAL OVERSIGHT PANEL

AUGUST OVERSIGHT REPORT *

THE GLOBAL CONTEXT AND INTERNATIONAL EFFECTS OF THE TARP

AUGUST 12, 2010.—Ordered to be printed

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

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CONGRESSIONAL OVERSIGHT PANEL AUGUST OVERSIGHT REPORT

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1

CONGRESSIONAL OVERSIGHT PANEL

AUGUST OVERSIGHT REPORT *

THE GLOBAL CONTEXT AND INTERNATIONAL EFFECTS OF THE TARP

AUGUST 12, 2010.—Ordered to be printed

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

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:

2010

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* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
Stabilization Act of 2008, Pub. L. No. 110–343

CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
ELIZABETH WARREN, Chair
PAUL S. ATKINS
RICHARD H. NEIMAN
DAMON SILVERS

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J. MARK MCWATTERS

(II)

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CONTENTS
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Executive Summary .................................................................................................

(III)

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AUGUST OVERSIGHT REPORT

AUGUST 12, 2010.—Ordered to be printed

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EXECUTIVE SUMMARY

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2
to funding in dollar-denominated markets. When short-term lenders began to question the ability of banks to repay their obligations, markets froze, and the international financial system verged
on chaos.
Faced with the possible collapse of their most important financial
institutions, many national governments intervened. One of the
main components of the U.S. response was the $700 billion Troubled Assets Relief Program (TARP), which pumped capital into financial institutions, guaranteed billions of dollars in debt and troubled assets, and directly purchased assets. The U.S. Treasury and
Federal Reserve offered further support by allowing banks to borrow cheaply from the government and by guaranteeing selected
pools of assets. Other nations’ interventions used the same basic
set of policy tools, but with a key difference: While the United
States attempted to stabilize the system by flooding money into as
many banks as possible—including those that had significant overseas operations—most other nations targeted their efforts more
narrowly toward institutions that in many cases had no major U.S.
operations. As a result, it appears likely that America’s financial
rescue had a much greater impact internationally than other nations’ programs had on the United States. This outcome was likely
inevitable given the structure of the TARP, but if the U.S. government had gathered more information about which countries’ institutions would most benefit from some of its actions, it might have
been able to ask those countries to share the pain of rescue. For
example, banks in France and Germany were among the greatest
beneficiaries of AIG’s rescue, yet the U.S. government bore the entire $70 billion risk of the AIG capital injection program. The U.S.
share of this single rescue exceeded the size of France’s entire $35
billion capital injection program and was nearly half the size of
Germany’s $133 billion program.
Even at this late date, it is difficult to assess the precise international impact of the TARP or other U.S. rescue programs because Treasury gathered very little data on how TARP funds
flowed overseas. As a result, neither students of the current crisis
nor those dealing with future rescue efforts will have access to
much of the information that would help them make well-informed
decisions. In the interests of transparency and completeness, and
to help inform regulators’ actions in a world that is likely to become ever more financially integrated, the Panel strongly urges
Treasury to start now to report more data about how TARP and
other rescue funds flowed internationally and to document the impact that the U.S. rescue had overseas. Going forward, Treasury
should create and maintain a database of this information and
should urge foreign regulators and multinational organizations to
collect and report similar data.
The crisis also underscored the fact that the international community’s formal mechanisms to resolve potential financial crises
are very limited. Even though the TARP legislation required Treasury to coordinate its programs with similar efforts by foreign governments, the global response to the financial crisis unfolded on an
ad hoc, informal, country-by-country basis. Each individual government made its own decisions based on its evaluation of what was
best for its own banking sector and for its own domestic economy.
Even on the occasions when several governments worked together

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to rescue specific ailing institutions, as in the rescues of European
banks Dexia and Fortis, national interests often came to the fore.
These ad hoc actions ultimately restored a measure of stability to
the international system, but they underscored the fact that the
internationalization of the financial system has outpaced the ability of national regulators to respond to global crises.
In particular, the crisis revealed the need for an international
plan to handle the collapse of major, globally significant financial
institutions. A cross-border resolution regime could establish rules
that would permit the orderly resolution of large international institutions, while also encouraging contingency planning and the development of resolution and recovery plans. Such a regime could
help to avoid the chaos that followed the Lehman bankruptcy, in
which foreign claimants struggled to secure priority in the bankruptcy process, and the struggles that preceded the AIG rescue, in
which the uncertain effect of bankruptcy on international contracts
put the U.S. government under enormous pressure to support the
company. Additionally, the development of international regulatory
regimes could help to discourage regulatory arbitrage, instead encouraging individual countries to compete in a ‘‘race to the top’’ by
adopting more effective regimes at the national level. Such regimes
would also provide a plan of action in the event that a financial crisis hit an internationally significant institution in a country that
was too small to bear the cost of a bailout. In the most recent crisis, the Netherlands’ rescue efforts totaled 39 percent of its GDP,
and Spain’s totaled 24 percent, raising the specter that a future crisis could swamp the ability of smaller nations with large banking
sectors to respond in absence of an international regime.
Moving forward, it is essential for the international community
to gather information about the international financial system, to
identify vulnerabilities, and to plan for emergency responses to a
range of potential crises. The Panel recommends that U.S. regulators encourage regular crisis planning and ‘‘war gaming’’ for the
international financial system. This recommendation complements
the Panel’s repeated recommendations that Treasury should engage in greater crisis planning and stress testing for domestic
banks.
Financial crises have occurred many times in the past and will
undoubtedly occur again in the future. Failure to plan ahead will
only undermine efforts to safeguard the financial system. Careful
policymakers would put plans in place before the next crisis, rather
than responding on an ad hoc basis at the peak of the storm.

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SECTION ONE:
A. Overview
The financial crisis that began in 2007 threw into relief two interesting facts about the international financial system. The first
is well-known: the international financial system is integrated to
the extent that in normal circumstances a bank’s national origin is
irrelevant to the people doing business with it. One of the consequences of some aspects of international integration, as discussed
below, is that a crisis in one part of the system rapidly spreads
across national boundaries. When such a crisis occurs, though, another fact becomes clear: in a crisis, a bank’s national origin matters very much indeed.
Although most countries followed one or more of the same general approaches described in this report, and although the governments affected by the crisis did coordinate effectively, responses to
the crisis have tended to be ad hoc and country-specific. Thus, although many institutions operate across national borders and are
sometimes not identified with their home countries, at the time of
crisis their national origins became more evident, and global expectations are that institutions will be the responsibility of their home
countries.
This report examines the international aspects of the rescue of
the financial system. In the United States, the Troubled Asset Relief Program (TARP) formed a large part of a coordinated government effort by various U.S. government agencies including the Federal Reserve Board, the FDIC, and Treasury. The report focuses on:
• To what extent the TARP and related efforts in the United
States had international implications; and
• To what extent the programs instituted by other countries
had repercussions in the United States or on U.S. institutions.
The report also examines the degree to which the TARP and related U.S. financial rescue efforts were coordinated with foreign
governments and central banks. Section 112 of the Emergency Economic Stabilization Act of 2008 (EESA) 1 requires the Secretary of
the Treasury to coordinate with the financial authorities and central banks of foreign governments to establish TARP-like programs
in other countries and permits the Secretary to purchase troubled
assets held by foreign financial authorities or banks. The Panel has
not previously analyzed Treasury’s performance, and the related
performance of the Federal Reserve Board in this area, but the
topic is clearly part of the Panel’s mandate. It implicates the use
of the Secretary’s authority under EESA, the impact of Treasury’s
actions on the financial markets, the TARP’s costs and benefits for
the taxpayer, and transparency on the part of Treasury.
The report builds on the Panel’s previous work, including its
April 2009 report assessing Treasury’s TARP strategy in light of
historical approaches and the crisis and responses to the crisis in
Europe.2
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1 12

U.S.C. § 5222.
Oversight Panel, April Oversight Report: Assessing Treasury’s Strategy: Six
Months of TARP (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-040709-report.pdf) (hereinafter ‘‘April Oversight Report’’).
2 Congressional

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B. Financial Integration and the Crisis

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1. Globalization Prior to the Crisis
The increasing interconnectedness of capital markets, the significant U.S. operations of foreign firms, and the rising predominance
of large, global U.S.-based institutions would eventually help elevate the crisis that began in 2007 from one involving problematic
subprime asset exposures at select institutions to one that provoked broader, systemic market fears of a financial and economic
collapse. The pre-crisis organization of the international financial
system was the path through which contagion spread; it also provided the veins into which rescue funds could be injected. This system was sprawling and not easily cordoned off by country.
Numerous factors contributed to financial globalization over the
past decade: increased liberalization of home country regulations,
the appeal of geographic risk diversification, a growing stable of
core multinational corporate clients, and rapidly developing capital
markets in attractive, higher growth, emerging market economies.3
The U.S. banking sector is influenced by foreign markets in
many ways, including: direct equity exposure to foreign investors,
loans to foreign entities, deposits and other funding from overseas
investors (including the interbank lending market), and credit risk
transfer instruments (such as credit default swaps or CDSs) and
other customized over-the-counter (OTC) contracts written on assets located in another country or entered into with a foreign
counterparty. Other forms of integration are more regulatory in nature, such as increased uniformity in accounting and regulatory
capital requirements.4 Markets and regulators also depend on
internationally recognized credit rating agencies for verification of
creditworthiness. Finally, sovereign debt allows governments to
raise funds, exposing investors (including banks) to interest rate,
currency, fiscal and political risks in various regions.5
The rising interconnectedness of global financial institutions and,
ultimately, economies, is illustrated by a growing correlation between equity market returns in the United States and those in the
rest of the world, particularly over the past decade (as shown in
Figure 1 below). This trend may indicate that geographic diversification is a less effective risk management tool than it was in the
past.

3 International Accounting Standards Board, Who We Are and What We Do (July 2010) (online
at
www.iasb.org/NR/rdonlyres/F9EC8205-E883-4A53-9972-AD95BD28E0B5/0/
WhoWeAreJULY2010.pdf) (hereinafter ‘‘IASB Background’’); Bank for International Settlements, The BIS in Profile (June 2010) (online at www.bis.org/about/profile.pdf).
4 IASB Background, supra note 3.
5 Peter B. Kenen, The Benefits and Risks of Financial Globalization, Cato Journal, Vol. 27,
No. 2, at 181–183 (Spring/Summer 2007) (online at www.cfr.org/content/publications/attachments/kenen.pdf); Matti Keloharju and Mervi Niskanen, Why Do Firms Raise Foreign Currency
Denominated Debt? Evidence from Finland, European Financial Management, Vol. 7, No. 4 (Dec.
2001).

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FIGURE 1: CORRELATION OF EQUITY MARKET RETURNS, UNITED STATES VS. REST OF
THE WORLD (BY DECADE, 1970s–2000s) 6

6 MSCI Indices. These figures represent the percent change in the market index as compared
to the first stated equity value of each decade. Michael Ehrmann, Marcel Fratzscher, and
Arnaud Mehl, What Has Made the Financial Crisis Truly Global? (May 24, 2009) (online at
www.hkimr.org/view_attachment.asp?type=2&id=329).
7 Nicola Cetorelli and Linda S. Goldberg, Banking Globalization and Monetary Transmission,
Bank for International Settlements CGFS Paper, No. 40, at 92 (June 2008) (online at
www.bis.org/publ/cgfs40.pdf) (hereinafter ‘‘Banking Globalization and Monetary Transmission’’).
8 See
Federal Deposit Insurance Corporation, FDIC Institution Directory (online at
www2.fdic.gov/idasp/index.asp) (accessed Aug. 10, 2010); Federal Deposit Insurance Corporation,
FDIC Statistics on Banking (online at www2.fdic.gov/SDI/SOB) (accessed Aug. 10, 2010). U.S.
banks with over $100 billion in total assets in 2006 accounted for 49.8 percent of total bank
assets. According to the FDIC, 14 institutions controlled $5.91 trillion of the $11.86 trillion in
total bank assets in 2006. For concentration data on the European market, see European Commission, European Financial Integration Report 2007, at 64 (online at ec.europa.eu/internal_market/finances/docs/cross-sector/fin-integration/efir_report_2007_en.pdf).

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The proportion of U.S. banking assets housed within globally oriented institutions has grown steadily over the years. U.S. banks
with significant foreign operations rose from just over 50 percent
of total U.S. bank assets in the early 1990s to nearly 70 percent
on the eve of the financial crisis7 at which time the five largest
U.S. firms (all global in nature), accounted for approximately 36
percent of total bank assets.8

7
FIGURE 2: SHARE OF TOTAL U.S. BANK ASSETS IN GLOBALLY ORIENTED U.S. BANKS 9

Figure 3 below outlines international contributions to revenue at
the leading U.S. and international banks in 2005 and 2006. On the
eve of the crisis in 2006, eight of the largest global banking institutions headquartered in the United States generated $110 billion in
net revenue from non-U.S. operations, accounting for 28 percent of
these banks’ total net revenues. For many of the larger, more systemically important institutions, though, overseas operations were
even more significant. For example, overseas revenue contributions
for The Goldman Sachs Group, Inc. (Goldman Sachs) (46 percent),
Citigroup Inc. (Citigroup) (44 percent), Lehman Brothers Holdings
Inc. (Lehman) (37 percent), Merrill Lynch (36 percent), and Morgan
Stanley (37 percent) were materially higher. (These figures exclude
non-bank entities such as hedge funds and insurance companies.
Insurer American International Group (AIG) generated approximately half of its 2004 to 2006 net revenue from overseas operations).10
A similar sample of eight leading European and Canadian banks
shows that $67 billion, or approximately 34 percent of aggregate
net revenue, came from the United States or all of North America,
but outside their home market, in 2006. As with the U.S. banks,
contributions from global, systemically important capital markets
institutions were generally higher, led by Credit Suisse Group AG
(Credit Suisse) (37 percent), HSBC Holdings plc (HSBC) (33 percent), UBS AG (UBS) (32 percent), and Deutsche Bank AG (Deutsche Bank) (28 percent). Across the U.S. securities industry, foreign-owned broker/dealers account for nearly one-third of U.S. securities revenue. Aggregate 2006 revenue data for the over 5,000
U.S.-operated broker/dealers reveal that 29 percent of this U.S. revenue is reported by foreign-owned broker/dealer subsidiaries in the
Globalization and Monetary Transmission, supra note 7, at 84.
Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on
Markets, and the Government’s Exit Strategy, at 20–21 (June 10, 2010) (online at cop.senate.gov/
documents/cop-061010-report.pdf) (hereinafter ‘‘June Oversight Report’’).
10 See

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9 Banking

8
U.S. (including Deutsche Bank, Credit Suisse, UBS, and many others), up from a 23 percent contribution in 2001.11
FIGURE 3: INTERNATIONAL NET REVENUE CONTRIBUTIONS, 2005–2006 12
Non-U.S. Revenue
(billions of dollars)

U.S. Banks

2005

Non-U.S. Revenue
(Percentage of Total)

2006

2005

2006

Bank of America ............................................................................
Bear Stearns ..................................................................................
Citigroup ........................................................................................
Goldman Sachs ..............................................................................
JPMorgan Chase .............................................................................
Lehman Brothers ............................................................................
Merrill Lynch ..................................................................................
Morgan Stanley ..............................................................................

4.2
0.9
33.4
10.6
11.5
5.5
8.5
8.2

8.2
1.2
38.2
17.3
16.1
6.5
12.0
11.0

7.5
12.5
41.4
42.0
21.4
36.6
33.7
34.7

11.3
13.2
43.6
45.9
26.2
36.8
35.5
37.0

Total ......................................................................................

82.7

110.5

25.1

28.4

U.S./North America
Revenue
(billions of dollars)

Non-U.S. banks

2005

U.S./North America
Revenue
(Percentage of total)

2006

2005

2006

CIBC ...............................................................................................
Credit Suisse ..................................................................................
Deutsche Bank ...............................................................................
HSBC ..............................................................................................
Royal Bank of Canada ...................................................................
Société Générale ............................................................................
TD Bank .........................................................................................
UBS ................................................................................................

1.4
9.5
7.2
21.6
3.8
3.3
2.2
12.3

1.3
10.1
10.5
23.6
4.0
3.5
2.3
12.2

14.0
38.6
24.1
34.5
23.8
13.8
21.9
37.2

12.6
36.8
27.7
33.0
21.8
12.3
19.4
32.2

Total ......................................................................................

61.2

67.3

36.1

34.1

12 Bloomberg

data and company filings. Net Revenue for Deutsche Bank converted from Euros to USD based on average FX rates in 2005
and 2006, respectively. Firms that list net revenue specifically from the United States: Canadian Imperial Bank of Commerce (CIBC), Royal
Bank of Canada, The Toronto-Dominion Bank (TD Bank), and UBS. Firms that list net revenue solely from North America: Credit Suisse, Deutsche Bank, HSBC, and Société Générale.

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U.S. investment banks have long held a commanding position in
European and Asian financial markets, and played a leading role
in modernizing the equity markets in both regions, along with developing a more liquid debt market. The 2006 league table data
(which measure investment bank performance) underscore the commanding market foothold of the top U.S. investment banks—Goldman Sachs, Morgan Stanley, Bank of America/Merrill Lynch,
Citigroup and JPMorgan Chase & Co. (JPMorgan Chase). These
firms accounted for five of the top eight league table slots in equity
capital markets fees and all of the top-five positions in announced
mergers and acquisitions volume in the region.13 In comparison,
the leading European banks penetrated the U.S. market to a lesser
11 Financial Industry Regulatory Authority (FINRA) statistics in response to Panel data request. 458 of the 5,223 FINRA-member broker/dealers in operation for all four quarters of 2006
cited a foreign country of origin or foreign ownership. In the aggregate, these firms reported
$128.8 billion in 2006 revenue from their U.S. operations, 29.2 percent of the $441.6 billion in
revenue reported by FINRA’s entire membership base, including both U.S. and foreign-owned
broker/dealers. This compares to $60.1 billion in revenue from foreign-owned broker/dealers and
$259.9 billion in overall net revenue from both U.S. and non-U.S. owned broker/dealers in the
U.S. market in 2001.
13 Data provided by Dealogic.

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extent by 2006, with their footprints in many cases supplemented
via acquisitions.14

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2. Globalization of the Crisis
The conventional wisdom in the pre-crisis years suggested that
banks that operate across global markets should be more stable,
given their ability to rely on a collection of geographically dispersed
businesses. But the degree of interlinkages within the financial
system and the globalized nature of the housing downturn created
a backdrop that magnified, rather than diluted, the risk to globally
interconnected financial institutions. The most harmful interlinkages were manifested primarily in (a) exposure to the housing crisis, particularly via holdings of U.S. mortgage-backed securities,
and (b) funding mechanisms that relied on the ability of financial
institutions to access overnight inter-bank funding markets, particularly in dollar-denominated markets, in many cases to fund assets linked to U.S. housing securities.15
A recent study by the Board of Governors of the Federal Reserve
System cites the following factors as helping to globalize the crisis:
• ‘‘a generalized run on global financial institutions, given
lack of information as to who actually held toxic assets and
how much;
• the dependence of many financial systems on short-term
funding (both in dollars and in other currencies);
• a vicious cycle of mark-to-market losses driving fire sales
of [asset-backed securities], which in turn triggered further
losses;
• the realization that financial firms around the world were
pursuing similar (flawed) business models and were subject to
similar risks; and
• global swings in risk aversion supported by instantaneous
worldwide communications and a shared business culture.’’ 16
Given that the U.S. subprime crisis—and the global housing
market collapse more broadly—is generally acknowledged as
ground zero for the financial crisis, a review of the mechanisms by
which the residential mortgage crisis was transmitted to global financial institutions is perhaps illustrative. At its core, the increase
in the securitization of mortgage loans broadened the exposure of
the U.S. housing market collapse beyond the traditional relationship of borrowers and lenders, leading to what one study called a
‘‘lengthening of the intermediation chains that increased the complexity and interconnectedness of the financial system, increasing
the potential for disruptions to spread swiftly across markets and
borders.’’ 17 Under this new framework, the old model of mortgage
14 Leading European banks gained a foothold in the U.S. market via an assortment of acquisitions: Credit Suisse acquired Donaldson, Lufkin & Jenrette in 2000 (after buying First Boston
in 1988); Deutsche Bank purchased Bankers Trust in 1998 (which previously bought investment
bank Alex Brown in 1997); and UBS purchased Paine Webber in 2000.
15 Steven B. Kamin and Laurie Pounder DeMarco, How Did a Domestic Housing Slump Turn
into a Global Financial Crisis?, Federal Reserve International Finance Discussion Papers, No.
994 (Jan. 2010) (online at www.federalreserve.gov/pubs/ifdp/2010/994/ifdp994.pdf) (hereinafter
‘‘How Did a Domestic Housing Slump Turn into a Global Financial Crisis?’’).
16 Id. at 6.
17 See International Monetary Fund, Global Financial Stability Report: Navigating the Financial Challenges Ahead, at 87 (Oct. 2009) (online at www.imf.org/External/Pubs/FT/GFSR/2009/
02/pdf/text.pdf) (hereinafter ‘‘IMF Global Financial Stability Report’’).

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10
lending, originating and holding loans on a bank’s balance sheet,
morphed into a new ‘‘originate to distribute’’ model. The economic
incentives for the mortgage originator at the front-end of the transaction chain changed with the securitization and distribution of
mortgage loans to investors. Because the loans’ originators did not
bear all the risk associated with the loans, they had less incentive
to ensure the quality of the loan and the creditworthiness of the
borrower.
FIGURE 4: SIMPLE BANK MORTGAGE LENDING EVOLVES INTO ‘‘RISK DIVERSIFICATION’’
(IMF ILLUSTRATION) 18

18 Chart based on IMF publication. See id. at 93. Definitions of key terms: Asset-backed security (ABS); Collateralized debt obligation (CDO); Collateralized debt obligation-squared (CDO2);
Mortgage-backed security (MBS); Structured investment vehicle (SIV). ‘‘Senior,’’ ‘‘Mezzanine,’’
and ‘‘Equity’’ tranches represent different classes of liabilities. The most junior tranche is equity,
followed by the mezzanine tranche, which are below more senior tranches. As the most junior
in the capital structure, equity tranches are the first to absorb losses on underperforming portfolios.
19 CDO and CDO2 represent securities backed by ABS or MBS, or in the case of CDO2, other
CDOs.
20 IMF Global Financial Stability Report, supra note 17, at 84–88. It should be noted that figures for non-U.S. issuance may be overstated due to the issuance of U.S. debt from non-U.S.
jurisdictions (e.g., Cayman Islands). Carol C. Bertaut et al., Understanding U.S. Cross-Border
Securities Data, Federal Reserve Bulletin (Feb 5. 2009) (online at www.federalreserve.gov/pubs/

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Problems in transparency as the transaction channel lengthened
and product sophistication expanded reinforced the risks in the
housing market. The manner in which these loans were repackaged
into mortgage securities, tranches of which then served as reference entities for a host of other products—including collateralized
debt obligations (CDOs) and CDO-squareds (as outlined below in
Figure 5) 19—not only widely dispersed the exposure to the U.S.
mortgage market but also greatly magnified the underlying risk in
the initial mortgage loans.20 Further, the complexity and opacity of
these products impeded the recognition of the risks they carried.

11
FIGURE 5: CDO & CDO-SQUARED ISSUANCE, 2000–2008 21

bulletin/2006/cross_border_securities.pdf) (hereinafter ‘‘Understanding U.S. Cross-Border Securities Data’’).
21 Understanding U.S. Cross-Border Securities Data, supra note 20.
22 ‘‘The magic of pooling and tranching was that, in the process, the risk distribution became
more benign, while the underlying loans were riskier and riskier, thus providing sought-after
higher returns.’’ See Carmine Di Noia et al., Keep It Simple: Policy Responses to the Financial
Crisis, Center for European Policy Studies Paper, at 21 (Mar. 24, 2009) (online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1368164).
23 See IMF Global Financial Stability Report, supra note 17, at 85.
24 See Franklin Allen, Michael K.F. Chui, and Angela Maddaloni, Financial Systems in Europe, the USA, and Asia, at 505–507, Oxford Review of Economic Policy (Nov. 4, 2004) (online
at finance.wharton.upenn.edu/allenf/download/Vita/finsystemseurope.pdf) (‘‘[T]he European market for mortgage-related products is very small. MBS issuance accounts for around 50 percent
of the overall European securitization market, but still represents a small portion of all funding
supply for mortgages. Despite significant growth rates in issuance recorded over recent years,
the European market for MBS is liquid only in the UK and the Netherlands.’’).
In 2007, issuance of mortgage-related securities in Europe totaled EUR 307 billion, with more
than EUR 246 billion of RMBS and CMBS issued in the United Kingdom, the Netherlands, and
Spain. However, the amount of MBS issuance in Europe is just 21 percent of the total amount
of agency and non-agency MBS issued in the United States in 2007, which was EUR 1,476 billion in the aggregate. European Securitization Forum, ESF Securitisation Data Report: Q1 2008
(June 2008) (online at www.afme.eu/document.aspx?id=2878) (hereinafter ‘‘ESF Securitisation
Data Report: Q1 2008’’).

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As became abundantly clear, the increased sophistication of
mortgage products—backstopped by supportive credit ratings—did
not necessarily dilute the risk from a regional, or much less a global, housing crisis.22 Rather, many banks continued to hold the troubled securities associated with these products, in addition to whole
loans on similar collateral.23
Of course, securitization allowed non-U.S. institutions to gain exposure to the U.S. housing market via an assortment of investment
vehicles. This was not necessarily a two-way street, as non-U.S.
residential mortgage securities markets were comparatively less
developed, and cross-border mortgage lending into these markets
was limited.24 Securitization issuance volumes by geography underscore the predominant role of the U.S. asset-backed securitization
market. From 1999 to 2009, the United States accounted for 80
percent of global securitization volume, with the balance largely
driven by Europe. As outlined in Section C.1.c below, a significant
portion of these U.S. securities, and the CDOs that referenced
them, ultimately wound up on the balance sheets of European in-

12
stitutions, resulting in substantial write-downs during the 2007–
2009 period.
FIGURE 6: SECURITIZATION ISSUANCE BY GEOGRAPHIC REGION, 1999–2009 25
[Billions of USD]

25 Asset-backed securities and mortgage-backed securities originating from each respective region, including public and private placements. The data does not incorporate U.S. agency securities. Data provided by Dealogic.
26 Non-agency securities are private label securities (issued by banks, brokerages and other
vehicles), and lack the support of agency-backed securities issued by the federal government
housing agencies, Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). Securities Industry and Financial Markets Association, SIFMA Research and Statistics (online at www.sifma.org/research/research.aspx?ID=10806)
(accessed Aug. 10, 2010).
27 Includes fixed and adjustable-rate mortgage (ARM) securities. Data provided by J.P. Morgan Research (MBS).

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At the end of 2007, $9.1 trillion in U.S. mortgage-related securities were outstanding. Of this amount, $2.4 trillion were non-agency residential mortgage-backed securities (RMBS), so-called private
label securities as they lacked the guarantee of Fannie Mae or
Freddie Mac, and $872 billion were commercial mortgage-backed
securities (CMBS).26 Of the outstanding non-agency RMBS, $1.5
trillion were subprime mortgage or Alt-A securities, which referenced loans to borrowers with lower credit scores or with respect
to properties with a higher loan-to-value ratio, or were underwritten on the basis of more lax documentation standards than
would be typical for prime borrowers.27 The total U.S. non-agency
housing market was 2.5 times the size of the European RMBS market (see Figure 7 below).
Residential securities exposures are outlined in the table below;
regional loss tallies and specific financial institutions’ losses are detailed in Figures 10 and 11, below.

13
FIGURE 7: RESIDENTIAL MORTGAGE BACKED SECURITIES OUTSTANDING, 2007
[Billions of USD]
U.S. Balance 28

Agency MBS .............................................................................................................................................................
Non-Agency MBS 29 ..................................................................................................................................................
Prime ...............................................................................................................................................................
Alt-A .................................................................................................................................................................
Option ARM ......................................................................................................................................................
Subprime .........................................................................................................................................................

4,188
2,390
581
714
304
790

Total .........................................................................................................................................................................
Europe 30 ..................................................................................................................................................................

6,578
977

28 Data

provided by J.P. Morgan Research (MBS).
fixed-rate and adjustable-rate mortgage (ARMs) securities.
balance converted from euro to dollar based on euro-dollar exchange rate at the end of the fourth quarter 2007. ESF
Securitisation Data Report: QI 2008, supra note 24, at 5.
29 Includes

30 European

One offshoot of globalization, and of the increased importance
and integration of emerging markets, was the higher profile of
state-controlled investment arms, or Sovereign Wealth Funds
(SWFs). SWFs were the first line of defense for many firms during
the initial phase of the crisis: banks sought to plug holes in their
balance sheets in late 2007 and early 2008, and SWFs were able
to provide capital.31 Even near the peak of the crisis in August
2008, a state-owned institution, Korea Development Bank (KDB),
was seen as a potential buyer of Lehman Brothers. After the collapse of Lehman, there was significant speculation that China
International Capital Corp (CICC), a Chinese government investment arm, would take a controlling stake in Morgan Stanley.32
3. Cross-Border Integration Within Financial Institutions

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While overseas operations generally presented attractive returns
to the parent companies of financial institutions, the structure of
these cross-border operations grew increasingly complex in order to
comply with the legal, regulatory, and tax requirements of each
country in which the banks operated. Complex internal procedures
ultimately permitted funds to flow freely across national boundaries even within a specific institution. In addition to operating
across multiple jurisdictions, the operations of the holding companies and their subsidiaries grew increasingly intertwined. These
structures would pose challenges when the system unraveled. As
the International Monetary Fund (IMF) noted, ‘‘legal frameworks
for facilitating cross-border finance in stable periods are typically
31 Between November 2007 and January 2008, SWFs invested approximately $38 billion in
Citigroup, Merrill Lynch, and Morgan Stanley. Citigroup was the major recipient of these capital injections, receiving $7.5 billion from the Abu Dhabi Investment Authority in November
2007 and $12.5 billion from a group of investors including the Government of Singapore Investment Corp. and the Kuwait Investment Authority in January 2008. Merrill Lynch received $5
billion in capital from Singapore’s Temasek Holdings in December 2007 and $6.6 billion from
a group of investors including the Korean Investment Corporation, the Kuwait Investment Authority, and the Mizuho Corporate Bank in January 2008. The China Investment Corporation
invested $5.6 billion in Morgan Stanley in December 2007. U.S. Government Accountability Office, Sovereign Wealth Funds: Publicly Available Data on Sizes and Investments of Some Funds
Are Limited, at 44–45 (Sept. 2008) (GAO–08–946) (online at www.gao.gov/new.items/
d08946.pdf).
32 New York Times, Korean Bank in Talks With Lehman Brothers (Sept. 2, 2008) (online at
www.nytimes.com/2008/09/02/business/worldbusiness/02iht-kdb.15817700.html); Christine Harper, Morgan Stanley Said to Be in Talks With China’s CIC, Bloomberg (Sept. 18, 2008) (online
at www.bloomberg.com/apps/news?pid=newsarchive&sid=aAQouiUZ6004).

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more effective than cross-border resolution arrangements that are
available in times of distress.’’ 33
When the financial crisis hit, and firms with significant operations outside their home countries experienced severe pressure or
failed, there was a widespread assumption that the countries
where they were headquartered would be responsible for any government rescue. Officials in the United States and across the world
faced the difficult and costly task of resolving these highly complex
corporate structures, including accounting for or unwinding internal and external business transactions across multiple jurisdictions.34 Depending on the relative importance and interconnectedness of a global firm’s operations in a particular host country, local
regulators also faced challenges in containing the damage from a
failing affiliate of a foreign-owned firm.35 U.S. and international
regulators faced challenges in assisting these institutions in an effective and orderly fashion, largely because they were unprepared
and ill-equipped to deal with such complex institutions operating
across multiple jurisdictions.36
The crisis revealed that challenges in one area of the firm can
quickly infect the entire organization.37 It is important to note that
a bank’s ability—or the market’s perception of a bank’s ability—to
honor its obligations is of the utmost importance in global finance.
Regulatory capital at the parent level holds the entire institution
together by backstopping the firm’s obligations and financing arrangements across its global operations.38 Thus, if the foreign parent of an institution is in trouble, this will impact the market’s assessment of the creditworthiness of an affiliate located in a different country. Credit ratings will come under pressure. Depositors,
counterparties, and customers will likely begin to flee, further pres33 International Monetary Fund, Resolution of Cross-Border Banks—A Proposed Framework
for Enhanced Coordination, at 8 (June 11, 2010) (online at www.imf.org/external/np/pp/eng/2010/
061110.pdf) (hereinafter ‘‘IMF Proposed Framework for Enhanced Coordination’’).
34 Lehman Brothers is an example of a failed cross-border institution that has been exceedingly difficult to resolve because of its complex structure and its extensive international operations. When Lehman Brothers Holdings filed for bankruptcy, contagion spread throughout the
entire bank because the financial health of Lehman Brothers was inextricably intertwined with
the financial health of the holding company and each of the 2,985 Lehman companies operating
in 50 countries. U.S. and international regulators did not have a comprehensive plan on how
to resolve such a complex institution, so regulators began wind-down proceedings in their respective jurisdictions, including Switzerland, Japan, Singapore, Hong Kong, Germany, Luxembourg, Australia, the Netherlands, and Bermuda. However, the resolution of Lehman has been
neither orderly nor effective because regulators in each country have made little effort to communicate or coordinate their wind-down proceedings. See Bank for International Settlements,
Basel Committee on Banking Supervision, Report and Recommendations of the Cross-border
Bank Resolution Group, at 14–15 (Mar. 2010) (online at www.bis.org/publ/bcbs169.pdf) (hereinafter ‘‘Report and Recommendations of the Cross-border Bank Resolution Group’’). See also
United States Bankruptcy Court, Southern District of New York, Report of Anton R. Valukas,
Examiner,
at
1482–1487
(Mar.
11,
2010)
(online
at
lehmanreport.jenner.com/
VOLUME%204.pdf).
35 See IMF Proposed Framework for Enhanced Coordination, supra note 33, at 8 (‘‘Certain
branches or subsidiaries may, in economic terms, be comparatively insignificant to a group yet
be of critical importance to their host country’s financial system.’’).
36 See Report and Recommendations of the Cross-border Bank Resolution Group, supra note
34, at 4–5, 29. See also Section E.3.b, infra.
37 IMF Proposed Framework for Enhanced Coordination, supra note 33, at 8.
38 ‘‘As [a] result of the interconnectedness of the financial group’s legal entities, weaknesses
in one entity can adversely affect the entire group. In group structures where liquidity is centralized, any sudden and material downgrading of the central entity’s credit ratings or the opening of insolvency proceedings against it would lead to the immediate illiquidity of the other entities in the group. The triggering of cross default or cross guarantee arrangements for funding
purposes as a result of rating downgrades or otherwise may also lead to financial distress in
other parts of the group.’’ IMF Proposed Framework for Enhanced Coordination, supra note 33,
at 8.

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suring the firm and its foreign branches, affiliates or subsidiaries.
As the recent crisis demonstrated, this process is often swift and
brutal.
C. Description of the International Financial Crisis
1. How the Crisis Developed

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a. Timeline of Crisis
The global financial crisis grew out of problems in the U.S.
subprime housing market. Those problems became widely apparent
in the summer of 2007, when two hedge funds from The Bear
Stearns Companies, Inc. (Bear Stearns) with heavy subprime exposure collapsed, and rating agencies began to downgrade scores of
subprime securities.39 Numerous European banks had invested in
U.S subprime securities, and their balance sheets experienced
stress as those investments lost value. In a few instances, those
losses popped into public view in 2007. On August 8, with the market for subprime securities cratering, French bank BNP Paribas
suspended withdrawals from three investment funds that had exposure to subprime loans.40 On August 9, Dutch investment bank
NIBC Bank N.V. (NIBC) announced that it lost Ö137 million ($189
million) 41 in the first half of 2007 on investments with exposure
to subprime loans.42 Also in the summer of 2007, two state-owned
German banks with exposure to U.S. subprime loans, Sachsen
Landesbank (Sachsen LB) and IKB Deutsche Industriebank AG
(IKB), received assistance from other state-owned banks in Germany.43 The emerging problems in the U.S. housing market also
began to affect commercial paper markets, since much of that
paper, issued by banks as a source of short-term funding, was
collateralized by U.S. housing-related securities.44
Amid the U.S.-centered market turmoil, Northern Rock plc
(Northern Rock), a highly leveraged U.K. mortgage lender that
held nearly one-fifth of all U.K. mortgages and relied heavily on
short-term financing,45 was unable by September 2007 to continue
funding its operations. The U.K. government lent an unspecified
amount to Northern Rock and, with a bank run under way, guaranteed its deposits. In February 2008, after Northern Rock’s finan39 See Congressional Oversight Panel, December Oversight Report: Taking Stock: What Has the
Troubled Asset Relief Program Achieved?, at 8–17 (Dec. 9, 2009) (online at cop.senate.gov/
documents/cop-120909-report.pdf) (hereinafter ‘‘December Oversight Report’’).
40 BNP Paribas, Background Information on Suspension and Reopening of ABS Funds in August (2007) (online at media-cms.bnpparibas.com/file/76/1/5761.pdf).
41 Exchanges from foreign currencies into U.S. dollars are noted in parentheticals throughout
this report. All exchanges are calculated using interbank exchange rates in the relevant time
period. Exchange rates are calculated using OANDA Corporation’s historical exchange rate database (online at www.oanda.com/currency/historical-rates). In some cases the abbreviation USD
is used in order to distinguish U.S. dollars from Canadian and Australian dollars.
42 NIBC, NIBC Reports Preliminary 2007 Half Year Results (Aug. 9, 2007) (online at
www.nibc.com/press/pressreleases/financialPress/Pages/pressrelease_1-2007-10.aspx).
43 Europa, State Aid: Commission Launches Probe into State Bail-Outs of IKB and Sachsen
LB (Feb. 27, 2008) (online at europa.eu/rapid/pressReleasesAction.do?reference=IP/08/
314&format=HTML&aged=0&language=EN&guiLanguage=en)
(hereinafter
‘‘Commission
Launches Probe into State Bail-Outs’’).
44 Viral Acharya and Philipp Schnabl, Do Global Banks Spread Global Imbalances? The Case
of Asset-Backed Commercial Paper During the Financial Crisis of 2007–09 (Oct. 15, 2009) (online
at www.imf.org/external/np/res/seminars/2009/arc/pdf/acharya.pdf).
45 Hyun Song Shin, Reflections on Northern Rock: The Bank Run That Heralded the Global
Financial Crisis, Journal of Economic Perspectives, Vol. 23, No. 1, at 101–109 (Winter 2009) (online at pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.101).

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cial condition deteriorated further, the U.K. government nationalized the firm.46 The collapse of Northern Rock presaged what
would become more apparent in 2008 and beyond: not only did the
United States experience a housing bubble, but so did the United
Kingdom, Ireland, Spain, and Denmark,47 among other countries.48
March 2008 brought the collapse of Bear Stearns, which also was
highly leveraged and had considerable exposure to subprime loans.
Because the U.S. government facilitated a private purchase with
government support,49 the immediate global repercussions of Bear
Stearns’ demise were limited. Still, the crisis continued to intensify.
On April 21, 2008, the Bank of England announced a liquidity
scheme under which banks could swap certain mortgage-related securities for UK Treasury bills,50 following the introduction of a
similar program in the United States.51 On July 11, 2008, the Danish National Bank granted an unlimited liquidity facility to
Roskilde Bank, and a private association of nearly all the banks in
Denmark provided a guarantee on losses of DKK 750 million ($158
million) on the liquidity facility, with further losses guaranteed by
the Danish government.52
The tremors that shook global financial markets between August
2007 and August 2008 gave way in September 2008 to an enormously destructive earthquake. The epicenter was the United
States, where the government took Fannie Mae and Freddie Mac
into conservatorship and guaranteed their debts, allowed Lehman
Brothers to enter bankruptcy, and authorized lending of up to $85
billion to prevent the bankruptcy of AIG.53 But the reverberations
were felt around the world, and especially in western Europe,
46 See National Audit Office, Her Majesty’s Treasury: The Nationalization of Northern Rock
(Mar. 20, 2009) (online at www.nao.org.uk/publications/0809/northern_rock.aspx) (hereinafter
‘‘The Nationalization of Northern Rock’’).
47 See Jānis Malzubris, Ireland’s Housing Market: Bubble Trouble, ECFIN Country Focus
(Sept. 26, 2008) (online at ec.europa.eu/economy_finance/publications/publication13187_en.pdf).
See also Danske Bank, Denmark: House Prices Falling (Apr. 24, 2008) (online at
mediaserver.fxstreet.com/Reports/ec9a150d-8773-45c5-988d-d8a08a4fb198/131bf1e5-826d-4d38b23f-c33c11c201bb.pdf).
48 France, Sweden, the Netherlands, and Italy also experienced large increases in housing
prices between 1997 and 2007. Reuven Glick and Kevin J. Lansing, Global Household Leverage,
House Prices, and Consumption, Federal Reserve Bank of San Francisco Economic Letter, No.
2010–01, at 3 (Jan. 11, 2010) (online at www.frbsf.org/publications/economics/letter/2010/el201001.pdf).
49 The Federal Reserve Bank of New York lent approximately $28.8 billion to a newly established, government-backed limited liability company, Maiden Lane LLC, to buy from Bear
Stearns certain mortgage-related securities and loans, and associated hedges. The purpose of
this transaction was to facilitate the merger of Bear Stearns with JPMorgan Chase. Federal Reserve Bank of New York, Maiden Lane Transactions (online at www.ny.frb.org/markets/
maidenlane.html) (accessed Aug. 10, 2010).
50 This scheme allowed banks to swap illiquid assets—generally residential mortgage-related
securities that were rated AAA and not backed by U.S. mortgages—for UK Treasury bills in
exchange for a fee, and for a period of up to three years. Bank of England, Special Liquidity
Scheme: Information (Apr. 21, 2008) (online at www.bankofengland.co.uk/markets/sls/slsinformation.pdf).
51 The Federal Reserve established the Term Securities Lending Facility in March 2008. See
Board of Governors of the Federal Reserve System, Term Securities Lending Facility (Feb. 5,
2010) (online at www.federalreserve.gov/monetarypolicy/tslf.htm).
52 On August 24, the Danish National Bank and the private association of banks began the
liquidation of Roskilde Bank. See Letter from Neelie Kroes, commissioner for competition policy,
European Commission, Aid for Liquidation of Roskilde Bank (Nov. 5, 2008) (online at
ec.europa.eu/competition/state_aid/register/ii/doc/NN-39-2008-WLWL-en–05.11.2008.pdf).
53 The U.S. government took a controlling equity stake in Fannie Mae, Freddie Mac, and AIG,
and it made changes in the management of all three firms. While these steps are characteristics
of nationalizations, there is no consensus on whether the rescues of these three firms should
be counted as nationalizations. For a discussion of nationalizations abroad, see Section C.2.b,
infra. For a more detailed description of the key events in the financial crisis from a U.S. perspective, see the Panel’s December 2009 report. December Oversight Report, supra note 39.

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17
where the largest banks are often more highly integrated with the
rest of the global financial system than they are in other parts of
the world.54
Fears of cascading failures across the financial landscape were
stoked by not only legacy toxic asset and counterparty exposures,
but also capitalization levels at major European institutions that
offered little cushion to absorb market fears of more pronounced
losses. Market and counterparty confidence collapsed, necessitating
increased intervention by government entities across the globe to
battle what had now become an international financial crisis. Interbank lending rates, which measure risk aversion and fears of bank
insolvency, illustrated the viral nature of what began as a relatively localized U.S. subprime crisis. This played out across the
European and U.S. interbank markets, creating a credit squeeze,
given the dependence on short-term wholesale funding on both
sides of the Atlantic.
The widening in spreads shown in Figure 8 mirrors the key
phases of the financial crisis, from the onset of the crisis in late
summer 2007 to the collapse of Bear Stearns in March 2008, and
later the bankruptcy of Lehman Brothers in September 2008, heralding the beginning of the most pronounced period of market
stress.
FIGURE 8: LIBOR OIS SPREAD THROUGHOUT THE CRISIS 55

54 See, e.g., Figure 3, supra, which shows that Credit Suisse, Deutsche Bank, HSBC, and UBS
derived between 27.7 percent and 36.8 percent of their 2006 revenue from the United States.
55 The sovereign debt crisis in Europe has caused spreads to increase in recent months. Data
provided by SNL financial.

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Amid the market panic in September 2008, developed countries
responded rapidly. The United States and European nations undertook numerous similar actions to stabilize financial markets. These
actions included instituting recapitalization programs, nationalizing financial institutions, increasing deposit insurance, guaranteeing assets generally, purchasing toxic assets, and relaxing ac-

18

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counting standards. The United States took some steps in September 2008,56 but it also quickly began coordinating with other
countries. On September 18, three days after Lehman Brothers
filed for bankruptcy, the U.S. Securities and Exchange Commission
(SEC) and the U.K.’s Financial Services Authority orchestrated a
temporary ban on short selling financial companies.57 Over the
course of the next month, the Federal Reserve also coordinated
with other central banks to expand pre-existing currency swap
agreements and cut interest rates by 0.5 percentage points.58 In
late September, the U.S. government continued to respond on an
ad hoc basis,59 and several of its counterparts across Europe organized rescues of specific banks.60 Iceland took the most extreme
steps, nationalizing three of its largest banks, which were highly
leveraged and unable to roll over their sources of funding.61
On October 4, the day after the U.S. government’s enactment of
EESA, the leaders of Germany, France, the United Kingdom and
Italy met to coordinate their responses to the crisis, and in the following days, Germany, France, and the United Kingdom all announced their own comprehensive responses. On October 8, the
U.K. government announced the establishment of a scheme to
guarantee bank debt. It also rolled out a plan to provide enough
capital to eight large financial institutions so that each could raise
its Tier 1 capital by £25 billion ($44 billion),62 though only Lloyds
and Royal Bank of Scotland (RBS) took the funds. On October 13,
the French government announced a Ö320 billion ($429 billion)
fund to provide loans to financial institutions; among the French
banks that eventually got assistance were BNP Paribas and Société
Générale. The same day, the German government announced a Ö70
billion ($94 billion) fund for recapitalizing banks, whose eventual
recipients included Commerzbank AG (Commerzbank) and WestLB
AG (WestLB), and a Ö400 billion ($537 billion) scheme for guaran56 Lehman Brothers filed for Chapter 11 on September 15, 2008. The next day, the United
States agreed to lend up to $85 billion to AIG. See generally December Oversight Report, supra
note 39, at 11, 15; June Oversight Report, supra note 10, at 58.
57 U.S. Securities and Exchange Commission, SEC Halts Short Selling of Financial Stocks to
Protect Investors and Markets (Sept. 19, 2008) (online at www.sec.gov/news/press/2008/2008211.htm). Financial Services Authority (U.K.), FSA Statement on Short Positions in Financial
Stocks (Sept. 18, 2008) (online at www.fsa.gov.uk/pages/Library/Communication/PR/2008/
102.shtml). Canada and Germany were among countries that instituted similar bans. Ontario
Securities Commission, OSC Issues Temporary Order Prohibiting Short Selling of Certain Financial Sector Issuers (Sept. 19, 2008) (online at www.osc.gov.on.ca/en/19317.htm);
Bunderanstalt für Finanzdienstleistungsaufsicht, BaFin Bans Short Selling—Eleven Stocks Concerned (Sept. 19, 2008) (online at www.bafin.de/cln_109/nn_720788/SharedDocs/Mitteilungen/EN/
2008/pm_080919_leerv_en.html).
58 See Section E.2, infra. See also Board of Governors of the Federal Reserve System, FOMC
Statement: Federal Reserve and Other Central Banks Announce Reductions (Oct. 8, 2008) (online
at www.federalreserve.gov/newsevents/press/monetary/20081008a.htm).
59 See, e.g., the Federal Reserve Board’s decision to grant bank-holding company status to
Goldman Sachs and Morgan Stanley on September 21, 2008. Board of Governors of the Federal
Reserve System, Press Release (Sept. 21, 2008) (online at www.federalreserve.gov/newsevents/
press/bcreg/20080921a.htm).
60 For a more detailed discussion of various governments’ responses to the crisis, see Section
C.2, infra.
61 The three banks were Kaupthing, Glitnir and Landsbanki. For further discussion of the Icelandic bank nationalizations, see Section C.2.b.
62 Abbey National plc (Abbey); Barclays plc (Barclays); Halifax Bank of Scotland Group plc
(HBOS); HSBC Bank plc; Lloyds TSB; Nationwide Building Society (Nationwide); Royal Bank
of Scotland; and Standard Chartered plc (Standard Chartered). HM Treasury, Financial Support
to the Banking Industry (Oct. 8, 2008) (online at www.hm-treasury.gov.uk/press_100_08.htm)
(hereinafter ‘‘Financial Support to the Banking Industry’’). A bank’s Tier 1 capital is its core
capital, which consists predominantly of common stock and retained earnings. Bank for International Settlements, Instruments Eligible for Inclusion in Tier 1 Capital (Oct. 27, 1998) (online
at www.bis.org/press/p981027.htm).

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19
teeing bank financing. The following day, the U.S. government announced its own plan for guaranteeing newly issued bank debt, the
Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program; 63 its own program of capital injections,
Treasury’s Capital Purchase Program (CPP), which initially included eight large financial institutions; 64 and a Federal Reserve
program, the Commercial Paper Funding Facility, to purchase commercial paper and thereby provide a backstop to that market.65 In
November 2008, the leaders of nations in the G–20 met in Washington, where they agreed on a five-point plan for financial reform.66
In January 2009, the British government announced another extraordinary assistance program, the Asset Protection Scheme
(APS). Under this program, banks were able to buy protection from
the government on a specified portfolio of assets. Again, only
Lloyds and RBS agreed to participate.67 This program was similar
in structure to the U.S. government’s Asset Guarantee Program
(AGP), which preceded the British plan and had only two participants, Citigroup and Bank of America Corporation (Bank of America).68
Despite some efforts at a more comprehensive solution,69 the balance sheets of many European banks continued to suffer throughout late 2008 and early 2009, and smaller European governments
responded with additional assistance on a piecemeal basis.70

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b. Impact on Major Economies Outside the United
States and Europe
Because the financial crisis originated in domestic housing bubbles, and was transmitted by highly leveraged multinational financial firms, countries that were shielded from those forces fared
63 Federal Deposit Insurance Corporation, FDIC Announces Plan to Free Up Bank Liquidity
(Oct. 14, 2008) (online at fdic.gov/news/news/press/2008/pr08100.html) (hereinafter ‘‘FDIC Announces Plan to Free Up Bank Liquidity’’).
64 The first eight participants in the CPP were JPMorgan Chase, Goldman Sachs, Citigroup,
Bank of America, Wells Fargo, Morgan Stanley, Bank of New York Mellon, and State Street
Corporation (State Street). See U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for Period Ending August 4, 2010 (Aug. 6, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-610%20Transactions%20Report%20as%20of%208-4-10.pdf) (hereinafter ‘‘Treasury Transactions
Report’’).
65 U.S. Department of the Treasury, U.S. Government Actions to Strengthen Market Stability
(Oct. 14, 2008) (online at financialstability.gov/latest/hp1209.html).
66 For further discussion of the G–20, see Sections C.3 and E.3.b, infra.
67 HM Treasury, The Asset Protection Scheme (APS) (online at www.hm-treasury.gov.uk/
apa_aps.htm) (accessed Aug. 10, 2010).
68 For further information about the Asset Guarantee Program, see Congressional Oversight
Panel, November Oversight Report: Guarantees and Contingent Payments in TARP and Related
Programs, at 13–27 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf)
(hereinafter ‘‘November Oversight Report’’). The Federal Reserve, Treasury, and the FDIC guaranteed a $301 billion pool of Citigroup assets at its inception, and Citigroup terminated its guarantee in December 2009. The U.S. government and Bank of America never agreed upon a finalized term sheet, and Bank of America ultimately paid $425 million to terminate the guarantee
in September 2009.
69 See Section C.2.a, infra, for a discussion of responses to the crisis by the U.K. and German
governments, which were more systematic than the responses of several other European governments.
70 For example, the Swiss government provided assistance to UBS, the Irish government took
ownership of Anglo Irish Bank, the Netherlands provided assistance to ING and SNS Reaal
N.V., the Belgian government took steps to stabilize Ethias Bank and KBC, and the Latvian
government nationalized that nation’s largest independent bank, Parex Banka.

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comparatively well.71 Brazil, India, China, Australia, and Canada,
for example, generally avoided the banking crises that plagued the
United States and much of Europe; 72 nonetheless their economies
felt many of the aftereffects of the global financial crisis.
Brazil’s banks were subject to tighter leverage requirements than
existed in Europe and the United States, the result of reforms implemented after Brazil’s 1990s-era banking crisis.73 Nonetheless,
the Brazilian economy, which had been experiencing strong growth,
contracted in the fourth quarter of 2008 and the first quarter of
2009. The Brazilian government responded by cutting interest
rates, providing a liquidity cushion to small Brazilian banks, and
by enacting a fiscal stimulus program, among other steps. Growth
returned to the economy in the second quarter of 2009, and according to one analyst, Brazil is one of the countries that has fared best
during the global financial crisis.74
India also fared comparatively well. Its highly regulated banking
sector had limited operations outside India, and therefore very little exposure to subprime lending in the United States. India did
feel the follow-on effects of the crisis, though. Its export-driven
economy suffered when global demand dropped; its financial sector
suffered from the global liquidity squeeze, which led to a fall in
lending; and its stock market lost roughly 50 percent of its value
between June and December 2008. Although the Indian government did not provide capital to Indian banks, it did respond to the
crisis with fiscal stimulus equal to about 2 percent of GDP, and it
shifted from a tightening monetary policy to an expansionary
one.75
China’s financial system also fared relatively well during the crisis, though it should be noted that China’s state-owned banks have
benefited from repeated government rescues in the recent past.76
71 This is not to suggest that financial integration between nations has negative effects on balance. Potential benefits from international financial integration include the increased ability of
nations to diversify and hedge against certain risks, and increased competition in domestic
banking sectors because of new foreign entrants, resulting in lower borrowing costs. Potential
costs include increased volatility, such that a financial shock in one country can result in a similar shock in another country. See Pierre-Richard Agenor, Benefits and Costs of International Financial Integration: Theory and Facts (2003) (online at people.ucsc.edu/∼hutch/241B/Ec241b
SYLLABUSWinter2010_files/Agenor_WorldEcon2003.pdf).
72 Furthermore, countries that had significant economic integration with the major economies
that were shielded from the financial crisis benefited from those ties. Examples include Australia and New Zealand, which are becoming increasingly economically integrated with China
and India, and were not hit hard by the crisis. See Yan Sen, Potential Growth of Australia and
New Zealand in the Aftermath of the Global Crisis, IMF Working Paper (May 2010) (WP/10/
127) (online at www.imf.org/external/pubs/ft/wp/2010/wp10127.pdf).
73 Brazil’s minimum capital-to-asset ratio is 11 percent, higher than the 8 percent risk-based
capital ratio used under the Basel agreement, and Brazil’s largest banks exercised greater caution than was required, with capital-to-asset ratios averaging around 16 percent. This lower
level of risk-taking provided Brazilian banks a larger cushion for losses than existed in large
U.S. and European banks. See José Roberto Mendonça de Barros, The Impact of the International Financial Crisis on Brazil, Real Instituto Elcano (Apr. 12, 2010) (online at
www.realinstitutoelcano.org/wps/portal/rielcano_eng/Content?WCM_GLOBAL_CONTEXT=/
elcano/elcano_in/zonas_in/international+economy/ari38-2010).
74 Id.
75 Rajiv Kumar and Pankaj Vashisht, The Global Economic Crisis: Impact on India and Policy
Responses
(Nov.
2009)
(online
at
www.adbi.org/files/
2009.11.12.wp164.global.economic.crisis.india.pdf).
76 See John P. Bonin and Yiping Huang, Dealing With the Bad Loans of the Chinese Banks,
at 19 (Jan. 2001) (online at deepblue.lib.umich.edu/bitstream/2027.42/39741/3/wp357.pdf). Many
Chinese banks were in need of capital at the height of the crisis in 2008, and one such bank
did receive government funds, albeit for idiosyncratic reasons. Late in 2008, China’s sovereign
wealth fund purchased $19 billion in securities from Agricultural Bank of China Limited (ABC)
(AgBank). Although AgBank had a large book of bad loans, this action was as much designed
to put the bank on the road to an eventual public offering as to provide financial stability. See

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China maintains capital controls that limit foreign investment by
individuals and businesses; these controls had beneficial effects
during the crisis, since Chinese investors had little exposure to
troubled parts of the U.S. and European financial systems.77 China’s banks had invested heavily in U.S. securities, but those investments were generally not in subprime securities, but rather in
safer Treasury bonds and securities issued by Fannie Mae and
Freddie Mac,78 which the U.S. government stepped in to backstop
during the crisis.79 Therefore, China’s financial system, like Brazil’s and India’s, did not sustain major damage from the crisis. China’s export-driven economy did suffer, though, from the sharp
downturn in global demand and the slowdown in foreign investment. China’s explosive growth slowed during the crisis, but the
government countered the effects of the slowdown by increasing
bank lending,80 lowering interest rates, and introducing fiscal stimulus spending that was among the largest in the world as a percentage of GDP.81
Australia also suffered relatively little from the crisis. Its only
decline in GDP occurred in the fourth quarter of 2009,82 meaning
Consulate-General of the People’s Republic of China in New York, Agricultural Bank of China
to Get $19 Billion Capital Injection (Oct. 22, 2008) (online at www.nyconsulate.prchina.org/eng/
xw/t519094.htm). AgBank completed the Hong Kong portion of its offering on July 15, 2010. See
Agricultural Bank of China Limited, Global Offering (June 30, 2010) (online at www.sfc.hk/
sfcCOPro/EN/displayFileServlet?refno=0608&fname=CoverEng_Jun3010.pdf).
77 See Nicholas Lardy, Anthony M. Solomon Senior Fellow, Peterson Institute for International
Economics, Lecture at New York University’s Stern School of Business, China’s Role in the Current Global Economic Crisis (Feb. 23, 2009) (hereinafter ‘‘China’s Role in the Current Global
Economic Crisis’’).
78 In June 2008, foreign investors owned $1.46 trillion of long-term debt issued by Fannie
Mae, Freddie Mac, other government-sponsored enterprises, and securities guaranteed by
Ginnie Mae. The foreign-owned share was 21 percent of the $6.99 trillion of such debt outstanding at the time, up from 7.3 percent in 2000. China held 36 percent of the foreign-owned
share in June 2008. See U.S. Department of the Treasury, Federal Reserve Bank of New York,
and Board of Governors of the Federal Reserve System, Report on Foreign Portfolio Holdings
of U.S. Securities as of June 30, 2008 at 5, 8 (Apr. 2009) (online at www.treas.gov/tic/
shla2008r.pdf).
79 The U.S. government’s decision to take Fannie Mae and Freddie Mac into conservatorship
provided greater assurance to investors that the government would stand behind their debt than
previously existed in the marketplace, even though there was already a widespread belief that
the U.S. government would not allow the two congressionally chartered mortgage firms to go
bankrupt. When the conservatorship was announced, James B. Lockhart, director of the Federal
Housing Finance Agency (FHFA), stated, ‘‘Monday morning, the businesses will open as normal,
only with stronger backing for the holders of MBS, senior debt and subordinated debt.’’ Federal
Housing Finance Agency, Statement of FHFA Director James B. Lockhart (Sept. 7, 2008) (online
at www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf). Mark Zandi, chief economist at
Moody’s Economy.com, wrote at the time: ‘‘The biggest winners are Fannie’s and Freddie’s debt
holders. Indeed, it was the mounting evidence that central banks, sovereign wealth funds, and
other global investors were growing reluctant to invest in the debt that was the catalyst for
Treasury’s actions. Fannie and Freddie debt is now effectively U.S. Treasury debt, ensuring that
debt holders will remain whole.’’ Mark Zandi, The Fannie-Freddie Takeover: A Latter-Day RTC
(Sept. 7, 2008) (online at www.economy.com/dismal/article_free.asp?cid=108515).
80 This rise in bank lending is today contributing to concerns that China has its own real estate bubble, which is prompting concerns about the Chinese banking sector and has led Chinese
officials to conduct stress tests of Chinese banks. For further discussion, see Section E.1, infra.
81 Of the nations in the G–20, only Saudi Arabia enacted a larger fiscal stimulus, calculated
as a percentage of GDP, for 2009 and 2010 than China. International Monetary Fund, Group
of Twenty, Meeting of the Deputies, January 31–February 1, 2009, London, U.K., Note by the
Staff of the International Monetary Fund, at 18 (online at www.imf.org/external/np/g20/pdf/
020509.pdf). See generally Congressional Research Service, China and the Global Financial Crisis: Implications for the United States (June 3, 2009) (online at www.fas.org/sgp/crs/row/
RS22984.pdf); China’s Role in the Current Global Economic Crisis, supra note 77.
82 Reserve Bank of Australia, Statistical Tables (online at www.rba.gov.au/statistics/tables/
index.html#output_labour) (accessed Aug. 4, 2010). The country’s economic stability partially resulted from its large exports of iron ore and coal, which increased in price in early 2010 and
were especially in demand as East Asian countries resumed their rapid pace of growth. See
Glenn Stevens, governor of the Reserve Bank of Australia, Remarks before the Western Sydney
Continued

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22
that Australia did not enter into a recession.83 Australia’s banks
for the most part remained healthy and profitable throughout the
crisis,84 though the country’s banking system did suffer the collapse of two large Australian companies and one particularly large
write-down on subprime mortgages.85 Australian banks maintained
high capital levels and, because domestic opportunities for investment were plentiful, their balance sheets contained relatively few
internationally tradable securities such as securitized loans.86 Australian banks also maintained high lending standards by issuing
relatively few loans requiring minimal documentation or a minimal
down payment.87
Although Canada’s GDP decreased for four straight quarters in
late 2008 and early 2009, its recession was linked strongly to its
reliance on the United States as a market for its exports.88 Its
banking system remained healthy. Leverage in Canadian banks
was limited.89 Canadian banks also sustained only modest losses
on structured products, which include the mortgage-related securities that led to enormous losses at U.S. and European banks.90 To
bolster the economy, the Canadian government passed a $62 billion
CAD ($51 billion) stimulus package in January 2009 and gradually
reduced interest rates from 3 percent in October 2008 to 0.25 percent in April 2009.91

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c. Financial Institutions Most Affected
The interconnections within the global financial marketplace and
the significant cross-border operations of major U.S. and foreignBusiness Connection (June 9, 2010) (online at www.rba.gov.au/speeches/2010/sp-gov090610.html).
83 The Australian government’s large fiscal stimulus in February 2009—the $42 billion AUD
($26.5 billion) stimulus was equal to about 3 percent of GDP—and interest rate cuts from 7 percent in September 2008 to 3 percent in April 2009 likely helped sustain the domestic economy.
Office of Australian Deputy Prime Minister and Treasurer Wayne Swan, Press Release—$42 Billion Nation Building and Jobs Plan (Feb. 3, 2009) (online at www.treasurer.gov.au/
DisplayDocs.aspx?doc=pressreleases/2009/
009.htm&pageID=003&min=wms&Year=2009&DocType=0); Reserve Bank of Australia, Statistical Tables (online at www.rba.gov.au/statistics/tables/index.html#interest_rates) (accessed Aug.
4, 2010).
84 Luci Ellis, head of the Reserve Bank of Australia Financial Stability Department, Remarks
at Victoria University, The Global Crisis: Causes, Consequences, and Countermeasures (Apr. 15,
2009) (online at www.rba.gov.au/speeches/2009/sp-so-150409.html) (hereinafter ‘‘Luci Ellis Remarks at Victoria University’’).
85 Lyndal McFarland, Crisis on Wall Street: In Australia, ANZ and NAB Join Loan-Loss Chorus, Wall Street Journal (Eastern Edition), at C.2 (Dec. 19, 2008); Lyndal McFarland, Despite
Calm, Risks Remain in Australian Banks Wall Street Journal (Eastern Edition), at C.7 (Sept.
10, 2008).
86 Luci Ellis Remarks at Victoria University, supra note 84.
87 Luci Ellis Remarks at Victoria University, supra note 84.
88 Data provided by Bloomberg. Close to 80 percent of Canada’s exports go to the United
States. Central Intelligence Agency, The World Factbook (online at www.cia.gov/library/
publications/the-world-factbook/geos/ca.html) (accessed Aug. 10, 2010).
89 Major Canadian banks had an asset-to-capital ratio of 18 to 1, compared to ratios of 25 to
1 in the United States and 30+ to 1 in Europe. Mark Carney, governor of the Bank of Canada,
Remarks at the Canadian Club of Montreal, Reflections of Recent International Economic Developments (Sept. 25, 2008) (online at www.bankofcanada.ca/en/speeches/2008/sp08-12.html).
90 Id. Canada’s banks lacked one of the incentives to securitize residential mortgages that existed elsewhere, which was the opportunity to hold less regulatory capital against the mortgages
than would otherwise be required. Because Canadian mortgages must usually be fully insured
by banks and homeowners, securitized mortgages and individual mortgages are usually assigned
the same risk-weighted rate in regulatory capital rules. Don’t Blame Canada, The Economist,
at 7 (May 16, 2010).
91 Government of Canada, The Challenge: Canada’s Economic Action Plan (online at
www.actionplan.gc.ca/eng/feature.asp?featureId=16) (accessed Aug. 4, 2010); Bank of Canada,
Canadian Interest Rates (online at www.bankofcanada.ca/en/rates/interest-look.html) (accessed
Aug. 4, 2010).

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23
based firms widened the fallout of the crisis, requiring a multipronged response by a host of national regulators and central
banks. The multinational nature of the largest global financial institutions contributed to both the direct losses on troubled securities assets and the cross-border panic that imperiled the functioning of global capital markets. Figure 9 shows those losses by
banks based in the key regions impacted by the financial crisis.
FIGURE 9: FINANCIAL CRISIS LOSSES ON SECURITIES HOLDINGS FOR BANKS LOCATED
IN NORTH AMERICA, EUROPE AND ASIA 92

92 As of First Quarter 2010. Total write-downs and losses do not include losses related to loan
charge-offs, increases in provisions for loan losses, and credit costs. Data provided by Bloomberg.
93 Panel staff conversation with Simon Johnson, professor at MIT and former chief economist
of the International Monetary Fund (July 30, 2010); Panel staff conversation with Roubini Global Economics Analysts Elisa Parisi and David Nowakowski (July 28, 2010).

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Comparatively weaker capitalization levels, illustrated by higher
leverage (in many cases twice that of comparable U.S. peers),
stoked fears among investors and market participants regarding
the ability of the European banking sector to withstand incremental losses. (Comparisons of write-downs, leverage and Tier 1
capital ratios are outlined below in Figure 11.) In the context of the
relative importance of the banking system in Europe to economic
growth (discussed below), there was growing fear among some market participants that European authorities were not taking sufficiently aggressive steps to shore up capital at key institutions.93

24
To some degree, these fears were compounded by variations in
the accounting treatment of balance sheet assets.94 95 Outside the
United States, most countries permit companies to report under
the International Financial Reporting Standards (IFRS). While
there are similarities between the IFRS and U.S. Generally Accepted Accounting Principles (GAAP), there are important differences
regarding fair value accounting that have created discrepancies
when U.S. financial institutions and international financial institutions recognize losses arising from troubled assets.96 In the case of
European banks, the majority of assets are valued at amortized
cost rather than fair value, which delayed the recognition of losses
and increased uncertainty during the crisis.97
Figure 10 below compares the write-downs that U.S. and European banks have taken on various asset classes through the duration of the crisis.
FIGURE 10: ESTIMATED WRITE-DOWNS ON U.S. AND FOREIGN BANK-HELD SECURITIES 98
[Billions of USD]

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Estimated
Holdings

Estimated
Write-downs

Implied
Cumulative
Loss Rate

Share of Total
Regional
Write-downs

Share of Global
Write-downs

U.S. Banks
Residential mortgage ...............
Consumer .................................
Commercial mortgage ..............
Corporate ..................................
Governments .............................
Foreign ......................................

1,495
142
196
1,115
580
975

189
0
63
48
0
71

12.6
0.0
32.1
4.3
0.0
7.3

50.9%
0.0%
17.0%
12.9%
0.0%
19.1%

20.6%
0.0%
6.9%
5.2%
0.0%
7.8%

Total for U.S. Banks ..........................

4,503

371

8.2

–

40.5%

94 Under U.S. GAAP, U.S. institutions may account for assets in different ways. For example,
a commercial bank may record a mortgage-backed security (‘‘MBS’’) at amortized cost by
classifying the security as held-to-maturity (‘‘HTM’’), whereas an investment bank may record
a MBS at fair value by classifying the security as available-for-sale (AFS). Held-to-maturity
(HTM) securities and held-for-investment (HFI) loans are recorded on the balance sheet at amortized cost rather than fair market value, whereas available-for-sale (AFS) securities are recorded on the balance sheet at fair market value. Only when a financial institution determines
that the HTM security is impaired and the impairment is other-than-temporary (OTTI) will the
institution record the value of the security at its fair market value. The institution has the discretion to determine whether an OTTI exists and will: (1) calculate the fair value of the asset;
(2) determine if the decline in value is related to a credit event; and (3) determine if the investor
is able or willing to hold the asset until it recovers its value. U.S. Securities and Exchange Commission, Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-to-Market Accounting, at 26, 30 (Dec. 30, 2008) (online
at www.sec.gov/news/studies/2008/marktomarket123008.pdf) (hereinafter ‘‘SEC Study on Markto-Market Accounting’’).
95 Id. at 47, 50, 104. The majority of commercial banks’ assets, including large loan books, are
reported at amortized cost. Commercial banks limit their use of fair value accounting to securities and derivatives. So, for example, commercial banks report subprime loan portfolios at amortized costs, but report subprime mortgage-backed securities at fair market value. In contrast,
investment banks report the majority of assets at fair value because these institutions are not
holding large loan portfolios, but are instead actively trading securities and derivatives.
96 For further discussion of fair value accounting, see Section C.2.f, infra. There are several
important differences between IFRS and GAAP fair value accounting including: (1) guidance on
accounting for assets at fair value is scattered throughout IFRS and is sometimes inconsistent;
(2) IFRS does not distinguish between debt securities and loans, so debt securities can be recorded on balance sheets as loans; (3) IFRS has different standards for recognizing impairment,
which results in differences in the timing of when an impairment charge is recorded on the balance sheet; and (4) HTM securities are only written down for incurred credit losses, whereas
GAAP securities are written down to fair value. SEC Study on Mark-to-Market Accounting,
supra note 94, at 23–24, 32–33.
97 Financial Crisis Advisory Group, Report of the Financial Crisis Advisory Group, at 4 (July
28, 2009) (online at www.ifrs.org/NR/rdonlyres/2D2862CC-BEFC-4A1E-8DDC-F159B78C2AA6/0/
FCAGReportJuly2009.pdf).

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25
FIGURE 10: ESTIMATED WRITE-DOWNS ON U.S. AND FOREIGN BANK-HELD SECURITIES 98—
Continued
[Billions of USD]
Estimated
Holdings

European Banks 99
Residential mortgage ...............
Consumer .................................
Commercial mortgage ..............
Corporate ..................................
Governments .............................
Foreign ......................................
Total for European Banks .................
Asian Banks 100
Total for Asian Banks .......................
Totals for All Bank-Held Securities
(U.S., Europe & Asia) 101 .............

Estimated
Write-downs

Implied
Cumulative
Loss Rate

Share of Total
Regional
Write-downs

Share of Global
Write-downs

1,191
329
315
1,574
2,506
2,615

157
9
74
47
0
152

13.2
2.7
23.5
3.0
0.0
5.8

33.0%
1.9%
15.5%
9.9%
0.0%
31.9%

17.1%
1.0%
8.1%
5.1%
0.0%
16.6%

9,261

476

5.1

–

52.0%

1,728

69

4.0

–

7.5%

15,492

916

5.9

–

100.0

98 Data

for U.S., Europe, and Asia bank losses on securities holdings only. Excludes write-down and losses related to bank holdings of
loans. Estimated holdings based on Q1 2009 data. IMF Global Financial Stability Report, supra note 17, at 87.
99 European banks include the United Kingdom, the Euro Area, and other mature European markets (Denmark, Norway, Iceland, Sweden, and
Switzerland).
100 Asian banks include Australia, Hong Kong SAR, Japan, New Zealand, and Singapore. Write-down data for Asian banks not categorized by
asset type.
101 Total references preceding sums for banking institutions headquartered in the United States, Europe, and Asia only.

Figure 11 below compares the write-downs during the crisis and
key balance sheet metrics on the eve of the crisis among specific
U.S. commercial banks, U.S. investment banks, and foreign banks.
(Both U.S. commercial banks and European banks calculated and
reported Tier 1 capital ratios under the Basel I framework during
the crisis. In contrast, U.S. investment banks calculated and reported capital adequacy ratios under an alternative computation
method created by the SEC, before beginning to report under the
Basel II framework at the beginning of 2008.) 102
FIGURE 11: BALANCE SHEET MEASURES (YEAR-END 2006) AND WRITE-DOWNS (2007–2010) OF
U.S. AND FOREIGN INSTITUTIONS
[Billions of USD]

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Total Assets

Total Equity

Gross
Leverage
Ratio 103

Tier 1
Risk-Based
Capital
Ratio 104

Write-downs & Losses
3Q2007–1Q2010 105

Percent of
2006 Equity

U.S. Banks 106
Bank of America ..........
Bear Stearns ................
Citigroup ......................
Goldman Sachs ............
JPMorgan Chase ...........
Lehman Brothers .........
Merrill Lynch ................
Morgan Stanley ............

1,460
350
1,884
838
1,352
504
841
1,121

135
12
122
36
116
19
39
35

10.8x
29.0x
15.4x
23.4x
11.7x
26.2x
21.6x
31.7x

8.6%
N/A
8.6%
N/A
8.7%
N/A
N/A
N/A

23.5
3.2
68.2
9.1
16.6
16.2
55.9
23.4

17.4
26.4
55.8
25.4
14.3
84.4
143.3
66.1

Foreign Banks 107
Banco Santander .........
Barclays .......................
BNP Paribas .................
CIBC .............................

1,100
1,951
1,900
271

62
54
72
11

17.7x
36.4x
26.3x
24.6x

7.4%
7.7%
7.4%
10.4%

0.0
26.2
4.3
9.5

0.0
48.9
5.9
86.4

102 U.S. Securities and Exchange Commission, Alternative Net Capital Requirements for
Broker-Dealers That Are Part of Consolidated Supervised Entities, 69 Fed. Reg. 34428 (June 21,
2004). This rule applied to five investment banks: Goldman Sachs, Morgan Stanley, Merrill
Lynch, Bear Stearns, and Lehman Brothers.

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26
FIGURE 11: BALANCE SHEET MEASURES (YEAR-END 2006) AND WRITE-DOWNS (2007–2010) OF
U.S. AND FOREIGN INSTITUTIONS—Continued
[Billions of USD]

Total Assets

Credit Suisse ................
Deutsche Bank .............
HBOS ............................
HSBC ............................
Royal Bank of Canada
Royal Bank of Scotland
Société Générale ..........
Toronto-Dominion Bank
UBS ..............................

1,030
2,090
930
1,861
411
1,705
1,262
350
1,964

Total Equity

48
44
32
115
21
89
44
21
46

Gross
Leverage
Ratio 103

21.3x
47.3x
29.3x
16.2x
19.4x
19.2x
28.6x
17.1x
43.0x

Tier 1
Risk-Based
Capital
Ratio 104

Write-downs & Losses
3Q2007–1Q2010 105

13.9%
8.5%
8.1%
9.4%
9.6%
7.5%
7.8%
12.0%
11.9%

19.1
17.0
15.2
26.6
5.9
31.3
12.8
0.9
52.4

Percent of
2006 Equity

39.5
38.5
47.9
23.2
27.8
35.2
29.0
4.4
114.7

103 Gross leverage ratio equals the ratio of total assets to total equity.
104 Goldman Sachs, Morgan Stanley, Bear Stearns, Merrill Lynch, and Lehman Brothers did not begin reporting Tier 1 risk-based capital ratios until 2008.
105 Included in the data are losses associated with the following: Non-mortgage ABS; Alt-A securities; Auction-rate securities; CDOs; CDS
and other derivatives; CMBS; Subsidiaries, investments in other firms, and corporate debt; Leveraged loans and collateralized obligations;
Monolines; Uncategorized mortgages and securities; Revaluation reserve and other comprehensive income; Prime mortgages and securities;
Uncategorized residential mortgage asset write-downs; Structured Investment Vehicles and ABCP; Subprime RMBS; Trading losses. Write-downs
and losses linked to credit costs associated with outstanding loans, loan charge-offs, and increases in provisions for loan losses were not included as these are to be expected as part of normal business operations. Data provided by Bloomberg.
106 2006 balance sheet data provided by SNL Financial.
107 Data provided by Bloomberg.

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As noted above, the European dimension to the crisis was magnified by the predominance of bank-intermediated credit in Europe,
as opposed to other sources of credit. This raised the importance
of European policy-makers stabilizing the banking system in order
to contain further disruptions to the continent’s economies. However, at the onset of the crisis—in the context of the comparatively
more lenient accounting treatment discussed above—the centrality
of these institutions in credit intermediation may have contributed
to less aggressive action in the wake of Bear Stearns and the leadup to the Lehman Brothers failure. As illustrated below, bank assets in the Eurozone area, including Denmark, Sweden, and the
United Kingdom, were $48.5 trillion at the end of 2007, approximately three times the size of the region’s GDP. This compares to
bank assets of $11.2 trillion in the United States, a level on par
with GDP. While these disparities indicate that the U.S. economy
was more reliant on the capital markets to raise equity and intermediate lending through the debt markets, both the U.S. and European financial systems were highly susceptible to the fallout from
the financial crisis. However, the concentration within Europe’s
banking sector raised the profile of a handful of multinational
banks, relative to the region’s overall economy. Additionally, many
European banks were comparatively more dependent on foreignsourced deposits, increasing their susceptibility to disruptions outside their home market.

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95,769
48,462
35,097
13,852
11,194
2,658
10,087

65,106
14,731
10,040
22,109
19,922
2,187
4,664

Stock
Market
Capitalization

28,629
8,778
7,606
7,419
6,596
823
7,148

Public

51,586
19,432
15,398
24,492
23,728
764
2,066

Private

Debt Securities

80,215
28,211
23,004
31,911
30,324
1,587
9,214

Total

175
308
287
91
81
185
230

Total
Bank
Assets

119
94
82
145
144
152
106

Stock
Market
Capitalization

146
179
188
209
220
111
210

Total
Debt
Securities

As Percentage of GDP

108 International Monetary Fund, Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks, at 177 (Apr. 2009) (online at www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/text.pdf) (hereinafter ‘‘IMF
2009 Global Financial Stability Report’’).
109 Total assets of commercial banks, including subsidiaries.
110 Figures for the European Union include totals from the Euro Area, Denmark, Sweden, and the United Kingdom.

54,841
15,741
12,221
15,244
13,808
1,436
4,384

GDP

Total
Bank
Assets 109

[billions of USD]

FIGURE 12: BANK ASSETS AND CAPITAL MARKET VS. GDP, 2007 108

World .....................................................................................................................................................
European Union 110 ...............................................................................................................................
Euro Area .....................................................................................................................................
North America .......................................................................................................................................
United States ...............................................................................................................................
Canada ........................................................................................................................................
Japan .....................................................................................................................................................

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This context is important for understanding efforts by the United
States and foreign governments. Actions by Treasury and the Federal Reserve to stabilize the U.S. financial system and its largest
financial institutions helped supplement rescue efforts in other
countries, just as overseas rescue efforts enhanced stability measures within the U.S. market. This is due to both the interconnectedness of global financial markets, and the multinational nature of
the largest U.S. and European financial institutions.

rfrederick on DSKD9S0YB1PROD with HEARING

2. The Ad Hoc Nature of Government Responses
The international responses to the crisis took various forms; 111
likewise, the way in which governments came to the choices they
made was varied. In some cases, governments emulated others’ actions, as seen in the EU’s decision to follow the United States’ lead
in stress-testing banks.112 In some cases, markets forced governments to take certain actions, as when Ireland’s move to increase
deposit insurance led to a flow of U.K. deposits to Irish banks,
prompting U.K. officials to increase their nation’s deposit insurance.113 And in some cases governments learned from past experience and adjusted their response accordingly, as when Ireland’s
asset management agency drew lessons from the Nordic bank crisis
in the 1990s.
For the most part, governments across the globe responded to the
crisis on an ad hoc basis as it unfolded. What this meant was that
most of the responses were tailored to address immediate problems,
and they tended to be targeted at specific institutions or specific
markets, rather than the entire financial system. Home country
regulators generally took responsibility for banks headquartered in
their jurisdictions, and the evidence suggests that assistance was
doled out less to stabilize the international financial landscape
than to respond to potential fallout across a particular domestic
market.114 The different conditions that nations placed on the
banks they rescued offer a good illustration of the frequent lack of
international coordination in many of the responses. For example,
the United Kingdom and France imposed lending targets for rescued banks, while the United States did not. The United States
took warrants in rescued banks, which allowed for the potential realization of gains on its investments, but other nations did not follow suit. Restrictions on executive compensation and pay for board
members also varied significantly in different countries.
These differences are not unexpected, given the speed with which
the financial crisis spread and the volatility of markets at the time;
the circumstances often did not permit measured cross-border cooperation, and while there was certainly a great deal of informal
communication between countries, it did not necessarily lead to coordinated action. Furthermore, it is not clear that a more systemic
111 These forms of intervention are discussed throughout Section C.2 and summarized by country in Annex I. See also the description of selected jurisdictions’ responses in the Panel’s April
2009 report. April Oversight Report, supra note 2, at 60–70.
112 For further discussion of the EU’s stress tests, see Section E.1.b, infra.
113 For further discussion of Ireland’s expanded deposit insurance, see Section C.2.c, infra.
114 According to the IMF, ‘‘when the regulatory authorities are faced with the distress or failure of a financial institution within their territory, they tend to give primary consideration to
the potential impact on their own stakeholders: namely, creditors to branches or subsidiaries
located within their jurisdiction, depositors and, in the final analysis, local taxpayers.’’ IMF Proposed Framework for Enhanced Coordination, supra note 33, at 9.

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29
global response to the crisis would have yielded better results,
given how quickly some countries emulated other countries’ responses at the height of the crisis. There is also no reason to think
that anything other than ad hoc, country-specific measures were
feasible at the peak of the crisis, given that different countries
have different interests, and they inevitably will seek to pursue
their own interests during an emergency. Fortunately in this instance, the interests of the countries most affected tended to converge at the peak of the crisis—when a further meltdown of the
global financial system would have had deleterious consequences
for many nations—though they later began to diverge again.

rfrederick on DSKD9S0YB1PROD with HEARING

a. Capital Injections
One of the most common government responses to the 2008 financial crisis was the direct purchase of securities from troubled
banks in order to inject needed capital into these firms and the financial sector in general. Although the term ‘‘capital injections’’
most commonly refers to the purchase of common or preferred
shares by a government, it can refer to a broad range of strategies.115 (When classifying such actions, among the many variables
to be considered are whether there is a private capital component
to the plan, the type of securities or other assets that are purchased, whether the government takes a minority or majority
stake, whether the securities are purchased at market value, and
the degree of government involvement in management, board membership, and operations.) The more extreme forms of capital injections fade into ‘‘nationalization,’’ discussed in the following section.
Equity capital injections are an efficient method of assisting failing financial institutions with non-performing assets, compared to
asset purchases for instance, since the new equity can be leveraged. Former Treasury Secretary Henry Paulson explained the advantage of this method in his recent book on the financial crisis:
To oversimplify: assuming banks had a ten-to-one leverage ratio, injecting $70 billion in equity would give us as
much impact as buying $700 billion in assets. This was the
fastest way to get the most money into the banks, renew
confidence in their strength and get them lending again.116
Although most capital injection programs followed and appear to
have been inspired by the TARP and its Capital Purchase Program
(CPP),117 some capital injections preceded the TARP, such as Germany’s purchases of equity in four major banks between August
2007 and August 2008.118 The United Kingdom’s capital injection
115 Organisation for European Co-operation and Development, Glossary of Statistical Terms:
Capital Injections (online at stats.oecd.org/glossary/detail.asp?ID=6233) (accessed Aug. 10, 2010).
116 Henry M. Paulson, Jr., On the Brink, at 337 (2010).
117 The CPP has been discussed extensively in previous Panel reports, notably the Panel’s February 2009, July 2009, December 2009, January 2010, and July 2010 reports.
118 See, e.g., Commission Launches Probe into State Bail-Outs, supra note 43. See also Frank
Hornig, Lothar Pauly, and Christian Reiermann, Bad Debts: American Mortgage Crisis Rattles
German Banking Sector, Der Speigel (Aug. 10, 2007) (online at www.spiegel.de/international/
business/0,1518,499160-2,00.html) (describing the capital injections into IKB by state-backed
Kreditanstalt für Wiederaufbau (KFW). The four banks that were assisted between Aug. 2007
and Aug. 2008 were IKB, WestLB, BayernLB, and SachenLB).

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30
program, discussed below, was also a likely inspiration for similar
programs.119
Following the establishment of the TARP on October 3, 2008,
many countries created similar stabilization funds that included a
capital injection component. Figure 13 below shows the volume of
capital injections implemented by G–20 countries between September 2008 and June 2009, with the bulk of capital injections occurring in November 2008.
FIGURE 13: GOVERNMENT CAPITAL INJECTIONS BY G–20 NATIONS 120

Many EU nations, in particular, established capital injection programs. For instance, on October 17, 2008, the German parliament
enacted the Financial Market Stability Act, which created a Ö480
billion ($646 billion) stabilization fund known as the Sonderfonds
Finanzmarktstabilisierung (SoFFin), which, among other things,
authorized up to Ö80 billion ($107 billion) in capital injections.121
Ultimately, only Ö29 billion ($40 billion) was expended on capital
injections into four banks, with more than half of that amount
going to Commerzbank.122
119 The

relationship between the U.K. program and the CPP is discussed in Section E.1, infra.
Monetary Fund, Updated Stocktaking of the G–20 Responses to the Global
Crisis: A Review of Publicly Announced Programs for the Banking System, at 7 (Sept. 3, 2009)
(online at www.imf.org/external/np/g20/pdf/090309b.pdf).
121 See Federal Agency for Financial Market Stabilisation, Fund for the Stabilization of the
Financial Market Starts Its Operations in Germany (Oct. 27, 2008) (online at www.soffin.de/en/
press/press-releases/2008/20081027_press_release_soffin.html). See also Federal Agency for Financial Market Stabilisation, The Formation (online at www.soffin.de/en/soffin/objectives/
the-formation/) (accessed Aug. 10, 2010); Federal Agency for Financial Market Stabilisation, Financing (online at www.soffin.de/en/soffin/financing/) (accessed Aug. 10, 2010).
122 See Federal Agency for Financial Market Stabilisation, Stabilisierungsmabnahmen des
SoFFin (June 30, 2010) (online at www.soffin.de/de/soffin/leistungen/massnahmen-aktuell/
index.html) (in German). See also Commerzbank, Term Sheet: SoFFin (Dec. 19, 2008) (online
at
www.commerzbank.com/media/aktionaere/vortrag/2008/081219_SoFFin_Term-Sheet.pdf).
SoFFin’s investments typically took the form of interest bearing hybrid securities termed ‘‘silent
participation,’’ as well as, in some cases, a stake in voting common equity. For example,
Commerzbank received a total of Ö16.9 ($23 billion) billion in hybrid securities, in several
tranches, bearing an interest rate of 9 percent, which the bank has so far been unable to pay.
These securities were later made convertible to common equity. See Commerzbank,
Commerzbank and SoFFin Agree on Loan Programme for Mittelstand (SME) (Dec. 18, 2008) (online at www.commerzbank.com/en/hauptnavigation/presse/archiv_/presse_mitteilungen/2008/
quartal_08_04/presselarchivldetail_08_04_4919.html). See also James Wilson, Commerzbank
Prepares for Withdrawal of State Support, Financial Times (May 20, 2010) (online at

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120 International

31

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Another, similar example is France’s State Shareholding Corporation (SPPE).123 Established on October 20, 2008, this government-owned entity purchased significant amounts of securities in
large banks such as BNP Paribas, Société Générale, and Credit
Agricole S.A. (Credit Agricole), in two separate rounds of recapitalization.124 Unlike the CPP, where the shares were directly held by
Treasury, SPPE was set up as a corporation (société anonyme),
with the government as the sole shareholder. SPPE was itself controlled by a preexisting government agency, the Government
Shareholding Agency (APE), which also controls government investments in many other sectors of the French economy, such as
telecom, airports, and defense.125 France’s long history with stateowned enterprises (entreprises publiques) made it possible for the
government to use a preexisting framework to address the unprecedented situation of the 2008 financial crisis. SPPE imposed a number of ‘‘behavioral commitments’’ on participating banks, including
lending targets and limits on severance payments for executives.126
The government of the United Kingdom was another notable
user of capital injections through its Bank Recapitalisation Scheme
(BRS), which was instituted on October 8, 2008 as part of a larger
package of stability measures.127 This £50 billion ($87 billion) program was designed to boost Tier 1 capital at British banks. Unlike
the CPP, however, the British government set a target for new capital to be raised by participating banks. Those banks could then either raise the capital on their own from private investors, or from
funds provided by the government in exchange for preferred and
www.ft.com/cms/s/0/bc23dc62-63a6-11df-a32b-00144feab49a.html). The German government
later purchased Ö1.8 billion ($2.4 billion) in common equity as well, giving it a 25 percent plus
1 share stake in the bank. These shares were purchased at near market value and did not cause
significant dilution of the bank’s private shareholders. Commerzbank, Annual General Meeting
2009 Approves Capital Increase to Allow for SoFFin Participation (May 16, 2009) (online at
www.commerzbank.com/en/hauptnavigation/presse/archivl/presselmitteilungen/2009/
quartal_09_02/presse_archiv_detail_09_02_5662.html). Conversion of the silent participation securities, however, which has been mentioned as a possible government exit strategy, would result in substantial dilution. SoFFin conditioned its investment on compensation limits for the
Commerzbank’s board. This cap was recently renewed until the bank becomes current on its
debt service on the government investment. Commerzbank, Commerzbank Invites for Annual
General Meeting on May 19, 2010 (Mar. 31, 2010) (online at www.commerzbank.com/en/
hauptnavigation/presse/archivl/presselmitteilungen/2010/quartal_10_01/
presse_archiv_detail_10_01_6773.html).
123 Officially the ‘‘Société de Prise de Participation de l’Etat.’’
124 SPPE investments were deeply subordinated perpetual hybrid debt securities known as
Titres Subordonnés Souscrits (TSS). TSS bear a two-phase interest rate—a fixed rate for the
first 5 years, upon which the security converts to variable rate. In the case of Société Generale,
SPPE’s investment was in non-convertible preferred stock, which did not differ greatly in effect
from the TSS. Because none of these investments were convertible, SPPE’s capital injections
were not dilutive to common equity holders. The additional debt service burden created by the
TSS put pressure on the participating banks’ profits, however. There is no evidence that the
SPPE forced changes in the management or board membership of participating banks. See Letter from Neelie Kroes, commissioner for competition policy, European Commission, Capital-Injection Scheme for Banks, at 3, 4–6 (Dec. 8, 2008) (online at ec.europa.eu/competition/state_aid/
register/ii/doc/N-613-2008-WLWL-en-08.12.2008.pdf) (hereinafter ‘‘Capital-Injection Scheme for
Banks’’). See also Mayer Brown, Summary of Government Interventions in Financial Markets:
France,
at
1–2
(Sept.
8,
2009)
(online
at
www.mayerbrown.com/publications/
article.asp?id=7847&nid=6).
125 APE, the Agence de Participations de l’Etat, was formed in 2003. It was specifically designed to separate the conflicting roles the government assumes in its relationship with stateowned corporations, as a shareholder, a customer, and a regulator. As a purely shareholding
entity, APE avoids the appearance of conflicts of interest and promotes transparency. See
Agence De Participations De L’Etat, The Missions of the Government Shareholding Agency
(APE) (online at www.ape.minefi.gouv.fr/sections/qu_est_ce_que_1_ape/) (accessed Aug. 10,
2010).
126 Capital-Injection Scheme for Banks, supra note 124, at 8–10.
127 Financial Support to the Banking Industry, supra note 62.

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common stock.128 Although this program, mentioned earlier in Section C.1.a, was open to all banks within the United Kingdom as
well as U.K. subsidiaries of foreign banks, the government’s focus
was on eight large and systemically significant banks.129 All eight
of these banks participated in the program in the sense of raising
the requisite capital. Only two of Britain’s largest banks, Royal
Bank of Scotland and Lloyds TSB, actually took the government
funds, totaling £37 billion ($65 billion).130
The British government emphasized that the Bank
Recapitalisation Scheme was designed to provide maximum protection for the taxpayer. This was highlighted by the Prime Minister
at the time, Gordon Brown, who contrasted the British approach
with the initial TARP plan for asset purchases.131 Even after the
United States switched to a strategy of capital injections, there
were substantial differences between the countries’ approaches.
Unlike the CPP, which was designed to be attractive to banks in
order to maximize participation, the BRS imposed a number of rigorous conditions on participating banks, including, among other
things, lending targets.132
Although most countries tended to focus on assisting their own
domestic banks, in certain cases, several countries jointly contributed capital to a troubled bank.133 A notable example occurred on
September 28, 2008 when the governments of Belgium, Netherlands, and Luxembourg purchased a 49 percent stake in Fortis
N.V./S.A. (Fortis), a large bank and insurance company, for Ö16.4
128 Mayer Brown, Summary of Government Interventions in Financial Markets: United Kingdom, at 1 (Sept. 8, 2009) (online at www.mayerbrown.com/public_docs/0363finSummary_of_Government_Interventions_UK_2col.pdf).
129 The eight large British financial institutions were: Abbey; Barclays; HBOS; HSBC Bank
plc; Lloyds TSB; Nationwide; RBS; and Standard Chartered.
130 Arguably, three banks took government funds, since Lloyds’ funding was conditioned on
a successful merger with HBOS. HBOS shareholders therefore indirectly benefited from the government funds provided to Lloyds. See Jodie Ginsberg and Steve Slater, UK Bank Bail-Out to
Take Big Stakes in Top Banks, Reuters (Oct. 13, 2008) (online at www.reuters.com/article/
idUSTRE49C1LQ20081013). The nature of the government investments in these firms was unlike most other capital injection programs, such as the CPP. In the case of RBS, the Government
acted as the underwriter for a £15 billion ($26 billion) common equity offering that would be
made available to existing RBS Shareholders at a fixed price of 65.5 pence per share (RBS was
trading at around 50–60 pence after a precipitous drop over the prior weeks). Only 0.24 percent
of the new shares were purchased by shareholders, leaving the remainder to be purchased by
the government at 65.5 pence per share. Additionally, the government subscribed for 5 billion
($8.5 billion) in convertible preferred shares (‘‘preference shares’’ in British parlance) bearing a
12 percent coupon. Both of these transactions were highly dilutive to existing shareholders. The
Lloyds/HBOS investment was similarly structured to the RBS investment, and similarly dilutive
to existing shareholders. See House of Commons, Treasury—Seventh Report Banking Crisis:
Dealing With the Failure of the UK Banks, at Section 3, paragraphs 133–146 (Apr. 21, 2009)
(online
at
www.parliament.the-stationery-office.co.uk/pa/cm200809/cmselect/cmtreasy/416/
41606.htm).
131 Landon Thomas Jr. and Julia Werdigier, Britain Takes a Different Route to Rescue Its
Banks, New York Times (Oct. 9, 2008) (online at www.nytimes.com/2008/10/09/business/
worldbusiness/09pound.html) (hereinafter ‘‘Britain Takes a Different Route to Rescue Its
Banks’’).
132 The Bank Recapitalization Scheme lending targets have not been successfully met. See,
e.g., Kathryn Hopkins, Banks Fail to Meet Targets to Increase Lending to Small Business, The
Guardian (Apr. 1, 2010) (online at www.guardian.co.uk/business/2010/apr/01/banks-fail-lendingbusiness-targets). Nevertheless, these targets were recently increased by the new coalition government. Jill Treanor, Coalition Plans New Lending Targets for Bailed-Out Banks, The Guardian (June 27, 2010) (online at www.guardian.co.uk/business/2010/jun/27/coalition-plans-banklending-targets). Lending targets of this sort, also employed by France, Austria, and the Netherlands, have been criticized by some, such as the Institute of International Finance, a global
banking trade group, as being protectionist and destabilizing to credit flows. Peter Foster, Government Lending Targets for Bail-Out Banks Feed Protectionism, Warns IIF, The Telegraph
(June 11, 2009) (online at www.telegraph.co.uk/finance/economics/5505726/Government-lendingtargets-for-bail-out-banks-feed-protectionism-warns-IIF.html).
133 International cooperation during the financial crisis is discussed in Section E, infra.

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billion ($23.9 billion).134 Despite a long history of cooperation between these three countries, the subsequent sale of Fortis to BNP
Paribas was delayed and complicated by opposition from Belgian
shareholders, highlighting the difficulties individual national concerns present in international rescue efforts.135
The EU, through the European Central Bank (ECB), used capital
injections as one of the strategies it pursued to assist banks in
member countries. On May 7, 2009, the European Central Bank
began the Covered Bond Purchase Programme to purchase eligible
Euro-denominated corporate bonds as a way of injecting additional
capital into the financial system, particularly banks.136 This program concluded on June 30, 2010 after being used to purchase Ö60
billion ($83.5 billion) in bonds.137 ECB documents indicate that the
ECB believed the program helped reduce euro zone covered bond
spreads significantly, and thus lowered the cost of capital raised
using these instruments.138
Japan had considerable experience with capital injections over
the past two decades, and brought this experience to bear in the
recent financial crisis. Beginning in 1997, the Japanese government injected over ¥10 trillion ($116 billion in today’s dollars) in
new capital into the Japanese banking system in two separate
tranches. These injections were accomplished either by purchasing
preferred shares or, more commonly, through subordinated debt.139
Some observers consider these actions to have been successful overall.140 In 2004, the Japanese government passed the Financial
Functions Strengthening Act, which provided a procedure for future capital injections.141 The Deposit Insurance Corporation of
Japan (DIC) began using this new authority in late 2006 with capital injections to two banks, Kiya Bank and Howa Bank Limited.
Beginning in March 2009, DIC began a series of capital injections
to 11 banks, in the form of convertible preferred shares.142 Due to
134 Fortis Bank, Annual Report 2008: Fortis Bank NV/SA, at 10 (Apr. 9, 2009) (online at
www.fortisbank.com/en/press/media/UK_FBBE_Annual_report_2008_20042009.pdf).
135 IMF Proposed Framework for Enhanced Coordination, supra note 33, at 13.
136 Mayer Brown, Summary of Government Interventions in Financial Markets: European Central Bank (and the Eurosystem), at 3 (May 26, 2009) (online at www.mayerbrown.com/
public_docs/ 0287fin-Interventions_ECB.pdf).
137 This currency conversion uses the average historical exchange rate during the 420 days
from the program’s inception to completion.
138 See, e.g., European Central Bank, Monthly Report on the Eurosystem’s Covered Bond Purchase Programme, May 2010, at 1 (June 2010) (online at www.ecb.int/pub/pdf/other/monthly
reporteurosystemcoveredbondpurchaseprogramme201006en.pdf).
139 See also April Oversight Report, supra note 2, at 55–60.
140 See, e.g., Heather Montgomery and Satoshi Shimizutani, The Effectiveness of Bank Recapitalizations in Japan, at 12 (June 2005) (online at hi-stat.ier.hit-u.ac.jp/research/discussion/2005/
pdf/D05-105.pdf). This research paper examines the effect of Japanese capital injections on international and regional bank behavior, specifically on regulatory capital strength, total lending,
lending to small businesses, and loan write-offs. In summary, the authors found that the second
round of capital injections (1998–99), which was more company specific in structure than the
first, was particularly effective. The authors partially credit this to a requirement that participating banks submit a restructuring plan that outlined how the capital would be used. See also
Richard Koo, The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can
Learn from Japan 1990–2005 (Oct. 2009) (online at www.imf.org/external/am/2009/pdf/
APDKoo.pdf).
141 See Mizuho Financial Group, Inc., Form 20–F for Fiscal Year Ended March 31, 2009, at
33 (Aug. 19, 2009) (online at www.sec.gov/Archives/edgar/data/1335730/000119312509177855/
d20f.htm).
142 Deposit Insurance Corporation of Japan, Capital Injection (online at www.dic.go.jp/english/
e_katsudou/e_katsudou3.html) (accessed Aug. 10, 2010); Deposit Insurance Corporation of
Japan, List of Capital Injection Operations Pursuant to the Financial Functions Strengthening
Act (online at www.dic.go.jp/english/e_katsudou/e_katsudou3-2.html) (accessed Aug. 10, 2010).

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their convertible nature, these capital injections were potentially
dilutive to existing shareholders.
Overall, capital injections were a common government response
during the initial weeks and months of the financial crisis. The example of the TARP certainly encouraged the use of capital injections, although there were many variations both in the manner in
which the capital was provided, and the consequences of the capital
injection to the company and its investors.143

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b. Nationalizations
In certain instances, governments went beyond capital injections,
completely or effectively nationalizing ailing financial institutions.
The term ‘‘nationalization’’ can be used to cover a wide array of
possible actions, from the government purchase of a majority stake
in a private firm as a passive investor to putting a failed bank into
receivership for liquidation. This section will generally disregard
the latter, as this strategy is not a new response to the recent financial crisis, and is usually simply a mechanism for conducting an
orderly bankruptcy, rather than an extraordinary government takeover of a private enterprise. In certain cases, however, it is difficult
to draw a strict distinction between a bank liquidation and nationalization.
The U.S. federal government’s placement of Fannie Mae and
Freddie Mac into conservatorship on September 8, 2008, as well as
the acquisition of 80 percent of insurance giant AIG on September
16, 2008, have been termed ‘‘nationalization’’ by some, in the latter
case notably by former AIG CEO Maurice ‘‘Hank’’ Greenberg.144
The federal government has not characterized these actions as nationalization, however, likely due to the negative connotations of
the term in the United States. Other nations, including most European nations, had no such compunction about calling similar actions nationalization.
The U.K. takeover of Northern Rock, one of the U.K.’s largest
banks at the time, is perhaps the best known nationalization of a
bank in the financial crisis. During the summer of 2007, ongoing
problems with U.S. subprime mortgages caused a severe contraction in the money markets, as banks became increasingly wary of
lending to one another. Beginning in September 2007, the Bank of
England made loans and provided other assistance to Northern
Rock, which had been unable to refinance its maturing debts. The
news of this support prompted a brief run on the bank, which was
only halted by promises of asset guarantees by the U.K. Treasury.
Despite this assistance, the company’s need for capital kept grow143 During the summer of 2010, the Committee of European Banking Supervisors stress tested
91 European banks. The tested banks comprised 65 percent of the European banking sector by
assets. These tests used an approach similar to that used in the 2009 U.S stress tests, discussed
in the Panel’s June 2009 Report. Congressional Oversight Panel, June Oversight Report: Stress
Testing and Shoring Up Bank Capital, at 6–26 (June 9, 2009) (online at cop.senate.gov/
documents/cop-060909-report.pdf) (hereinafter ‘‘June Oversight Report’’). Results of the tests
were announced on July 23, 2010, and are available online. See Committee of European Banking
Supervisors, 2010 EU Wide Stress Testing (July 2010) (online at www.c-ebs.org/
EuWideStressTesting.aspx). These stress tests are also discussed in Section E.1.b, infra.
144 Mark E. Ruquet, Greenberg Pans AIG ‘‘Nationalization’’, National Underwriter Life and
Health (Sept. 18, 2008) (online at www.lifeandhealthinsurancenews.com/News/2008/9/Pages/
Greenberg-Pans-AIG-Nationalization-.aspx). For an extensive review of the AIG rescue, see June
Oversight Report, supra note 10.

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ing. By February 2008, the government’s potential liabilities from
Northern Rock totaled more than £100 billion ($196 billion).
Unable to find a buyer for Northern Rock, the government announced it was nationalizing the bank on February 17, 2008.145
After a lengthy arbitration process, it was determined that former
Northern Rock shareholders should not be compensated.146 The nationalized Northern Rock shares were held by UK Financial Investments Ltd., a publicly owned firm that would allow the government
to remain a passive investor. Nevertheless, sweeping changes were
instituted at Northern Rock, including a new board of directors,
many layoffs, a merger with another nationalized bank, a split into
a ‘‘good bank’’ and a ‘‘bad bank,’’ and the sale or transfer of many
assets, including much of the mortgage book. Although the nationalization was controversial, the company has recovered somewhat
and expects to repay the government loan by the end of 2010.147
Another example of nationalization was Germany’s takeover of
Hypo Real Estate AG (HRE), a major mortgage lender. After over
Ö80 billion ($107 billion) in loan guarantees by the German government failed to solve HRE’s substantial financial problems, the government, through SoFFin, made a Ö2.9 billion ($4.1 billion) offer to
purchase 90 percent of the firm, which was accepted on June 2,
2009.148 This offer closely followed the passage of a new expropriation law on April 9, 2009.149 On June 8, 2009, using the provisions
of the new law, SoFFin demanded that the remaining shares be
turned over to it.150 After much dispute with the minority shareholders over this ‘‘squeeze-out,’’ particularly with the American private equity firm J.C. Flowers, HRE was finally fully acquired by
SoFFin on October 5, 2009.151 The government did not remove the
HRE’s CEO, presumably because he had joined HRE in October
145 See The Nationalization of Northern Rock, supra note 46, at 23. This report contains numerous criticisms of the British government’s handling of the Northern Rock situation, and puts
the estimated taxpayer losses at between £2 and £10 billion ($3 to $14 billion).
146 Prior to nationalization, Northern Rock had over 190,000 shareholders. In 2008, the British
Treasury appointed an independent ‘‘valuer’’ to determine what compensation these shareholders should receive. The valuer ultimately determined that Northern Rock shares were
worthless if the £25 billion ($40 billion) government loan was subtracted from Northern Rock’s
pre-nationalization value. This decision not to grant any compensation caused considerable controversy among former shareholders, many of whom disputed the valuer’s assumptions and
methodology. Northern Rock, Independent Valuation Under the Northern Rock PLC Compensation Scheme Order 2008: Consultation Document December 2009 (Dec. 2009) (online at
www.northernrockvaluer.org.uk/media/uploads/page_contents/downloadables/
Consultation%20Document%20December%202009.pdf). See generally Northern Rock, Northern
Rock Valuer’s Website (online at www.northernrockvaluer.org.uk/default.aspx) (accessed Aug. 10,
2010).
147 See Northern Rock, Update on State Aid Approval Process for Northern Rock (June 26,
2009)
(online
at
companyinfo.northernrock.co.uk/investorRelations/news/
viewFeedarticle.aspx?id=169296873417676); BBC News, Northern Rock Confirms Split Plan
(June 26, 2009) (online at news.bbc.co.uk/2/hi/business/8121517.stm).
148 Hypo Real Estate Group, Hypo Real Estate Shareholders Approve Capital Increase (June
2,
2009)
(online
at
www.hyporealestate.com/eng/pdf/02062009_PIHV_2009_Englisch_Endfassung.pdf).
149 Mayer Brown, Summary of Government Interventions in Financial Markets: Germany, at
1–3 (Sept. 8, 2009) (online at www.mayerbrown.com/publications/article.asp?id=7848&nid=6).
150 Id. at 5.
151 Hypo Real Estate Group, HRE General Meeting Passes Resolution on the Squeeze-Out of
Minority Shareholders (Oct. 5, 2009) (online at www.hyporealestate.com/eng/pdf/PIaO_Hauptversammlung_englisch_Endfassung.pdf). For explanation of the J.C. Flowers dispute,
see, e.g., Carter Dougherty, J.C. Flowers Has No Allies in Battle Over Hypo Real Estate, The
New York Times (Apr. 27, 2009) (online at www.nytimes.com/2009/04/28/business/global/
28hypo.html).

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2008 and was not held responsible for the company’s condition.152
Although this takeover may have saved a major lender from bankruptcy, HRE remains an extremely weak company. Despite being
under complete government ownership for over a year, HRE was
the only German bank to fail the recent EU bank stress tests.153
The 2008 financial crisis had a greater impact on Iceland’s economy than that of any other nation. Following the collapse of Glitnir
Bank (Glitnir), the Icelandic government announced on September
28, 2008 that it would nationalize the bank through purchase of a
75 percent equity stake for the equivalent of $875 million.154 Within days, however, the government decided to cancel the purchase
and put the insolvent bank directly into receivership, as well as
NBI hf (Landsbanki) and Kaupthing Bank (Kaupthing), the two
other large banks in the country.155 These institutions were divided
into ‘‘old’’ and ‘‘new’’ banks—essentially a bad bank-good bank
strategy—with the latter designed to be viable businesses without
the burden of the distressed assets of the former banks.156 The
CEOs of Kaupthing and Landsbanki resigned upon takeover, presumably under government pressure. The CEO of Glitnir was
asked to stay on, but has since resigned.157 Iceland is still in the
process of resolving these and other banks in receivership.

rfrederick on DSKD9S0YB1PROD with HEARING

c. Expanded Deposit Insurance
Deposit insurance schemes provide a safety net that maintains
depositor confidence in the solvency of banks and discourages bank
runs by small, uninformed depositors. Insured depositors are protected against the consequences associated with the failure of a
bank, thereby relieving them of the difficult task of monitoring and
assessing the health of their financial institution in order to ensure
the security of their savings. Insurance levels are typically capped
under the assumption that larger depositors are better informed
and thus better able to exert discipline on banks. A trusted deposit
insurance scheme can be particularly valuable in times of crisis
when market participants of all sizes find it difficult to distinguish
between illiquid and insolvent financial institutions or to gauge the
level of implicit government support for the financial sector. In the
fall of 2008, most developed economies expanded their deposit in152 See Hypo Real Estate AG, Supervisory Board Appoints New Members to the Management
Board of Hypo Real Estate Holding AG (Oct. 13, 2008) (online at www.hyporealestate.com/eng/
pdf/20081007_19.15_Ad.Hoc_eng.pdf).
153 The European stress tests are discussed in Section E.1.b, infra.
154 Tasneem Brogger and Helga Kristin Einarsdottir, Iceland Drops Glitnir Purchase; Bank in
Receivership,
Bloomberg
(Oct.
8,
2008)
(online
at
noir.bloomberg.com/apps/
news?pid=newsarchive&sid=a9KS9N9H_GLw&refer=home%5D).
155 Ministry of Justice and Ecclesiastical Affairs (Iceland), Announcement: Decision of the Financial Supervisory Authority on the Appointment of a Receivership Committee for GlitnirmBank
hf, The Legal Gazette (Oct. 7, 2008) (online at www.fme.is/lisalib/getfile.aspx?itemid=5671).
156 Financial Supervisory Authority of Iceland, Annual Report 2009, at 12 (June 11, 2010) (online at www.fme.is/lisalib/getfile.aspx?itemid=7294).
157 Glitnir’s press release archive does not cover the period prior to October 2008. Several
press accounts have mentioned that the CEO was requested to stay. See, e.g., David Teather,
Banking Crisis: Iceland Takes Control of Glitnir, The Guardian (Sept. 29, 2008) (online at
www.guardian.co.uk/business/2008/sep/29/icelandiceconomy.banking). In any event, the CEO remained at Glitnir for several months after nationalization. Though Glitnir did not announce his
departure, a new CEO has since been appointed. See, e.g., Glitnir, New CEO of Glitnir Bank
(Aug. 5, 2009) (online at www.glitnirbank.com/home/198-new-ceo-of-glitnir-bank.html).

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surance schemes to avoid further destabilization as a result of bank
runs.158
According to the International Association of Deposit Insurers, 99
countries had explicit deposit insurance schemes in operation at
the onset of the financial crisis.159 In the fall of 2008, ‘‘47 jurisdictions acted to strengthen their deposit insurance systems in response to the crisis.’’ 160
In the United States, language in EESA temporarily raised the
ceiling on FDIC deposit insurance from $100,000 per depositor per
bank to $250,000.161 The increase became permanent with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010.162 In addition, two weeks prior to the
passage of EESA, Treasury responded to a broad-based run on
money market mutual funds triggered by the collapse of Lehman
Brothers by creating the Temporary Guarantee Program for Money
Market Funds (TGPMMF). TGPMMF provided a guarantee to investors in all participating money market funds that the value of
their investment would not drop below $1.00 per share.163 After
two extensions, the TGPMMF expired on September 18, 2009.164
The first foreign government to expand its deposit insurance
scheme was Ireland. On September 20, 2008, Ireland’s Minister of
Finance announced that the Irish government would increase its
insurance limit from Ö20,000 ($29,000) to Ö100,000 ($143,000).165
On September 30, only hours after the U.S. House of Representatives surprised financial markets by failing in its initial attempt to
pass financial stability legislation, Ireland went a step further,
passing an emergency law authorizing an unlimited temporary
guarantee arrangement safeguarding all deposits and debts with
its six major banks for two years.166
This unilateral decision to guarantee deposits of any size raised
concerns among other EU countries and the European Commissioner for Competition Policy that Ireland was distorting the market by providing its banks with a competitive advantage.167 Re158 Sebastian Schich, Financial Crisis: Deposit Insurance and Related Financial Safety Net Aspects, OECD Journal: Financial Market Trends, Vol. 2008/2, No. 95, at 12–21 (2008) (online at
www.oecd.org/dataoecd/36/48/41894959.pdf).
159 International Association of Deposit Insurers, 2007/2008 Annual Report, at 15 (2008) (online at www.iadi.org/annual_reports/IADI_AnnualReport_low.pdf). In addition to the 99 deposit
insurance schemes in operation, another 8 were pending, and 12 were planned or under study
as of March 2008.
160 International Association of Deposit Insurers, 2008/2009 Annual Report: Charting a
Course Through a Global Crisis, at 1 (2009) (online at www.iadi.org/annual_reports/
AnnualReport08_09.pdf).
161 See 12 U.S.C. § 5241(a)(1).
162 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, at
§ 335 (2010) (hereinafter ‘‘Dodd-Frank Wall Street Reform and Consumer Protection Act’’).
163 See November Oversight Report, supra note 68, at 27–35.
164 See U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization and Rehabilitation Policies, at 46 (Sept. 2009) (online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf).
165 Credit Institutions (Financial Support) Act of 2008 (No. 18 of 2008) (Oct. 2, 2008) (online
at www.irishstatutebook.ie/2008/en/act/pub/0018/print.html).
166 The six banks covered by the guarantee were Allied Irish Bank, Bank of Ireland, Anglo
Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society, and the Educational
Building Society. Department of Finance (Ireland), Government Decision to Safeguard Irish
Banking System (Sept. 30, 2008) (online at www.finance.gov.ie/documents/pressreleases/2008/
blo11.pdf) (hereinafter ‘‘Government Decision to Safeguard Irish Banking System’’).
167 See Neelie Kroes, commissioner for competition policy, European Comission, Speech Before
the Economic and Monetary Affairs Committee, European Parliament, Dealing with the Current
Financial
Crisis
(Oct.
6,
2010)
(online
at
europa.eu/rapid/
Continued

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ports of an exodus of deposits from U.K. banks to Irish banks led
the U.K.’s Financial Services Authority (FSA), on October 3, to increase its compensation limit for bank deposits from £35,000
($61,834) to £50,000 ($88,335) on individual claims and up to a
maximum of £100,000 ($176,670) for joint accounts.168 The United
Kingdom also found itself in the position of guaranteeing the deposits of Icesave, an online branch of the failed Icelandic bank
Landsbanki, which catered to British citizens.169 The Icesave guarantee was an unusual case of a bank being rescued by a foreign
government.170 It highlights the difficulties in effectively dealing
with
globalized
financial
institutions,
especially
those
headquartered in small nations, such as Iceland, which lack the
economic capacity to rescue large firms themselves.
The lack of an initial coordinated EU approach to deposit insurance expansion underscored the potential adverse spillover effects
of adjusting national deposit insurance in a globalized economy.171
This problem is magnified in the European Economic Area (EEA)
where member states observe a ‘‘single passport’’ system that permits financial services operators legally established in one member
state to operate in the other member states without further authorization requirements. Under a European Commission directive
adopted in 1994 that sets minimum standards for deposit insurance, all EEA members must establish a deposit insurance scheme
with minimum coverage of Ö20,000 ($27,000 in today’s dollars) per
depositor. Deposits in banks that use the passport system to establish branches or subsidiaries in other EEA member states are covered by the deposit insurance scheme of the bank’s home state.172
As the United Kingdom found in the case of the Icelandic bank
Landsbanki, this arrangement can cost the host state in the event
that the bank’s home state deposit insurance scheme is unwilling
or unable to protect depositors.173
pressReleasesAction.do?reference=SPEECH/08/
498&format=HTML&aged=0&language=EN&guiLanguage=en).
168 Financial Services Authority (U.K.), Compensation Scheme to Cover Savers’ Claims Up to
£50,000 (Oct. 3, 2008) (online at www.fsa.gov.uk/pages/Library/Communication/PR/2008/
114.shtml) (hereinafter ‘‘FSA Press Release—Compensation Scheme’’).
169 Financial Services Authority (U.K.), Icesave—Statement to Customers (Oct. 8, 2010) (online
at
www.fsa.gov.uk/pages/consumerinformation/firmnews/2008/
icesavestatementcustomers_.shtml).
170 Similar rescues of local subsidiaries of Icelandic banks were implemented by the Netherlands. See, e.g., Netherlands—De Nederlandsche Bank (DNB), Press Release: DNB Activates Deposit Guarantee Scheme for Savers at Icesave (Oct. 9, 2008) (online at www.dnb.nl/en/news-andpublications/news-and-archive/persberichten-2008/dnb189090.jsp).
171 See, e.g., Larry Elliott, Miles Brignall, and Henry McDonald, Savers in Stampede to Safety,
The
Guardian
(Oct.
2,
2008)
(online
at
www.guardian.co.uk/politics/2008/oct/02/
alistairdarling.ireland); British Bankers Association, BBA Statement on Irish Guarantee (Oct. 1,
2008) (online at www.bba.org.uk/bba/jsp/polopoly.jsp?d=1569&a=14580) (‘‘The extent of the guarantee has clear consequences for firms competing to win retail deposits and, while we support
proposals aimed at re-introducing stability to the financial markets, we need fair play for financial institutions across Europe.’’).
172 European Parliament and the Council of the European Union, Directive 94/19/EC of the
European Parliament and of the Council of 30 May 1994 on Deposit-Guarantee Schemes, at Art.
4(1)
(May
30,
1994)
(online
at
eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=CELEX:31994L0019:EN:HTML). Pursuant to Article 4(1) of 94/19/EC,
‘‘[d]eposit-guarantee schemes introduced and officially recognized in a Member State in accordance with Article 3(1) shall cover the depositors at branches set up by credit institutions in other
Member States.’’ Thus, for example, depositors in branches of Irish banks located in the United
Kingdom are covered by the Irish deposit insurance scheme. In the event that the host country
that the foreign branch is operating in has a higher coverage limit than that bank’s home country, the host country must allow the bank to buy into its insurance scheme in order to cover
the difference. Id. at Art. 4(2).
173 Icesave was an internet branch of Landsbanki, an Icelandic bank with an EEA passport.
Icesave had ‘‘topped up’’ into the U.K.’s Financial Services Compensation Scheme (FSCS), mean-

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On October 4, 2008, French Prime Minister and then-acting EU
President Nicolas Sarkozy hosted a summit with leaders from Germany, the United Kingdom, and Italy to discuss a coordinated response to the crisis. The four nations criticized Ireland for issuing
a unilateral deposit guarantee without first consulting with its EU
partners. A statement from the German Chancellor’s office stated
that Ireland’s move ‘‘forced London in turn to raise its own bank
guarantees to prevent a stampede to transfer savings from the
United Kingdom to Ireland.’’ 174 A day later, German Chancellor
Angela Merkel and Finance Minister Peer Steinbrück provided a
verbal guarantee of all private bank deposits in German banks.175
Numerous other EU member states, including Greece, Austria,
Denmark, and Sweden, followed suit in the first week of October
before the EU Economic and Financial Affairs Council announced
an agreement among all EU members to raise the minimum level
of deposit guarantee protection to Ö50,000 ($68,000) for an initial
period of at least one year.176 The agreement was formalized by an
amendment to the deposit insurance directive proposed by the European Commission in mid-October and passed by the European
Parliament in March 2009.177 The amendment called for an increase of deposit insurance to Ö50,000 ($63,000) 178 by June 30,
ing that Iceland’s Depositors’ and Investors’ Guarantee Fund (IDIGF) was liable for the first
Ö20,887 ($28,765) of any claim, and the FSCS was liable for any amount above that up to the
U.K. limit, of £50,000 ($87,805) at the time. See Financial Services Authority (U.K.), Financial
Risk Outlook 2009, at 19 (Feb. 2009) (online at www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2009.pdf). As discussed in Section C.1.b, on October 6, 2008, Iceland adopted
emergency legislation authorizing the nationalization of its three largest banks, including
Landsbanki, all of which had lost the ability to refinance their liabilities in international capital
markets. The Icelandic government announced it would guarantee all domestic deposits at these
institutions, but was non-committal as to how depositors in foreign branches would be treated.
The United Kingdom stepped in to cover these deposits in order to maintain confidence in the
British banking system. See United Kingdom Financial Services Compensation Scheme (FSCS),
Determination: FSCS Accelerated Compensation for Depositors Instrument 2008 (Landsbanki Islands hf) (Nov. 4, 2008) (online at www.fscs.org.uk/industry/determinations/icesave/). The IDIGF
agreed to reimburse the United Kingdom for the amounts paid out to eligible depositors of the
Icesave accounts up to Ö20,887 ($28,765) per depositor, totaling approximately £2.4 billion ($4
billion). However, as a result of the financial crisis, the IDIGF has limited resources at this
time, so a loan agreement was reached to satisfy the IDIGF’s debt (guaranteed by the government of Iceland) to the United Kingdom. The terms of the loan are still awaiting approval from
the Icelandic Parliament and President. See Prime Minister’s Office (Iceland), Press Release: Iceland
Negotiations
Concluded—Outcome
Presented
(Oct.
18,
2009)
(online
at
eng.forsaetisraduneyti.is/news-and-articles/nr/4008); Acceptance and Amendment Agreement Relating to a Loan Agreement Dated 5 June 2009 Between The Depositors’ and Investors’ Guarantee
Fund of Iceland and Iceland and The Commissioners of Her Majesty’s Treasury (Oct. 19, 2009)
(online www.althingi.is/pdf/icesave/01-AAA-UK.pdf); IceNews, EFTA Extends Iceland Icesave
Deadline (July, 24, 2010) (online www.icenews.is/index.php/2010/07/24/efta-extends-icelandicesave-deadline/).
174 Office of the German Federal Chancellor, Confidence Must Be Restored in Financial Markets (Oct. 5, 2008) (online at www.bundeskanzlerin.de/nn_704284/Content/EN/Archiv16/Artikel/
2008/10/2008-10-04-g4-paris-finanzmarkt__en.html).
175 Id. (‘‘We tell all savings account holders that your deposits are safe. The federal government assures it.’’).
176 Council of the European Union, Press Release: 2894th Council Meeting, Economic and Financial Affairs (Oct. 7, 2008) (www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/
ecofin/103250.pdf).
177 European Parliament and the Council of the European Union, Directive 2009/14/EC of the
European Parliament and of the Council of 11 March 2009 Amending Directive 94/19/EC on
Deposit Guarantee Schemes as Regards the Coverage Level and the Payout Delay, at Art. 1 (Mar.
11, 2009) (online at ec.europa.eu/internal_market/bank/docs/guarantee/200914_en.pdf) (hereinafter ‘‘Amendment to Deposit Insurance Directive’’).
178 The discrepancy in the euro-to-dollar conversions between the time of the announced agreement and formal adoption of the amendment results from a drop in the value of the euro relative to the dollar during this period.

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2009 and harmonization of coverage levels at Ö100,000 ($126,000)
by December 31, 2010.179
Outside Europe, the most significant deposit insurance policy responses to the crisis occurred in Australia and New Zealand. Before
the crisis began, Australia and New Zealand were two of the only
major developed economies with no deposit insurance schemes at
all, instead favoring rigorous supervisory regimes to maintain confidence in their banking sectors. On October 12, 2008, the two
countries made coordinated announcements of new deposit insurance policies. Australia introduced a guarantee of deposits of up to
$1 million AUD ($644,000) in Australian-owned banks, locally incorporated subsidiaries of foreign banks, credit unions, and building societies for a period of three years.180 New Zealand introduced
an opt-in deposit scheme covering retail deposits at banks and nonbank deposit taking entities for two years.181 Hong Kong and
Singapore followed later that same week with two-year suspensions
of the deposit coverage limit in their existing insurance schemes.182
d. Central Bank Liquidity and Other Programs
Board of Governors of the Federal Reserve System
The actions undertaken by the Federal Reserve can largely be
classified into four groups: 183
• Provision of Short-term Liquidity to Banks. Through programs such as the Primary Dealer Credit Facility (PDCF), the
Term Securities Lending Facility (TSLF), and the Term Auction Facility (TAF), which were established in late 2007 and
early 2008, the Federal Reserve acted in its role as lender of
last resort and to provide liquidity to banks and other depository institutions.
• Provision of Liquidity to Borrowers and Investors. The
Money Market Investor Funding Facility (MMIFF), the AssetBacked Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), and the Term Asset-Backed Securities Loan Facility (TALF), which were established in the fall of 2008, provided
liquidity to market participants.
• Purchase of Long-term Securities. As the liquidity facilities
that had been established to face the crisis were wound down,
the Federal Reserve expanded its facilities for purchasing
mortgage related securities. The Federal Reserve purchased
$175 billion of federal agency debt securities and $1.25 trillion
179 Amendment

to Deposit Insurance Directive, supra note 177, at Art. 1.
of Australian Deputy Prime Minister and Treasurer Wayne Swan, Government Announces Details of Deposit and Wholesale Funding Guarantees (Oct. 24, 2008) (online at
www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/
117.htm&pageID=003&min=wms&Year=&DocType=).
181 Reserve Bank of New Zealand, Deposit Guarantee Scheme Introduced (Oct. 12, 2008) (online at www.rbnz.govt.nz/news/2008/3462912.html).
182 Hong Kong Monetary Authority, Press Release: Financial Secretary Announces New Measures to Support Confidence in the Hong Kong Banking System (Oct. 14, 2008) (online at
www.info.gov.hk/hkma/eng/press/2008/20081014e6_index.htm); Ministry of Finance and Monetary Authority of Singapore, Joint Press Statement (Oct. 16, 2008) (online at www.mas.gov.sg/
news_room/press_releases/2008/MOF_and_MAS_Joint_Press_Statement.html).
183 For additional details on these programs, see Annex I, infra.

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of agency mortgage-backed securities by the end of March
2010.184
• Institution-Specific Assistance. In March 2008, the Federal
Reserve provided $28.8 billion in funding to Maiden Lane
LLC—a special purpose vehicle (SPV) created to purchase
mortgage-backed securities from Bear Stearns in order to facilitate the merger between that company and JPMorgan
Chase. In the fall of 2008, through the creation of two additional SPVs—Maiden Lane II and III—as well as a revolving
credit facility, the Federal Reserve committed up to $137.5 billion to AIG.185 Finally, in late 2008 and early 2009, the Federal Reserve, along with Treasury and the FDIC, participated
in ring-fence guarantees of $118 billion for Bank of America 186
and $301 billion for Citigroup.187

184 Board of Governors of the Federal Reserve System, Minutes of the Federal Open Market
Committee, at 10 (Dec. 15–16, 2009) (online at www.federalreserve.gov/newsevents/press/
monetary/fomcminutes20091216.pdf) (‘‘[T]he Federal Reserve is in the process of purchasing
$1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.’’).
185 This figure is composed of the $85 billion revolving credit facility and the maximum loans
to Maiden Lane II and III of $22.5 billion and $30 billion, respectively.
186 As defined by Treasury, a ‘‘ring-fencing’’ is the segregation of certain assets from the rest
of a financial institution’s balance sheet in order to address problems with the assets in isolation. U.S. Department of the Treasury, Decoder (Sept. 18, 2009) (online at
www.financialstability.gov/roadtostability/decoder.htm). While a Provisional Term Sheet was
drafted reflecting the outlines of Bank of America’s asset guarantee agreement, the parties
never agreed upon a finalized term sheet. Even though no agreement had been memorialized
in writing and the parties were still negotiating certain terms (i.e., there was no explicit guarantee), the parties negotiated a fee to compensate the government upon Bank of America’s decision to terminate ongoing negotiations surrounding the unfinalized guarantee. Pursuant to the
Bank of America Termination Agreement, Bank of America made payments of $276 million to
Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC. U.S. Department
of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, and Bank of America Corporation, Termination Agreement, at 1–2 (Sept. 21, 2009)
(online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20%20executed.pdf).
187 In the case of this agreement, Treasury, the FDIC, and the Federal Reserve placed guarantees, or assurances, against losses on pools of certain assets owned by Citigroup. As consideration for the guarantee, Citigroup issued Treasury with $4.034 billion face value of preferred
stock and warrants to purchase 66,531,728 shares of common stock at a strike price of $10.61.
The FDIC was issued $3.025 billion in preferred stock. Master Agreement Among Citigroup Inc.,
Certain Affiliates of Citigroup Inc. Identified Herein, Department of the Treasury, Federal Deposit Insurance Corporation and Federal Reserve Bank of New York (Jan. 15, 2009) (online at
www.financialstability.gov/docs/AGP/Citigroup_01152009.pdf). Upon the termination of the guarantee, Citigroup canceled $1.8 billion of the $7 billion in AGP Preferred that Citigroup had
issued to Treasury and the FDIC as consideration. The $5.259 billion in trust preferred securities retained reflects a $1.8 billion reduction since the loss-sharing agreement was terminated
after one year. Treasury will incur the $1.8 billion haircut initially, but will receive up to $800
million of the Citigroup trust preferred securities currently held by the FDIC, provided that
Citigroup repays its outstanding debt issued under the FDIC’s TLGP. As part of the termination
fee, Citigroup also paid $50 million to the Federal Reserve Bank of New York. U.S. Department
of the Treasury, Citigroup Termination Agreement (Dec. 23, 2009) (online at
www.financialstability.gov/docs/Citi%20AGP%20Termination%20Agreement%20%20Fully%20Executed%20Version.pdf).

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FIGURE 14: FEDERAL RESERVE’S CRISIS RESPONSE 188

European Central Bank (ECB)
The ECB has characterized its crisis response as being centered
upon three building blocks. The first was the expansion of liquidity
through the adaptation of the ECB’s regular refinancing operations. The ECB adopted what it called a ‘‘fixed rate full allotment’’
tender process. In normal times the ECB would auction a set
amount of central bank credit with one-week maturity and let the
market demand determine the price. Under the ‘‘fixed rate full allotment’’ method, the ECB was willing to fill any liquidity shortage
at the interest rate it set itself for maturities up to six months.
Therefore, the ECB acted as a ‘‘surrogate for the market in terms
of both liquidity allocation and price-setting.’’ 189 The second building block of the ECB’s response was the expansion of the list of assets it took as collateral. The final building block was the inclusion
of a large number of additional counterparties that were eligible to
participate in the refinancing operations. Prior to the crisis, 1,700
counterparties were eligible to participate; by April 2009, 2,200
credit institutions in the Euro area met the criteria to refinance
through the ECB. Finally, the ECB announced its intention to purchase $80.5 billion in euro-denominated covered bonds.190

188 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release:
Factors Affecting Reserve Balances: Data Download Program (online at www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP) (accessed Aug. 10, 2010).
189 Jean-Claude Trichet, president, European Central Bank, Speech at the University of National and World Economy, The Financial Crisis and the Response of the EC (June 12, 2009)
(online at www.ecb.int/press/key/date/2009/html/sp090612.en.html).
190 Jean-Claude Trichet, president, European Central Bank, and Lucas Papademos, vice president, European Central Bank, Introductory Statement with Q&A (May 7, 2009) (online at
www.ecb.int/press/pressconf/2009/html/is090507.en.html).
191 Bank of England, News Release: Special Liquidity Scheme (Apr. 21, 2008) (online at
www.bankofengland.co.uk/publications/news/2008/029.htm).

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Bank of England (BoE)
On April 21, 2008 the BoE announced its Special Liquidity
Scheme, which allowed banks to swap certain mortgage-backed and
other securities for UK Treasury Bills.191 In October 2008, the BoE

43
established a permanent Discount Window Facility, providing
banks with access to long-term liquidity. In response to the worsening financial conditions, the BoE announced the creation of an
asset purchase facility on January 19, 2009. Under this program,
which was similar to the U.S. Asset Guarantee Program, the BoE
was initially authorized to make purchases of up to Ö50 billion ($66
billion) of corporate bonds, syndicated loans, commercial paper, and
certain types of ABS.192 The British central bank eventually purchased Ö200 billion ($276 billion) 193 in assets and, as of June 8,
2010, has announced that the program will remain on hold.
Bank of Japan
The Bank of Japan responded to the financial crisis primarily
through asset purchases. On January 22, 2009, the Bank of Japan
announced its intention to purchase up to 3 trillion yen of commercial paper (including asset-backed commercial paper).194 The Bank
of Japan resumed its purchases of bank stocks on February 3, 2009
with the announcement that it had committed an additional 1 trillion yen to the program.195 The Japanese central bank also committed 1 trillion yen toward the creation of a subordinated loan
program.196
Swiss National Bank (SNB)
The SNB announced on October 15, 2008 that it would begin to
issue its own debt—SNB Bills—in order to absorb excess liquidity
in the financial system. On March 12, 2009, the SNB announced
its intention to purchase foreign currency against the Swiss Franc
and Swiss Franc bonds in order to halt its rapid appreciation.197
Finally, the SNB and the Swiss government financed an effort to
rescue Switzerland-based bank UBS. Along with other steps taken
by the Swiss government, the SNB provided financing of up to $54
billion dollars against an equity contribution made by UBS of up
to $6 billion to an entity created solely to purchase troubled assets
from UBS.198

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e. Guarantees and Purchases of Impaired Assets
European governments both guaranteed and purchased impaired
assets. In contrast, in the United States, guarantees of impaired
192 HM Treasury, Statement on Financial Intervention to Support Lending in the Economy
(Jan. 19, 2009) (online at www.hm-treasury.gov.uk/press_05_09.htm) (hereinafter ‘‘HM Treasury
Statement on Financial Intervention’’).
193 This currency conversion uses the average historical exchange rate during the 570 days
from the program’s inception to its suspension.
194 Bank of Japan, Outright Purchases of Corporate Financing Instruments (Jan. 22, 2009) (online at www.boj.or.jp/en/type/release/adhoc09/un0901b.pdf).
195 This was a continuation of a program that began in 2002. As of September 2008 the Bank
of Japan held 1.27 trillion yen of bank stocks. Bank of Japan, The Bank of Japan to Resume
Stock Purchases Held by Financial Institutions (Feb. 3, 2009) (online at www.boj.or.jp/en/type/
release/adhoc09/fss0902a.pdf).
196 Bank of Japan, Provision of Subordinated Loans to Banks (Mar. 17, 2009) (online at
www.boj.or.jp/en/type/release/adhoc09/fsky0903a.htm). Each bank was limited to a maximum of
350 billion yen and both loan amounts and interest rates for the loans were determined by a
quarterly auction. The program ended new disbursements at the close of March 2010. Bank of
Japan, Establishment of ‘‘Principal Terms and Conditions for Provision of Subordinated Loans’’
(Apr. 10, 2009) (online at www.boj.or.jp/en/type/release/adhoc09/fsky0904a.pdf).
197 Swiss National Bank, Monetary Policy Assessment of 12 March 2009 (Mar. 12, 2009) (online
at www.snb.ch/en/mmr/reference/pre_20090312/source/pre_20090312.en.pdf).
198 Swiss Federal Department of Finance, Federal Council Takes Decision on Measure to
Strengthen Switzerland’s Financial System (Oct. 16, 2008) (online at www.efd.admin.ch/
dokumentation/medieninformationen/00467/index.html?lang=en&msg-id=22019).

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assets played a significant role in the rescue,199 but purchases of
such assets did not, despite the fact that the TARP was initially
envisioned as a purchase program.200 One problem with asset purchases is the difficulty of setting prices for the transactions. If the
prices are set at market levels, then the purchases lock in bank
losses, and are likely to reveal banks as unacceptably weak. If the
purchases are made at par, they represent direct subsidies to the
banks and their shareholders—subsidies potentially so large in the
U.S. case as to exceed the scale of the TARP.
i. Guarantees of Assets and Debt
Liability guarantees quickly spread through Europe amidst concerns that banks covered by guarantees enjoyed a competitive advantage over banks without comparable resources. Beginning in
September 2008, European and Canadian bank regulators introduced a series of liability guarantees aimed at preventing bank
runs and managing threats to real estate prices caused by wounded
financial services providers that were deemed too big to fail. The
guarantees took various forms, ranging from highly targeted approaches tailored to support a few large banks (an approach taken
in the United States) 201 to widespread measures pledging hundreds of billions of Euros for bank recapitalization plans and loan
guarantee initiatives. Explicit guarantees, such as the backstops in
the United States for the government sponsored enterprises and
Citigroup, are associated with more risk than the implicit guarantees that helped other CPP recipients raise funds and repay TARP
loans quickly.202
In the United States, the FDIC’s Temporary Liquidity Guarantee
Program, announced in October 2008, introduced new debt and
transaction account guarantee programs aimed at boosting interbank lending and safeguarding some accounts in excess of deposit
limits.203 In late 2008, the Federal Reserve Board and the FDIC
guaranteed more than $301 billion of Citigroup assets.204
The most extensive foreign guarantees were orchestrated by a
handful of European countries and bore numerous similarities.
From September 2008 to October 2008, Germany, France, and the
United Kingdom introduced sizeable backstops for a handful of
large financial institutions. Belgium, France, Luxembourg, and
Germany collectively established Ö200 billion ($287 billion) of guarantees to support Dexia Group S.A. (Dexia) and HRE, respectively.205 These guarantees were introduced on a standalone basis
and were kept separate from distinct plans that raised a combined
total of Ö720 billion of far-reaching guarantees in both countries.206

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199 November

Oversight Report, supra note 68.
200 Congressional Oversight Panel, Accountability for the Troubled Asset Relief Program: The
Second Report of the Congressional Oversight Panel, at 15–16 (Jan. 9, 2009) (online at
cop.senate.gov/documents/cop-010909-report.pdf).
201 November Oversight Report, supra note 68, at 13–40.
202 November Oversight Report, supra note 68, at 7.
203 FDIC Announces Plan to Free Up Bank Liquidity, supra note 63.
204 November Oversight Report, supra note 68, at 6.
205 Dexia SA, Annual Report 2008, at 10 (Apr. 20, 2008) (online at www.dexia.com/docs/2009/
2009_AG/annual_report/20090513_RA_corporate_UK.pdf); Hypo Real Estate Group, Annual Report 2008, at 37 (Apr. 24, 2009) (online at www.hyporealestate.com/eng/pdf/
AR2008_09_04_24_final_GL.pdf) (hereinafter ‘‘Annual Report 2008’’).
206 Id. at 220; Sullivan & Cromwell LLP, French Bank Relief Act (Oct. 20, 2008) (online at
www.sullivanandcromwell.com/files/Publication/df0f1dd1-b716-40e9-bd9d-77f99c5cc3b9/Presen-

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Germany arguably executed Europe’s most extensive deployment
of guarantees. Its guarantees included short-term assurances for
covered bonds and commitments to shore up vulnerable money
market funds. Germany’s multifaceted approach also involved
stalled initial efforts to broker a collaborative rescue effort between
the public and private sector. HRE, Germany’s second-largest commercial property and commercial finance lender at the height of
the crisis, received an initial Ö35 billion ($51 billion) emergency
line of guaranteed financing in September 2008 and two separate
Ö15 billion ($19 billion) financing guarantees the following
month.207
SoFFin, the bank rescue fund established on October 17, 2008 by
the German Financial Market Stabilisation Act, provided approximately Ö62 billion ($81 billion) 208 of guarantees for Bayerische
Landesbank (BayernLB), IKB, HRE, and HSH Nordbank AG between November 2008 and March 2009.209 SoFFin later approved
a one-year extention of Hypo’s rescue package starting in December
2009. Hypo also received a Ö52 billion ($77 billion) extension on
guarantees from SoFFin that was scheduled to end in June
2010.210
Italy and Canada took a more concentrated approach that made
guarantees available to their respective banking sectors without establishing guarantees for specific financial institutions. Implicit
guarantees extended through the Canadian Lenders Assurance Facility, which provided insurance on wholesale term borrowing of
federally regulated deposit-taking institutions for six months beginning October 23, 2008.211 The underlying stability of Canada’s
banking system contributed to a climate in which commercial lending institutions neither recapitalized nor drew down on government
bank funding guarantees.212 Italy took a different approach by enacting a series of laws between November 27, 2008 and January
29, 2009. The legislation was aimed at creating new resources for
oversight bodies, such as the Ministry for the Economy and Finance, which gained the ability to guarantee capital increases for
banks identified as undercapitalized by the Bank of Italy.213
tation/PublicationAttachment/5d0a7d25-18f4-41c9-a019-7842c8dd4fdf/
SC_Publication_French_Bank_Relief_Act.pdf) (hereinafter ‘‘Summary of French Bank Relief
Act’’).
207 Annual Report 2008, supra note 205, at 37.
208 This currency conversion uses the average historical exchange rate during the 121 days
between this period.
209 BayernLB, A New Direction for BayernLB: Bank to Concentrate on Core Activities (Dec. 1,
2008) (online at www.bayernlb.de/internet/ln/ar/sc/Internet/en/Downloads/0100_CorporateCenter/
1323Presse_Politik/Pressemeldungen/2008/12Dezember/01122008NewBusinessmodel.pdf);
IKB
Deutsche Industriebank, Ad-hoc Announcement Pursuant to Sec. 15 of the German Securities
Trading Act: IKB Receives Guarantees from the Special Fund for the Stabilization of the Financial Market (Dec. 22, 2008) (online at www.ikb.de/content/en/ir/news/ad_hoc_announcements/All/
081222_SoFFin_englisch.pdf); HSH Nordbank AG, SoFFin Approves HSH Nordbank Business
Model (Mar. 7, 2009) (online at www.hsh-nordbank.com/en/presse/pressemitteilungen/
press_release_detail_194560.jsp).
210 Hypo Real Estate Holding AG, Annual Report for Year Ended 2009, at 24 (Mar. 26, 2010)
(online at www.hyporealestate.com/eng/pdf/AR09_HRE_10_03_25_19_45_GL.pdf).
211 Canadian Department of Finance, Government of Canada Strengthens Canadian Advantage In Credit Markets (Oct. 23, 2008) (online at www.fin.gc.ca/n08/08-080-eng.asp).
212 Lev Ratnovski Lev and Rocco Huang, Why Are Canadian Banks More Resilient?, International Monetary Fund Working Paper, at 3 (July 2009) (WP/09/152) (online at www.imf.org/
external/pubs/ft/wp/2009/wp09152.pdf).
213 DLA Piper, Summary of the Italian Rescue Plan to Stabalise the Financial Markets (Jan.
23,
2009)
(online
at
www.dlapiper.com/files/upload/
Continued

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In a combined public-private rescue not replicated in other jurisdictions, on July 11, 2008, the Danish National Bank granted an
unlimited liquidity facility to Roskilde Bank, and a private association of nearly all the banks in Denmark provided a guarantee on
losses of DKK 750 million ($158 million) on the liquidity facility,
with further losses guaranteed by the Danish government.214
The United Kingdom also employed guarantees that took shape
as targeted rescue efforts and broader stabilization measures. After
providing a stream of liquidity facilities and guarantees beginning
in November 2007 to Northern Rock, the U.K. introduced a credit
guarantee scheme in October 2008.215 HM Treasury initially announced up to £250 billion ($437 billion) of guarantees for new
short and medium-term debt issuance to help banks recapitalize in
conjunction with a separate recapitalization scheme.216 This program initially offered guarantees to the entire range of extendedcollateral operations at banks that subscribed to the program. As
the crisis deepened, in December 2008 HM Treasury extended the
credit guarantee scheme’s deadline to 2014 from 2012 and lowered
participation fees charged to banks.217 A few weeks later, the
goverment extended the drawdown window of its credit guarantee
scheme to December 31, 2009 from April 9.218 During the drawdown window, banks could issue new debt, and continue rolling all
of it over until April 13, 2012, and up to a third of the total amount
over the next two years.
The UK introduced its Asset Protection Scheme (APS) in January 2009 to help banks protect capital from further erosion. The
scheme guaranteed certain types of assets, such as commercial and
residential property loans or structured credit assets from eligible
banks with at least £25 billion ($37 billion) in assets in exchange
for a fee.219 Lloyds entered into a relationship with APS in March
2009 due to its previous purchase of Halifax Bank of Scotland
Group Plc, which regulators believed held significant troubled assets. Lloyds placed £260 billion ($369 billion) with APS and negotiated a 4 percent fee that amounted to £10 billion ($14 billion).
During this time Lloyds was careful to avoid handing British taxpayers a 60 percent stake, which could have occurred if the government’s £4 billion ($6 billion) of preference shares were converted
into ordinary equity. To this end, Lloyds improved its position with
a £13.5 billion ($22 billion) rights issue and raised an additional
£7.5 billion ($12 billion) by swapping existing debt for contingent
capital. The capital raise paid off and Lloyds was allowed to exit
APS in November 2009.220 The exit relieved the British govern%205087723_1_UKGROUPS(EMEA%20Govt%20Rescue%20Plan%20-%20Italy%20%209%20Feb%2009).PDF).
214 See discussion in Section C.1.a, supra.
215 See HM Treasury, Revised Spring Supplementary Estimates, 2008–09 (Feb. 2009) (online
at www.hm-treasury.gov.uk/d/springsupps0809_hmt.pdf); FSA Press Release—Compensation
Scheme, supra note 168; Financial Support to the Banking Industry, supra note 62.
216 Financial Support to the Banking Industry, supra note 62.
217 HM Treasury, Changes to Credit Guarantee Scheme (Dec. 15, 2008) (online at www.hmtreasury.gov.uk/press_138_08.htm).
218 HM Treasury Statement on Financial Intervention, supra note 192.
219 HM Treasury, Statement on the Government’s Asset Protection Scheme (Jan. 19, 2009) (online at www.hm-treasury.gov.uk/press_07_09.htm) (hereinafter ‘‘HM Treasury Statement on the
Asset Protection Scheme’’).
220 HM Treasury, Implementation of Financial Stability Measures for Lloyds Banking Group
and Royal Bank of Scotland (Nov. 3, 2009) (Notice 99/09) (online at www.hm-treasury.gov.uk/

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ment of a potential liability of up to 90 percent of £260 billion ($262
billion).
France participated in one of the largest guarantee programs targeting an individual bank by providing slightly more than 36 percent of a Ö150 billion ($204 billion) rescue for Dexia SA. Belgium
and Luxembourg covered the remaining balance.221 On October 13,
2008, French President Nicolas Sarkozy announced plans to provide up to Ö320 billion ($429 billion) of loan guarantees that were
available through year end 2009.222 The guarantees covered loans
for up to five years.
Ireland employed a different variation that created guarantees
for six of its largest banks at once. The initial offer, which applied
to Allied Irish Banks plc (Allied Irish Bank), Bank of Ireland
Group (Bank of Ireland), Anglo Irish Bank Corporation (Anglo Irish
Bank), Irish Life and Permanent Plc (Irish Life and Permanent),
Irish Nationwide Building Society and the Educational Building
Society, was initially structured to wind down in two years.223
Japan was the only G–7 member that addressed its banking
problems without implementing significant liability guarantees.

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ii. Asset Purchases
Asset purchases were another tool that governments used during
the crisis, both to deal with problematic assets on bank balance
sheets and in some countries as a way to loosen the monetary supply.
In the United States, the Public-Private Investment Program
(PPIP), announced by Treasury in 2009,224 was initially designed
to use up to $100 billion of TARP dollars and private capital to facilitate private purchases of legacy loans and securities. The program aimed to generate up to $500 million in purchasing power for
legacy assets under a partnership between the government and private sectors. Some potential investors were also offered non-recourse loans as an incentive to purchase non-agency residential
asset backed mortgage securities and commercial mortgage backed
securities. Treasury’s August 6, 2010 TARP transaction report indicates a $22.4 billion final investment amount for PPIP.225 Treasury
has scaled back the program’s scope from a larger initial budget.226
As discussed earlier in Section C.2.d, the Federal Reserve purchased roughly $1.25 trillion of agency mortgage-backed securities
between January 2009 and March 2010. The Federal Reserve also
purchased up to $300 billion of longer-term U.S. Treasury securities over a period of several months. In addition, Treasury purpress_99_09.htm) (hereinafter ‘‘HM Treasury Notice—Lloyds Banking Group and Royal Bank of
Scotland’’).
221 Official Journal of the European Union, Procedures Relating to the Implementation of the
Competition Policy, at 43 (Apr. 8, 2009) (online at www.eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=OJ:C:2009:181:0042:0044:EN:PDF).
222 Summary of French Bank Relief Act, supra note 206.
223 Government Decision to Safeguard Irish Banking System, supra note 166.
224 U.S. Department of the Treasury, Treasury Department Releases Details on Public-Private
Partnership Investment Program (Mar. 23, 2009) (online at www.ustreas.gov/press/releases/
tg65.htm).
225 Treasury Transactions Report, supra note 64, at 22.
226 Congressional Oversight Panel, January Oversight Report: Exiting TARP and Unwinding
Its Impact on the Financial Markets, at 105 (Jan. 13, 2010) (online at cop.senate.gov/documents/
cop-011410-report.pdf) (hereinafter ‘‘January Oversight Report’’).

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chased approximately $220 billion in agency mortgage-backed securities under a program that ended December 31, 2009.227
The United Kingdom introduced a £50 billion ($73 billion) asset
purchase plan on January 19, 2009,228 which was increased to £75
billion ($106 billion) on March 5, 2009,229 and increased again to
£125 billion ($188 billion) on May 7, 2009.230 U.K. officials soon
added provisions within the facility to purchase commercial paper
and corporate bonds as a means of injecting liquidity into the credit
markets. Other purchases included medium and long-maturity conventional U.K. Treasury bonds traded on the secondary market.
Regulators also added a secured working paper facility to help keep
short-term borrowing options solvent.231 When output and other
vital economic indicators failed to show signs of recovery, the program’s ceiling was raised to £200 billion ($330 billion) from £175
billion ($289 billion) on November 5, 2009.232 The asset purchase
program coincided with a decision of the United Kingdom’s Monetary Policy Committee on March 5, 2009 to engage in quantitative
easing and reduce the Bank Rate to 0.50 percent. The asset purchase program was a critical part of this operation.233 To make the
scheme work, the Bank of England provided liquidity to inject capital into commercial banks by purchasing various public and private sector assets. The purchases were an instrumental part of restoring liquidity to credit markets and assisting borrowers by pushing down interest rates tied to yields.234
Under the U.K. plan, various assets were purchased under different pricing schemes. As an example, the plan included a commercial paper facility that acquired assets directly from companies
or market participants trading outstanding inventory. The latter
group was charged an additional fee. Eligible commercial paper
had a minimum maturity of three months, an investment-grade
rating and issuance from non-bank companies. As of May 21, 2009
the program had accumulated £2.25 billion ($3.6 billion) of commercial paper, roughly a third of the available stock. Corporate bonds
were acquired through reverse auctions from financial institutions
that functioned as market makers. The format was chosen to ensure banks would pay the lowest possible prices for assets.
Ireland introduced an innovative asset purchase scheme that enabled its largest banks to transfer up to Ö90 billion ($119.1 billion)
into a newly created entity known as the National Asset Manage227 U.S. Department of the Treasury, Treasury Issues Update on Status of Support for Housing
Programs (Dec. 24, 2009) (online at www.ustreas.gov/press/releases/2009122415345924543.htm).
228 HM Treasury Statement on Financial Intervention, supra note 192.
229 Bank of England, Bank of England Reduces Bank Rate by 0.5 Percentage Points to 0.5%
and Announces £75 Billion Asset Purchase Programme (Mar. 5, 2009) (online at
www.bankofengland.co.uk/publications/news/2009/019.htm).
230 Bank of England, Bank of England Maintains Bank Rate at 0.5% and Increases Size of
Asset Purchase Programme by £50 Billion to £125 Billion (May 7, 2009) (online at
www.bankofengland.co.uk/publications/news/2009/037.htm).
231 Bank of England, Asset Purchase Facility: Secured Commercial Paper (June 8, 2009) (online at www.bankofengland.co.uk/markets/apf/securedcpf/index.htm).
232 Bank of England, Bank of England Maintains Bank Rate at 0.5% and Increases Size of
Asset Purchase Programme by £25 Billion to £200 Billion (Nov. 5, 2009) (online at
www.bankofengland.co.uk/publications/news/2009/081.htm).
233 James Benford et al., Quantitative Easing, Bank of England Quarterly Bulletin (Q2 2009)
(www.bankofengland.co.uk/publications/quarterlybulletin/qb090201.pdf).
234 Id.

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ment Agency (NAMA).235 NAMA stated that Ireland’s banks ‘‘will
be cleansed of risky categories of loans at a price that is less than
their current value on the banks’ balance sheets.’’ 236 The transactions were financed by the issuance of government bonds. NAMA
announced the transfer of its first tranche of loans from Allied
Irish Banks on April 6, 2010. In the transaction NAMA acquired
loans with a face value of Ö3.29 billion ($4.44 billion) in exchange
for NAMA securities valued at Ö1.9 billion ($2.56 billion), resulting
in a 42 percent discount after taking account of foreign exchange
movements.237 The initial transfers also included a Ö670 million
($903.8 million) purchase of loans from Irish Nationwide Building
Society for Ö280 million ($377.7 million) of NAMA securities, a 58
percent discount.

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f. Changes in Accounting Rules
Government assistance to financial firms was not limited to outside sources of capital or guarantees; another tool involved the
amendment of existing fair value accounting rules, which sometimes require changes to an institution’s reported financial statement position without a corresponding change in actual assets or
liabilities. The use of this tool proved to be politically charged and
resulted in intense and continuing debates between regulatory authorities and accounting standard-setters in both the United States
and Europe.
The goal of fair value accounting is to estimate the value of assets and liabilities on the balance sheet at their market value; in
other words, the amount a seller would receive for an asset or
would have to pay to offload a liability in the current market.238
When market values are readily determinable through actively
traded securities and the prices at which debt is issued, fair value
accounting may aid in the presentation of some reported assets and
liabilities, although the extent to which fair value accounting adds
to the understanding of an institution’s balance sheet may also depend on the nature of the institution’s business. When market values become opaque due to lack of market activity, more subjective
methods are used to determine the value of financial instruments.
The SEC, through securities regulations, has empowered the Financial Accounting Standards Board (FASB) to establish accounting standards for the purpose of providing investors with the disclosure of meaningful financial information in a way that is accu235 National Asset Management Agency, Annex I—Questions and Answers in Relation to the
National Asset Management Agency (NAMA) Initiative, at 14 (2009) (online at www.nama.ie/
Publications/2009/NAMAFrequentlyAskedQuestions.pdf).
236 Id. at 10.
237 National Asset Management Agency, National Asset Management Agency—First AIB Loans
Transfer
(Apr.
6,
2010)
(online
at
www.nama.ie/Publications/2010/
NAMAFirstAIBLoansTransfer.pdf).
238 Fair value accounting focuses on the exit price of a transaction, valuing it from the seller’s
perspective, as opposed to the entry price required to purchase the asset or received for assuming the liability. See Financial Accounting Standards Board, Fair Value Measurements and Disclosures—Exit Price, Topic 820–10–20 (online at asc.fasb.org/glossarysection&trid=
2155951%26analyticsAssetName=subtopic_page_section%26nav_type=subtopic_page)
(hereinafter ‘‘Fair Value Measurements and Disclosures’’) (accessed Aug. 10, 2010) (Exit Price is defined as ‘‘[t]he price that would be received to sell an asset or paid to transfer a liability.’’).

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rate and effective.239 The users, preparers, and auditors of financial reports are all in the business of decision making: investing or
not investing in a company based on the financials, determining
the best method of presenting the financial information, and ensuring the accuracy and reliability of the information. To meet the decision-making needs of all users of financial information, FASB established a hierarchy of qualities for accounting information: usefulness, relevance, reliability, comparability, and consistency, countered by the constraints of cost and materiality.240 Thus, information needs to be both timely and verifiable while also consistent
across organizations and without the benefit exceeding the cost of
providing the information; therefore, a constant tension exists between requiring too much or too little in a company’s disclosures.
Accounting rules have continually expanded in recent years to require fair value reporting for debt and equity securities and derivative transactions, but uniformity in the application and valuation
methodology was not established until 2007 with the issuance of
Statement of Financial Accounting Standards 157 (SFAS 157).241
At the time of the financial crisis, fair value accounting in the
United States was governed by SFAS 115, which required the classification and reporting of debt securities and equity securities with
a readily determinable fair market value,242 and SFAS 157, which
established a hierarchy of fair value measurements to account for
assets and liabilities with active markets and those with none.243
Shortly after the implementation of SFAS 157, however, the finan239 U.S. Securities and Exchange Commission, Policy Statement: Reaffirming the Status of the
FASB as a Designated Private-Sector Standard Setter (Apr. 25, 2003) (online at www.sec.gov/
rules/policy/33-8221.htm).
240 Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 2:
Qualitative Characteristics of Accounting Information, at 2–4 (May 1980) (online at
www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable
=MungoBlobs&blobkey=id&blobwhere=1175820900526&blob
header=application%2Fpdf).
241 On July 1, 2009, U.S. generally accepted accounting principles was replaced by the FASB
with the issuance of FASB Accounting Standards Codification (the Codification). SFAS 157 is
now referred to as Fair Value Measurement and Disclosures (Topic 820). Topic 820 did not
change the contents of SFAS 157.
242 SFAS 115 creates three classification categories: held-to-maturity, trading, and availablefor-sale. A debt security is considered held-to-maturity if the enterprise has the positive intent
and ability to hold to maturity. These securities are reported at amortized cost and thus, experience no fair value adjustments. Trading securities are debt and equity securities bought and
held primarily for the purpose of selling them in the near term. These securities are reported
at fair value, with unrealized gains and losses included in earnings. Available-for-sale securities
are debt and equity securities not classified in the other two categories. They are reported at
fair value, with unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders’ equity (Accumulated Other Comprehensive Income). While SFAS
115 does not apply to unsecuritized loans, it does apply to mortgage-backed securities. See Financial Accounting Standards Board, Summary of Statement No. 115: Accounting for Certain Investments in Debt and Equity Securities (May 1993) (online at www.fasb.org/summary/
stsum115.shtml); Financial Accounting Standards Board, Accounting Standards Codification
320–10–25–1 (online at asc.fasb.org/section&trid=2196939%26analyticsAssetName=subtopic_
page_subsection%26nav_type=subtopic_page#d3e22050-111558).
243 SFAS 157 (now referred to as Topic 820) establishes three levels of valuation. Level 1 applies to securities actively trading in an open market (e.g., stocks, active bonds), and requires
valuation based on quoted prices in active markets for identical instruments. Level 2 valuation
is based on observable, and thus auditable, inputs used to estimate an exit value (e.g., OTC interest-rate swap for which the fair value is based on observable data such as the contract terms
and current LIBOR forward rate curve). The final valuation method is Level 3, which applies
to securities for which markets do not exist or are illiquid (e.g., CDOs, many derivatives, and
stock in unlisted companies), and is based on unobservable inputs and assumptions that usually
are employed in a company’s internal model to develop a valuation. See Fair Value Measurements and Disclosures, supra note 238; Financial Accounting Standards Board, Subsequent
Measurement—Fair Value Hierarchy, Topic 820–10–35–37 (online at asc.fasb.org/
section&trid=2155956%26analyticsAssetName=subtopic_page_section%26nav_type=subtopic
_page) (accessed Aug. 10, 2010).

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cial crisis caused markets to freeze and much activity to cease,
which presented a significant problem for a valuation methodology
that relies on an open, active, liquid market. Instead, companies relied more strongly on their own assumptions and models, which allowed for greater subjectivity, less comparability across organizations, and the potential for manipulation by the firms’ management. In aggregate, as of the first quarter of 2008, S&P 500 financial sector institutions carried 44 percent of their assets at fair
value and 13 percent of their liabilities at fair value.244 For institutions such as commercial banks, the deposit base makes up a substantial portion of the firm’s liabilities. Capital market-oriented
firms carried approximately 30 percent of their liabilities at fair
value. While obtaining readily available market values was complicated by frozen markets, allowing managers to use more judgment in reported losses and write-downs through the use of modeling, it is also possible that managers used market uncertainty as
an excuse to avoid a write-down. Fair value accounting required
companies to take significant write-downs on assets that, in many
cases, triggered regulatory and capital adequacy requirements.245
Section 133 of EESA mandated that the SEC, in consultation with
other regulatory bodies, conduct a study on mark-to-market accounting standards as provided by FASB. After holding public
hearings and conducting its own analysis, the SEC ultimately declared that fair value accounting was neither a cause of the financial crisis nor an issue with troubled banks, but that it did need
some minor revisions.246
Amid pressure from U.S. lawmakers and financial companies
such as Citigroup and Wells Fargo & Co, in April 2009 FASB voted
to ease fair-value accounting rules during ‘‘illiquid’’ or ‘‘inactive’’
markets.247 The changes permit companies to use ‘‘significant’’
244 At S&P 500 financial sector companies as of Q1 2008, approximately 44 percent and 13
percent of assets and liabilities, respectively, were recorded at fair value for accounting purposes
on the balance sheet. Of these assets and liabilities, approximately 81 percent and 74 percent,
respectively, were valued using Level 2 or Level 3 valuation methodology, which are described
in note 243, supra. See Analysis Group, Fair Value Accounting: What Lawyers Need to Know
(Oct. 1, 2009) (online at www.securitiesdocket.com/wp-content/uploads/2009/10/Final-Oct1-FairValue.pdf) (hereinafter ‘‘Analysis Group Presentation on Fair Value Accounting’’).
245 This creates a sort of fair value spiral in which asset prices fall. In turn, financial institutions make fair value write-downs and as a consequence balance sheets weaken and regulatory
requirements are violated or loan covenants breached. The institution must de-lever by selling
assets or raising new equity. Unfortunately, new equity markets dry up, so asset sales becomes
the only option. As investment positions are highly correlated across global institutions, the
market is imbalanced by a flood of sellers and prices drop further. Due to the supply and demand imbalance, investors with liquidity then step in to buy the assets at bargain prices, and
the spiral ends. Analysis Group Presentation on Fair Value Accounting, supra note 244.
246 SEC Study on Mark-to-Market Accounting, supra note 94.
247 Financial Accounting Standards Board, FASB Staff Position: Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, at 4–5 (Apr. 9, 2009) (FSP FAS 157–4) (online
at www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=
1175820922722&blobheader=application%2Fpdf). The FASB Staff Position establishes the following eight factors for determining whether a market is not active enough to require markto-mark accounting:
1. There are few recent transactions.
2. Price quotations are not based on current information.
3. Price quotations vary substantially either over time or among market makers.
4. Indexes that previously were highly correlated with the fair values of the asset or liability
are demonstrably uncorrelated with recent indications of fair value for that asset or liability.
5. There is a significant increase in implied liquidity risk premiums, yields, or performance
indicators (such as delinquency rates or loss severities) for observed transactions or quoted
prices when compared with the reporting entity’s estimate of expected cash flows, considering
all available market data about credit and other nonperformance risk for the asset or liability.
Continued

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judgment when valuing certain investments in their investment
portfolios, which allows for more flexibility in valuing impaired securities. The proposal would apply only to equity and debt securities, though, and FASB staff said that banks should elect to disregard only transactions that are not orderly, i.e., those that occur
under distressed circumstances. At the time, some market analysts
commented that going forward write-ups could be expected, and
these adjustments would ultimately boost bank earnings.248
Arthur Levitt, a former SEC Chairman, was critical of the
changes. He commented that fair value ‘‘provides the kind of transparency essential to restoring public confidence in U.S. markets,’’
and stated that he was deeply concerned about FASB succumbing
to political pressures.249 That said, FASB did not acquiesce to all
of the lobbying pressure. The organization rejected a request from
banks that would have enabled them to apply fair-value changes
retroactively to their 2008 year-end financial statements.
More recently, FASB has sought public comment on a proposal
that would require banks to report the fair value of loans on their
books, in addition to carrying or book values. Currently, public financial institutions report the fair value of their loans only in footnotes to the quarterly reports to regulators. The American Bankers
Association (ABA) has come out against the proposal, arguing that
doing so would increase ‘‘pro-cyclicality’’ and ultimately inject volatility into the financial system. Edward Yingling, chief executive officer of the American Bankers Association, said in a statement,
‘‘The proposal would greatly undermine the availability of credit by
making it difficult to make many long-term loans, the value of
which, even if performing perfectly, would likely be reduced on the
day a loan is made.’’ 250 Former FDIC Chairman William Isaac has
also criticized the proposal, saying that ‘‘just by making the proposal, the FASB will lead banks to quit making loans without easily discernable market values and keep the ones they do make to
shorter maturities.’’ 251 On the other hand, Sandy Peters, head of
the financial reporting policy group at the CFA Institute, an association of investment professionals, commented: ‘‘The pro-cyclicality
argument is that when you give people information, they act on it.
Banks don’t like the volatility it presents and what it might do to
the share price, but it’s still relevant information.’’ 252
Outside the United States, the International Accounting Standards Board (IASB) has also debated the issue of fair value account6. There is a wide bid-ask spread or significant increase in the bid-ask spread.
7. There is a significant decline or absence of a market for new issuances for the asset or
liability or similar assets or liabilities.
8. Little information is released publicly.
Pressure on the FASB mounted when U.S. House Financial Services Committee members
urged FASB Chairman Robert Herz at a March 12 hearing to reconsider fair-value methodologies. Less than a week later, FASB’s March proposal received further criticism from investor
advocates and accounting-industry groups.
248 Ian Katz, FASB Eases Fair-Value Rules Amid Lawmaker Pressure, Bloomberg (Apr. 2,
2009) (online at www.bloomberg.com/apps/news?pid=newsarchive&sid=aMG.2SUJ3Rz4).
249 Id.
250 Michael J. Moore, FASB Plan Would Force Banks to Report Loan Fair Value, Bloomberg
Businessweek (May 27, 2010) (online at www.businessweek.com/news/2010-05-27/fasb-planwould-force-banks-to-report-loan-fair-value-update1-.html) (hereinafter ‘‘FASB Plan Would Force
Banks to Report Loan Fair Value’’).
251 Dakin Campbell, FASB Plan is ‘‘Destructive Idea,’’ Ex-FDIC Chief Says, Bloomberg
Businessweek (May 28, 2010) (online at www.businessweek.com/news/2010-05-28/fasb-plan-isdestructive-idea-ex-fdic-chief-says-update1-.html).
252 FASB Plan Would Force Banks to Report Loan Fair Value, supra note 250.

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ing.253 In October 2008, IASB published educational guidance on
the application of fair value measurement when markets become
inactive, and, in the face of political pressure from the European
Commission (EC),254 allowed banks to reclassify certain securities
as held-to-maturity to allow for reporting at historical, or amortized, cost. The EC effectively forced IASB’s hand with this decision, threatening that either asset reclassification be allowed or
that the EC would create another ‘‘carve out’’ for international accounting rules. That is, all IASB standards are scrutinized by the
European Financial Reporting Advisory Group (EFRAG) established by the EC in 2001. As the aforementioned body would have
hindered the potential for an eventual convergence of accounting
standards, IASB allowed the asset reclassification, which provided
international institutions temporary relief from potential writedowns.255
Part of the EU’s argument in pushing the IASB to make this
change was to better align IFRS with U.S. GAAP. SFAS 115 and
SFAS 65 within U.S. GAAP allowed for asset reclassification in
specific instances, allowances that have carried over to the current
U.S. GAAP codified standards.256 Originally, International Ac253 Approximately 120 nations and reporting jurisdictions permit or require International Financial Reporting Standards (IFRS), which are promulgated by IASB, for domestic listed companies, with approximately 90 of those countries fully conformed with IFRS, including the EU.
Canada and South Korea are expected to transition to IFRS by 2011; Mexico will require transition for all listed companies in 2012; and Japan is currently debating full adoption of IFRS with
potential conversion in 2015 or 2016. American Institute of Certified Public Accountants, International Financial Reporting Standards FAQs (online at www.ifrs.com/ifrs_faqs.html) (accessed
Aug. 10, 2010). Since 2002, with the support and monitoring of the SEC, FASB and IASB have
formally worked towards the mutual goal of convergence of U.S. GAAP and IFRS into a single
set of high-quality global accounting standards. Under its current work plan, the SEC plans to
make a convergence decision about incorporating IFRS in the financial reporting requirements
of U.S. issuers in 2011. See U.S. Securities and Exchange Commission, Commission Statement
in Support of Convergence and Global Accounting Standards (online at www.sec.gov/rules/other/
2010/33-9109.pdf) (Release Nos. 33–9109; 34–61578) (accessed Aug. 10, 2010).
254 The EU has adopted nearly all IFRSs, with limited modifications, or ‘‘carve outs.’’ While
the EC typically waits on new standards or modifications to come from IASB and then votes
on their inclusion in current regulations, in 2008, at the height of the financial crisis, the EC
proposed an amendment to IAS 39 (fair value accounting standards) that would allow for the
reclassification of assets from trading to held-to-maturity. The EC made this move in case the
IASB decided against any changes to the current fair value standard at the time, but the knowledge that an additional ‘‘carve out’’ by the EU would create even more discrepancies within
international standards and impede the convergence process put added pressure on the IASB
to acquiesce to the EC’s proposal. See European Commission, International Accounting Standards and Interpretations Endorsement Process in the EU (online at ec.europa.eu/internal_market/accounting/docs/ias/endorsement_process.pdf) (accessed Aug. 10, 2010); Huw Jones,
EU Executive to Ease Fair Value on Banks, Reuters (Oct. 10, 2008) (online at www.reuters.com/
article/idUSLA68354320081010).
255 In the United States, the Securities and Exchange Commission issued a report on this
topic. See U.S. Securities and Exchange Commission, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by
U.S. Issuers (Nov. 14, 2008) (online at www.sec.gov/rules/proposed/2008/33-8982.pdf). See also
Accountancy Age, Tweedie Nearly Quit After Fair Value Change (Nov. 12, 2008) (online at
www.accountancyage.com/accountancyage/news/2230424/tweedie-nearly-quit-fair-value).
256 SFAS 115 allowed a security to be reclassified out of the trading category in rare circumstances. SFAS 65 allowed for a loan to be reclassified out of the held-for-sale category if
the institution has the intention and ability to hold the loan for the foreseeable future or until
maturity. International Accounting Standards Board, Reclassification of Financial Assets:
Amendments to IAS 39 and IFRS 7, at 10–12 (Oct. 2008) (online at www.iasb.org/NR/rdonlyres/
BE8B72FB-B7B8-49D9-95A3-CE2BDCFB915F/0/AmdmentsIAS39andIFRS7.pdf)
(hereinafter
‘‘Reclassification of Financial Assets: Amendments to IAS 39 and IFRS 7’’). The FASB standards
have since been codified into a set of standards that allows for more simplified reference and
use but did not materially change any prior standards. U.S. standards have remained fairly
similar since October 2008, with transfers of assets from held-to-maturity allowed in certain circumstances and those into or from the trading category allowed in rare instances. Sale or transfer of a held-to-maturity security due to the following reasons is not considered inconsistent with
the security’s original classification: evidence of a significant deterioration in the issuer’s creditContinued

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counting Standard (IAS) 39 disallowed any reclassifications for financial assets classified as held for trading. Although IASB is cognizant that a reclassification under SFAS 115 is extremely rare, it
allowed for the amendment to IAS 39 due to the fact that though
it is not used in practice, reclassification is at least an option under
U.S. GAAP. Thus, the amended IAS 39 allows for reclassifications
in similar instances as those allowed under U.S. GAAP. In a dissenting opinion to this amendment, however, IASB members James
J. Leisenring and John T. Smith noted that though the playing
field may have been leveled in regards to asset reclassification,
they believed the original IFRS reclassification rules to be superior
to U.S. GAAP and U.S. GAAP to be superior to IFRS in terms of
timing and measurement of asset impairment.257
Similar to FASB’s allowance for more judgment in the use of fair
value methodology, IASB issued guidance on measuring fair value
in inactive markets, specifically the use of broker or pricing service
quotes as inputs as well as internal modeling. Both standard setters have continued to require the use of fair value accounting but
emphasize that the objective of fair value measurement is to determine the price at which an orderly transaction would take place,
not the price of a distressed sale or liquidation.258

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3. International Organizations
International organizations—from the G–20 to the IMF to the Financial Stability Board—used their different core competencies to
exert significant influence over national policy responses to the financial crisis. The G–20, a forum of finance ministers and central
bank governors from 20 systemically significant economies, promotes international economic stability and development through
cooperative action between industrial and emerging-market countries.259 The G–20 was created as a response to the financial crises
of the late 1990s and amid a growing understanding that emergworthiness, tax law change that reduces or eliminates the tax-exempt status of interest on the
debt security, major business combination or disposition that requires the sale or transfer of
held-to-maturity securities to maintain the entity’s interest rate or credit rate risk positions,
change in statutory or regulatory requirements significantly modifying what constitutes a permissible investment or maximum number of investments, a significant increase in the industry’s
capital requirements by the regulator that requires asset divestiture, or a significant increase
in the risk weights of debt securities used for regulatory risk-based capital. Financial Accounting Standards Board, Accounting Standards Codification 320–10–35 (online at asc.fasb.org/
section&trid=2196945%26analytics
AssetName=subtopic_page_
subsection%26nav_type=subtopic_ page#d3e24816-111560) (accessed Aug. 10, 2010); Financial
Accounting Standards Board, Accounting Standards Codification 320–10–25–6 (online at
asc.fasb.org/link&sourceid=SL2247003-111560&objid= 6871231) (accessed Aug. 10, 2010).
257 Reclassification of Financial Assets: Amendments to IAS 39 and IFRS 7, supra note 256.
U.S. GAAP differs from IFRS in its explicit use of three levels of valuation techniques, while
IAS 39 emphasizes using market inputs over internal, firm specific inputs, GAAP recognizes day
one profit or loss on fair value even if based on unobservable inputs, whereas IFRS defers day
one recognition if fair value measurement is not based on observable inputs. U.S. GAAP and
IFRS also differ in slight ways on their fair value treatment of liabilities and equity instruments, as well as disclosure requirements. International Accounting Standards Board and Financial Accounting Standards Board, Fair Value Measurement Project Update (Agenda Paper 8)
(Mar. 2009) (online at www.iasb.org/NR/rdonlyres/7E90DA08-C957-4B4E-9950-594B57E6D1A5/
0/FVM0903joint8obs.pdf).
258 International Accounting Standards Board, IASB Expert Advisory Panel: Measuring and
Disclosing the Fair Value of Financial Instruments in Markets That are No Longer Active, at
10
(Oct.
2008)
(online
at
www.iasb.org/NR/rdonlyres/0E37D59C-1C74-4D61-A9848FAC61915010/0/IASB_ Expert_Advisory_ Panel_October_2008.pdf).
259 See Group of Twenty, About G–20 (online at www.g20.org/about_what_is_g20.aspx)
(accessed Aug. 10, 2010). G–20 members are: Argentina, Australia, Brazil, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, the Republic of Korea, Russia, Saudi
Arabia, South Africa, Turkey, the United Kingdom, and the United States.

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ing-market countries were not sufficiently represented in global
economic discussion and governance.260 G–20 members are drawn
from six continents, and their countries collectively represent approximately 90 percent of the world’s gross national product.261
In November 2008, the G–20 held the Summit on Financial Markets and the World Economy in Washington, D.C., to ‘‘achieve
needed reforms in the world’s financial system.’’ 262 The G–20 diagnosed the ‘‘root causes’’ of the global crisis, assessed systemic ramifications, and formulated the Action Plan to Implement Principles
of Reform.263 The Plan is based on five ‘‘common principles’’ for reforming financial markets—strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets, reinforcing international cooperation, and reforming international financial institutions—and 47 short- and mediumterm actions that leverage the core competencies of international
organizations to achieve financial reform.264
In April 2009, the G–20 held a London summit to further advance the Action Plan by crafting a declaration that authorized additional measures to promote global financial system reform, including: stronger international frameworks for prudential regulation; greater transparency; more effective regulation of credit rating agencies; and more rigorous regulation and oversight of systemically important financial institutions, markets, and instruments.265 The G–20 also agreed to support the ability of emerging
markets and developing countries to access capital by making significant resource commitments to strengthen global financial institutions, including: tripling the IMF’s resources to $750 billion; creating a new Special Drawing Rights allocation of $250 billion that
serves as an international reserve asset that supplements countries’ official reserves; increasing support for Multilateral Development Bank lending by $100 billion; and providing $250 billion of
support for trade finance.266
The G–20 also created the Financial Stability Board (FSB) at the
April 2009 Summit, as the successor to the Financial Stability
Forum (FSF), in order to support the G–20’s vision for financial
system reform.267 The FSB’s core purpose is to promote international financial reform and stability by coordinating the regulations and policies of national financial authorities and international
260 See

id.
id.
Group of Twenty Washington Summit, Declaration Summit on Financial Markets and
the World Economy, at 1 (Nov. 15, 2008) (online at www.g20.org/Documents/
g20_summit_declaration.pdf).
263 See id. at 1.
264 See id. at 1.
265 See Group of Twenty London Summit, Declaration on Strengthening the Financial System,
at 1–2 (Apr. 2, 2009) (online at www.g20.utoronto.ca/2009/2009ifi.pdf) (hereinafter ‘‘G–20 London
Summit Declaration’’).
266 Id. See also International Monetary Fund, Fact Sheet: Special Drawing Rights (SDRs) (Jan.
31, 2010) (online at www.imf.org/external/np/exr/facts/sdr.HTM) (‘‘The SDR is an international
reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
Its value is based on a basket of four key international currencies, and SDRs can be exchanged
for freely usable currencies.’’).
267 The FSB has a broader mandate and a larger membership than the FSF, which was created in February 1999. See Financial Stability Board, Financial Stability Board Charter, at 1–
2 (Sept. 13, 2009) (online at www.financialstabilityboard.org/publications/r_090925d.pdf) (hereinafter ‘‘FSB Charter’’). See also G–20 London Summit Declaration, supra note 265, at 1.
261 See

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standard-setting bodies.268 The FSB seeks to diagnose the weaknesses of the financial system and devise remedies to address
them; promote coordination and information exchange among financial authorities; provide regulatory policy advice and counsel;
conduct strategic reviews of the policy development work of the
international standard setting bodies; set guidelines for supervisory
colleges; support contingency planning for cross-border crisis management for systemically important firms; and collaborate with the
IMF to conduct Early Warning Exercises.269 In its September 2009
report, Improving Financial Regulation, the FSB issued a comprehensive financial reform program that included guidelines for:
strengthening the global capital and liquidity framework for banks;
making global liquidity more robust; reducing the moral hazard
posed by systemically important financial institutions; strengthening accounting standards; improving compensation practices; and
expanding oversight of the financial system.270
The IMF has forged a close collaborative relationship with the
G–20 and the FSB.271 The IMF has 187 member countries, and its
primary purpose is to ‘‘safeguard the stability of the international
monetary system.’’ 272 The IMF has assumed an important role in
identifying lessons learned from the financial crisis and is relied
upon to provide early warning, financial vulnerability, financial
soundness, and macro-prudential indicators by gathering and analyzing data through surveillance of individual countries, regions,
and the entire world.273
As a result of the financial crisis, the IMF has revised its surveillance priorities to increase domestic and cross-border regulation of
major financial centers and deepened its analysis of linkages between markets, institutions, exchange rates, and external stability
risks.274 The IMF also created and chaired an interagency group

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268 See

FSB Charter, supra note 267, at 1–2.
269 FSB Charter, supra note 267. The FSB has taken several steps to attempt to make its operations transparent, but in certain key areas, it remains somewhat opaque. Its charter discloses the general process for determining the membership of its plenary committee, for instance, but the FSB does not list the names and titles of individual representatives. It also
states that the ‘‘number of seats in the Plenary assigned to Member jurisdictions reflects the
size of the national economy, financial market activity and national financial stability arrangements of the corresponding Member jurisdiction,’’ but it fails to provide specific information on
the process for making these determinations, nor does it identify the number of seats that were
assigned to each member. The charter also provides for standing committees and working
groups, but the membership and activities of these entities have not been disclosed. Id. at 4.
In addition, the FSB provides limited information about the content of plenary committee meetings. It issues press releases after plenary meetings that describe discussion topics and areas
of agreement in general terms. See, e.g., Financial Stability Board, Financial Stability Board
Meets on the Financial Reform Agenda (Jan. 9, 2010) (online at www.financialstabilityboard.org/
press/pr_100109a.pdf). However, these press releases are not in the form of minutes, and they
include few details about particular issues and concerns raised by specific member countries.
Moreover, the FSB does not publish specific agendas in advance of its plenary meetings. The
FSB has not yet issued a press release for the plenary committee meeting that occurred on June
14, 2010 in Toronto, even though the meeting occurred approximately two months ago.
270 See Financial Stability Board, Improving Financial Regulation: Report of the Financial Stability Board to G–20 Leaders (Sept. 25, 2009) (online at www.financialstabilityboard.org/publications/r_090925b.pdf).
271 The G–20 has relied on the IMF to provide research and analysis during the crisis. See
generally Group of Twenty, Progress Report on the Economic and Financial Actions of the London, Washington, and Pittsburgh G–20 Summits Prepared by Korea, Chair of the G–20 (July 20,
2010) (online at www.g20.org/Documents2010/07/July_2010_G20_Progress_Grid.pdf).
272 International Monetary Fund, Annual Report 2009 (2009) (online at www.imf.org/external/
pubs/ft/ar/2009/eng/pdf/ar09_eng.pdf) (hereinafter ‘‘IMF Annual Report’’); International Monetary Fund, About the IMF: Overview (online at www.imf.org/external/about/overview.htm)
(accessed Aug. 10, 2010).
273 See id. at 41–44.
274 See id. at 42.

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that collects, analyzes, and promulgates financial sector data on
the G–20 economies.275 In September 2009, the group issued a
joint advisory report with the FSB explaining the role that financial information gaps played in the financial crisis, proposing best
practices for data collection, identifying financial network connections across economies, and monitoring the susceptibility of domestic economies to shocks.276 In October 2009, the FSB, IMF, and BIS
issued a collaborative report offering guidelines and analytical
frameworks for assessing the systematic importance of financial institutions, markets, and instruments across countries.277 The IMF
has also helped developing countries to manage their economies effectively by offering training and by designing macroeconomic, financial, and structural policies. Additionally, the IMF began increasing the amount of funds available for lending and made it
easier for countries with good credit to access loans quickly in early
2009.278 The eventual recipients of these loans, however, were developing countries with only a marginal impact on the international financial system.279 By contrast, developed countries preferred to finance their capital injection and asset guarantee programs themselves rather than apply for IMF funds.
The Bank for International Settlements (BIS) is another international institution is working toward financial stability and reform.280 The BIS’s mission is to ‘‘serve central banks and financial
authorities in their pursuit of monetary and financial stability, to
foster international cooperation in those areas and to act as a bank
for central banks.’’ 281 The BIS houses the Basel Committee on
Banking Supervision, which recommends financial reforms and
issues macro-prudential guidelines and supervisory policies for central banks to mitigate systemic risk.282 The G–20 has charged the
Basel Committee with increasing transparency, strengthening capital requirements, and developing enhanced guidance to improve
central banks’ risk management practices.283 All G–20 members

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275 Id.

at 12–13.
276 See International Monetary Fund and Financial Stability Board, The Financial Crisis and
Information Gaps: Report to the G–20 Finance Ministers and Central Bank Governors (Oct. 29,
2009) (online at www.financialstabilityboard.org/publications/r_091107e.pdf).
277 See International Monetary Fund, Bank for International Settlements, and Financial Stability Board, Guidance to Assess the Systemic Importance of Financial Institutions, Markets and
Instruments: Initial Considerations (Oct. 2009) (online at www.bis.org/publ/othp07.pdf).
278 IMF Annual Report, supra note 272, at 25. By contrast, at the very beginning of the crisis,
the IMF had focused more on addressing food and fuel price shocks than on addressing failed
financial institutions. See id. at 22–23.
279 The biggest IMF emergency loans in 2009 were issued to Mexico, the Ukraine, and Hungary. IMF Annual Report, supra note 272, at 32.
280 See Bank for International Settlements, 80th Annual Report, at 1–5 (June 28, 2010) (online
at www.bis.org/publ/arpdf/ar2010e.pdf?noframes=1).
281 See id. at 107.
282 See id. at 114–118.
283 See G–20 London Summit Declaration, supra note 265, at 2. See also Group of Twenty,
Progress Report on the Immediate Actions of the Washington Action Plan, at 2, 4–6 (Mar. 14,
2009) (online at www.g20.org/Documents/g20_washington_actionplan_progress_140309.pdf). Progressive adoption implies that implementation schedules may differ across and within countries.
The United States, the European Union, Australia, and India have already implemented Basel
II. See Office of the Comptroller of the Currency, OCC Approves Basel II Capital Rule (Nov. 1,
2007) (online at www.occ.gov/ftp/release/2007-123.htm); Official Journal of the European Union,
Directive 2006/49/EC of the European Parliament and of the Council on the Capital Adequacy
of Investment Firms and Credit Institutions (June 14, 2006) (online at eur-lex.europa.eu/
LexUriServ/site/en/oj/2006/l_177/l_17720060630en02010255.pdf); Susan Bultitude, Commercial
and Regulatory Response to Current Financial System Turbulence: Regulatory Responses to Financial Market Turbulence, at 3 (2008); Reserve Bank of India, Monetary Policy Statement
2010–11, at 25 (2010) (online at rbidocs.rbi.org.in/rdocs/notification/PDFs/MPSA200410.pdf).

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have agreed to adopt and phase-in the Basel II capital framework,
which was initially published in 2004, by the end of 2010.284 Basel
II measures and sets minimum standards for capital adequacy
based on credit risk, operational risk, and market risk and aligns
regulatory capital requirements closely with these underlying risks
to help banks better identify and manage capital risks.285 In June
2008, the Basel Committee issued Principles for Sound Liquidity
Risk Management and Supervision, which emphasized that banks
should have a ‘‘robust liquidity risk management framework’’ and
sufficient loss-absorbing capital to withstand stress events, and detailed best practices for achieving these ends.286
In December 2009, the Basel Committee issued a reform proposal—commonly referred to as Basel III—that aims to strengthen
global capital and liquidity regulations and to increase resiliency
within the banking sector.287 The proposal has been endorsed by
the FSB and the G–20 leadership and contains five core reforms
that would apply to all countries that adopt it: First, it raises the
quality, consistency, and transparency of capital bases by imposing
new, more rigorous Tier I capital requirements. For example, it requires common shares and retained earnings to be the ‘‘predominant’’ form of Tier I capital and limits the remainder to instruments that are subordinated with fully discretionary or non-cumulative dividends or coupons without a maturity date or an incentive
to redeem. The plan also phases out hybrid capital instruments,
which are now capped at 15 percent of Tier I capital. Second, the
proposal strengthens the risk coverage of the capital framework by
raising capital requirements for trading book and complex
securitization exposures and resecuritization. It also incorporates a
‘‘stressed value-at-risk capital requirement’’ based on a 12-month
period of ‘‘significant financial stress’’ and raises the standards of
the supervisory review and disclosure processes. Third, it introduces a leverage ratio as a supplement to the Basel II risk-based
framework to protect against excessive leverage in the banking system. Fourth, it contains requirements for a capital buffer that can
be used during periods of stress. Finally, it employs a global ‘‘minimum liquidity standard’’ for international banks.288

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4. The International Financial Landscape in the Aftermath
of the Crisis
The aftermath of the most severe stages of the global financial
crisis brought stark changes in management practices within
banks, unprecedented government intervention within the financial
sector, and modifications to the international financial system. The
284 See Group of Twenty Toronto Summit, Declaration, at 16 (June 26–27, 2010) (online at
www.g20.org/Documents/g20_declaration_en.pdf).
285 See Bank for International Settlements, Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards: A Revised Framework, at
6 (June 2006) (online at www.bis.org/publ/bcbs128.pdf).
286 See Bank for International Settlements, Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision (Sept. 2008) (online at
www.bis.org/publ/bcbs144.pdf). (‘‘Liquidity is the ability of banks to fund increases in assets and
meet obligations as they come due, without incurring unacceptable losses.’’).
287 See Bank for International Settlements, Basel Committee on Banking Supervision, Consultative Document: Strengthening the Resilience of the Banking Sector, at 2–3 (Dec. 2009) (online at www.bis.org/publ/bcbs164.pdf).
288 Id. at 3.

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dramatic crisis produced enormous financial losses whose impact
was felt throughout the entire world.
The sheer amount of capital lost due to the crisis had the most
pervasive effects in altering the international financial landscape.
By the spring of 2009, the International Monetary Fund (IMF) was
estimating that financial institutions worldwide would lose approximately $4 trillion on their loans and security holdings from
2007 to 2010.289 Three of the five large, independent U.S. investment banks—Bear Stearns, Lehman Brothers, and Merrill Lynch—
had either ceased to exist or were bought up by another bank. The
two remaining independent U.S. investment banks, Goldman Sachs
and Morgan Stanley, had converted to bank holding companies
(BHCs), thereby gaining permanent access to the Federal Reserve
discount window. In Europe, Iceland’s three major banks, as well
as ABN AMRO Bank N.V. (ABN AMRO) and Fortis in the Netherlands, Northern Rock in the United Kingdom, and the Anglo Irish
Bank in Ireland had all been nationalized.
Perhaps the most striking feature of the financial landscape after
the crisis was unprecedented government intervention. As a result
of the losses they suffered, many banks needed to raise new equity
from shareholders and/or their home-country governments.
Governments continue to fund a number of major financial institutions. While many of the large banks in the United States that
were propped up by government intervention have succeeded in
paying back a majority of their loans, banks like the Royal Bank
of Scotland and Northern Rock continue to rely upon British government funding as a source of bank capital.290
As noted above,291 disparities between the accounting standards
of American and international banks were also highlighted in the
wake of the crisis. In particular, fair value accounting rules remain
a source of international regulatory friction.
Individual banks also altered their own management practices in
the wake of the financial crisis. Prior to the crisis, very few large
financial firms with international operations had risk management
structures capable of assessing the large risks to which they were
in fact exposed. An October 2009 report of the Financial Stability
Board notes that firms have undertaken a number of changes in
risk management practices in the aftermath of the crisis. Among
the most significant are engaging board and senior management in
risk management, increased use of and improvements to stress
testing, and improving funding and liquidity risk management programs.292
289 IMF 2009 Global Financial Stability Report, supra note 108, at xv. A recent IMF Report
puts this figure at $2.3 trillion. These figures ($4 trillion and $2.3 trillion) are global estimates
of banks losses on all bank loans and bank securities for the period 2007–2010. See International Monetary Fund, Global Financial Stability Report: Meeting New Challenges to Stability
and Building a Safer System, at 12 (Apr. 2010) (online at www.imf.org/external/pubs/ft/gfsr/
2010/01/pdf/text.pdf).
290 Other major international examples include ING in the Netherlands (recapitalized, asset
guarantees); UBS AG, Switzerland (capital injections); and Anglo-Irish Bank, Republic of Ireland (nationalized). In the United States, the major example is Citigroup (recapitalized).
291 See Section C.2.f, supra.
292 Many banks kept a low advances to deposits ratio to significantly diminish risk and several, such as HSBC, which kept its ratio at around 100 percent. HSBC Holdings, Annual Report
and Accounts 2009, at 246 (Mar. 1, 2010) (online at www.hsbc.com/1/PA_1_1_S5/content/assets/
investor_relations/hsbc2009ara0.pdf).

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5. Winding Down Rescue Efforts
Buoyed by a rising market and a dramatic turnaround in the fortunes of global banks beginning in 2009, several significant rescue
efforts extended by foreign governmental agencies were curtailed or
wound down altogether.
Between September 2009 and January 2010, numerous banks in
G–7 countries rallied to extricate themselves from various government support programs. In early November 2009 Lloyds Banking
Group completed its exit from the United Kingdom’s Asset Protection Scheme (APS) and paid a £2.5 billion ($4.1 billion) fee that
helped recoup the taxpayers’ investments.293 Formed in February
2009, the APS insured banks against the risk of losses stemming
from backlogs of shaky assets, such as corporate and leveraged
loans, commercial property loans and structured credit assets.294
Royal Bank of Scotland, which positioned assets originally valued
at £325 billion ($471 billion) with APS under an agreement that its
liability was reduced to £19.5 billion ($28.2 billion) of potential
losses, is still covered by the plan.295 RBS reportedly agreed to fees
that amount to £6.5 billion ($9.4 billion), or 2 percent of the assets
covered by the plan, and issued non-voting B shares to HM Treasury to cover the costs.
In the fall of 2009, France’s Société Générale and BNP Paribas
both completed separate capital raises to repay government assistance and strengthen their capital positions.296
Earlier this year, a number of bank support schemes in healthier
economies were shuttered. On March 31, Australia ended a program that backstopped lenders and warned banks against using
the situation as an excuse to increase interest rates above national
levels. A separate guarantee for depositors with up to $1 million
AUD ($920,000) per account will be held in place for at least one
more year. Australian regulators said the program enabled banks
to raise more than $32 billion AUD ($29 billion) from international
credit markets since its inception. Participating banks paid more
than $1 billion AUD ($920 million) for the service.
Bank guarantee programs in the United States, Canada, France
and South Korea had shut down by late 2009, and other programs
in the United Kingdom, Sweden, Germany, Spain, Ireland and
Denmark were slated to close this year after numerous extensions.
In addition, the European Commission approved an extension of
guarantee schemes for banks in Ireland, Spain, and Denmark and
a liquidity scheme in Hungary until December 31, 2010.297
293 HM

Treasury Notice—Lloyds Banking Group and Royal Bank of Scotland, supra note 220.
Treasury Statement on the Asset Protection Scheme, supra note 219.
Treasury, Statement on the Government’s Asset Protection Scheme, at 3 (Feb. 26, 2009)
(online
at
webarchive.nationalarchives.gov.uk/20100407010852/www.hm-treasury.gov.uk/d/
press_18_09.pdf).
296 On October 6, 2009, Société Générale announced a Ö4.8 billion ($7 billion) rights offer slated to reimburse the government for Ö3.4 billion ($5 billion), which was apportioned in equal
measures of subordinated debt and preferred shares. The cost of that government support was
expected to reach Ö185 million ($270 million). Nearly two weeks earlier, BNP Paribas announced a plan to raise Ö4.3 billion ($6.3 billion) through its own rights offer. The deal was intended to help BNP repay the French government for Ö5.1 billion ($7.5 billion) plus Ö226 million
($330.6 million) in interest. Both BNP and Société Générale agreed to increase household loan
volumes over the coming year by 3 percent.
297 Europa, State Aid: EU Authorises Extension of Bank Support Scheme in Ireland, Spain,
Denmark
and
Hungary
(June
29,
2010)
(online
at
europa.eu/rapid/
pressReleasesAction.do?reference=IP/10/854&type=HTML).
294 HM

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295 HM

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As some banking systems regain strength and regulators wind
down emergency assistance programs, governments are shifting
their focus to preventive measures. The recently enacted Wall
Street Reform and Consumer Protection Act of 2010 appears likely
to result in tougher banking regulations in the United States. Some
advocates of the United States’ taking a leadership role have
pushed for a stronger version of a provision in the Dodd-Frank
Wall Street Reform and Consumer Protection Act that sets limited
conditions on the content of Tier 1 capital at large banks 298 and
stated officials at the Basel Committee on Banking Supervision had
failed the international community. These ideas were expressed by
Senator Ted Kaufman (D–DE), who called Basel I and II ‘‘colossal
failures’’ and criticized the direction of Basel III on the Senate
floor. As an alternative to relying on an international rules committee, Senator Kaufman specifically pressed for legislation that
provided strict guidelines to define Tier 1 capital.299 Despite this
criticism, the new law mainly calls for tougher capital requirements and leaves the final details open to interpretation by regulators and industry experts. Future regulations in the United
States will also depend on the final form of the Basel III accords,
which will establish international capital and leverage standards
for banks. Months before President Obama signed the financial reform bill into law, Comptroller of the Currency John C. Dugan took
the opposite side of Senator Kaufman’s argument and urged Congress to collaborate on capital standards with the international
community.300 Even though the Dodd-Frank bill was signed by
President Obama there are still questions about whether regulators
will use powers granted by the law to take a lead role on banking
standards or adopt a wait-and-see approach concerning the talks in
Switzerland.
D. International Impact of Rescue Funds
The interconnectedness of the financial system, the increasing
fluidity of borders with respect to financial transactions and the
flow of capital,301 and several decisions concerning the allocation of
TARP funds mean that U.S. rescue programs likely had international ramifications and also that international rescue programs
likely assisted U.S. institutions. As discussed in more detail below,
however, the flow of funds from the United States is likely to have
exceeded the flow of funds into it (both in absolute and relative
terms).
Despite the methodological challenges that make it difficult to
pinpoint the precise movement of funds,302 it is very likely that a
meaningful portion of TARP funds had an international impact, as
298 Dodd-Frank

Wall Street Reform and Consumer Protection Act, supra note 162, at § 171.
of Senator Ted Kaufman, Banking Conference Should Agree to Strong Financial Reforms to Bolster International Bank Capital Standards (June 17, 2010) (online at
www.kaufman.senate.gov/press/press_releases/release/?id=C328F9F2-7628-43FC-BD70D06BA22C89D6).
300 John C. Dugan, comptroller of the currency, Remarks before the Institute of International
Bankers (Mar. 1, 2010) (online at www.occ.gov/ftp/release/2010-26a.pdf).
301 For further discussion concerning globalization and cross-border integration within financial institutions, see Section B, supra.
302 The Panel emphasized this point in its December oversight report. December Oversight Report, supra note 39, at 111 (‘‘[I]t is difficult to establish, in many cases, whether any TARP
funds ended up outside the United States.’’).

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demonstrated in more detail below. There may have been both
positive and negative consequences of this cross-border flow of
funds. EESA requires the Secretary to take steps to maximize taxpayer return,303 and an investor is likely to benefit from a company’s ability to pursue the best possible business opportunities. In
some cases, permitting a company to bolster international sales
through international investments may generate revenues that
allow it to repay the taxpayer in full within a reasonable period of
time. General Motors Company (General Motors), for example, has
invested in its China operations and has seen sales there increase
dramatically.304 Limiting General Motors’ ability to take advantage
of its opportunities in Asia might have weakened the taxpayer’s investment in the company.
Enabling the cross-border flow of funds may also benefit companies over the long term. If the government had permitted AIG to
compensate domestic counterparties in return for the termination
of certain credit default swap contracts but had required the company to abrogate similar contracts with foreign counterparties,
AIG’s ability to conduct international transactions in the future
would have been compromised. The U.S. government might have
been in an awkward negotiating position vis-à-vis foreign governments if TARP recipients had been required to abrogate foreign
contracts while simultaneously honoring domestic contracts.
On the other hand, there may be several drawbacks to using domestic rescue funds to finance foreign operations. It may encourage
free riders, as foreign governments that expect their counterparts
to initiate large rescue operations may be less likely to take action
themselves. If the costs of financial rescue efforts are realized by
home countries but benefits are distributed among foreign economies, countries may engage in a ‘‘race to inaction.’’
The cross-border flow of rescue funds may also encourage regulatory arbitrage. Companies may be incentivized to locate their
headquarters in countries that are likely to initiate prompt, extensive rescue efforts in the event of a crisis, while shifting their operations—and potentially the most risky operations—to countries
with less stringent regulation. Such offshore movements could reduce the capacity of U.S. regulators to monitor the institution and
could negatively affect the U.S. labor market, which might result
in U.S. taxpayers realizing a reduced percentage of the economic
benefits of the institution’s operations while bearing a substantial
portion of the costs of a rescue.
Ultimately, basic governance principles may be disrupted when
the government of one country asks its citizens to subsidize the
303 12 U.S.C. § 5201(2)(C). See also 12 U.S.C. § 5233(b)(1)(A)(iv) (requiring the Congressional
Oversight Panel to submit ‘‘regular reports’’ on the ‘‘effectiveness of the program from the standpoint of minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.’’).
304 General Motors’ sales in China in the first half of 2010 outpaced sales for the same period
in 2009 by 48.5 percent. General Motors Corp., GM Sets New June, First Half Sales Records
in
China
(July
2,
2010)
(online
at
media.gm.com/content/media/cn/en/news/
news_detail.brand_gm.html/content/Pages/news/cn/en/2010/June/0702) (hereinafter ‘‘GM Sets
New June, First Half Sales Records in China’’). According to Stephen J. Girsky, the vice chairman for corporate strategy and business development, ‘‘China’s a big piece of the value of the
company, and since we pull cash out of China, it helps fund investments in other parts of the
company as well.’’ David Barboza and Nick Bunkley, G.M., Eclipsed at Home, Soars to Top in
China, New York Times (July 21, 2010) (online at www.nytimes.com/2010/07/22/business/global/
22auto.html?hp=&pagewanted=all).

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economy of another country. The authority of a government to tax
its citizens derives in part from the assumption that money taken
from individual citizens will be used for the collective good of that
nation’s citizenry.305 To tax one nation’s citizens to benefit those of
another may be contrary to that fundamental principle. Regarding
the TARP, it is conceivable that in some cases TARP funds could
be used for purposes that are contrary to the interests of U.S. citizens if, for example, the outsourcing of U.S. economic activities facilitated domestic job losses.
Regardless of the policy merits of permitting the cross-border
flow of U.S. rescue funds or allowing more rescue funds to flow out
of the United States than back into it—and the Panel takes no position on that issue—it is not easy to disentangle the cross-border
flow of TARP funds. The difficulty of assessing the size and scope
of the cross-border movement of rescue money makes it challenging
to evaluate the impact of those movements on both U.S. and foreign economies.
As the Panel has described in several prior reports, two factors
make it difficult to track the flow of TARP funds. First, the TARP
did not require recipient institutions to use the funds for specific
purposes or to submit reports on their use of the funds, a problem
that was due in part to the terms and structure of the Securities
Purchase Agreements (SPAs) signed by TARP recipients. Although
the SPAs included a list of the goals of the TARP, they did not
specify how these goals would be met, measured, or reported. They
also included the goals as part of the precatory opening clauses of
the agreement, as opposed to situating them in the binding language that followed. As a result, the SPAs did not impose specific
obligations on TARP recipients to track the funds they received.306
The absence of these data impedes the process of following the
money. Despite the Special Inspector General for TARP’s
(SIGTARP) assessment that financial institutions may in fact be
capable of providing ‘‘meaningful information’’ on their use of
TARP funds, few institutions have done so.307
305 See,
e.g., Federalist No. 30 (online at www2.hn.psu.edu/faculty/jmanis/poldocs/fedpapers.pdf) (‘‘[T]wo considerations will serve to quiet all apprehension on this head: one is, that
we are sure the resources of the community, in their full extent, will be brought into activity
for the benefit of the Union.’’).
306 See U.S. Department of the Treasury, Securities Purchase Agreement for Public Institutions
(online at www.financialstability.gov/docs/CPP/spa.pdf) (hereinafter ‘‘Securities Purchase Agreement for Public Institutions’’) (accessed Aug. 10, 2010). December Oversight Report, supra note
39, at 108–09 & n.435 (‘‘Added to the fact that there are no specific restrictions on use of funds
or requirements with respect to the reporting of such use, the SPAs seem to be a missed opportunity for monitoring the use of taxpayers’ funds.’’). Several other Panel reports discuss the absence of use of funds reports. See, e.g., Congressional Oversight Panel, May Oversight Report:
The Small Business Credit Crunch and the Impact of the TARP, at 26 n.65 (May 13, 2010) (online at cop.senate.gov/documents/cop-051310-report.pdf); Congressional Oversight Panel, Questions About the $700 Billion Emergency Economic Stabilization Funds, at 4–5 (Dec. 10, 2008)
(online
at
frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_
cong_senate_committee_prints&docid=f:45840.pdf) (noting the need for the companies that received TARP funds to explain how they were using those funds).
307 Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP
Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP
Funds, at 5–13 (July 20, 2009) (online at www.sigtarp.gov/reports/audit/2009/
SIGTARP_Survey_Demonstrates_That_Banks_Can_Provide_Meaningful_Information_
On_Their_Use_Of_TARP_Funds.pdf). Citigroup presents a notable exception. Citigroup established a Special TARP Committee, which set up guidelines consistent with the objectives and
spirit of the program, and internal controls to ensure that TARP funds would only be used for
lending and mortgage activities. It also separately publishes regular reports summarizing its
Continued

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Second, because money is fungible, it is not possible to isolate a
dollar of government spending on a rescue program and connect it
to a dollar of spending by a financial institution.308 Without careful
safeguards, there is no guarantee that money allocated for one purpose is not used for another.
In addition, as mentioned above, regulatory barriers and tax implications may impede the movement of money across borders.309
This creates complications for following the money because it
means that money does not necessarily move in direct proportion
to the size of an institution’s overseas business operations. For instance, if Bank X received $100 million from the TARP and conducts 10 percent of its operations in Brazil, there is no certainty
that $10 million of the government’s investment would be employed
for its Brazilian operations.
One interesting distinction between U.S. and non-U.S. rescue efforts may be noted, however. The CPP, the primary tool used in the
TARP rescue of the U.S. banking system, was a systemic program:
it focused on the banking industry as a whole. In doing so, it injected $163.5 billion into the 17 of the 19 largest U.S. banks.310
Those largest banks are, as discussed in more detail below, the
banks with the largest international operations.311 In contrast, European rescue programs tended in the main to focus more on specific troubled institutions; even the U.K. capital injection program
was only taken up by two institutions. The operations of many of
the largest non-U.S. recipients of rescue funds were, as seen below,
either concentrated on their home markets, such as Hypo Real Estate in Germany, or extended over only one national border (as
seen with the Irish and Icelandic banks operating in the United
Kingdom).312 The logical inference is that the U.S. banking rescue
may well have had significantly more international impact than
non-U.S. rescue efforts had on the United States.

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1. U.S. Rescue Funds that May Have Benefited Foreign
Economies
Figure 15 details the potential international dimension of U.S.
rescue programs. The figure shows the funds that U.S.-based institutions received from the U.S. government and the revenue those
institutions derived from their operations outside of the United
States. Although the size of an institution’s international operations cannot serve as a perfect proxy for the percentage of rescue
funds that it used internationally, it may provide a rough guide.
Companies with more sizeable international operations are likely
to allocate a greater percentage of rescue funds to international
purposes.
TARP spending initiatives. See generally Citigroup, TARP Progress and Updates (online at
www.citigroup.com/ citi/corporategovernance/tarp.htm) (accessed Aug. 10, 2010).
308 December Oversight Report, supra note 39, at 109.
309 For further discussion concerning globalization and cross-border integration within financial institutions, see Section B.3, supra.
310 Treasury Transactions Report, supra note 64.
311 Additionally, where the U.S. rescue addressed the needs of individual institutions in supplemental TARP programs such as the TIP and the SSFI, the recipients were institutions with
extensive international operations such as AIG, Bank of America, and Citigroup. See January
Oversight Report, supra note 226, at 27–28.
312 However, as discussed in Section B.2 above, it merits mention that many European banks
made substantial investments in U.S.-based assets with significant exposure to the U.S. housing
market.

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65
FIGURE 15: U.S. RESCUE PROGRAMS WITH INTERNATIONAL DIMENSIONS
Federal
Funds
Received
($millions) 313

U.S. Firms

Express 314

American
.................................................
AIG 315 ........................................................................
316
...................................................
Bank of America
Bank of New York-Mellon 317 .....................................
318
...........................................................
Capital One
Chrysler 319 .................................................................
320
...............................................................
Citigroup
General Motors 321 ......................................................
GMAC 322 ....................................................................
Goldman Sachs 323 .....................................................
JPMorgan Chase 324 ...................................................
Merrill Lynch 325 .........................................................
Morgan Stanley 326 .....................................................
State Street 327 ...........................................................

Non-U.S. Revenue
($millions)
2005

3,389
69,835
35,000
3,000
3,555
14,310
50,000
50,745
16,290
10,000
25,000
10,000
10,000
2,000

8,180
49,685
5,178
1,810
1,088
NA
33,414
54,557
2,170
10,599
11,480
8,518
9,540
2,130

2006

Non-U.S. Revenue
(% Total)
2005–2006

8,760
55,899
10,699
2,063
997
NA
38,211
63,310
2,091
17,304
16,091
12,056
13,511
2,741

33
48
12
30
8
NA
41
35
11
44
24
34
38
41

313 Unless otherwise noted, Federal Funds Received are calculated using TARP transactions report. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as% 20of%207-30-10.pdf) (hereinafter ‘‘Treasury
Transactions Report’’).
314 U.S.
net
revenue.
American
Express,
Annual
Report
2006
(Mar.
8,
2007)
(online
at
library.corporate-ir.net/library/64/644/64467/items/235025/Amex_06AR_03_8_07.pdf).
315 U.S. total revenue. U.S. revenues calculated by subtracting Canadian revenues from domestic. American International Group, Inc., Form
10–K
for
the
Fiscal
Year
Ended
December
31,
2006
(Mar.
1,
2007),
at
24,
124
(online
at
www.sec.gov/Archives/edgar/data/5272/000095012307003026/y27490e10vk.htm).
316 TARP funds received by institution through the Capital Purchase Program (CPP) and through the Targeted Investment Program (TIP).
Does not include the $10 billion acquired with the acquisition of Merrill Lynch in January 2009. U.S. revenue. U.S. revenues calculated by
subtracting Canadian revenues from North American revenues. Bank of America, Annual Report 2006, at 150 (Mar. 1, 2007) (online at
media.corporate-ir.net/media_files/irol/71/71595/reports/2006_AR.pdf).
317 Domestic revenue. Bank of New York-Mellon, Form 10–K for the Fiscal Year Ended December 31, 2006, at 31 (Mar. 2007) (online at
www.bnymellon.com/investorrelations/financialreports/archive/bankofnewyork/10K2006.pdf).
318 Domestic
total
revenue.
Capital
One,
Annual
Report
2006,
at
54,
130
(Mar.
2007)
(online
at
media.corporate-ir.net/media_files/irol/70/70667/AR2006.pdf).
319 While Chrysler Group LLC (Chrysler) was a non-public subsidiary of DaimlerChrysler in 2005–2006, an average of 23 percent of Chrysler’s revenue from 1995–1996 was foreign. Chrysler Corp., Form 10–K for the Fiscal Year Ended December 31, 1996 (Jan. 21, 1997) (online at
www.sec.gov/Archives/edgar/data/791269/0000950124-97-000176.txt).
320 Treasury made three separate investments in Citigroup Inc. (Citigroup) under the CPP, Targeted Investment Program (TIP), and Asset
Guarantee Program (AGP) for a total of $50 billion. On 6/9/2009, Treasury entered into an agreement with Citigroup to exchange up to $25
billion of Treasury’s investment in Fixed Rate Cumulative Perpetual Preferred Stock, Series H (CPP Shares) ‘‘dollar for dollar’’ in Citigroup’s
Private and Public Exchange Offerings. On 7/23/2009 and 7/30/2009, Treasury exchanged a total of $25 billion of the CPP shares for Series
M Common Stock Equivalent (‘‘Series M’’) and a warrant to purchase shares of Series M. On 9/11/2009, Series M automatically converted to
7,692,307,692 shares of common stock and the associated warrant terminated on receipt of certain shareholder approvals. North America
total revenues, net of interest expense. Citigroup, Inc., Form 10–K for the Fiscal Year Ended December 31, 2006, at 104 (Feb. 23, 2007) (online at www.sec.gov/Archives/edgar/data/ 831001/000119312507038505/d10k.htm). Regional revenue numbers from Bloomberg (accessed August 5, 2010).
321 General Motors Corp., Form 10–K for the Fiscal Year Ended December 31, 2006, at 61–65 (Mar. 15, 2007) (online at
www.sec.gov/Archives/edgar/data/40730/000095012407001502/k11916e10vk.htm).
322 Total net financing revenue and other income. GMAC LLC, Form 10–K for the Fiscal Year Ended December 31, 2006 (Mar. 13, 2007) (online at www.sec.gov/Archives/edgar/data/40729/000095012407001471/k12221e10vk.htm).
323 Total net revenues, listed for ‘‘Americas’’ although footnote states that ‘‘substantially all relates to the United States.’’ Goldman Sachs,
2006
Annual
Report,
at
118
(Mar.
2007)
(online
at
www2.goldmansachs.com/our-firm/investors/financials/archived/annual-reports/attachments/2006-gs-annual-report.pdf).
324 JPMorgan Chase, 2006 Consolidated Financial Statements (Feb. 21, 2007) (online at files.shareholder.com/downloads/ONE/
986211036x0x86653/f71d68a8-37bb-4c6a-80dc-e733557ff685/Consolidated_financial_statements_and_Notes.pdf).
325 Net Revenue, United States. Originally $10 billion was set aside for Merrill Lynch under the CPP. However, settlement was deferred
pending merger. The purchase of Merrill Lynch by Bank of America was completed on 1/1/2009, and this transaction under the CPP was
funded
on
1/9/2009.
Merrill
Lynch,
Complete
Financials
2006,
at
93
(online
at
www.ml.com/annualmeetingmaterials/2006/ar/pdfs/annual_report_2006_financials.pdf) (accessed Aug. 11, 2010).
326 Net Revenue, United States. Morgan Stanley, Form 10–K for the Fiscal Year Ended December 31, 2006, at 32, 157 (Feb. 13, 2007) (online at www.sec.gov/Archives/edgar/data/895421/000119312507027693/d10k.htm).
327 Total
revenue.
State
Street,
Annual
Report
2007,
at
24,
124
(online
at
library.corporate-ir.net/library/78/782/78261/items/284296/STT_AR.pdf) (accessed Aug. 11, 2010).

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As shown in the figure above, several institutions that received
U.S. rescue funds had substantial international operations. The
amount of funding—as well as the terms—varied from institution
to institution. In addition, because the TARP imposed few restrictions on the use of the funds,328 each institution used the funds for
different purposes. Many of these large institutions had extensive
non-U.S. operations. As discussed above, the percentage of an institution’s revenue derived from foreign operations may serve as a
328 See

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rough—but imperfect—approximation of the cross-border flow of
rescue funds, or at least the potential overseas benefit that such
funds might have provided. The examples below provide some additional context on the ways in which institutions have employed
government assistance for cross-border purposes.
• AIG. As discussed in more detail in the Panel’s June 2010 report, due to the international nature of AIG’s business,329 approximately $61.6 billion of TARP and other government funds received
by the company went to foreign institutions and governments.330
More than half of the money AIG paid to credit default swap (CDS)
counterparties on multi-sector collateralized debt obligations
(CDOs) went to foreign institutions ($40.2 billion of the $62.2 billion in notional value).331
—AIG’s foreign subsidiaries received some funds through
capital contributions. Life insurance subsidiary Nan Shan as
well as others in Taiwan, Japan, and Hong Kong received $4.4
billion.
—Foreign counterparties of AIG received government funds
from AIG’s payments through its securities lending program.
AIG’s foreign-based securities lending counterparties received
$28.7 billion.332
—TARP and government funds also benefited foreign banks
through AIG’s regulatory capital swaps.333 Although the full
list of these counterparties is unknown, the top seven counterparties to these swaps held a combined $210.9 billion in notional exposure.334
329 As noted in the Panel’s June 2010 report, one-third of AIG’s revenues are derived from
East Asia. See June Oversight Report, supra note 10, at 104.
330 Of the 61.6 billion that went to foreign institutions and governments, $4.4 billion went to
foreign life insurance subsidiaries, $28.7 billion to securities lending counterparties, $17.2 billion
to Maiden Lane III counterparties, and $11.3 billion to CDS counterparties for additional collateral postings.
331 It is important to note, also, that some of these foreign-based institutions have subsidiaries
in the United States, so the potential existed for funds to flow through to them.
332 The following foreign-based securities lending counterparties received U.S. rescue funds:
Barclays ($7.0 billion), Deutsche Bank ($6.4 billion), BNP Paribas ($4.9 billion), HSBC ($3.3 billion), Dresdner Kleinwort ($2.2 billion), UBS ($1.7 billion), ING ($1.5 billion), Société Générale
($0.9 billion), Credit Suisse ($0.4 billion), Paloma Securities ($0.2 billion), and Citadel Securities
($0.2 billion). The following foreign-based AIGFP CDS counterparties received government funds
through either additional collateral postings or Maiden Lane III: Deutsche Bank ($5.4 billion),
Landesbank Baden-Wuerttemberg ($0.1 billion), Coöperatieve Centrale RaiffeisenBoerenleenbank B.A. (Rabobank) ($0.8 billion), Société Générale ($11.0 billion), The Royal Bank
of Scotland ($0.7 billion), Deutsche Zentral-Genossenschaftsbank ($1.0 billion), Dresdner Bank
AG ($0.4 billion), UBS ($3.3 billion), Barclays ($1.5 billion), Bank of Montreal Financial Group
(Bank of Montreal) ($1.1 billion), Calyon ($2.3 billion), Deutsche Zentralgenossenschaftbank AG
(DZ Bank) ($0.7 billion), KFW ($0.5 billion), Banco Santander ($0.3 billion), Danske ($0.2 billion), and HSBC Bank ($0.2 billion). See American International Group, Inc., AIG Discloses
Counterparties to CDS, GIA, and Securities Lending Transactions (Mar. 15, 2009) (online at
media.corporate-ir.net/media_files/irol/76/76115/ releases/031509.pdf).
333 Many European banks entered into CDSs with a France-based subsidiary of AIGFP in
order to decrease the amount of regulatory capital they were required to hold. As these swaps
were not terminated as part of the government rescue, the benefits that the counterparties received came not in the form of cash but rather in the continuation of contracts that led to more
favorable regulatory treatment in the counterparties’ home countries. See June Oversight Report, supra note 10, at 111–114.
334 The counterparties to AIG’s regulatory capital swaps included the following top seven
swap-holders: Dutch bank ABN AMRO ($56.2 billion notional exposure), Danish bank Danske
($32.2 billion notional exposure), German bank KFW ($30 billion notional exposure), and French
banks Credit Logement ($29.3 notional exposure), Calyon ($24.3 billion notional exposure), BNP
Paribas ($23.3 billion notional exposure) and Société Générale ($15.6 billion notional exposure).
See Reg Capital Arb, E-mail from Paul Whynott, Federal Reserve Bank of New York, to
Alejandro LaTorre, vice president, Federal Reserve Bank of New York (Nov. 4, 2008) (FRBNY–
TOWNS–R1–188408). For further data on the impact an AIG bankruptcy would have had on
these counterparties, see June Oversight Report, supra note 10, at 112–114.

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—AIGFP’s foreign CDS counterparties received $17.2 billion
through Maiden Lane III payments and $11.3 billion from additional collateral postings. Further foreign counterparties benefited from the creation of the Maiden Lane III facility.335
In addition to direct payments to foreign counterparties, some of
a domestic counterparty’s own counterparties may be located overseas, which may result in further cross-border payments. Conversely, money paid to a foreign counterparty may return to the
United States via its own counterparty relationships with U.S. institutions. The dealings of Goldman Sachs with respect to the
CDSs on CDOs that were eventually acquired by Maiden Lane III
provide a compelling example of the effect of counterparty relationships on the flow of funds across borders, as 96.9 percent of the
cash received by Goldman effectively flowed to non-U.S. institutions.336 (These institutions, as well as other indirect foreign beneficiaries of the AIG rescue—entities that sold hedges on AIG to
Goldman and benefited from not having to make good on that protection—are listed in Annex II.)
• General Motors. GM, which received a total of $50.7 billion
from Treasury amid challenges in the domestic market, increased sales in China by 48.5 percent, and sold more vehicles
in China than it did in the United States in the past year.337
While GM has stated that no taxpayer money has been used
to further operations in China, the Chinese government stimulus package strengthened demand amongst Chinese citizens
by encouraging sales of fuel-efficient vehicles and assisting
farmers with purchases of cars.338 It can be inferred that assets held as a result of capital injection programs by the U.S.
government strengthened GM’s capabilities abroad. As shown
in Figure 16 below, while capital injections helped subsidize
GM’s losses in North America and Europe, GM generated posi335 See

June Oversight Report, supra note 10, at 93.
to recently released documents, there were 32 Goldman CDS counterparties that
benefited directly from government assistance provided through the Maiden Lane III facility,
and 31 of these entities are foreign. Each of the foreign entities listed below held a CDO for
which Goldman had written CDS protection and entered into contracts with AIG laying off that
risk. While Goldman was required to perform under its contracts whether or not AIG performed,
when the government made the decision to pay AIG’s counterparties at par—including Goldman—the following foreign entities were direct beneficiaries: DZ Bank, Banco Santander Central Hispano SA, Rabobank Nederland-London Branch, Zurcher Kantonalbank, Dexia Bank S.A.,
BGI INV FDS GSI AG, Calyon-Cedex Branch, The Hongkong & Shanghai Banking Corp., Depfa
Bank Plc, Skandinaviska Enskilda Bankensweden, Sierra Finance plc (Sierra Finance), PGGM
Pensioenfonds (PGGM), Natixis, Zulma Finance Plc (Zulma Finance), Stoneheath Re CRDV G
(Stoneheath), Hospitals of Ontario Pension Plan, Venice Finance plc (Venice Finance), KBC
Asset Management, NVD Star Finance, MNGD Pension Funds LTD, Shackleton Re Limited
(Shackleton), Infiniti Finance plc, Legal & General Assurance, Barclays, Signum Platinum, Lion
Capital Global Credit I LTD, Kommunalkredit Int Bank, Credit Linked Notes LTD, Ocelot CDO
I PLC, Hoogovens PSF ST, Hypo Public Finance Bank, and The Royal Bank of Scotland. It merits mention that it is not possible to develop a perfect correlation between funds provided to
Goldman and funds that went to foreign entities. Since Goldman was making payments to its
counterparties on the CDS contracts even before the government created the Maiden Lane III
facility, it is difficult to track the precise flow of government funds that were provided as part
of the AIG rescue. See Senate Committee on Finance, Grassley Submits Questions for Committee
Record About Taxpayer Dollars for AIG, Goldman Sachs Counterparties (July 23, 2010) (online
at finance.senate.gov/newsroom/ ranking/release/?id=cb2c54ae-fb8b-43e0-abeb-9d12a422810c)
(see ‘‘Attachment 2’’). Please see Annex II, infra, for a discussion of the indirect beneficiaries
of the government’s assistance to AIG.
337 Treasury Transactions Report, supra note 64, at 18; GM Sets New June, First Half Sales
Records in China, supra note 304.
338 Nick Bunkley, G.M., Eclipsed at Home, Soars to Top in China, New York Times (July 21,
2010) (online at www.nytimes.com/2010/07/22/business/ global/22auto.html?pagewanted=all)
(Phone interview between Nick Bunkley and Steve Girsky, VP of Corporate Strategy and Business Development at GM).

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336 According

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tive earnings in both Latin America and the Asia Pacific region
leading up to its financial rescue by the U.S. government.
FIGURE 16: GENERAL MOTORS INCOME (LOSS) FROM CONTINUING OPERATIONS, PRE-TAX (NINE
MONTHS ENDED SEPTEMBER 30) 339
[Dollars in millions]
2007

GM
GM
GM
GM

North America ..........................................................................................................................
Latin America ..........................................................................................................................
Europe ......................................................................................................................................
Asia Pacific ..............................................................................................................................

$(2,062)
924
(79)
609

2008

$(10,553)
1,476
(908)
117

339 General Motors Corp., Form 10–Q for the Quarterly Period Ended September 30, 2008, at 54 (Nov. 10, 2008) (online at
www.sec.gov/Archives/ edgar/data/40730/000095015208009040/k46806e10vq.htm).

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• Chrysler. Chrysler last reported earnings in the fall of 2007
prior to being taken private by Cerberus Capital Management.
Representatives from the company did communicate that
Chrysler lost $431 million in the first quarter of 2008.340
Chrysler, which has received upwards of $14.3 billion from
Treasury, has seen its operations expand in select international markets but falter in the aggregate.341 The Italian
automaker Fiat benefited from U.S. government rescue efforts,
as Fiat assumed a 35 percent stake in Chrysler without committing to make future cash injections into the company. More
recently, Chrysler has announced that its sales increased by 92
percent in the United Kingdom, and by 75 percent in China in
December 2009. Nevertheless, international sales fell by 34
percent for all of 2009.342
• GMAC/Ally Financial. GMAC, which recently renamed itself
Ally Financial, received $16.3 billion from Treasury.343 Its net
revenue expanded from 2006 to 2007, but the company experienced no significant changes in terms of geographic sources of
that revenue. In 2006, GMAC’s international net revenue hovered around 22 percent of its total net revenue.344 This is similar to 2007, when 24 percent of its net revenue was foreign,
and the company seemed to be expanding throughout Latin
America and Canada.345 The majority of the company’s 2007
foreign net revenue was attributed to Europe and Latin America. Undoubtedly, the rescue of GMAC enabled the company to
continue operating its profitable international and insurance
operations, whereas its domestic auto finance operations and
Residential Capital LLC (ResCap), whose mortgage assets are
both foreign and domestic, continued to generate losses for
GMAC leading up to the fall of 2008. In fact, in the first nine
months of 2008, GMAC’s North American operations lost $950
340 Daimler AG, Annual Report 2008, at 53 (Feb. 17, 2009) (online www.daimler.com/Projects/
c2c/channel/documents/1677323_DAI_2008_Annual_Report.pdf) (hereinafter ‘‘Daimler Annual
Report’’).
341 U.S. Department of the Treasury, Troubled Asset Relief Program Report to Congress for
the Period January 1, 2009 to January 31, 2009 (Feb. 3, 2009) (online at
www.financialstability.gov/docs/105CongressionalReports/ 105aReport_02032009.pdf).
342 Chrysler Group, Chrysler Group LLC Reports December 2009 Sales Outside North America
(Jan.
6,
2010)
(online
at
www.media.chrysler.com/
newsrelease.do;jsessionid=5191A83AE4AF64CD206BD16D25AD3636?&id=8815).
343 Treasury Transactions Report, supra note 64, at 18.
344 Data accessed through Bloomberg data service on July 22, 2010.
345 Data accessed through Bloomberg data service on July 22, 2010.

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million, and ResCap lost $4.6 billion. In April 2010, ResCap
announced that it had agreed to sell the majority of its European mortgage assets to funds affiliated with the Fortress
Group.
• Citigroup. Citigroup received $50 billion in TARP funds
through three investments by Treasury.346 Citigroup has published quarterly reports specifying the uses to which it has put
its TARP funds.347 These reports detail an entirely domestic
use of capital, making funds available to U.S. consumers and
commercial borrowers. Additionally, Citigroup used funds to
help mortgage holders avoid foreclosure and to help credit card
holders manage their card debt.348 While approximately 45
percent of Citigroup’s income in 2005 and 2006 came from nonU.S. sources, the company’s losses were predominately from
domestic businesses. Of the $32.1 billion in losses Citigroup
suffered in 2008, $2.1 billion, or nearly 8 percent, of the losses
stemmed from the company’s overseas operations.349 Citigroup
posted $1.7 billion in losses in Europe, the Middle East, and
Africa as well as $2 billion in losses from its Latin American
businesses. These losses were countered by $1.6 billion in profits from the company’s operations in Asia. The assistance provided by the American taxpayer through the TARP was used
for a number of purposes, including increasing liquidity and
bolstering the company’s balance sheet against mounting
losses both domestically and abroad.
U.S. rescue efforts impacted foreign institutions in several other
ways. For instance, foreign institutions benefited from the Federal
Reserve’s liquidity facilities, such as the currency swaps it negotiated with foreign central banks that allowed them to provide U.S.
dollar funding to foreign institutions.350 In addition, some foreign
institutions were able to take advantage of the FDIC’s Temporary
Liquidity Guarantee Program (TLGP), so long as they owned commercial banks in the United States: HSBC, BNP Paribas, Banco
Santander, and Mitsubishi Tokyo Financial Group all issued debt

346 December Oversight Report, supra note 39, at 20. This figure ($50 billion) includes $45 billion in capital injections and the TARP’s $5 billion exposure to losses under the Asset Guarantee
Program.
347 See, e.g., Citigroup, TARP Progress Report Fourth Quarter 2009 (Mar. 2, 2010) (online at
www.citibank.com/citi/corporategovernance/data/tarp/tarp_ pr_4q09.pdf?ieNocache=929).
348 See id.
349 Citigroup, Inc., Form 10–K for the Fiscal Year Ended December 31, 2008, at 26 (Feb. 27,
2009)
(online
at
www.sec.gov/Archives/edgar/data/
831001/000119312509041237/
d10k.htm#fin30906_13).
350 See Section E.2, infra.

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of $1 billion or more through the TLGP’s Debt Guarantee Program.351 One key effect of U.S. rescue programs was the competitive advantages they may have provided to U.S. financial institutions. Signaling the government’s implicit guarantee of institutions
it deemed to be ‘‘too big to fail’’ may have given U.S. institutions
funding advantages over their foreign counterparts.352 Additionally, when the U.S. government provided support to U.S. firms that
might have failed otherwise, foreign firms lost the opportunity to
expand their market share.
2. International Rescue Funds That May Have Benefited the
United States
The benefits of rescue efforts flowed not only from the United
States to other countries, the U.S. economy also benefited both directly and indirectly from rescue efforts that originated outside its
borders. As discussed above, however, because the major non-U.S.
rescue efforts were institution-focused as opposed to systemic, and
because most of the failing institutions were not, in general, international operators, there was less potential for cash to flow to the
United States from those rescues. Figure 17 details the potential
extent of foreign rescue programs on the U.S. economy. As stated
above, the size of an institution’s foreign operations does not necessarily match the exact percentage of rescue funds that it directed
abroad. Nonetheless, the table below illustrates the presence that
major foreign financial institutions have in the United States or
the Americas, and it is likely that the impact of the foreign rescue
programs on the U.S. economy is roughly commensurate with that
presence.

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351 The TLGP included two components: the Debt Guarantee Program (DGP) and the Transaction Account Guarantee program (TAG). See, e.g., November Oversight Report, supra note 68,
at 35. The foreign entities listed below issued debt under the DGP. In addition, approximately
60 foreign institutions participated in the TAG.

DEBT ISSUED BY FOREIGN BANKS UNDER THE TLGP PROGRAM
[Dollars in millions]
Parent Company Name
Amount Issued
BNP Paribas SA
1,000
Banco Bilbao Vizcaya Argentaria SA
470
Mitsubishi UFJ Finl Grp Inc
1,000
Banco Santander S.A.
1,600
HSBC Holdings plc
2,675
Total
6,745
Source: SNL Financial, TLGP Debt Issued (Aug. 3, 2010) (online at www.snl.com/interactive/TDGPParticipants.aspx). These figures include debt issued both by parent companies and by their subsidiaries.
352 See Daniel K. Tarullo, member, Board of Governors of the Federal Reserve System, Remarks at the Symposium on Building the Financial System of the 21st Century, Armonk, New
York, Toward an Effective Resolution Regime for Large Financial Institutions (Mar. 18, 2010)
(online at www.federalreserve.gov/newsevents/speech/tarullo20100318a.htm) (hereinafter ‘‘Toward an Effective Resolution Regime for Large Financial Institutions’’) (‘‘Entrenching too-bigto-fail status obviously . . . undermines market discipline, competitive equality among financial
institutions of different sizes, and normal regulatory and supervisory expectations.’’).

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71
FIGURE 17: FOREIGN GOVERNMENT ASSISTANCE WITH INTERNATIONAL IMPLICATIONS
Government Aid 353
(millions of euros)

Total Revenue 354
(millions of euros)

U.S./Americas
Revenue
(2005–06% Total)

Non-U.S. Firms
Type 355

ABN AMRO (Netherlands) 356 ....................
AEGON (Netherlands) 357 ...........................
Agricultural Bank of China (China) 358 ....

Amount

...................
Allied Irish Bank
Bank of Ireland (Ireland) 361 .....................
362
..........................
BNP Paribas (France)
Commerzbank (Germany) 363 .....................

C
C
C
A
C
N
G+C
G+C
C
G+C

Credit Agricole (France) 364 .......................
Dexia (France/Belgium) 365 .......................

C
G+C

Erste Bank (Austria) 366 ............................
Fortis (Benelux) 367 ....................................

C
C
N
N
G
C
G
C
G
C
N
N
C
G
N
C
C
C
C
A

Anglo Irish Bank (Ireland) 359 ...................
(Ireland) 360

Glitnir (Iceland) .........................................
HRE (Germany) 368 ....................................
IKB (Germany) 369 ......................................
ING Groep (Netherlands) 370 ......................
Lloyds/HBOS (U.K.) 371 ...............................
Northern Rock (U.K.) .................................
Kaupthing (Iceland) 372 .............................
KBC (Belgium) 373 .....................................
Landsbanki (Iceland) 374 ...........................
Raiffeisen Zentralbank (Austria) 375 .........
Royal Bank of Scotland (U.K.) 376 .............
Société Générale (France) 377 ....................
UBS (Switzerland) 378 ................................

2005

2006

U.S./N.A.*/
Americas**

2,600
3,000
14,868
94,754
4,000

22,334
31,478
14,301

27,641
28,025
19,335

N/A
**52.5
N/A

1,105

1,431

14.8

3,500
3,500
5,100
8,200
15,000
3,000
6,400
150,000
2,700
11,300
12,800
....................
52,000
3,500
12,000
10,000
35,100
19,000
N/A
N/A
7,000
14,800
N/A
1,750
45,500
3,400
7,200
72,900

3,784
3,562
26,219
7,311

4,486
3,596
32,429
9,419

2.8
N/A
**12.5
**4.5

17,504
6,112

21,083
7,163

*6.4
N/A

4,577
90,419

5,551
96,602

N/A
*3.9

481
970
754

870
1,141
685

N/A
**16.5
**4.7

70,143

73,621

*38.4

43,711
1,331
1,301
9,242

43,138
1,554
1,940
10,763

N/A
N/A
N/A
N/A

809
2,069
34,108
21,236
28,042

1,021
3,298
37,075
24,849
32,571

N/A
N/A
19.0
**11.7
38.0

353 Data

from the IMF unless otherwise noted.
from Bloomberg, L.P. unless otherwise noted.
= Asset Purchase, C = Capital Injection or Loan, G = Liability Guarantee, N = Nationalization.
356 Fortis’s share of ABN AMRO was purchased by the Dutch Government in October 2008 as part of their nationalization of the Dutch
branch of Fortis. The Dutch government provided funding to ABN AMRO of Ö2.6 billion ($3.7 billion) in mid-2009. ABN AMRO,
ABNÖAMRO—Fortis, 2007–2009 (online at www.abnamro.com/nl/images/020_About_ABN_ AMRO/020_History/020_Downloads/ABN_AMRO_
Fortis_2007_2010.pdf) (accessed Aug. 10, 2010) (in Dutch). Note: net and total revenue not available geographically for ABN AMRO: however,
15.9 percent of operating income in the 2005–2006 period came from the United States. ABN AMRO, 2006 20–F, at F–27 (online at
files.shareholder.com/downloads/ABN/984734423x0x145141/3741deb3–e6cb-4d27-9279-043b411b13fe/aa_20f_2006.pdf) (accessed Aug. 10,
2010).
357 AEGON,
Annual
Report,
2008
(online
at
www.aegon.com/Documents/aegon-com/Sitewide/Publications/Annual-reports/
Archive/2008-Annual-report.pdf) (accessed Aug. 10, 2010). The Americas is AEGON’s largest market (online at
www.aegon.com/Documents/aegon-com/Media/Fact-sheets/Fact-sheet-Americas.pdf). Total revenues based upon U.S. GAAP. Americas revenues
includes AEGON USA and AEGON Canada. AEGON, 20–F 2006 (online at www.aegon.com/Documents/aegon-com/Sitewide/
Publications/SEC-filings/2006-SEC-filings-20-f.pdf).
358 Yuan translated to euros on respective transaction dates of October 29, 2008 (capital injection RMB 130,000 million, or R19.1 billion)
and November 21, 2008 (removal of RMB 815,695 million, or $120 billion, of bad assets). Daimler Annual Report, supra note 340, at 16.
Total Revenue calculated as Interest Income + Fee and Commission Income + Other Operating Income + Investment Income + Subsidy Income + Non Operating Income. Agricultural Bank of China, Annual Report 2006, at 51 (online at www.abchina.com/en/about-us/
annual-report/2006/default.htm) (accessed Aug. 10, 2010).
359 There was no monetary cap on the Irish government’s guarantee. Department of Finance (Ireland), Credit Institutions (Financial Support)
Scheme 2008, Frequently Asked Questions (Dec. 16, 2008) (online at www.finance.gov.ie/documents/publications/other/faqbankguar.pdf). Department of Finance (Ireland), Minister’s Statement (Mar. 31, 2009) (online at www.finance.gov.ie/viewdoc.asp?DocID=5803); Department of Finance (Ireland), Minister’s Statement (Jan. 15, 2009) (online at www.finance.gov.ie/viewdoc.asp?DocID=5627&CatID=
1&StartDate=01+January+2009&m=); Anglo Irish Bank, Annual Report 2006, at 65 (2007) (online at edgar.sec.gov/Archives/
edgar/vprr/07/9999999997-07-022766) (hereinafter ‘‘Anglo Irish Bank Annual Report’’).
360 AIB Group, Allied Irish Banks, P.L.C. Capital Update (Feb. 12, 2009) (online at www.aib.ie/servlet/ContentServer?pagename= PressOffice/
AIB_Press_Releas/aib_po_d_press_releases-0_08&cid=1233740850586&poSection=AR&poSubSection=paDA&position=notfirst&rank=top&month=
02&year=2009); Anglo Irish Bank Annual Report, supra note 359, at 65.
361 Net revenue not available geographically for Bank of Ireland, but 2.9 percent of total operating income was U.S.-based over 2005–2006.
Bank of Ireland, 2006 Form 20–F (Mar. 2007) (online at www.secinfo.com/ d14D5a.u3qF3.htm#_tx94774_51).
362 BNP Paribas, Communiques de Press (Mar. 31, 2009) (online at www.bnpparibas.com/fr/actualites/communiques-presse.asp?Code=
LPOI-7QNPDY&Key=Emission%20de%205,1%20milliards%20d’euros%20d’action%20de%20pr%C3%A9f%C3%A9rence%20dans%20le%20cadre%
20du%20Plan%20fran%C3%A7ais%20de%20soutien% 20%C3%A0%20l’%C3%A9conomie).
354 Data

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363 Commerzbank Aktiengesellschaft, Credit Linked Note Programme (Aug. 1, 2008) (online at www.commerzbank.com/media/aktionaere/
emissionsprogramme/cln_programme/Nachtrag_20090512.pdf).
364 Europa, Press Release: State Authorizes Modification (Jan. 28, 2009) (online at europa.eu/rapid/pressReleasesAction.do?reference=IP/
09/158&format=HTML&aged=0&language=EN&guiLanguage=fr).
365 Dexia’s capital increase of Ö6.4 billion ($8.7 billion) was contributed by Belgium (Ö3 billion or $4.1 billion), France (Ö3 billion or $4.1
billion) and Luxembourg (Ö376 million or $513 million). Europa, ‘‘State Aid: Commission approves joint aid from Belgium, France and Luxembourg to rescue Dexia’’ (online at europa.eu/rapid/ pressReleasesAction.do?reference=IP/08/1745&format=HTML&aged=0&language). Note: net
revenue not available geographically for Dexia SA, but 18.3 percent of net income was U.S.-based over 2005–2006. Dexia S.A., Annual Report
2006 (online at www.dexia.com/docs/2007/20070509_AG/annual_ report/en/ra2006en.htm) (accessed Aug. 11, 2010).
366 Erste Group, Investor Information (Oct. 30, 2008) (online at www.erstegroup.com/sPortal/download?document Path=ebgroup_
en_0196_ACTIVE%2FDownloads%2FInvestor_ Relations%2FIR_News_2008eng%2FIR_ News_081030en.pdf). The Erste Group (Erste Bank) states
that it operates in a single business segment, and a single geographical segment: the provision of banking services in the Republic of Croatia. Erste Bank, Annual Report 2006 (online at www.erstebank.hr/godisnja_izvjesca/ annual_report_2006.pdf) (accessed Aug. 11, 2010).
367 On September 28, 2008, the Netherlands invested Ö4.0 billion ($5.8 billion), Belgium invested Ö4.7 billion ($6.9 billion), and Luxembourg invested Ö2.5 billion ($3.7 billion), and each acquired a 49.9 percent stake in their respective country’s sector of Fortis. On October 3,
2008, the Dutch government fully acquired their share of Fortis, including its stake in ABN AMRO, for a total of Ö16.8 billion ($23.4 billion)
and nationalized it. The Belgian government purchased the remainder of its portion on October 5, 2008, and immediately sold 75 percent of
Fortis Bank SA/NV and 16 percent of Fortis Banque Luxembourg to BNP Paribas, as well as 100 percent of Fortis Insurance Belgium for
Ö5.73 billion ($7.86 billion). Letter from Nathan J. Greene, partner, Shearman & Sterling, to Douglas J. Scheidt, associate director and chief
counsel, U.S. Securities and Exchange Commission, Fortis Investment Management SA—No-Action Request (Jan. 27, 2009) (online at
www.sec.gov/divisions/investment/noaction/2009/ fortisgroup012709-incoming.pdf); Government of the Netherlands, Dutch State Acquires Fortis
Nederland (Oct. 3, 2008) (online at government.nl/News/Press_releases_and_ news_items/2008/October/Dutch_State_ acquires_Fortis_Nederland); Europa, State Aid: Commission Clears State Aid to Rescue and Restructure Fortis Bank and Fortis Bank Luxemburg
(Dec. 3, 2008) (online at europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1884). Net Revenue is only available for the Banking segment
and is Ö10,166 million ($12.8 billion) for 2006 and Ö8,782 million ($10.9 billion) in 2005. Fortis, Annual Report 2006, at 138 (online at
www.ageas.com/Documents/Financial _Statements_2006_UK_lrs.pdf) (accessed Aug. 11, 2010).
368 Additionally, on March 28, 2009, SoFFin recapitalized Hypo Real Estate Group by subscribing 20 million shares. Hypo Real Estate, Press
Release (Apr. 14, 2009) (online at www.hyporealestate.com/eng/pdf/PI-Verlaengerung _SoFFingarantien_final_engl.pdf); Bank for International
Settlements, An Assessment of Financial Sector Rescue Programmes, BIS Papers No. 48 (July 2009) (online at www.bis.org/publ/bppdf
/bispap48.pdf).
369 Deutsche Industriebank, Annual Report 2007/2008 (online at www.ikb.de/content/en/ir/financial_ reports/annual_report_2007_
2008/Konzern_englisch_080814_sicher.pdf) (accessed Aug. 10, 2010).
370 Netherlands Ministry of Finance, Press Release (Oct. 19, 2008) (online at www.minfin.nl/english/News/Newsreleases/2008/10/Government
_reinforces_ING’s_core_capital_by_EUR_10_billion).
371 While detailed information on segmented revenue was not available for 2005 and 2006, Lloyds did detail their foreign loans and advances to banks and customers by region. From 2005 to 2006, foreign loans to banks and customers in the United States accounted for 40.3
percent of all their foreign loans and advances. Lloyds TSB, 2006 Form 20F, at 45 (June 8, 2007) (online at
www.lloydsbankinggroup.com/media/pdfs/investors/2006/2006_LTSB_Form_20F.pdf).
372 Kaupthing specifically says that their four major areas of operation are Iceland, the United Kingdom, Scandinavia, and Luxembourg.
Therefore, it can be inferred that they do not derive much (if any) revenue from their operations in the United States. Kaupthing, 2006 Annual
Report, at 144 (2006) (online at www.kaupthing.com/library/7493).
373 In its 2006 Annual Report, KBC Bank notes that faced over Ö4 billion ($5 billion) in risk exposure in North America, but fails to divide
its revenues by geographic segment. KBC, KBC Annual Report 2006, at 67 (2006) (online at tools.euroland.com/arinhtml/
bkbc/2006/ar_eng_2006/index.htm).
374 Net operating revenues for 2005 of 60,978 million kronor ($972 million) translated to EUR. Landsbanki, 2006 Annual Report (online at
www.landsbanki.is/Uploads/documents/ArsskyrslurOgUppgjor/Landsbanki_Annual_Report_2006.pdf) (accessed Aug. 11, 2010).
375 Raffeisen Zentralbank Austria AG, Press Release (2009) (online at www.rzb.at/eBusiness/rzb_template1/10232967115041023296711595
_1024688700058_525822672865827658-554881300075676209-NA-NA-DE.html).
376 The Royal Bank of Scotland received £13 billion ($19 billion) in cash, £6.5 billion ($9.4 billion) in fees and exchange, and an additional £25.5 billion ($36.8 billion) in 2009. See Royal Bank of Scotland Group, 2008 Annual Results: Analysts Presentation (Feb. 26, 2009)
(online at files.shareholder.com/downloads/RBS/973615354x0x285293/ 04846b7d-2923-4886845ffc617b8aeb02/2008_ Annual_Results _
26_February_2009_Transcript.pdf);
BBC
News,
UK
Banks
Receive
£37bn
Bailout
(Oct.
13,
2008)
(online
at
news.bbc.co.uk/2/hi/business/7666570.stm); Royal Bank of Scotland Group, Royal Bank of Scotland Group PLC—General Meeting Statement
(Dec. 15, 2009) (online at files.shareholder.com/downloads/RBS/973615354x0x338886/ 22510ae8-2685-4173-b7e26d6b71f1f1eb/RBS_
News_2009_ 12_15_General_announcements.pdf).
377 These funds came in two rounds: December 2008 and May 2009. David Gauthuer-Villars, Société Générale Looks to Repay France’s Aid,
Wall Street Journal (Oct. 7, 2009) (online at wsj.com/article/SB1254806353 21166897.html).
378 UBS capitalized a fund with $6 billion of equity in addition to $54 billion from the Swiss National Bank to create a fund to buy risky
assets
off
UBS’s
books.
UBS,
Financial
Reporting:
Fourth
Quarter
2008
(Feb.
10,
2009)
(online
at
www.ubs.com/1/ShowMedia/investors/quarterly_ reporting?contentId=160658&name=q4report.pdf) (hereinafter ‘‘UBS Financial Reporting: Fourth
Quarter 2008’’); UBS, Quarterly Reporting: Changes in 2008 (online at www2.ubs.com/1/e/investors/08q3/0003.html) (accessed Aug. 10, 2010).

As the table above suggests, the benefits of rescue efforts did not
flow only from the United States to other countries—the U.S. economy also benefited both directly and indirectly from rescue efforts
that originated outside its borders. As with rescue efforts originated in the United States, foreign rescue efforts may produce a
two-way flow of funds: on the one hand, counterparty relationships
may mean that foreign governments provide money to domestic institutions that then flows out of the country, but on the other hand,
counterparty relationships may mean that funds provided to foreign institutions may flow back into the domestic economy. In contrast to the U.S. institutions listed in Figure 15 above, many of the
institutions that benefited from the largest non-U.S. rescues had
limited foreign operations (or at least limited operations in the
United States). The following list highlights some of the effects that
may have been felt in the United States as a result of the rescue
efforts undertaken by foreign governments.

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• Royal Bank of Scotland. RBS operates in the United States
primarily through its subsidiary Citizens Financial Group
(Citizens), which is a large commercial bank with retail and
corporate banking operations in several regions of the United
States.379 At the end of 2008, the company’s U.S. operations
consisted of £126.2 billion ($183 billion) in loans and advances
to customers.380 RBS received £45.5 billion ($71 billion) in government assistance. In light of its U.S. operations, it is possible
that a portion of this assistance helped to recapitalize Citizens,
which in turn would have provided meaningful support to U.S.
customers.381
• UBS. UBS operates a large institutional securities and investment banking operation in the United States.382 In 2007 and
2008, UBS recorded a loss of $34 billion associated with its exposure to the U.S. residential mortgage market.383 On October
16, 2008, UBS reached an agreement with the Swiss National
Bank (SNB) to transfer up to $60 billion of illiquid securities
and other assets off of UBS’s balance sheet and into a fund
managed by the SNB. SNB financed the fund with a loan of
up to 90 percent of the purchase price, while the remaining 10
percent was provided by UBS through equity contributions.
The transfer included $31 billion of primarily cash securities in
U.S. RMBS, U.S. CMBS, U.S. student loan auction rate certificates and other student loan-backed securities, and a U.S. reference-linked note program.384 Approximately $8 billion in
U.S. subprime and Alt-A MBS was transferred into the
fund.385 This close link between U.S.-based assets and the
Swiss government’s rescue program make it very likely that
the program benefited the U.S. economy by providing a market
for otherwise illiquid U.S.-based securities.
• ING. The Dutch company Internationale Nederlanden Groep
(ING) operates in the United States as a commercial investment bank, a life insurance and retirement services provider,
and an internet bank. ING, which received over Ö10 billion
($12.8 billion) from the Dutch government in October 2008,
saw its revenue decrease dramatically in the United States
and North America between 2008 and 2009.386 ING’s U.S. operations had more than Ö25 billion ($35.5 billion) in exposures
379 Royal Bank of Scotland Group, Annual Report for Foreign Private Issuers (20F), at 245
(Apr. 29, 2009) (online at www.investors.rbs.com/our_performance/secfiling.cfm?filingID=
950103_09_966).
380 Id. at 256.
381 See id. at 265 (‘‘Under current Federal Reserve policy, the Group is required to act as a
source of financial strength for its U.S. bank subsidiaries. Among other things, this source of
strength obligation could require the Group to inject capital into any of its U.S. bank subsidiaries if any of them became undercapitalised.’’).
382 UBS also acquired the asset management firm PaineWebber (now known as UBS Financial
Services, Inc.) in 2000. In 2006, UBS Financial Services, Inc. had $62.7 billion in assets under
management. SNL Financial.
383 UBS Financial Reporting: Fourth Quarter 2008, supra note 378, at 73.
384 UBS, UBS Further Materially De-risks Balance Sheet through Transaction with Swiss National Bank (Oct. 16, 2008) (online at www.ubs.com/1/e/investors/releases?newsId=154213).
385 Swiss National Bank, SNB StabFund Concludes Transfer of UBS Assets (Apr. 3, 2009) (online at www.snb.ch/en/mmr/reference/pre_20090403/source/pre_20090403.en.pdf).
386 ING Group, Transactions With the Dutch State (Mar. 26, 2010) (online at www.ing.com/
group/showdoc.jsp?docid=363620_ EN&menopt=ivr1|fis); ING Group, 2009 Annual Report, at 193
(2009)
(online
at
www.ing.com/cms/idc_cgi_isapi.dll?IdcService=GET_FILE&dDocName=
440367_EN&RevisionSelectionMethod=latestReleased).

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74
to the U.S. residential market.387 These substantial exposures
to the U.S. housing market make it likely that rescue funds
provided to the parent company may have indirectly benefited
the U.S. economy.
• Credit Agricole. Credit Agricole, Europe’s largest retail bank,
received Ö3 billion ($3.8 billion) in subordinated debt from the
French government in November 2008. In their North American asset management, private bank, and investment bank
branches, they employ 1,800 workers. During the 2005–2006
period, an average of 8 percent of Credit Agricole’s revenue derived from its operations in North America.388 Additionally, as
of December 2008, 11 percent of its commercial lending exposures to non-bank customers were in the United States.389
Certain U.S. companies that had operations abroad also benefited from rescue programs by other nations. For instance, in 2008
and 2009, the governments of Canada and Ontario announced loan
programs totaling over $5 billion to assist GM and Chrysler. The
loans, repayable in three separate installments over eight years,
put stringent limitations on dividend payments as well as executive
privileges and compensation.390
3. The Largest, Systemically Significant Institutions and the
International Flow of Rescue Funding
U.S. bank-owned assets abroad, which total $3.8 trillion, account
for approximately 20 percent of all U.S.-owned assets abroad at the
end of 2007. Likewise, as shown in Figure 18 below, foreign bankowned assets in the United States, which total $4.0 trillion, account for roughly 20 percent of all foreign-owned holdings in the
United States.
FIGURE 18: CROSS-BORDER ASSET HOLDINGS, YEAR-END 2007 391
[Dollars in trillions]
Total

U.S.-Owned Assets Abroad .......................
Foreign-Owned Assets in the United
States ...................................................

Financial
Derivatives

Securities
(non-U.S.
Treasury)

Claims/Liabilities
of U.S. Banks

Financial
Sub-Total

18.3

2.6

6.8

3.8

13.2

20.4

2.5

6.2

4.0

12.7

391 U.S.

Bureau of Economic Analysis, Table G.1, International Investment Position of the United States at Year-End 2007 and 2008 (June
2010) (online at www.bea.gov/scb/pdf/2010/06%20June/D%20Pages/0610dpg_g.pdf) (accessed Aug. 10, 2010).

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Importantly, 80 percent of these bank assets represent cross-border holdings owned by the bank, with the remaining 20 percent reflecting positions held on behalf of customers, such as short-term
securities (assets) and deposits (liabilities). Of this 80 percent—the
positions owned by the bank—more than two-thirds are between
foreign affiliates of a U.S.-owned institution, or U.S. affiliates of a
foreign-owned institution (i.e., a multinational bank’s intercompany
387 ING
Group, 2008 Annual Report, at 260 (2008) (online at www.ing.com/group/
showdoc.jsp?docid=372285_EN&menopt=ivr1|pub1|arp&lang=en).
388 Bloomberg Financial.
389 Credit Agricole S.A., Registration Document and Annual Report 2009 (2009) (online at
www.credit-agricole.com/en/content/download/1900/16498/version/1/file/
2009_Registration_Document.pdf); Daimler Annual Report, supra note 340.
390 Office of the Premier of Ontario, Government Support to the Auto Industry (Dec. 20, 2008)
(online at www.news.ontario.ca/opo/en/2008/12/government-support-to-the-auto-industry.html).

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claims).392 By definition, the institutions included in these data
represent the largest, most systemically important banks and securities firms in both the United States and Europe.
A review of the international operations of major TARP recipients as well as leading foreign firms helps illustrate the far-reaching benefits from the U.S. government’s assistance. As discussed in
greater detail in Section B, firms such as Citigroup, JPMorgan
Chase, Goldman Sachs, and Morgan Stanley have significant operations overseas, not just as core components in the international financial market plumbing, but also through global treasury services
for investors and corporations (Citigroup and JPMorgan Chase),
and significant retail banking operations in Asia and Latin America (Citigroup). Other U.S. firms, such as State Street (43 percent
non-U.S. revenue in 2006) and Bank of New York Mellon (30 percent non-U.S. revenue in 2006), provide trust bank and global custodial services for corporations and investment managers throughout the world. Even American Express, a financial institution associated primarily with the U.S. retail market, has significant nonU.S. operations (31 percent), reflecting global transaction and payment operations that serve international commercial and retail customers.
This is a two-way street, as foreign-headquartered banks also
rely heavily on the U.S. institutional and retail market. Credit
Suisse, Deutsche Bank, and UBS boast significant operations in
the U.S. capital markets, via their investment banking, trading,
and prime brokerage arms. Additionally, UBS and HSBC have
meaningful retail operations in the United States—UBS via the
high-net-worth Paine Webber platform, and HSBC through its
more mainstream banking and consumer finance operations.
While useful data on intercompany capital flows during the crisis
are limited, the Federal Reserve publishes aggregate data on flows
from U.S. banks to their foreign parents and from foreign banks to
their U.S. parents. The Federal Reserve cited ‘‘unusual flows’’ during the crisis, reflecting overseas demand to fund dollar assets and
a pronounced pullback in cross-border positions based on heightened risk aversion, in the context of a concerted effort aimed at
‘‘channeling liquidity home to protect the parent bank.’’ 393 These
cross-border, intercompany flows, including much smaller flows to
non-affiliates, are categorized into three distinct stages of the crisis. (Net shifts of U.S.-owned, Europe-owned and other foreignowned institutions during these stages are illustrated in Figure 19
below.)
• Initial Phase, August 2007 to August 2008: A $380 billion increase in net lending abroad was driven by U.S. affiliates of
European institutions, which as a group accounted for a $450
billion increase in overseas lending. Foreign affiliates of U.S.
parents also channeled funds back to the United States, although in a much smaller amount ($36 billion), presumably to
shore up the parent’s liquidity base.
392 Gross cross-border positions of U.S. and European-owned banks in the United States approximate one another, whereas the balance (less than 10 percent) reflects positions for banks
with headquarters in Asia, Canada, and Australia. Carol C. Bertaut and Laurie Pounder, The
Financial Crisis and U.S. Cross-Border Financial Flows, at A156 (Nov. 2009) (online at
www.federalreserve.gov/pubs/bulletin/2009/pdf/bulletin_article_november_2009a1.pdf).
393 Id. at A147, A160.

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• Crisis Peak, September 2008 to December 2008: There was a
reversal of $346 billion in net lending, as U.S. firms hoarded
dollars and short-term funding markets collapsed, whereas European parents of U.S. affiliates took advantage of new dollar
funding from their central banks (via swap lines with the Federal Reserve), easing the pressure on U.S. affiliates to send
dollars home, resulting in $288 billion in net inflows to European-owned banks in the United States.
• Final Phase, January 2009 to June 2009: There was a resumption of net lending abroad, with a $436 billion increase in net
outflows as dollar interbank lending markets improved, replacing a reliance on foreign central bank dollar liquidity programs.
FIGURE 19: NET FLOWS OF U.S.-OWNED AND EUROPE-OWNED BANKS, AUGUST 2007–
JUNE 2009 394

394 A positive value indicates a net financial inflow to the United States, and a negative value
indicates a net financial outflow from the United States. Id. at A158, A160.

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While the Federal Reserve data outlined above provide a broad
overview of cross-border financial transactions involving U.S. affiliates and their foreign parents, and involving foreign affiliates and
their U.S. parents, these data should not be viewed as a monolithic
representation of intercompany flows within individual institutions
during the crisis. Financial disclosures of U.S.-owned and foreignowned banks offer limited insight into inter-company flows during
the crisis (or any period for that matter), limiting the ability to
track the flow of TARP funds to overseas operations and international rescue funding to U.S. operations. However, in some instances a reconstruction of rescue funds is possible, as with AIG
and to a lesser extent General Motors and Chrysler. Given that
many of the firms that received government assistance were interconnected with the global financial framework, just as AIG was, it
is reasonable to assume that U.S. and foreign taxpayer assistance
to systemically important multinational financial firms benefited
counterparties, investors, and economies far beyond the home coun-

77
try. In the case of the largest U.S. and foreign investment banks
(such as Morgan Stanley, Citigroup, and Deutsche Bank), their operations were far more intertwined and of much greater scale globally than Lehman Brothers’ were.
E. Cooperation and Conflict in the Different Government
Responses to the Crisis
Throughout the financial crisis, the Federal Reserve and Treasury have taken a number of actions to support financial stabilization internationally. Federal Reserve Chairman Ben S. Bernanke
has commented that ‘‘a clear lesson of the recent period is that the
world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies. International cooperation
is thus essential if we are to address the crisis successfully and
provide the basis for a healthy, sustained recovery.’’ 395
In this section of the report, the Panel evaluates the extent of
international cooperation with respect to financial stabilization
since the emergence of the financial crisis in the summer of 2007
and assesses whether anything could have been done differently.
1. International Coordination and Treasury’s Role in Supporting Financial Stabilization Internationally

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a. Legal Authority
Section 112 of EESA provides a legal authority and framework
for Treasury’s role in supporting financial stabilization internationally during the financial crisis. Section 112 requires the Secretary
of the Treasury to ‘‘coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To
the extent that such foreign financial authorities or banks hold
troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.’’ 396
395 Ben S. Bernanke, chairman, Board of Governors of the Federal Reserve System, The
Stamp Lecture at the London School of Economics, The Crisis and the Policy Response (Jan. 13,
2009) (online at www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm).
396 12 U.S.C. § 5222. Section 101 of EESA authorized the Secretary to establish the TARP ‘‘to
purchase and to make and fund commitments to purchase, troubled assets from any financial
institution, on such terms and conditions as are determined by the Secretary, and in accordance
with this Act and the policies and procedures developed and published by the Secretary.’’
With respect to the latter provision of Section 112 (the authorization for Treasury to purchase
troubled assets from foreign financial authorities or banks acquired by extending financing to
subsidiaries of U.S.-based financial institutions that have failed or defaulted on the financing
arrangement), Treasury states that no such purchases have been made. Treasury conversations
with Panel staff (July 22, 2010).
During the Congressional debates surrounding the passage of EESA, several members of Congress voiced concern with the latter portion of this statutory provision, arguing that the language was very expansive and open-ended. On October 1, 2008, Senator Richard Shelby (R–AL)
noted that ‘‘[u]nder a provision hidden deep in the legislation, the Treasury Secretary also has
the authority to purchase troubled assets from foreign central banks and governments.’’ Statement of Sen. Shelby, Congressional Record, S10240 (Oct. 1, 2008). On the same day, Senator
Arlen Specter (then-R–PA) stated that ‘‘[t]he legislation contains authority for the Treasury Secretary to compensate foreign central banks under some conditions. It provides that troubled assets held by foreign financial authorities and banks are eligible for the TARP program if the
banks hold such assets as a result of having extended financing to financial institutions that
have failed or defaulted. Had there been an opportunity for floor debate, that provision might
have been sufficiently unpopular to be rejected or at least sharply circumscribed with conditions.’’ Statement of Sen. Specter, Congressional Record, S10279 (Oct. 1, 2008).
Continued

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Treasury states that it has coordinated extensively with its foreign counterparts throughout the financial crisis, and that this particular statutory provision neither added to Treasury’s mandate
nor changed its approach with respect to international affairs.397
Treasury’s view is that the inclusion of this provision, therefore, resulted in no different behavior on the part of Treasury than what
it was already doing in the international realm.
While this particular statutory provision is relatively short in
comparison to other key EESA provisions, its substance and inclusion are telling for several reasons.
First, given the Federal Reserve’s role as the U.S. central bank
and the plethora of actions it has taken during the financial crisis,
it is perplexing that the statute does not direct the Secretary of the
Treasury to consult with the Federal Reserve when coordinating
with foreign financial authorities and central banks. While the Federal Reserve and Treasury have very different roles (the TARP was
established to give Treasury the ability to purchase equity in a financial institution, and the Federal Reserve is limited to making
loans), given the complementary relationship between these roles,
it seems important that they coordinate their actions. It is unclear
whether this omission was deliberate (i.e., Congress expected that
Treasury and the Federal Reserve would collaborate closely but
wanted one voice to represent U.S. interests) or due simply to a
drafting error.
Second, since the financial crisis developed into a global problem,
Congress intended for Treasury to coordinate with its foreign counterparts and likely thought that a collaborative effort would both
minimize the likelihood that one country would be advantaged over
others and send a strong signal to the markets.
Third, Treasury’s authority to coordinate with foreign finance
ministers and central banks is broad and expansive, and is not limited to the design of programs that are exact replicas of the TARP
as implemented in the United States. While the statute authorizes
Treasury to coordinate with foreign financial authorities and central banks to establish TARP-like programs in other countries, the
Panel notes that the U.S. approach allows for a number of different
policy and programmatic responses, such as asset purchases, capital injections, increased deposit insurance, and government guarantees.
Fourth, Congress’ authorization for the Treasury Secretary to
purchase troubled assets from foreign financial authorities or
banks acquired as a result of extending financing to subsidiaries of
U.S.-based financial institutions that have failed or defaulted on
the financing arrangement seems to have been included under the
On October 2, 2008, however, Representative Roy Blunt (R–MO) introduced a letter from Secretary Paulson in which Paulson pledged to limit Treasury’s role in dealing with foreign financial institutions, in accord with the requirements of EESA, so that Treasury’s actions would be
limited to foreign entities with assets acquired from U.S. institutions. Secretary Paulson reminded members of Congress that ‘‘[t]he Act requires that eligible financial institutions must
be established and regulated and have significant operations in the United States’’ [in accord
with the definition of ‘‘financial institution’’ in Section 3(5) of EESA] and that ‘‘it is the intention
of the Department of the Treasury that all mortgages or mortgage-related assets purchased in
the Troubled Asset Relief Program will be based on or related to properties in the United
States.’’ Statement of Rep. Blunt, Congressional Record, H10757 (Oct. 3, 2008).
397 Treasury conversations with Panel staff (July 22, 2010); Clay Lowery, assistant secretary
of the Treasury for international affairs (Nov. 2005–Jan. 2009), conversations with Panel staff
(July 23, 2010).

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assumption that Treasury would conduct an asset purchase program (as it originally contemplated and as described in Sections
101 and 113 of EESA), rather than capital injections, since asset
purchases work better under a reverse auction mechanism. In Congress’ view, having more sellers in an asset pool under a reverse
auction-type mechanism might have produced better results. The
greater the participation in an auction, the better odds there are
for lower pricing, which protects the interests of the taxpayer. The
significance and relevance of this provision, however, were diminished once Treasury made the strategic decision to pursue capital
injections instead of purchasing troubled assets.398
Finally, while the inclusion of this section is explicit evidence of
Congress’ desire for Treasury to play a pivotal role in supporting
financial stabilization internationally, Congress did not provide any
content to the term ‘‘coordinate,’’ so the provision does not impose
any meaningful obligation on the part of Treasury. This may in
part explain Treasury officials’ particular interpretation of this provision, as discussed above.
b. Coordination Concerning the Creation of TARP-like
Programs and Support for Banking Industry
During the latter part of 2008, various finance ministers and central bank governors focused almost exclusively on emergency rescues of their respective banking systems.
As discussed above (and as confirmed in Panel staff conversations with experts and policymakers), countries generally responded to the financial crisis by developing rescue packages focused on systemic issues within their jurisdictions rather than focusing heavily on specific institutions.399 There were, however, several exceptions. Beginning in early 2008 and continuing through
mid-September, the United States acted largely on a case-by-case
basis in response to the increasing stresses on financial institutions
including Bear Stearns, Lehman Brothers, and AIG. In March
2008, the Federal Reserve Bank of New York (FRBNY) extended
credit to Maiden Lane LLC in order to facilitate the merger of Bear
Stearns and JPMorgan Chase. In mid-September 2008, the Federal
Reserve and Treasury had to face the failure of Lehman Brothers
(after the United Kingdom’s Financial Services Authority (FSA),
the regulator of all providers of financial services in the United
Kingdom, declined to approve Barclays’ acquisition of Lehman),
and the rescue of AIG in light of the systemic risks they believed
its failure would impose.400 According to then-Treasury Secretary
Henry M. Paulson, Jr., these steps were ‘‘necessary but not suffi-

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398 Treasury

conversations with Panel staff (July 22, 2010).
399 Treasury conversations with Panel staff (July 22, 2010); Clay Lowery, assistant secretary
of the Treasury for international affairs (Nov. 2005–Jan. 2009), conversations with Panel staff
(July 23, 2010); Dr. C. Fred Bergsten, director of the Peterson Institute for International Economics and former assistant secretary of the Treasury for international affairs, conversations
with Panel staff (July 29, 2010); Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship
at the Sloan School of Management at MIT and former chief economist at the IMF, conversations with Panel staff (July 30, 2010). For further discussion on the interventions taken by countries across the globe, see Sections C.1 and C.2, supra.
400 For a comprehensive discussion and analysis of the government’s rescue of AIG, see June
Oversight Report, supra note 10.

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cient,’’ 401 prompting his joint decision with Chairman Bernanke to
shift gears and focus on formulating a comprehensive approach to
resolve financial market stresses. On September 20, 2008, Secretary Paulson and Chairman Bernanke asked Congress ‘‘to take
further, decisive action to fundamentally and comprehensively address the root cause of this turmoil’’ 402 by submitting legislation
requesting authority to purchase troubled assets from financial institutions in order to promote market stability. On October 3, 2008,
after approval from both houses of Congress, President George W.
Bush signed EESA into law.
In a display of international partnership at a time when global
finance markets were severely strained, the G–7 finance ministers
and central bank governors held a meeting at the U.S. Department
of the Treasury during the weekend of October 10–12, 2008 (one
week after the passage of EESA and amidst the IMF and World
Bank annual meetings), to discuss economic conditions, financial
market developments, and individual and collective policy responses. According to then Undersecretary of the Treasury for
International Affairs David H. McCormick, one of the central messages for the weekend was that ‘‘the turmoil is a global phenomena.’’ 403 At this time, Mr. McCormick referenced the recent
passage of EESA, stated that other countries were ‘‘considering appropriate programs given their national circumstances,’’ and said
that Treasury looked forward ‘‘to working with them as they move
forward with their plans.’’ During the meeting, then-Secretary
Paulson briefed his foreign counterparts on the U.S. financial rescue efforts, including strategies to use the EESA authority to purchase and insure mortgage assets and purchase equity in financial
institutions. Secretary Paulson and Undersecretary McCormick
maintained regular contact with their G–7 and other international
counterparts in order to strengthen international collaboration efforts to stabilize financial markets and restore confidence in the
global economy.404 It appears that the existence of the TARP,
therefore, might have served to enhance the negotiating position of
the U.S. government (at least in a limited way) as it demonstrated
the willingness of U.S. officials to be aggressive and forceful in
committing a significant amount of resources to confront a deepening crisis.405
401 Senate Committee on Banking, Housing, and Urban Affairs, Written Testimony of Henry
M. Paulson, Jr., secretary, U.S. Department of the Treasury, Turmoil in U.S. Credit Markets:
Recent Actions regarding Government Sponsored Entities, Investment Banks and other Financial
Institutions, 110th Cong. (Sept. 23, 2008) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=04ba224a-4cee-463e-b1d8-0cd771e85bd4).
402 Id.
403 David H. McCormick, undersecretary for international affairs, U.S. Department of the
Treasury, Prepared Statement in Advance of G–7 Finance Ministers and Central Bank Governors Meeting (Oct. 8, 2008) (online at www.treas.gov/press/releases/hp1190.htm).
404 Treasury conversations with Panel staff (July 22, 2010).
405 Clay Lowery conversations with Panel staff (July 23, 2010); Sabina Dewan, associate director of international economic policy, and Lauren D. Bazel, associate director of government affairs, Center for American Progress, conversations with Panel staff (July 26, 2010); Adam Posen,
senior fellow at the Peterson Institute for International Economics (PIIE) and member of the
Monetary Policy Committee of the Bank of England, conversations with Panel staff (July 27,
2010); Vincent Reinhart, former director of the Federal Reserve Board’s Division of Monetary
Affairs and resident scholar at the American Enterprise Institute for Public Policy Research,
conversations with Panel staff (July 19, 2010). Mr. Reinhart held a number of senior positions
in the Divisions of Monetary Affairs and International Finance at the Federal Reserve Board
and served for the last six years of his Federal Reserve career as secretary and economist of
the Federal Open Market Committee. For further discussion concerning the role of the TARP
in international negotiations, see Section E.3.c, infra.

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At the meeting, the G–7 finance ministers and central bank governors endorsed an aggressive five-part plan to guide individual
and collective policy steps to provide liquidity and strengthen the
capital base of financial institutions. This plan included, among
other items, agreements to ‘‘[t]ake decisive action and use all available tools to support systemically important financial institutions
and prevent their failure,’’ ‘‘[t]ake all necessary steps to unfreeze
credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding,’’ and
‘‘[e]nsure that our banks and other major financial intermediaries,
as needed, can raise capital from public as well as private sources,
in sufficient amounts to re-establish confidence and permit them to
continue lending to households and businesses.’’ 406 Then-Secretary
Paulson also referenced the need to ‘‘continue to closely coordinate
our actions and work within a common framework so that the action of one country does not come at the expense of others or the
stability of the system as a whole,’’ and noted how it has never
‘‘been more essential to find collective solutions to ensure stable
and efficient financial markets and restore the health of the world
economy.’’ 407 Perhaps most importantly, this meeting presented a
platform through which the G–7 finance ministers and central
bank governors could present a common front and stand behind a
common strategy at a time when aggressive and forceful action
could help calm the financial markets.
While endorsing a coordinated approach to the financial crisis
and outlining a broad set of principles, the G–7 leaders, however,
failed to announce any concrete steps, underscoring the challenge
of crafting a global plan to address turmoil in the financial markets. On the one hand, the lack of specificity has garnered some
criticism from those who argue that these types of vague piecemeal
responses fail to provide certainty to the markets. Simon Johnson,
the Ronald A. Kurtz Professor of Entrepreneurship at the Sloan
School of Management at MIT and former chief economist at the
IMF, argues that ‘‘[y]ou need specific, concrete steps, not a list of
principles that are obvious and everyone can easily agree to.’’ 408 In
addition, Federal Reserve Vice Chairman Donald L. Kohn commented that ‘‘[a]lthough most countries wound up in a similar
place, the process was not well coordinated, with action by one
According to Mr. Reinhart, while the TARP (and the stress tests in particular) signaled to
the world that the United States was aggressive and organized enough to commit significant
resources to confront the financial crisis (which enhanced the U.S. negotiating position), over
time, the U.S. negotiating position was diminished as the TARP was implemented, and U.S. officials became less willing to commit additional resources.
406 U.S. Department of the Treasury, G–7 Finance Ministers and Central Bank Governors Plan
of Action (Oct. 10, 2008) (online at www.treas.gov/press/releases/hp1195.htm). The G–7 also
agreed to:
1. Ensure that our respective national deposit insurance and guarantee programs are robust
and consistent so that our retail depositors will continue to have confidence in the safety of their
deposits.
2. Take action, where appropriate, to restart the secondary markets for mortgages and other
securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
407 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. Following
Meeting of the G7 Finance Ministers and Central Bank Governors (Oct. 10, 2008) (online at
www.treas.gov/press/releases/hp1194.htm) (hereinafter ‘‘Paulson October 2008 Statement’’).
408 Anthony Faiola and Neil Irwin, World Leaders Offer Unity But No Steps to Ease Crisis,
Washington Post (Oct. 12, 2008) (online at www.washingtonpost.com/wp-dyn/content/story/2008/
10/11/ST2008101102372.html) (hereinafter ‘‘World Leaders Offer Unity But No Steps to Ease
Crisis’’) (including remarks from an interview with Professor Johnson).

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country sometimes forcing responses by others.’’ 409 On the other
hand, the flexibility contained within the broad set of principles
outlined by the G–7 provided each country with the discretion to
implement solutions to the crisis based upon their evaluation of
what was best for their own banking sector and their domestic
economy. According to Shoichi Nakagawa, the former Japanese finance minister, ‘‘[e]ach of the G–7 nations knows what has to be
done, what the government needs to do. Each country understands
what needs to be done.’’ 410
Given that many countries had banking systems with different
levels of impairment, a single coordinated response may have hindered their ability to formulate targeted responses to their unique
economic challenges and limited the amount of experimenting and
learning that occurred in the process. Furthermore, as discussed
above, despite the lack of specificity contained in the G–7 communique, most countries generally intervened in similar ways using
the same basic set of policy tools.411
While not all issues were resolved, since the G–7 agreement provided each nation with the discretion and flexibility to formulate
how to safeguard its own banking system, many countries decided
to provide broad support to their banking systems. As discussed
above, the rescue plans in different countries, while they each have
some unique features, contained similar elements: expanded deposit insurance, guarantees on non-deposit liabilities, purchases of
impaired assets, and capital injections for financial institutions.
On October 14, 2008—less than two weeks after EESA was
signed into law—then-Secretary Paulson formally announced that,
alongside the Federal Reserve’s establishment of a Commercial
Paper Funding Facility (CPFF) and the FDIC’s creation of the
Temporary Liquidity Program (TLGP),412 Treasury would ‘‘purchase equity stakes in a wide array of banks and thrifts.’’ 413 Treasury concluded that while it is easy to make direct capital injections,
setting up a structure to buy particular assets or groups of assets
in the absence of liquid trading markets was more difficult.
Although Treasury officials have explained that the change in
strategy with respect to capital injections rather than asset purchases was motivated both by the severity of the crisis and the
need for prompt action,414 as discussed above, its decision may
409 Donald L. Kohn, vice chairman, Board of Governors of the Federal Reserve System, Remarks at the Federal Reserve Bank of Boston 54th Economic Conference, Chatham, Massachusetts, International Perspective on the Crisis and Response (Oct. 23, 2009) (online at
www.federalreserve.gov/newsevents/speech/kohn20091023a.htm) (hereinafter ‘‘Donald Kohn Remarks at the Federal Reserve Bank of Boston’’).
410 World Leaders Offer Unity But No Steps to Ease Crisis, supra note 408 (including remarks
from an interview with Mr. Nakagawa).
411 For further discussion on the interventions taken by countries across the globe, see Sections C.1 and C.2, supra.
412 The purpose of the CPFF was to enhance the liquidity of the commercial paper market
by increasing the availability of term commercial paper funding to issuers and by providing
greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. The TLGP was designed to unlock inter-bank credit markets and restore
rationality to credit spread.
413 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.treas.gov/press/releases/hp1205.htm).
414 Henry M. Paulson, Jr., secretary of the Treasury (2006—2009), conversations with Panel
staff (Aug. 5, 2010); U.S. Department of the Treasury, Remarks by Secretary Henry M. Paulson,
Jr. on Financial Rescue Package and Economic Update (Nov. 12, 2008) (online at www.treas.gov/
press/releases/hp1265.htm) (stating that the decision to purchase equity directly from financial
institutions was ‘‘the fastest and most productive means of using our new authorities to stabilize
our financial system.’’).

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have also been influenced by similar actions taken across the globe,
particularly the United Kingdom under the leadership of thenPrime Minister Gordon Brown. While such actions were not dispositive, it is possible that they might have played a role in the actions Treasury decided to take domestically.415
During an interview after announcing his government’s financial
rescue on October 8, 2008, Mr. Brown implied that the United
Kingdom’s plan was a faster and more efficient solution to the financial crisis than buying troubled real estate-related assets from
financial institutions (as was initially proposed under the U.S. financial rescue plan). He remarked that ‘‘[t]his is not the American
plan. The American plan is to buy up these bad assets by a state
fund. Our plan is to buy shares in the banks themselves and therefore we will have a stake in the banks. We know that the taxpayers’ interest had got to be protected at all times, and that is
why we are ensuring that it is an investment stake in the banks.
We are not just simply giving money.’’ Mr. Brown also commented
that the time for purchasing impaired assets had since come and
gone, and he hoped that other countries would follow his lead. On
the same day, Mr. Brown wrote to EU leaders to urge them to follow the United Kingdom as a model ‘‘where a concerted international approach could have a very powerful effect.’’ 416 At a press
briefing held after the United Kingdom’s rescue announcement,
then-Secretary Paulson signaled that Treasury was considering a
rescue plan through which the government would provide capital
injections to financial institutions in exchange for ownership
stakes.417 This marked the first occasion in which Treasury indiFor further discussion concerning the flexibility that EESA gives Treasury in terms of dealing
with troubled assets (i.e., Treasury could either buy real estate-related troubled assets directly
from the institutions that held them or instead put capital directly into those institutions by
buying their preferred stock) and Treasury’s ultimate decision to provide financial institutions
with capital injections rather than asset purchases, see Congressional Oversight Panel, August
Oversight Report: The Continued Risk of Troubled Assets, at 7–10 (Aug. 11, 2009) (online at
cop.senate.gov/documents/cop-081109-report.pdf).
415 Treasury conversations with Panel staff (July 22, 2010); Clay Lowery, assistant secretary
of the Treasury for international affairs (Nov. 2005–Jan. 2009), conversation with Panel staff
(July 23, 2010); Senate Committee on Finance, Testimony of Neil M. Barofsky, Special Inspector
General for the Troubled Asset Relief Program, Transcript: An Update on the TARP Program
(July 21, 2010) (publication forthcoming); Vincent Reinhart conversation with Panel staff (July
19, 2010) (supporting the proposition that the TARP so quickly transitioned into capital injections in part because of the similar actions taken by the United Kingdom).
During a conversation with Panel staff, then-Secretary Paulson stated that while he and
President Bush had a conversation with then-Prime Minister Gordon Brown about capital injections, ‘‘the decision to make capital injections was a response to a rapidly changing situation,
including a rapidly deteriorating market and the need for prompt and effective responsive action.’’ In Mr. Paulson’s view, the U.S. decision to inject capital into the banks was dictated by
the need to prevent a meltdown of the U.S. financial system, and was not impacted by the U.K.’s
capital program. Mr. Paulson also referenced how the design and implementation of the CPP
in the United States wound up being very different from the capital injection programs done
throughout Europe, including the United Kingdom. According to Mr. Paulson, ‘‘the U.K.’s capital
program involved more government control than our program and had terms that were more
punitive. Its effect was to nationalize two banks on the brink of failure, and no others participated.’’ While only two banks participated in the United Kingdom’s capital injection program,
707 financial institutions of all sizes participated in the CPP. Henry M. Paulson, Jr., secretary
of the Treasury (2006–2009), conversation with Panel staff (Aug. 5, 2010).
416 Britain Takes a Different Route to Rescue Its Banks, supra note 131; Robert Hutton and
Rebecca Christie, Brown Bank Rescue Takes U.K. Beyond Paulson Debt Plan, Bloomberg (Oct.
9,
2008)
(online
at
www.bloomberg.com/apps/news?pid=new
sarchive&sid=aiNQKy3bayK0&refer=uk).
417 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) (stating
that ‘‘the EESA adds broad, flexible authorities for Treasury to buy or insure troubled assets,
provide guarantees, and inject capital.’’).

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cated publicly that it was contemplating capital injections instead
of asset purchases.
Furthermore, the influence of the actions of foreign countries
(such as the U.K. bank debt guarantees) upon the U.S. response
was displayed in FDIC Chairman Sheila Bair’s remarks at the joint
Treasury, Federal Reserve, and FDIC press conference on October
14, 2008. Chairman Bair noted that ‘‘[o]ur efforts also parallel
those by European and Asian nations. Their guarantees for bank
debt and increases in deposit insurance would put U.S. banks on
an uneven playing field unless we acted as we are today.’’ 418 As
U.S. officials worked to implement the FDIC’s Temporary Liquidity
Guarantee Program (TLGP), they consulted closely with foreign financial authorities to ensure that actions taken in the United
States would not cause problems for other countries, while also
safeguarding the interests of U.S. institutions.419
Further evidence of the close coordination or emulation between
U.S. and U.K. policymaking is displayed in the United Kingdom’s
particular interest in the Asset Guarantee Program (AGP), created
pursuant to Section 102 of EESA and through which the Federal
Reserve, Treasury, and the FDIC placed guarantees, or assurances,
against distressed or illiquid assets held by Citigroup and Bank of
America.420 In the days and weeks immediately after the announcement of the AGP, U.S. and U.K. officials held periodic discussions about the structure of this program and the challenges the
Federal Reserve, Treasury, and the FDIC were facing with respect
to implementation.421 Ultimately, as discussed above, the United
Kingdom established its own asset protection scheme.
On February 10, 2009, the Obama Administration announced its
Financial Stability Plan—a broad framework for financial recovery
and stability that included a combination of stress tests for the nation’s largest BHCs (formally known as the Supervisory Capital Assistance Program, or SCAP), a public-private investment program
to help remove impaired assets from the balance sheets of financial
institutions, a comprehensive foreclosure mitigation plan, and initiatives designed to spearhead consumer and business lending.422
Between February and May 2009, the Federal Reserve, the Office
of the Comptroller of the Currency (OCC), and the FDIC worked
collaboratively to conduct stress tests of the 19 largest BHCs in the
United States and to identify the potential losses across select categories of loans, resources available to absorb those losses, and any
shortfalls in capital buffers.423
Certain U.S. responses to the crisis, and especially the stress
tests, have informed foreign responses. In 2009, as discussed above,
the European Union conducted an aggregated stress test of its 22
biggest cross-border lenders. This round of tests was superficially
418 Federal Deposit Insurance Corporation, Statement by Federal Deposit Insurance Corporation Chairman Sheila Bair: U.S. Treasury, Federal Reserve, FDIC Joint Press Conference (Oct.
14, 2008) (online at www.fdic.gov/news/news/press/2008/pr08100a.html).
419 Treasury conversations with Panel staff (July 22, 2010); Clay Lowery, assistant secretary
of the Treasury for international affairs (Nov. 2005–Jan. 2009), conversation with Panel staff
(July 23, 2010).
420 For further discussion of the AGP, see Section E.1.b, supra.
421 Treasury conversation with Panel staff (July 22, 2010).
422 U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf).
423 For further discussion and analysis of the stress tests, see June Oversight Report, supra
note 143.

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similar to the U.S. stress tests. Like the U.S. tests, the EU stress
tests were guided by two scenarios: a baseline scenario and an adverse scenario. However, the EU tests differed from the U.S. tests
in several important ways. Unlike the U.S. stress tests, which assessed the condition of individual institutions, the outcomes of the
EU tests were aggregated to show the health of the overall EU
banking sector (i.e., bank-by-bank results were not released), and
the exercise was not used to determine which banks needed to be
recapitalized. In addition, whereas the U.S. stress tests were centrally coordinated, the EU tests were applied by the relevant national supervisory authority, meaning that the stress test application could have conceivably varied on a country-by-country basis.
Recently, the European Union decided to conduct another round
of stress tests on 91 banks. While there still are some differences
in approach between the United States and the European Union,
this latest round appears to resemble more closely the U.S. stress
tests in both form and substance. In contrast to its 2009 predecessor and the U.S. tests, which did not assess smaller banks, the
scope of the 2010 Committee of European Banking Supervisors
(CEBS) tests went beyond the EU’s largest banking organizations.
Like the U.S. stress tests, this latest round was guided by both
baseline and adverse scenarios to determine whether banks are
sufficiently capitalized to deal with severe economic shocks, and at
least some European governments appear inclined to recapitalize
their banks if necessary.424 Relative to the 2009 test, the 2010
CEBS test was much more transparent. Most importantly, the
2010 CEBS test released bank-by-bank results rather than results
in the EU aggregate. Additionally, the process for how the stress
tests were applied was disclosed. However, it is unclear whether
transparency was increased because: (1) the U.S. test was widely
regarded as more successful than the 2009 CEBS test; (2) the EU’s
sovereign debt crisis prompted a crisis of confidence among banks’
investors that could be cleared up only by increasing transparency;
or (3) some combination of these two factors. As the Panel has
noted previously, the U.S. stress tests helped to restore confidence
in the nation’s largest banking organizations by looking ahead and
providing clear statements of the prospective condition of each of
424 Transcript: Merkel Q&A, Wall Street Journal (June 24, 2010) (online at online.wsj.com/
article/NA_WSJ_PUB:SB10001424052748704629804575324913545117850.html) (stating that
‘‘building trust will only work if every country also shows how it will handle the results, for
example by recapitalizing its banks if necessary’’).
According to the results announced on July 23, 2010, seven out of 91 European banks failed
the stress tests. At this point, however, there remains no clear path for recapitalization for
banks found to be capital-deficient. While Greece, Spain, and Germany have bank bailout funds
that firms might be able to access if they cannot raise funds privately, the CEBS continues to
emphasize that ‘‘it is the responsibility of the national supervisory authority to require and take
supervisory actions toward a bank.’’ Committee of European Banking Supervisors, CEBS’s Press
Release on the Results of the 2010 EU-Wide Stress Testing Exercise (July 23, 2010) (online at
stress-test.c-ebs.org/documents/CEBSPressRelease.pdf) (hereinafter ‘‘CEBS Press Release on the
Results of the EU-Wide Stress Tests’’). The idea of recapitalizing banks, if necessary, is very
similar to, and an emulation of, Treasury’s commitment to recapitalize any of the 19 stress tested bank holding companies that needed additional capital. U.S. Department of the Treasury,
Secretary Geithner Introduces Financial Stability Plan (Feb. 10, 2009) (online at www.treas.gov/
press/releases/tg18.htm) (stating that ‘‘[t]hose institutions that need additional capital will be
able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital.’’).

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the BHCs tested.425 It appears that the European regulators have
learned this lesson, as one of their primary objectives was to reassure investors that banks are sufficiently capitalized.426 While a
bank’s national origin is significant for purposes of the stress tests
(within the United States, Treasury committed to recapitalize any
of the 19 stress-tested BHCs, if necessary), the stress test results
have international implications because investors are more prone
to invest in an institution that has been found to be adequately
capitalized.
The China Banking Regulatory Commission has also conducted
stress tests on its banks over the past year (assuming residential
real estate price declines of as much as 60 percent in the hardest
hit markets). It is difficult, though, to determine the extent to
which, if any, this response was informed by the U.S. stress tests
because the Chinese economy, as discussed above, has generally
avoided the banking crises that impacted the United States and
much of Europe (as demonstrated by the record issuance of $1.4
trillion in new loans by Chinese banks in 2009).427
According to Assistant Secretary for Financial Stability Herbert
M. Allison, Jr., the Administration continues to work through multilateral institutions and through direct bilateral engagement to
foster financial regulatory reform and improve the stability of the
global economy.428 The G–7/G–8 members’ finance ministers and
central bank governors continued to meet and coordinate actions
into 2009, emphasizing a commitment to reestablish full confidence
in the global financial system. From November 2008 through April
2009, the G–20 Leaders process became increasingly relevant (as
noted by the increasing frequency of meetings and communiqués)
as it focused intensively on rescue efforts.429 Mr. Allison stated further that the G–20 Leaders process is the ‘‘key channel for international cooperation to strengthen the framework for supervising
and regulating the financial markets.’’ 430

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2. Role of Central Banks at the Height of the Crisis
As Federal Reserve Vice Chairman Donald L. Kohn stated, ‘‘[t]he
financial and economic crisis that started in 2007 tested central
banks as they had not been tested for many decades,’’ and the Federal Reserve and other central banks have had to make innovative
425 June Oversight Report, supra note 143, at 27–29. The Panel cautions, however, that the
stress tests should neither be dismissed nor assigned greater value than they merit.
426 See CEBS Press Release on the Results of the EU-Wide Stress Tests, supra note 424 (stating that the ‘‘overall objective of the 2010 exercise is to provide policy information for assessing
the resilience of the EU banking system to possible adverse economic developments and to assess the ability of banks in the exercise to absorb possible shocks on credit and market risks,
including sovereign risks’’); Committee of European Banking Supervisors, CEBS’s Statement on
Key Features of the Extended EU-Wide Stress Test (July 7, 2010) (online at www.c-ebs.org/
CMSPages/GetFile.aspx?nodeguid=357173cf-0b06-4831-abcd-4ea90c64a960) (stating that ‘‘[t]he
objective of the extended stress test exercise is to assess the overall resilience of the EU banking
sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks . . . ’’).
427 For further discussion of the impact of the global financial crisis on major economies outside the United States and Europe, including China, see Section C.1.b, supra.
428 Congressional Oversight Panel, Questions for the Record from Assistant Secretary Herbert
M. Allison, Jr., at 11 (Mar. 4, 2010) (online at cop.senate.gov/documents/testimony-030410
-allison-qfr.pdf) (hereinafter ‘‘Questions for the Record from Assistant Secretary Herbert M. Allison, Jr.’’).
429 For further discussion of the increasing relevance and role of the G–20 during the financial
crisis, see Section C.3, supra.
430 Questions for the Record from Assistant Secretary Herbert M. Allison, Jr., supra note 428,
at 11.

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(and sometimes unprecedented) changes
as the crisis played out.431 At the height
central banks worked together closely
largely on addressing liquidity pressures
in funding markets.

to traditional policy tools
of the financial crisis, the
in focusing their efforts
and resolving disruptions

a. Focus on Liquidity Pressures
Starting in late 2007, central banks generally responded to funding problems with significant expansions of their liquidity facilities.
Such actions typically included lengthening lending maturities,
pumping large amounts of funds into overnight markets, broadening acceptable collateral, and sometimes initiating new auction
techniques. Starting in September 2007, the Federal Reserve conducted several large operations in the federal funds market (such
as reducing the spread of the discount rate over the target federal
funds rate), and the Bank of Canada, the Bank of Japan, the ECB,
and other central banks conducted special operations to inject overnight liquidity at the same time. In addition, on October 8, 2008,
the Federal Reserve announced a reduction in its policy interest
rate jointly with five other major central banks—the Bank of Canada, the Bank of England, the ECB, the Swedish National Bank,
and the Swiss National Bank—with the Bank of Japan expressing
support. The Federal Reserve also created a number of emergency
liquidity facilities at the height of the crisis to meet the funding
needs of key non-bank market participants, including primary securities dealers, money market mutual funds, and other users of
short-term funding markets, such as purchasers of securitized
loans.432
b. Reciprocal Currency Arrangements (‘‘Swap Lines’’)

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i. Background
The credit and liquidity constraints seen at the height of the financial crisis disrupted U.S. dollar funding markets not only domestically but also overseas. While some foreign financial institutions have relied on dollars acquired through their U.S. affiliates,
‘‘many others relied on interbank and other wholesale markets to
obtain dollars.’’ 433 Normally, these borrowers can obtain dollar
funding at the same interest rates as U.S. banks, depending upon
431 Donald L. Kohn, vice chairman, Board of Governors of the Federal Reserve System, Speech
at the Carleton University, Ottawa, Canada, The Federal Reserve’s Policy Actions During the
Financial Crisis and Lessons for the Future (May 13, 2010) (online at www.federalreserve.gov/
newsevents/speech/kohn20100513a.htm).
432 For example, in December 2007, several central banks jointly announced measures to address elevated pressures in short-term funding markets. The Federal Reserve created the Term
Auction Facility (TAF) to auction term funds to depository institutions against the wide variety
of collateral that can be used to secure loans at the discount window, the Bank of Canada entered into term purchase and resale agreements, and the Bank of England expanded the total
amount of reserves offered and expanded the range of collateral accepted for short-term funding
in its repo open market operations. In March 2008, the Federal Reserve established the Term
Securities Lending Facility (TSLF), which allowed primary dealers to swap a range of less liquid
assets for Treasury securities in the Federal Reserve’s portfolio for terms of about one month,
and the Bank of England introduced a similar type of facility (a plan to swap securities backed
by mortgages for government bonds for a period of up to three years) in April 2008.
433 Ben S. Bernanke, chairman, Board of Governors of the Federal Reserve System, Remarks
at the Fifth European Central Banking Conference, Frankfurt, Germany, Policy Coordination
Among Central Banks (Nov. 14, 2008) (online at www.federalreserve.gov/newsevents/speech/
bernanke20081214a.htm).

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their level of credit risk.434 Beginning in August 2007, however, the
interbank lending market experienced significant disruptions. As
stated by Michael J. Fleming, a vice president in the Capital Markets Function of FRBNY’s Research and Statistics Group, and
Nicholas Klagge, an economic analyst in the Risk Analytics Function of FRBNY’s Credit and Payment Risk Group, ‘‘[c]oncerns about
credit risk and higher demand for liquidity placed extraordinary
strains on the global market for interbank funding in U.S. dollars,’’
as ‘‘[i]nterbank interest rates denominated in dollars increased
sharply, and market participants reported little or no interbank
lending at maturities longer than overnight.’’ 435 The increased
spread between the London Interbank Rate (LIBOR) and the overnight indexed swap (OIS)—a measure of illiquidity in financial
markets that is used as a proxy for fears of bank bankruptcy—signaled that interbank lending at longer maturities was perceived to
be especially risky.436 These market conditions signaled a sharp reduction in the general availability of credit, which was driven
largely by fears over credit risk and lender uncertainty about their
own liquidity needs.

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ii. Summary of Swap Line Programs
In response to these market disruptions, the Federal Reserve and
other central banks established reciprocal currency arrangements,
or swap lines, starting in late 2007.437 A swap line functions as follows: as the borrowing central bank draws down on its swap line,
it sells a specified quantity of its currency to the lending central
bank in exchange for the lending central bank’s currency at the
prevailing market exchange rate. The two central banks simultaneously enter into an agreement that obligates the borrowing central bank to buy back its currency at a future date at the same exchange rate that prevailed at the time of the initial draw, along
with interest.438 Fluctuations in exchange rates or interest rates,
434 Michael J. Fleming and Nicholas J. Klagge, The Federal Reserve’s Foreign Exchange Swap
Lines, Current Issues in Economics and Finance, Vol. 16, No. 4, at 2 (Apr. 2010) (online at
www.newyorkfed.org/research/current_issues/ci16-4.pdf) (hereinafter ‘‘The Federal Reserve’s Foreign Exchange Swap Lines’’).
435 Id. at 1.
436 Id. at 2.
437 Between December 2007 and April 2009, the Federal Reserve established swap lines with
the following foreign central banks: European Central Bank (ECB), Swiss National Bank (SNB),
Bank of Japan, Bank of England, Bank of Canada, Reserve Bank of Australia, Sveriges
Riksbank (Sweden), Danmarks Nationalbank (Denmark), Norges Bank (Norway), Reserve Bank
of New Zealand, Banco Central do Brasil, Banco de Mexico, Bank of Korea, and Monetary Authority of Singapore. The ECB also established swap lines with the central banks of Denmark
and Hungary to provide euro liquidity in those countries. For further details concerning the
swap lines, see Annex I, infra.
On April 6, 2009, the Federal Reserve, the Bank of England, the European Central Bank, the
Bank of Japan and the Swiss National Bank announced swap arrangements that would enable
the provision of foreign currency liquidity by the Federal Reserve to U.S. financial institutions.
If drawn upon, these arrangements were designed to provide liquidity in sterling in amounts
of up to £30 billion ($44.5 billion), in euro in amounts of up to Ö80 billion ($107.9 billion), in
yen in amounts of up to ¥10 trillion ($100 billion), and in Swiss francs in amounts of up to CHF
40 billion ($35 billion). While these foreign currency liquidity swap lines were initially authorized through October 30, 2009 and were later extended through February 1, 2010, the Federal
Reserve did not make any draw downs on these swap lines.
438 See The Federal Reserve’s Foreign Exchange Swap Lines, supra note 434, at 2.
According to Federal Reserve Governor Daniel K. Tarullo, ‘‘the existence of these facilities can
reassure market participants that funds will be available in case of need, and thus help forestall
hoarding of liquidity, a feature that exacerbated stresses during the global financial crisis.’’
House Financial Services, Subcommittee on International Monetary Policy and Trade and Subcommittee on Domestic Monetary Policy and Technology, Written Testimony of Daniel K.
Tarullo, member, Board of Governors of the Federal Reserve System, The Role of the Inter-

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therefore, have no effect on the payments made at the end of the
transaction, meaning that the Federal Reserve bears no market
pricing risk as a result of its swap lines. The borrowing central
bank will then lend the dollars at variable or fixed rates to entities
in its country.
In the immediate aftermath of the Lehman Brothers bankruptcy
in September 2008, the Federal Reserve rapidly expanded the size
and scope of its swap line program, increasing the total amount of
dollars made available to central banks under the program from
$67 billion to $620 billion. In December 2008—the peak of the Federal Reserve’s swap program—swaps outstanding totaled more
than $580 billion, accounting for over 25 percent of the Federal Reserve’s total assets.439 During 2009, however, foreign demand for
dollar liquidity through swap lines decreased, primarily for two
reasons: (1) funding market conditions improved; and (2) banks
were able to secure funds elsewhere at lower costs. (Since the loans
provided by the borrowing central banks to financial institutions in
their jurisdictions are offered at rates that would be above market
rates in normal times, demand typically decreases when market
conditions improve, and market alternatives become more attractive.)
The swap line programs established by the Federal Reserve,
which ended on February 1, 2010,440 enhanced the ability of foreign central banks to provide U.S. dollar funding to financial institutions in their jurisdictions at a time when interbank lending was
effectively frozen.441 According to Messrs. Fleming and Klagge, the
swaps ‘‘potentially improve[d] conditions in the global funding and
credit markets more generally.’’ 442 Overall, they conclude that ‘‘the
evolution of funding pressures during the crisis suggests that swap
line program announcements and operations were effective at easing strains in dollar funding markets.’’ 443 All of the swaps established from December 2007 to February 2010 were repaid in full,
and the Federal Reserve earned $5.8 billion in interest.

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3. Assessment of Degree of Cooperation vs. Competition/
Conflict
There are numerous examples of effective coordination efforts,
which are documented in more detail above: unified interest rate
cuts, currency swaps, and the use of the G–20 are evidence of sucnational Monetary Fund and Federal Reserve in Stabilizing Europe, at 7–8 (May 20, 2010) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/tarullo_testimony_5.20.10.pdf).
439 The Federal Reserve’s Foreign Exchange Swap Lines, supra note 434, at 5.
440 The Panel notes that in response to the European sovereign debt crisis, the Federal Reserve reestablished its swap line facilities by entering into agreements with the ECB and other
major central banks (the Bank of England, the Swiss National Bank, the Bank of Canada, and
the Bank of Japan) in order to counteract a shortage of dollar liquidity. The Federal Reserve
also agreed to disclose information regarding the use of the swap lines (along with the total
amount of swaps outstanding by individual central bank) by each of the counterparty central
banks on a weekly basis. These swaps were authorized through January 2011. Board of Governors of the Federal Reserve System, Federal Reserve Releases Agreements with Foreign Central
Banks to Reestablish Temporary Dollar Swap Facilities (May 11, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20100511a.htm).
441 For further discussion of how the events of late 2008 fostered an environment of uncertainty that made the cost of borrowing impractical for financial institutions, see Section C.1.a,
supra.
442 The Federal Reserve’s Foreign Exchange Swap Lines, supra note 434, at 1.
443 The Federal Reserve’s Foreign Exchange Swap Lines, supra note 434, at 6.

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cessful coordination.444 There are also numerous examples of insufficient coordination.445 For instance, neither central banks nor ministries of finance maintained a global database of information, and
as a result, policymakers occasionally found themselves without
key data as the crisis unfolded.446 This lack of centralized publicly
available data on governmental financial rescue efforts continues to
this day, as there is no consistent and reliable single source for this
information. In addition, the wide range of transparency levels
amongst governments makes comparison between countries difficult. The Panel understands that the IMF has collected this data
from various governmental authorities,447 but that this data was
provided on a confidential basis. This is the type of information
that should be publicly available for use in policymaker analysis.
Similarly, the fact that stress tests were neither global nor uniform
suggests that there is room for substantial improvement.
A comprehensive and definitive evaluation of the degree of coordination that occurred during the financial crisis will be possible
only with the benefit of historical perspective. Only time will tell
whether the degree of coordination was appropriate and whether
444 See Sections C.3 and E.2, supra. Lael Brainard, undersecretary for international affairs,
U.S. Department of the Treasury, Remarks As Prepared for Delivery at the Peterson Institute
for International Economics (July 26, 2010) (online at treasury.gov/press/releases/tg789.htm)
(‘‘[I]n response to the most globally synchronized recession the world has seen, we have mounted
the most globally coordinated response the world has attempted.’’); Paulson October 2008 Statement, supra note 407 (‘‘Governments around the world have taken actions to address financial
market developments, and international cooperation and coordination has [sic] been robust.’’);
U.S. Department of the Treasury, Under Secretary for International Affairs David H. McCormick
Remarks to the Better Hong Kong Foundation (Oct. 22, 2008) (online at www.ustreas.gov/press/
releases/hp1230.htm) (hereinafter ‘‘David H. McCormick Remarks to the Better Hong Kong
Foundation’’) (‘‘Over the past two weeks, we have witnessed an unprecedented international response to this financial turmoil. The Group of Seven industrialized countries have announced
and are implementing a coordinated action plan to stabilize financial markets and restore the
flow of credit . . . [C]entral banks from around the world have acted together in recent months
to provide additional liquidity for financial institutions.’’); David H. McCormick, under secretary
for international affairs, U.S. Department of the Treasury, Remarks before the Barclays Asia
Forum, Our Economy, A Global Challenge (Nov. 12, 2008) (online at www.ustreas.gov/press/releases/hp1276.htm) (hereinafter ‘‘David H. McCormick Remarks before the Barclays Asia
Forum’’) (‘‘We should take confidence from the fact that countries around the world have responded with comprehensive actions to help stem the crisis. The Group of Seven (G–7) industrialized countries announced and are implementing a coordinated action plan to stabilize financial
markets, restore the flow of credit, and support global economic growth. Others throughout Europe, Asia, and Latin America have adopted similar approaches.’’); Adam Posen, senior fellow
at the Peterson Institute for International Economics and member of the Monetary Policy Committee of the Bank of England, conversation with Panel staff (July 27, 2010) (discussing the
quality of international coordination efforts during the crisis); C. Fred Bergsten, director, Peterson Institute of International Economics, conversations with Panel staff (July 29, 2010) (referring to the quality of coordination as one of the defining elements of the crisis); International
Monetary Fund, United States: Financial System Stability Assessment, at 43 (July 2010) (online
at www.imf.org/external/pubs/ft/scr/2010/cr10247.pdf) (hereinafter ‘‘IMF Financial System Stability Assessment’’) (‘‘U.S. agencies appear to have managed to achieve a high level of coordination with counterparts abroad during the recent crisis, building on longstanding relationships’’).
445 See Donald Kohn Remarks at the Federal Reserve Bank of Boston, supra note 409 (‘‘[T]he
process was not well coordinated, with action by one country sometimes forcing responses by
others.’’). Other examples include the U.K. dispute with Iceland regarding deposits in
Landsbanki; U.K. and EU fears regarding Ireland’s blanket bank liability guarantee; variances
in timing and substance of short-selling and deposit insurance rules; and the cumbersome bailouts of Fortis and Dexia by the failing banks’ multiple home country regulators. The IMF described the Fortis bailout as illustrative of ‘‘the tendency for national interests to come to the
fore in a crisis and the difficulty in such circumstances of achieving a cross-border consensus,
even between jurisdictions whose financial regulators have a long tradition of co-operation and
whose legal frameworks are considerably harmonized.’’ IMF Proposed Framework for Enhanced
Coordination, supra note 33, at 13.
446 See generally Financial Stability Board and International Monetary Fund, The Financial
Crisis and Information Gaps (Oct. 29, 2009) (online www.imf.org/external/np/g20/pdf/
102909.pdf). See also Clay Lowery, assistant secretary of international affairs (2005–2009), conversations with Panel staff (July 23, 2010).
447 See International Monetary Fund, A Fair and Substantial Contribution by the Financial
Sector, at 35–36 (June 2010) (online at www.imf.org/external/np/g20/pdf/062710b.pdf).

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countries focused too much on their own narrow national interests
at the expense of the global economy. Yet even if reaching a definitive conclusion is not possible, the nature of coordination during
the financial crisis raises several key issues.
a. Complete Coordination may not Always be Desirable
Ideally, international rescue efforts would include a mixture of
uniform collective action and individuated, country-specific action
tailored to address the specific needs of specific countries. As detailed above and in prior Panel reports, the financial crisis is littered with numerous examples of coordinated and isolated approaches. Acting in concert, several central banks took the unprecedented step of announcing a coordinated reduction in interest rates
in the fall of 2008. Acting alone, the U.S. government designed
stress tests specific to U.S. institutions and to the U.S. economy,
intending to restore confidence in its largest financial institutions.

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b. The Importance of Coordinating Before a Crisis
The financial crisis demonstrated that no matter how globally integrated the economy may be, borders still matter: ultimately each
individual nation is called upon to bear the costs of assisting and
restoring its own economy and suffers the consequences if it does
not.448 In part because they will bear these costs, countries tend to
act in their own self-interest. Sometimes the self-interest of one
country aligns with the interests of the international community,
as it did during many phases of the financial crisis. When central
banks agreed to coordinate a cut in interest rates, for example, the
interests of individual nations were in alignment with the broader
needs of the economic system. In other situations, however, it is
less clear that these interests are in alignment. These misalignments of interests may produce weaknesses in international supervision (pre-crisis) or may weaken the scope and scale of reform efforts (post-crisis).449 It is also uncertain whether these interests
would align in a future crisis.450 For example, Brookings Institution fellow Douglas J. Elliott maintains that as institutions become
more and more internationally integrated and have less of a foot448 See Donald Kohn Remarks at the Federal Reserve Bank of Boston, supra note 409
(‘‘[R]egulations must be passed and implemented nationally. On one level, this type of action
is simply what is required under existing legal structures. On another level, it reflects the reality that taxpayers in individual countries end up bearing much of the cost when home-country
institutions need to be stabilized.’’); Domenico Lombardi, president of The Oxford Institute for
Economic Policy and Nonresident Senior Fellow at the Brookings Institution, conversations with
Panel staff (Aug. 2, 2010) (stating that in spite of the increasing globalization of finance, the
policy framework remains local). See also John Lipsky, first deputy managing director, International Monetary Fund, Remarks at the ECB and its Watchers Conference XII, Towards an
International Framework for Cross Border Resolution (July 9, 2010) (online at www.imf.org/external/np/speeches/2010/070910.htm) (hereinafter ‘‘John Lipsky Remarks at the ECB and its
Watchers Conference XII’’) (‘‘As has been noted widely, major financial firms today live globally
but die locally.’’). Other analysts have discussed the importance of home countries in terms of
market perceptions of rescue capacity. Countries perceived as unable to provide sufficient rescue
assistance to their institutions may find that perception reflected in the capital markets. RGE
Monitor staff conversations with Panel staff (July 28, 2010).
449 Simon Johnson, professor at MIT and former chief economist of the International Monetary
Fund, conversations with Panel staff (July 30, 2010).
450 See IMF Proposed Framework for Enhanced Coordination, supra note 33, at 13 (discussing
‘‘the tendency for national interests to come to the fore in a crisis and the difficulty in such
circumstances of achieving a cross-border consensus, even between jurisdictions whose financial
regulators have a long tradition of co-operation and whose legal frameworks are considerably
harmonized’’).

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print in one specific country, home country governments may be
more reluctant to accept the full bill for rescuing the company.451
Making an effort to coordinate in advance of a crisis could help
to minimize the likelihood and effect of misaligned national interests at moments when alignment is most critical.452 The IMF has
advocated this approach, asserting that it is ‘‘essential’’ to initiate
‘‘[e]x ante information gathering, preparation, and ‘war gaming.’ ’’ 453 Ex ante coordination permits countries to establish rules,
expectations, and purposes during the periods when it is easiest to
do so—as one economist noted, coordinating during a crisis is a
‘‘scramble.’’ 454 Advance coordination allows countries to consider a
complex interplay of factors—domestic needs, concerns about maintaining competitiveness, and arbitrage opportunities—at a time
when sustained, thoughtful consideration is possible. It also helps
government officials to develop relationships with each other that
may prove useful when they are forced to interact during a crisis.455 Finally, ex ante coordination may enable governments to develop processes for working across a diverse array of national regulatory regimes.456
There are a number of ex ante mechanisms that could help to facilitate coordination during a crisis. A cross-border resolution regime could establish rules that would permit the orderly resolution
of large international institutions, while also encouraging contingency planning and the development of resolution and recovery
plans.457 Such a regime could help to avoid the chaos that followed
the Lehman bankruptcy, in which foreign claimants struggled to
451 Douglas J. Elliott, fellow, Brookings Institution, conversations with Panel staff (July 30,
2010). See also John Lipsky Remarks at the ECB and its Watchers Conference XII, supra note
448 (‘‘Indeed, recent experience demonstrates that the more interconnected and integrated international financial institutions and groups have become, the more disruptive and value-destroying uncoordinated local resolution actions are likely to be.’’).
452 Of course, some countries may perceive that there are risks in placing too much emphasis
on ex ante coordination. Taking steps in advance of a crisis requires officials to make certain
assumptions about the form the next crisis will take. If those assumptions turn out to be false,
then countries may find themselves locked into certain regimes that limit their flexibility in responding to challenges they face. For this reason, when dealing with certain issues, some countries may believe that it is preferable to defer certain types of coordinating efforts until a crisis
actually arises. Simon Johnson, professor at MIT and former chief economist of the International Monetary Fund, conversations with Panel staff (July 30, 2010).
453 IMF Financial System Stability Assessment, supra note 444, at 40. Former Secretary
Paulson stated that the United States conducted ‘‘war games’’ with the U.K. prior to the crisis.
In this context, the term ‘‘war games’’ refers to efforts to plan for potential economic emergencies, rather than military exercises. Henry M. Paulson, secretary of the Treasury (2006–
2009), conversations with Panel staff (Aug. 5, 2010). It does not appear that similar exercises
were conducted at an international scale.
454 Simon Johnson, professor at MIT and former chief economist of the International Monetary
Fund, conversations with Panel staff; Toward an Effective Resolution Regime for Large Financial Institutions, supra note 352 (‘‘[T]he high legal and political hurdles to harmonized crossborder resolution processes suggest that, for the foreseeable future, the effectiveness of those
processes will largely depend on supervisory requirements and cooperation undertaken before
distress appears on the horizon.’’).
455 See John Lipsky Remarks at the ECB and its Watchers Conference XII, supra note 448
(‘‘[W]hen faced with the potential failure of a large international financial institution, national
authorities will be willing to cooperate fully only if they trust each other.’’).
456 See David H. McCormick Remarks before the Barclays Asia Forum, supra note 444 (‘‘We
can also foster international cooperation by making it easier and more efficient for countries to
interact across national regulatory regimes.’’).
457 While the recently enacted Dodd-Frank legislation provides for resolution authority within
the United States, it makes no provision for cross-border resolution authority. The IMF has advocated for the creation of an international resolution framework. John Lipsky Remarks at the
ECB and its Watchers Conference XII, supra note 448. See also IMF Financial System Stability
Assessment, supra note 444, at 50 (‘‘[C]ross-border issues in the event of the future failure of
a systemic international group would remain a challenge.’’).

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secure priority in the bankruptcy process,458 and that preceded the
AIG rescue, in which the uncertain effect of bankruptcy on international contracts pressured the U.S. government to support the
company.459 Additionally, the development of international regulatory regimes could help to discourage regulatory arbitrage and
pressure individual countries to compete in a ‘‘race to the top’’ by
adopting more effective regimes at the national level.460 Senator
Christopher Dodd (D–CT) has argued that routine meetings between senior regulators of G–20 countries—including meetings of a
‘‘Principals Group’’ prior to G–20 summits—would help to ensure
that regulations are consistent across borders.461
Finally, ex ante coordination could help to establish robust institutions that could provide a framework for resolving issues during
the crisis itself. Regular meetings of the G–20 and FSB, for example, establish a setting and mode of communication that could become a convenient default during a crisis.462 Facilitating the
growth of such institutions also helps government officials to develop working relationships with each other that would promote efficiency in crisis response efforts. For instance, involving international institutions at G–20 meetings places the institution side
by side with heads of state and finance ministers.463 Strengthening
such institutions has a more subtle normative effect as well: it adds
legitimacy to the notion that economic policy is an international endeavor in addition to a national one.
There are also less formal coordinating mechanisms that could be
developed prior to a crisis. For instance, an international information database could provide details on international markets and
on multinational companies’ cross-border exposures that could assist both national governments and international bodies in coordinating rescue efforts during a crisis. According to the IMF, some

458 John Lipsky Remarks at the ECB and its Watchers Conference XII, supra note 448; IMF
Financial System Stability Assessment, supra note 444, at 44; C. Fred Bergsten, director, Peterson Institute of International Economics, conversations with Panel staff (July 29, 2010).
459 See generally June Oversight Report, supra note 10.
460 To address the problem of regulatory arbitrage, the January 2009 Special Report recommended that the State Department and U.S. financial regulators work together with other
countries to assure that a regulatory floor be created. The report also recommends the United
States participate in international organizations that promote coordination between national
regulators. The Basel Committee on Bank Supervision, the Senior Supervisors Group, and the
International Organization of Securities Commissions are mentioned specifically. Congressional
Oversight Panel, Special Report on Regulatory Reform, at 45–46 (Jan. 2009) (online at
cop.senate.gov/documents/cop-012909-report-regulatoryreform.pdf). See also IMF Financial System Stability Assessment, supra note 444, at 5, 43 (‘‘Every effort should be taken to coordinate
these efforts internationally, to ensure they encourage a ‘race to the top’ rather than inconsistent approaches that could widen the scope for regulatory arbitrage . . . The growth in transactions booked in offshore tax havens illustrates the channels that have opened for regulatory
and tax arbitrage and underscore the importance of U.S. participation in international efforts
toward coordinated and consistent supervisory and regulatory policies.’’).
461 Atlantic Council, Dodd: G20 Has Taken Over (Aug. 4, 2010) (online at www.acus.org/
new_atlanticist/dodd-g20-has-taken-over).
462 See David H. McCormick Remarks to the Better Hong Kong Foundation, supra note 444
(‘‘[T]he recent crisis has highlighted the importance of continued cooperation among major
economies through such forays as the G–20, the Financial Stability Forum, and the International Monetary Fund.’’).
463 Domenico Lombardi, president of the Oxford Institute for Economic Policy and nonresident
senior fellow at the Brookings Institution, conversations with Panel staff (Aug. 2, 2010); Douglas
J. Elliott, fellow, Brookings Institution, conversations with Panel staff (July 30, 2010).

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countries have already begun taking steps to make such information accessible.464

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c. The Role of the TARP in Multilateral Negotiations
According to Administration officials who were working closely
with their foreign counterparts during the fall and early winter of
2008, the existence of the TARP enhanced the ability of the United
States to convince other countries to enact measures to combat the
financial crisis.465 When the United States hosted the G–20 summit in Washington, DC in November 2008, the TARP had been in
effect for more than a month, and several U.S. financial institutions had already received TARP funds. By the time of the next
summit, in London in April 2009, hundreds of institutions had received TARP funds.466 The existence of the TARP evidenced the
willingness of the United States to address its own economic challenges and signaled to the international community that the country recognized the seriousness of the financial crisis. The TARP
also thrust the United States into a position of ‘‘demonstrable leadership,’’ 467 according to one former Treasury official, and provided
credibility at a time when the United States was trying to convince
other countries to join it in developing a robust crisis response.468
Without the TARP, the United States would have had little credibility in these negotiations.469
At the same time, Vincent Reinhart, a resident scholar at the
American Enterprise Institute, maintains that the TARP eventually became perceived as a liability for the U.S. government in its
interactions with foreign governments. Whereas initially it had
been viewed as a bold, early step to address the financial crisis, as
time progressed it was viewed less as a systematic response and
more as a reflection of a disjointed, ad hoc effort. This perception
of the program decreased its usefulness in enhancing U.S. credibility.470 In addition, the government’s ability to use the existence
of the TARP to bolster its negotiating position was blunted by the
perception that the United States was responsible for causing the
financial crisis.471
464 See IMF Financial System Stability Assessment, supra note 444, at 43 (‘‘The United States
has embraced efforts to improve information sharing and cooperation in the supervision of internationally active financial firms.’’).
465 Clay Lowery, assistant secretary of international affairs (2005–2009), conversation with
Panel staff (July 23, 2010); Vincent Reinhart, resident scholar, American Enterprise Institute,
conversation with Panel staff (July 19, 2010).
466 See Treasury Transactions Report, supra note 64.
467 Clay Lowery, assistant secretary of international affairs (2005–2009), conversation with
Panel staff (July 23, 2010); David H. McCormick Remarks to the Better Hong Kong Foundation,
supra note 444 (‘‘These actions demonstrate to market participants around the world that the
United States is committed to taking all necessary steps to unlock our credit markets, minimize
the impact of the current instability on the U.S. economy, and restore the health of the global
financial system.’’).
468 Domenico Lombardi, president of the Oxford Institute for Economic Policy and nonresident
senior fellow at the Brookings Institution, conversations with Panel staff (Aug. 2, 2010).
469 C. Fred Bergsten, director, Peterson Institute of International Economics, conversations
with Panel staff (July 29, 2010).
470 Vincent Reinhart, resident scholar, American Enterprise Institute, conversation with Panel
staff (July 19, 2010).
471 Adam Posen, senior fellow at the Peterson Institute for International Economics and member of the Monetary Policy Committee of the Bank of England, conversation with Panel staff
(July 27, 2010); Sabina Dewan, associate director of international economic policy, the Center
for American Progress, conversation with Panel staff (July 26, 2010).

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d. The Power of Informal Coordination Networks
Much of the coordination that occurred during the crisis took the
form of informal communications.472 In some situations, Treasury
officials picked up a phone to call their foreign counterparts; in others, small groups of countries gathered to share information. Informal communication helped officials to stay informed as to what
their counterparts were doing, which was particularly important
because of the speed at which the crisis unfolded. For example, according to then-Secretary Paulson, Treasury officials communicated
regularly with foreign governments about a variety of subjects, including Fannie Mae and Freddie Mac. In addition, Secretary
Paulson himself would occasionally talk to very senior foreign officials during critical times.473
In other cases, without any direct communication, one country’s
action on a particular issue inspired another country to act.474 In
some cases, these parallel actions were due to competitive pressures—in this manner, competition fostered outcomes that looked
from a distance as though they had been the product of collaboration. In other cases, such as the stress tests, one country’s actions
served as a best practices template that other countries could employ when they faced similar challenges.475 Some experts maintain
that few examples of real coordination exist—in most cases, one
country simply emulated the rescue efforts of another.476
It is also possible that as the crisis developed, informal coordination efforts hardened into more formal processes. The G–20 supplanted the G–8 as the primary international economic negotiating
body, possibly in part because the large volume of information
being communicated between G–8 participants and other countries
made it easier to bring those countries directly to the negotiating
table. The expansion served the purpose of raising the views of
countries with emerging markets,477 and also permitted policymakers to resolve many issues within the context of a single negotiating body.
The emergence of the G–20 also reflects the importance of symbolism and tone in crisis response.478 Regardless of the number of
concrete measures that have been implemented as a direct result
of G–20 summits, the meetings facilitated aggressive action by governments across the globe by setting a tone that the international
community supported timely, substantial economic interventions.
472 Henry M. Paulson, secretary of the Treasury (2006–2009), conversation with Panel staff
(Aug. 5, 2010); Treasury conversations with Panel staff (July 22, 2010); Simon Johnson, professor at MIT and former chief economist of the International Monetary Fund, conversation with
Panel staff (July 30, 2010).
473 Henry M. Paulson, secretary of the Treasury (2006–2009), conversations with Panel staff
(Aug. 5, 2010).
474 See Section C.2.c, supra.
475 See Section C.2, supra.
476 Vincent Reinhart, resident scholar, American Enterprise Institute, conversation with Panel
staff (July 19, 2010); Sabina Dewan, associate director of international economic policy, the Center for American Progress, conversation with Panel staff (July 26, 2010); Simon Johnson, professor at MIT and former chief economist of the International Monetary Fund, conversation with
Panel staff (July 30, 2010).
477 Clay Lowery, assistant secretary of international affairs (2005–2009), conversation with
Panel staff (July 23, 2010).
478 Treasury conversations with Panel staff (July 22, 2010).

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96
As one Treasury official stated, the goal was to use a ‘‘show of
force’’ to present a common front in fighting the financial crisis.479
F. Conclusions and Recommendations

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The international response to the crisis that started in 2007 developed on an ad hoc, informal, jurisdiction-by-jurisdiction basis.
The G–7/G–8, G–20, and multinational organizations such as the
IMF all played a significant role in the rescue and an even larger
role in the subsequent reform efforts. The international response
was by no means uncoordinated; however, governments ultimately
made their decisions based on an evaluation of what was best for
their own banking sector and their domestic economy, and consideration of the specific impact of their actions on either the financial
institutions or banking sector or the economies of other jurisdictions was not a high priority. This owed to both the rapid and brutal pace of the crisis, as well as the absence of effective cross-border
crisis response structures. Ultimately, this meant that the assistance that was provided to specific troubled institutions depended
very much on where they were headquartered.
Despite the limitations of international coordination, most countries ultimately intervened in similar ways, using the same basic
set of policy tools: capital injections to financial institutions, guarantees of debt or troubled assets, asset purchases, and expanded
deposit insurance. As the report illustrates, macro-economic responses taken by central banks, which had a broader discretion to
design liquidity facilities, were the most coordinated.
Although these ad hoc actions ultimately restored a measure of
stability to the international system, and the role of the capital injection programs adopted by the governments of both the United
Kingdom and the United States was key to that stability, there is
no doubt that international cooperation could be improved. Even
when several governments came together to rescue a specific ailing
institution over a short period, as in the rescues of Dexia and
Fortis, national interests came to the fore. Instances of effective
collaboration to orchestrate broader, market-wide interventions occurred on a more limited basis. The internationalization of the financial system has, in short, outpaced the ability of national regulators to respond to global crises.
In light of the international integration of markets, and in light
of the fact that some of the recipients of rescue funds were large
international institutions, it was inevitable that rescue funds would
flow across borders. In the absence of reliable data, however, it is
possible to say only that it seems likely that U.S. money had more
impact on non-U.S. institutions and economies than non-U.S. rescue funds had on the United States, even after adjusting for the
relative size of the various jurisdictions’ rescues. Because Treasury
has gathered very little data on how bailout funds flowed overseas,
however, neither students of the current crisis nor those dealing
with future rescue efforts will have access to all the information
needed to make well-informed decisions. One of the most crucial
problems in the crisis was the lack of transparency about which
parties were exposed and to whom they were exposed, and where
479 Treasury

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conversations with Panel staff (July 22, 2010).

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cash flowed could be helpful in informing future estimates of exposure.
In the interests of transparency and completeness, and to help
inform regulators’ actions in a world that is likely to become ever
more financially integrated, the Panel strongly urges Treasury to
collect and report more data about how TARP and other rescue
funds flowed internationally, and to document the impact that the
U.S. rescue had overseas. Treasury should create and maintain a
database of this information and should urge foreign regulators to
collect and report similar data. Information of this type would have
enabled regulators in all jurisdictions to formulate a more tailored
and coordinated response, to know with whom they should have coordinated those responses, and to anticipate better the effects of
any actions taken.
In enacting the TARP, Congress explicitly required Treasury to
coordinate its financial stability efforts with those of other nations.
The crisis underscored the fact that the international community’s
formal mechanism to plan in advance for potential financial crises
is limited. Financial crises have occurred many times in the past
and will occur again in the future, and policymakers would do well
to have plans in place before they happen, rather than responding,
however well, on an ad hoc basis at the peak of the storm. Moving
forward, it is essential for the international community to gather
information about the international financial system, identify
vulnerabilities, and plan for emergency responses to a wide range
of potential future crises. U.S. regulators should encourage regular
crisis planning and financial ‘‘war gaming.’’ Without this kind of
cross-national forward planning, efforts in the United States to
limit exposure and to address the impact of ‘‘too big to fail’’ institutions will be undermined.
Finally, international bodies such as the FSB and the BIS are
likely to become ever more important in crisis response and regulation. For this reason, it is crucial that their dealings, and the interaction of U.S. regulators with them, are open and transparent and
that U.S. regulators make clear to policymakers the impact that
such bodies have on the U.S. banking industry and broader economy. The FSB especially should be sensitive to the transparency of
its processes.

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ANNEX I: TABLES
FIGURE 20: GLOBAL FINANCIAL RESCUE EFFORTS BY COUNTRY (AS OF MAY 2010) i
[Billions of USD] ii
GDP iii

Australia ...........
Belgium ............
France ...............
Germany ...........
Iceland v ...........
Ireland ..............
Italy ..................
Japan ................
Luxembourg ......
Netherlands ......
Spain ................
Switzerland .......
United Kingdom

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United States x

Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitment vi ..
Outlays vii .........
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments viii
Outlays ix ..........
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............
Commitments ...
Outlays .............

826.2
162.8
NA
221.6
468.0
199.7
658.8
406.6
13.5
1.4
802.9
137.0
85.1
5.6
54.6
54.6
NA
13.0
301.9
209.4
341.7
136.6
61.8
56.5
487.2
610.0
2,995.2
1,630.6

Bank
Assets iv

Commitments

2007

2007

Percent
of
GDP

950
................
459
................
2,594
................
3,321
................
20
................
261
................
2,118
................
4,384
................
50
................
777
................
1,440
................
434
................
2,803
................
13,807
................

1,680
................
2,324
................
10,230
................
6,600
................
47
................
1,631
................
4,336
................
10,087
................
1,348
................
3,869
................
2,979
................
3,620
................
11,655
................
11,194
................

86.9
................
NA
................
18.0
................
19.8
................
66.2
................
307.4
................
4.0
................
1.2
................
NA
................
38.8
................
23.7
................
14.2
................
17.4
................
21.7
................

Outlays

Percent
Bank
Assets

Percent
of
GDP

Percent
Bank
Assets

49.2
................
NA
................
4.6
................
10.0
................
28.8
................
49.2
................
2.0
................
0.5
................
NA
................
7.8
................
11.5
................
1.7
................
4.2
................
26.8
................

................
17.1
................
48.3
................
7.7
................
12.2
................
6.9
................
52.4
................
0.3
................
1.2
................
26.2
................
26.9
................
9.5
................
13.0
................
21.8
................
11.8

................
9.7
................
9.5
................
2.0
................
6.2
................
3.0
................
8.4
................
0.1
................
0.5
................
1.0
................
5.4
................
4.6
................
1.6
................
5.2
................
14.6

i Commitment and outlay data for all countries compiled from the European Central Bank (ECB) unless noted otherwise. European Central
Bank, Extraordinary Measures in Extraordinary Times: Public Measures in Support of the Financial Sector in the EU and the United States (July
2010) (online at www.ecb.int/pub/pdf/scpops/ecbocp117.pdf). Government support programs include capital injection, liability guarantees, and
asset support unless noted otherwise. Commitment data not available for all forms of assistance and may be understated.
ii Foreign currency values were converted to USD using an average of daily EUR–USD exchange rates between 10/1/2008 and 5/31/2010.
Averages computed using Bloomberg data service (accessed Aug. 11, 2010).
iii International Monetary Fund, Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks, at 177
(Apr. 2009) (online at www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/text.pdf); International Monetary Fund, World Economic Outlook Database
(Apr. 2010) (online at www.imf.org/external/pubs/ft/weo/2010/01/weodata/download.aspx). Bank assets for Australia, Iceland, and India compiled using Bloomberg data service (accessed Aug. 11, 2010).
iv Id.
v For the reasons outlined in note vi, infra, this percentage is substantially understated and should not be directly compared those of other
nations on this table. Special Investigative Commission, Report of the Special Investigative Commission: Depositors’ and Investors’ Guarantee
Fund and Deposit Guarantees in General, at 65 (Apr. 12, 2010) (online at sic.althingi.is/pdf/RNAvefKafli17Enska.pdf); Mayer Brown, Summary
of
Government
Interventions
in
Financial
Markets:
Iceland,
at
3–4
(Sept.
8,
2009)
(online
at
www.mayerbrown.com/publications/article.asp?id=7850&nid=6).
vi The $13.5 billion in commitments shown here consists only of direct capital injections to banks and guarantees of domestic bank deposits. It does not include other assistance, including guarantees of certain foreign deposits, central bank liquidity support, or a $10 billion IMF
rescue package for the Icelandic government. Total commitments of government assistance exceed $13.5 billion and almost certainly exceed
GDP, but are difficult to quantify given the scale of problems Iceland experienced and the confusion caused by the crisis. For example, the
Icelandic central bank has not published detailed statistics on the banking system since 2007. Central Bank of Iceland (Sedlabanki), Monetary
Statistics
(May
2009)
(online
at
www.sedlabanki.is/?pageid=552&itemid=5a037662-26ea-477d-bda8-d71a6017cc05&nextday=21&nextmonth=2). Other aspects of the Icelandic
crisis are discussed in Sections C.1.b and C.1.c, and in Figure 17, supra.
vii Includes direct capital injections only. Iceland’s outlays considerably exceeded this amount, as explained in note vi, supra.
viii Deposit Insurance Corporation of Japan, List of Capital Injection Operations Pursuant to the Financial Functions Strengthening Act (online
at www.dic.go.jp/english/e_katsudou/e_katsudou3-5.html) (accessed Aug. 10, 2010); Bank of Japan, Outright Purchases of Corporate Financing
Instruments (Jan. 22, 2009) (online at www.boj.or.jp/en/type/release/adhoc09/un0901b.pdf); Bank of Japan, The Bank of Japan to Resume Stock
Purchases Held by Financial Institutions (Feb. 3, 2009) (online at www.boj.or.jp/en/type/release/adhoc09/fss0902a.pdf); Bank of Japan, Provision of Subordinated Loans to Banks (Mar. 17, 2009) (online at www.boj.or.jp/en/type/release/adhoc09/fsky0903a.htm). See also Takafumi Sato,
Global
Financial
Crisis—Japan’s
Experience
and
Policy
Response
(Oct.
20,
2009)
(online
at
www.frbsf.org/economics/conferences/aepc/2009/09_Sato.pdf).
ix Id.
x U.S. financial support totals include Federal Reserve liquidity facilities. Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, at 318–319 (June 10, 2010) (online at
cop.senate.gov/documents/cop-061010-report.pdf).

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99
FIGURE 21: FEDERAL RESERVE LIQUIDITY PROGRAMS
Start
Date

End
Date

Maximum
Commitment

Description

Final
Disposition

Term Asset-Backed Securities Loan Facility (TALF)
June 30,
2010.

FRBNY makes loans on a collateralized
basis to holders of eligible asset-backed
securities
(ABS)
and
commercial
mortgage-backed securities (CMBS).
Term Auction Facility (TAF)

December
12, 2007.

March 8,
2010.

The TAF provided credit through an auction
mechanism to depository institutions in
generally sound financial condition. The
TAF offered 28-day and, beginning in August 2008, 84-day loans.

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
September
18, 2008.

February 1,
2010.

The AMLF was a lending facility that financed the purchase of high-quality
asset-backed commercial paper from
money market mutual funds (MMMFs) by
U.S. depository institutions and bank
holding companies.
Commercial Paper Funding Facility (CPFF)

October 7,
2008.

February 1,
2010.

The CPFF provided a liquidity backstop to
U.S. issuers of commercial paper through
a specially created limited liability company (LLC) called CPFF LLC. This LLC
purchased three-month unsecured and
asset-backed commercial paper directly
from eligible issuers.

The CPFF’s holdings
of commercial
paper peaked at
$350 billion in January 2009.

The CPFF incurred no
losses on its commercial paper holdings, and accumulated nearly $5 billion in earnings,
primarily from interest income,
credit enhancement
fees, and registration fees.

Primary Dealer Credit Facility (PDCF)
March 16,
2008.

February 1,
2010.

An overnight loan facility that provided
funding to primary dealers.
Term Securities Lending Facility (TSLF)

March 11,
2008.

February 1,
2010.

FRBNY lent Treasury securities to primary
dealers for 28 days against eligible collateral in two types of auctions.
Money Market Investor Funding Facility (MMIFF)

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October 21,
2008.

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FRBNY provided senior secured funding to
SPVs to facilitate a private-sector initiative to finance the purchase of eligible
assets from eligible investors.

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100
FIGURE 22: RECIPROCAL FOREIGN EXCHANGE SWAP LINES WITH THE UNITED STATES, 2007–
2009 480
[Dollars in millions]
Country

Agreement
Date

Original
Amount

European Union ............

12/12/2007

$20,000

Switzerland ...................

12/12/2007

4,000

Japan ............................

9/18/2008

60,000

United Kingdom ...........

9/18/2008

40,000

Canada .........................

9/18/2008

10,000

Australia .......................

9/24/2008

10,000

Sweden .........................

9/24/2008

10,000

Denmark .......................

9/24/2008

5,000

Norway ..........................

9/24/2008

5,000

New Zealand ................
Brazil ............................
Mexico ..........................
South Korea ..................
Singapore .....................

10/28/2008
10/29/2008
10/29/2008
10/29/2008
10/29/2008

15,000
30,000
30,000
30,000
30,000

Changes to Original
Agreement

Swap line extended and increased
7 times until the Fed removed
the cap on 10/13/2008.
Swap line increased 6 times until
the Fed removed the cap on
10/13/2008.
Swap line increased twice before
the Fed removed the cap on
10/14/2008.
Swap line increased twice before
the Fed removed the cap on
10/13/2008.
Swap line increased once on
9/29/2008.
Swap line increased once on
9/29/2008.
Swap line increased once on
9/29/2008.
Swap line increased once on
9/29/2008.
Swap line increased once on
9/29/2008.
None ................................................
None ................................................
None ................................................
None ................................................
None ................................................

Expiration
of Swap
Line 481

Total
Amount
482 Full

2/1/2010

483 Full

2/1/2010

484 Full

2/1/2010

485 Full

2/1/2010

$30,000 ....

2/1/2010

$30,000 ....

2/1/2010

$30,000 ....

2/1/2010

$15,000 ....

2/1/2010

$15,000 ....

2/1/2010

$15,000
$30,000
$30,000
$30,000
$30,000

2/1/2010
2/1/2010
2/1/2010
2/1/2010
2/1/2010

allotment.
allotment.
allotment.
allotment.

....
....
....
....
....

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480 Source: Board of Governors of the Federal Reserve System.
As reflected in the chart, the swap lines expired on February 1, 2010; however, as a result of U.S. dollar short-term funding problems in
Europe, in May 2010 the Federal Reserve reestablished swap lines with the European Union, Switzerland, the United Kingdom, Canada, and
Japan. Each swap line will expire in January 2011. Board of Governors of the Federal Reserve System, Press Release (May 10, 2010) (online
at www.federalreserve.gov/newsevents/press/monetary/20100510a.htm); Board of Governors of the Federal Reserve System, Press Release (May
9, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20100509a.htm).
481 The Federal Reserve extended the swap lines with each country multiple times. On June 25, 2009, it extended the swap lines with all
central banks until February 1, 2010. Board of Governors of the Federal Reserve System, Press Release (June 25, 2009) (online at
www.federalreserve.gov/newsevents/press/monetary/20090625a.htm).
482 On October 13, 2008 the Federal Reserve removed the cap on the amount the European Central Bank (ECB) could draw on the swap
line.
Board
of
Governors
of
the
Federal
Reserve
System,
Press
Release
(Oct.
13,
2008)
(online
at
www.federalreserve.gov/newsevents/press/monetary/20081013a.htm) (hereinafter ‘‘Oct. 13 Federal Reserve Press Release’’). Prior to removing the
cap, the ECB was authorized to draw up to $240 billion. Board of Governors of the Federal Reserve System, Press Release (Sept. 29, 2008)
(online at www.federalreserve.gov/newsevents/press/monetary/20080929a.htm) (hereinafter ‘‘Sept. 29 Federal Reserve Press Release’’).
483 On October 13, 2008 the Federal Reserve removed the cap on the amount the Swiss National Bank (SNB) could draw on the swap line.
Sept. 29 Federal Reserve Press Release, supra note 482. Prior to removing the cap, the SNB was authorized to draw up to $60 billion. Sept.
29 Federal Reserve Press Release, supra note 482.
484 On October 14, 2008 the Federal Reserve removed the cap on the amount the Bank of Japan (BOJ) could draw on the swap line. Board
of
Governors
of
the
Federal
Reserve
System,
Press
Release
(Oct.
14,
2008)
(online
at
www.federalreserve.gov/newsevents/press/monetary/20081014d.htm). Prior to removing the cap, the BOJ was authorized to draw up to $120 billion. Sept. 29 Federal Reserve Press Release, supra note 482.
485 On October 13, 2008, the Federal Reserve removed the cap on the amount the Bank of England (BOE) could draw on the swap line.
Sept. 29 Federal Reserve Press Release, supra note 482. Prior to removing the cap, the BOE was authorized to draw up to $80 billion. Sept.
29 Federal Reserve Press Release, supra note 482.

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101
ANNEX II: CASE STUDY: THE FOREIGN BENEFICIARIES
OF PAYMENTS MADE TO ONE OF AIG’S DOMESTIC
COUNTERPARTIES
The interconnected nature of the international financial system
and the ease with which cash flows across national boundaries
have been noted throughout this report. Although the Panel cannot
obtain information about the ultimate recipients of all TARP payments, the Panel now has a more complete picture of the dealings
between AIG, recipient of one of the largest U.S. rescue packages,
and Goldman Sachs. These dealings provide a useful example of
the way in which a payment to a U.S. company, which fulfills its
contractual obligations to its U.S. counterparties, ultimately ends
up in the hands of institutions all around the world. While the information below relates exclusively to Goldman and its relationships with foreign counterparties, it is likely that many other beneficiaries of government rescue efforts had similar counterparty relationships. Accordingly, it is also likely that these relationships produced significant indirect benefits for foreign institutions.
As the following data make clear, taxpayer aid to AIG became
aid to Goldman, and aid to Goldman became aid to a number of
domestic and foreign investors. In some cases, the aid was in the
form of repayment in full of obligations that, without government
help, could have ended in default. In other cases, the aid was in
the form of guarantees that other parties did not have to pay because the government prevented any defaults.
AIG provided credit default swap (CDS) protection on a number
of collateralized debt obligations (CDOs), which were the source of
continuing collateral demands on AIG. As part of the AIG rescue,
the CDOs underlying the CDSs were acquired by a special-purpose
vehicle primarily funded by the government, Maiden Lane III. The
entities set out in the table below held CDSs written by Goldman
against the CDOs that were eventually acquired by Maiden Lane
III. In order to sell those CDOs to Maiden Lane III, in most cases
Goldman had to obtain them from these counterparties, so the
Maiden Lane III funds effectively flowed to Goldman’s counterparties.486 Nearly all of these second-level counterparties, both by
number and dollar amount, were non-U.S. institutions, with European banks making up by far the largest contingent.
FIGURE 23: GOLDMAN’S COUNTERPARTIES TO MAIDEN LANE III CDOs
[Dollars in millions]
Total Funds
Received from
ML3

Institution

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DZ Bank ..........................................................................................................................................................
Banco Santander Central Hispano SA ...........................................................................................................
Rabobank Nederland-London Branch .............................................................................................................
ZurcherKantonalbank ......................................................................................................................................
Dexia Bank SA ................................................................................................................................................
BGI INV FDS GSI AG .......................................................................................................................................
Calyon-Cedex Branch .....................................................................................................................................
The Hongkong & Shanghai Banking Corporation ..........................................................................................

$2,504
1,544
852
998
865
633
663
631

486 June Oversight Report, supra note 10, at 110–11, 174 n.668 (discussing that detailed information was not available on the topic of ‘‘counterparties’ counterparties’’ as beneficiaries of the
government rescue).

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102
FIGURE 23: GOLDMAN’S COUNTERPARTIES TO MAIDEN LANE III CDOs—Continued
[Dollars in millions]
Total Funds
Received from
ML3

Institution

Depfa Bank Plc ..............................................................................................................................................
Skandinaviska Enskilda Bankensweden ........................................................................................................
Sierra Finance ................................................................................................................................................
PGGM ..............................................................................................................................................................
Natixis .............................................................................................................................................................
Zulma Finance ................................................................................................................................................
Stoneheath ......................................................................................................................................................
Hospitals of Ontario Pension Plan .................................................................................................................
Venice Finance ...............................................................................................................................................
KBC Asset Management NVD Star Finance ...................................................................................................
MNGD Pension Funds LTD ..............................................................................................................................
Shackleton Re Limited ...................................................................................................................................
Infinity finance plc .........................................................................................................................................
Legal & General Assurance ............................................................................................................................
Barclays ..........................................................................................................................................................
GSAM Credit CDO LTD ....................................................................................................................................
Signum Platinum ............................................................................................................................................
Lion Capital Global Credit I LTD ....................................................................................................................
Kommunalkredit Int Bank ..............................................................................................................................
Credit Linked Notes LTD .................................................................................................................................
Ocelot CDO I PLC ...........................................................................................................................................
Hoogovens PSF ST ..........................................................................................................................................
Hypo Public Finance Bank .............................................................................................................................
Royal Bank of Scotland ..................................................................................................................................

692
365
322
440
399
661
300
273
363
308
244
128
375
87
102
84
102
16
24
14
9
46
10
5

Total ......................................................................................................................................................

14,059

The table below identifies 87 entities that benefited indirectly
from government assistance provided to AIG. Each of these entities
wrote credit default swap protection on AIG for Goldman. Of these
87 entities, 43 are foreign. When the government intervened to prevent AIG from failing, these foreign entities were not required to
make payments on that protection, which they would have been obligated to do in the event of an AIG default.487 Foreign hedge providers made up 43.4 percent of the total, by dollar amount, with
European banks and other financial institutions being most heavily
represented.
FIGURE 24: GOLDMAN COUNTERPARTIES’ EXPOSURE TO AN AIG DEFAULT
Net Exposure
to Goldman on
AIG CDSs

Institution

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Citibank, N.A. .................................................................................................................................................
Credit Suisse International ............................................................................................................................
Morgan Stanley Capital Services Inc. ............................................................................................................
JPMorgan Chase Bank N.A. London Branch ..................................................................................................
Lehman Brothers Special Financing, Inc. ......................................................................................................
Swiss Re Financial Products Corporation ......................................................................................................
PIMCO Funds Total Return Fund ....................................................................................................................
Deutsche Bank AG London Branch ................................................................................................................
KBC Financial Products Cayman Islands Ltd. ...............................................................................................
Royal Bank of Canada London Branch ..........................................................................................................
PIMCO Funds Low Duration Fund ..................................................................................................................

$402,246,000
309,730,000
242,500,000
216,040,000
174,780,082
132,100,000
120,000,000
87,246,700
84,650,000
76,000,000
70,200,000

487 June Oversight Report, supra note 10, at 111, 174 n.669 (discussing that detailed information was not available on the topic of hedge providers as ‘‘indirect beneficiaries’’ of the government rescue).

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103
FIGURE 24: GOLDMAN COUNTERPARTIES’ EXPOSURE TO AN AIG DEFAULT—Continued
Net Exposure
to Goldman on
AIG CDSs

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Institution

Société Générale .............................................................................................................................................
Wachovia Bank, National Association ............................................................................................................
Natixis Financial Products Inc. ......................................................................................................................
Merrill Lynch International .............................................................................................................................
Natixis .............................................................................................................................................................
Bank of Nova Scotia, The ..............................................................................................................................
Credit Agricole Corporate and Investment Bank ...........................................................................................
BNP Paribas ...................................................................................................................................................
Dresdner Bank AG London Branch .................................................................................................................
Alphadyne International Master Fund, Ltd. ...................................................................................................
Bank of America, National Association .........................................................................................................
MBIA INC. .......................................................................................................................................................
Bank of Montreal London Branch ..................................................................................................................
Commerzbank Aktiengesellschaft ...................................................................................................................
Lyxor Starway SPC Lyxor Starway PFLO .........................................................................................................
Unicredit Bank AG ..........................................................................................................................................
Government of Singapore Investment Corporation PTE Ltd ..........................................................................
Banco Finantia SA ..........................................................................................................................................
Bank of Montreal Chicago Branch .................................................................................................................
Wicker Park CDO I, Ltd. .................................................................................................................................
Bluecorr Fund, LLC .........................................................................................................................................
Suttonbrook Capital Portfolio LP ....................................................................................................................
Citibank, N.A. London Branch ........................................................................................................................
BlueMountain Timberline Ltd. ........................................................................................................................
PIMCO Global Credit Opportunity Master Fund LDC PIMCO ..........................................................................
AQR Absolute Return Master Account L.P. ....................................................................................................
Moore Macro Fund, L.P. ..................................................................................................................................
Norges Bank ...................................................................................................................................................
JPMorgan Chase Bank, National Association ................................................................................................
Fortis Bank .....................................................................................................................................................
PIMCO Combined Alpha Strategies Master Fund LDC PIMCO .......................................................................
WestLB AG London Branch .............................................................................................................................
AQR Global Asset Allocation Master Account, L.P. ........................................................................................
Citadel Equity Fund Ltd. ................................................................................................................................
Allianz Global Investors KAG Allianz PIMCO Mobil Fonds .............................................................................
Barclay’s Bank plc .........................................................................................................................................
PIMCO Combined Alpha Strategies Master Fund LDC PIMCO .......................................................................
Arrowgrass Master Fund Ltd ..........................................................................................................................
Mizuho International plc ................................................................................................................................
Rabobank International London Branch ........................................................................................................
Standard Chartered Bank Singapore Branch ................................................................................................
Millennium Park CDO I, Ltd. ..........................................................................................................................
III Relative Value Credit Strategies Hub Fund Ltd. .......................................................................................
Internationale KAG mbH INKA B ....................................................................................................................
Goldentree Master Fund, Ltd. .........................................................................................................................
National Bank of Canada ..............................................................................................................................
Loomis Sayles Multistrategy Master Alpha, Ltd. ...........................................................................................
PIMCO Variable Insurance Trust Low Duration Bond Portfolio ......................................................................
Tiden Destiny Master Fund Limited ...............................................................................................................
Stichting Pensioenfonds Oce ..........................................................................................................................
Intesa Sanpaolo SpA ......................................................................................................................................
PIMCO Global Credit Opportunity Master Fund LDC PIMCO ..........................................................................
DCI Umbrella Fund plc Diversified Cred Investments FD Three ...................................................................
Halbis Distressed Opportunities Master Fund LTD. .......................................................................................
UBS Funds, The, UBS Dynamic Alpha Fund ..................................................................................................
Goldentree Master Fund II, Ltd. .....................................................................................................................
RP Rendite Plus Multi Strategie Investment Grade MSIG .............................................................................
Cairn Capital Structured Credit Master Fund Limited ..................................................................................
Allianz Global Inv KAG mbH DBI PIMCO Global Corp Bd Fds .......................................................................
PIMCO Funds: Pacific Investment Mgmt Serfloating Income Fd ...................................................................
UBS Dynamic Alpha Strategies Master Fund Ltd. .........................................................................................
Allianz Global Investors KAG mbH DIT FDS Victoria DFS ..............................................................................
PIMCO Funds: Global Investors Series plc Low Ave Duration Fd ..................................................................

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62,280,000
60,214,000
56,345,000
41,435,000
37,064,400
36,165,000
34,800,000
31,500,000
29,110,000
27,771,000
25,070,000
25,000,000
25,000,000
25,000,000
22,729,000
20,000,000
20,000,000
20,000,000
18,000,000
17,500,000
15,600,000
15,000,000
12,500,000
12,000,000
12,000,000
11,750,000
10,000,000
10,000,000
9,246,000
8,000,000
8,000,000
8,000,000
7,750,000
7,400,000
7,000,000
6,090,000
6,000,000
5,500,000
5,400,000
5,000,000
5,000,000
5,000,000
5,000,000
4,500,000
4,480,000
3,000,000
3,000,000
2,700,000
2,500,000
2,450,000
2,000,000
2,000,000
2,000,000
2,000,000
1,250,000
1,180,000
1,100,000
1,000,000
1,000,000
800,000
750,000
600,000
600,000

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104
FIGURE 24: GOLDMAN COUNTERPARTIES’ EXPOSURE TO AN AIG DEFAULT—Continued
Net Exposure
to Goldman on
AIG CDSs

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Institution

VerDate Mar 15 2010

Internationale Kapitalanlagegesellschaft mbH PKMF INKA ...........................................................................
BFT Vol 2 ........................................................................................................................................................
PIMCO Funds Low Duration Fund II ...............................................................................................................
Goldentree Credit Opportunities Master Fund, Ltd. .......................................................................................
Embarq Savings Plan Master Trust ...............................................................................................................
Russell Investment Company Russell Short Duration Bond Fund ................................................................
PIMCO Funds Low Duration Fund III ..............................................................................................................
Equity Trustees Limited PIMCO Australian Bond Fund .................................................................................
Public Education Employee Retirement System of Missouri .........................................................................
PIMCO Bermuda Trust II PIMCO JGB Floater Foreign Strategy Fd ................................................................
D.B. Zwirn Special Opportunities Fund, Ltd. .................................................................................................
PIMCO Bermuda Trust II PIMCO Bermuda JGB Floater US Stra Fd ..............................................................
Frank Russell Investment Company Fixed Income II Fund ............................................................................

550,000
500,000
500,000
340,000
300,000
300,000
300,000
300,000
200,000
200,000
101,500
100,000
100,000

Total ......................................................................................................................................................

$2,790,413,682

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105
SECTION TWO: TARP UPDATES SINCE LAST REPORT
A. TARP Repayments
In July 2010, Fulton Financial Corporation and Green City Bancshares, Inc. fully repurchased their preferred shares under CPP.
Treasury received $377 million in repayments from these two companies. On July 14, 2010, Green City Bancshares also repurchased
$33,000 in preferred shares that Treasury held from warrants that
were already exercised. A total of 20 banks have fully repaid $16.5
billion in preferred equity CPP investments in 2010. As of July 30,
2010, 78 institutions have redeemed their CPP investments.
B. CPP Warrant Dispositions
As part of its investment in senior preferred stock of certain
banks under the CPP, Treasury received warrants to purchase
shares of common stock or other securities in those institutions. In
July, Discover Financial Services and Bar Harbor Bancshares repurchased their warrants from Treasury for $172.3 million in total
proceeds. The Panel’s best valuation estimate at repurchase date
for Discover and Bar Harbor warrants were $166 million and
$518,511 respectively. As of July 30, 2010, the warrants from 52
banks have been liquidated. Of these banks, 39 have repurchased
their warrants; Treasury sold the warrants for 13 institutions at
auction.
C. Conference on the Future of Housing Finance Reform
On July 27, 2010, President Obama announced plans to hold the
‘‘Conference on the Future of Housing Finance’’ on August 17,
2010. The conference will be the culmination of a series of events
meant to gather public input on a housing finance reform proposal,
which is planned to be sent to Congress in January 2011. In April
2010, Treasury and the U.S. Department of Housing and Urban
Development issued a series of questions for public comment regarding plans for a more stable housing financing system. Among
the topics addressed in the questions were federal housing finance
objectives in the context of broader housing policy objectives, the
role of the federal government in a housing financing system, and
suggested improvements to the current financing system.

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D. Community Development Capital Initiative
On July 30, 2010, two companies exchanged their CPP investments for equivalent investments under the Community Development Capital Initiative (CDCI). These were the first two transactions under the program. University Financial Corp., Inc., which
received $11.9 million for subordinated debentures from CPP, received an additional $10.2 million from CDCI upon its entrance
into the program. Guaranty Financial Corporation received $14
million for subordinated debentures from CPP; however, Treasury
did not make an additional investment in this bank as part of the
exchange. As of July 30, 2010, the total CDCI investment amount
was $36.1 million.

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The CDCI was announced on February 3, 2010 as a means of
providing lower-cost capital to Community Development Financial
Institutions (CDFIs) that lend to small businesses in the country’s
economically hard-hit areas. As participating CDFIs, Guaranty Financial and University Financial receive capital investments at a
2 percent initial dividend rate. The rate will increase to 9 percent
after eight years if there are any outstanding investments in the
participating institution. Under the CPP, banks pay an initial 5
percent dividend rate, which increases to 9 percent after only five
years.
E. HFA Hardest Hit Fund Program
On March 29, 2010, Treasury announced a second round of HFA
Hardest Hit Fund assistance with a focus on the states with large
concentrations of people living in economically distressed areas. On
August 3, 2010, the Administration approved the use of $600 million in ‘‘Hardest Hit Fund’’ foreclosure-prevention funding by the
Housing Finance Agencies (HFAs). The state HFAs will receive the
following amounts from the HFA Hardest Hit Fund: North Carolina ($159 million), Ohio ($172 million), Oregon ($88 million),
Rhode Island ($43 million), and South Carolina ($138 million). Programs in these states aim to provide mortgage assistance for the
unemployed or underemployed, as well as to assist in reduction or
settlement of second liens, payment for arrearages, and facilitation
of short sales and/or deeds-in-lieu to avoid foreclosure. Last month,
the Administration approved $1.5 billion in HFA funding for the
top five states most affected by the decline in housing prices.
F. Metrics

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Each month, the Panel’s report highlights a number of metrics
that the Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for the Troubled Asset Relief Program (SIGTARP), and the Financial Stability
Oversight Board, consider useful in assessing the effectiveness of
the Administration’s efforts to restore financial stability and accomplish the goals of EESA. This section discusses changes that have
occurred in several indicators since the release of the Panel’s July
report and includes two additional indicators that aid in understanding the international aspects of the financial crisis.
• Financial Indices. Since its post-crisis trough in April 2010,
the St. Louis Financial Stress Index has increased over elevenfold,
although it has fallen by a third since the Panel’s July report.488
488 Federal Reserve Bank of St. Louis, Series STLFSI: Business/Fiscal: Other Economic Indicators (Instrument: St. Louis Financial Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/fred2/categories/98) (accessed Aug. 5, 2010). The index includes 18 weekly
data series, beginning in December 1993 to the present. The series are: effective federal funds
rate, 2-year Treasury, 10-year Treasury, 30-year-Treasury, Baa-rated corporate, Merrill Lynch
High Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-rated, 10-year
Treasury minus 3-month Treasury, Corporate Baa-rated bond minus 10-year Treasury, Merrill
Lynch High Yield Corporate Master II Index minus 10-year Treasury, 3-month LIBOR–OIS
spread, 3-month TED spread, 3-month commercial paper minus 3-month Treasury, the J.P. Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange Market Volatility
Index, Merrill Lynch Bond Market Volatility Index (1-month), 10-year nominal Treasury yield
minus 10-year Treasury Inflation Protected Security yield, and Vanguard Financials ExchangeTraded Fund (equities). The index is constructed using principal components analysis after the
data series are de-meaned and divided by their respective standard deviations to make them
comparable units. The standard deviation of the index is set to 1. For more details on the con-

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The recent trend suggests that financial stress continues moving
towards its long-run norm. The index has decreased over three
standard deviations from the starting date of EESA in October
2008, indicating better overall financial health since the initiation
of TARP.
FIGURE 25: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX

Volatility has decreased of late. The Chicago Board Options Exchange Volatility Index (VIX) has fallen about 25 percent since the
COP July report, although the level is still higher than its post-crisis low on April 12, 2010.

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Insert offset folio 139 here 57731A.012

struction of this index, see Federal Reserve Bank of St. Louis, National Economic Trends Appendix: The St. Louis Fed’s Financial Stress Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/NETJan2010Appendix.pdf) (accessed Aug. 5, 2010).
489 Data accessed through Bloomberg data service on August 5, 2010.

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FIGURE 26: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX 489

108
1. Interest Rates and Spreads
• LIBOR Rates. As of August 6, 2010, the 3-month and 1month London Interbank Offer Rates (LIBOR), the prices at
which banks lend and borrow from each other, were 0.411 and
0.293, respectively. Although they had increased significantly
in the three preceding months, there has been a slight easing
in these rates since the Panel’s July Report. This may reflect
the results of the European bank stress test. Over the longer
term, rates remain heightened relative to pre-crisis levels.490
FIGURE 27: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF AUGUST 6, 2010)
Current Rates
(as of 8/6/2010)

Indicator

3-Month LIBOR 491 .........................................................................
1-Month LIBOR 492 .........................................................................
491 Data
492 Data

Percent Change from Data
Available at Time of Last
Report (6/24/2010)

.411
.293

(15.5)
(23.4)

accessed through Bloomberg data service on August 3, 2010.
accessed through Bloomberg data service on August 3, 2010.

Since the Panel’s July report, interest rate spreads have generally fallen slightly. Thirty-year mortgage interest rates and 10year Treasury bond yields have both declined recently and the conventional mortgage spread, which measures the 30-year mortgage
rate over 10-year Treasury bond yields, has fallen very slightly
since late June as well.493
The TED spread, which serves as an indicator for perceived risk
in the financial markets, fell slightly since June as compared to
nearly doubling over the month of May.494 The LIBOR–OIS spread
reflects the health of the banking system. While it increased over
threefold from early April to July, it has fallen by almost a third
since peaking in mid-July.495 Decreases in the LIBOR–OIS spread
and the TED spread suggest that hesitation among banks to lend
to counterparties is receding.
The interest rate spread for AA asset-backed commercial paper,
which is considered mid-investment grade, has fallen by about
fourteen percent since the Panel’s July report. The interest rate
spread on A2/P2 commercial paper, a lower grade investment than
AA asset-backed commercial paper, has fallen by over a quarter
since the Panel’s July report.

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490 Data

accessed through Bloomberg data service on August 3, 2010.
493 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release
H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency:
Weekly)
(online
at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (hereinafter ‘‘Federal Reserve Statistical Release H.15’’) (accessed Aug. 5,
2010).
494 Federal Reserve Bank of Minneapolis, Measuring Perceived Risk—The TED Spread (Dec.
2008) (online at www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4120).
495 Data accessed through Bloomberg data service on Aug. 5, 2010.

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109
FIGURE 28: INTEREST RATE SPREADS
Current Spread
(as of 7/31/2010)

Indicator

Conventional mortgage rate spread 496 ..........................................................
TED Spread (basis points) ..............................................................................
Overnight AA asset-backed commercial paper interest rate spread 497 ........
Overnight A2/P2 nonfinancial commercial paper interest rate spread 498 ....

Percent Change
Since Last Report
(7/1/2010)

1.52
26.41
0.11
0.19

(1.9)
(27.3)
(14.1)
(28.1)

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496 Federal Reserve Statistical Release H.15, supra note 493; 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 10-Year,
Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Aug. 5, 2010).
497 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
AA
Asset-Backed
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Aug. 5, 2010); Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Aug. 5, 2010). In order to provide a more
complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month.
498 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data
Download
Program
(Instrument:
A2/P2
Nonfinancial
Discount
Rate,
Frequency:
Daily)
(online
at
www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Aug. 5, 2010). In order to provide a more complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month.

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110
FIGURE 29: TED SPREAD 499

FIGURE 30: LIBOR-OIS SPREAD 500

500 Data

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499 Data

accessed through Bloomberg data service on Aug. 3, 2010.
accessed through Bloomberg data service on Aug. 6, 2010.

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• Corporate Bond Spread. The spread between Moody’s Baa
Corporate Bond Yield Index and 30-year constant maturity
U.S. Treasury Bond yields doubled from late April to mid-June.
However, since mid-June, the trend has reversed and the
spread has fallen about fifteen percent. This spread indicates
the difference in perceived risk between corporate and government bonds, and a declining spread could indicate waning concerns about the riskiness of corporate bonds.

111
FIGURE 31: MOODY’S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
YIELD 501

501 Federal Reserve Bank of St. Louis, Series DGS30: Selected Interest Rates (Instrument: 30Year Treasury Constant Maturity Rate, Frequency: Daily) (online at research.stlouisfed.org/
fred2/) (accessed June 28, 2010). Corporate Baa rate data accessed through Bloomberg data
service on June 25, 2010.
502 RealtyTrac,
Foreclosure Activity Press Releases (Nov. 13 2008) (online at
www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&itemid=5420).
503 RealtyTrac,
Foreclosure Activity Press Releases (June 30, 2010) (online at
www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&itemid=9438).
504 Sales of new homes in May were 276,000, the lowest rate since 1963. U.S. Census Bureau
and U.S. Department of Housing and Urban Development, New Residential Sales in June 2010
(July 26, 2010) (online at www.census.gov/const/newressales.pdf); U.S. Census Bureau, New Residential Sales—New One-Family Houses Sold (online at www.census.gov/ftp/pub/const/
sold_cust.xls) (accessed Aug. 10, 2010).
505 Most recent data available for May 2010. See Standard and Poor’s, S&P/Case-Shiller
Home Price Indices, (Instrument: Case-Shiller 20-City Composite Seasonally Adjusted, Frequency: Monthly) (online at www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff-p-us---) (hereinafter ‘‘S&P/Case-Shiller Home Price Indices’’)
(accessed Aug. 5, 2010); Federal Housing Finance Agency, U.S. and Census Division Monthly
Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/webfiles/
15669/MonthlyIndex_Jan1991_to_Latest.xls) (accessed Aug. 5, 2010) (hereinafter ‘‘FHFA Housing Price Index Data’’). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs. See Standard and Poor’s, S&P/Case-Shiller Home Price Indices and Seasonal Adjustment, S&P Indices: Index Analysis (Apr. 2010).

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• Housing Indicators. Foreclosure actions, which consist of default notices, scheduled auctions, and bank repossessions,
dropped 2 percent in May to 313,841. This metric is over 12
percent above the foreclosure action level at the time of the
EESA enactment.502 Foreclosure sales accounted for 31 percent
of all residential sales in the first quarter of 2010.503 Sales of
new homes rose slightly to 330,000, but remain extremely
low.504 Both the Case-Shiller Composite 20-City Composite as
well as the FHFA Housing Price Index increased slightly in
May 2010. The Case-Shiller and FHFA indices are 6 percent
and 3 percent, respectively, below their levels of October
2008.505
Additionally, Case-Shiller futures prices indicate a market expectation that home-price values will stay constant or decrease

112
through the end of 2010.506 These futures are cash-settled to a
weighted composite index of U.S. housing prices, as well as to specific markets in 10 major U.S. cities, and are used both to hedge,
by businesses whose profits and losses are related to any area of
the housing industry, and to balance portfolios by businesses seeking exposure to an uncorrelated asset class. As such, futures prices
are a composite indicator of market information known to date and
can be used to indicate market expectations for home prices.
FIGURE 32: HOUSING INDICATORS
Most Recent
Monthly Data

Indicator

Monthly foreclosure actions 507 ......................................
S&P/Case-Shiller Composite 20 Index 508 ......................
FHFA Housing Price Index 509 .........................................

313,841
147.3
196.0

Percent Change
from Data Available
at Time of Last
Report

Percent
Change Since
October 2008

(1.9)
1.1
0.5

12.3
(5.7)
(3.0)

507 RealtyTrac,

Foreclosures (online at www.realtytrac.com/home/) (accessed Aug. 6, 2010). Most recent data available for June 2010.
Home Price Indices, supra note 505. Most recent data available for May 2010.
Housing Price Index Data, supra note 505. Most recent data available for May 2010.

508 S&P/Case-Shiller
509 FHFA

FIGURE 33: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES 510

506 Data accessed through Bloomberg data service on Aug. 5, 2010. The Case-Shiller Futures
contract is traded on the CME and is settled to the Case-Shiller Index two months after the
previous calendar quarter. For example, the February contract will be settled against the spot
value of the S&P Case-Shiller Home Price Index values representing the fourth calendar quarter
of the previous year, which is released in February one day after the settlement of the contract.
Note that most close observers believe that the accuracy of these futures contracts as forecasts
diminishes the farther out one looks.
510 All data normalized to 100 at January 2000. Futures data accessed through Bloomberg
data service on August 6, 2010. S&P/Case-Shiller Home Price Indices, supra note 505.

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• International Indicators. The crisis, while originating in the
U.S. housing market, spread rapidly through the international
financial system and resulted in recessions of varying degrees
worldwide. While developing countries’ growth rates fell steeply but never dropped below zero, the U.S. contraction was of
less depth and less duration than those of the Euro area,
United Kingdom, and Japan.

113
FIGURE 34: PERCENT CHANGE IN GDP, CONSTANT PRICES 511

Foreign investment in the United States was at historically high
levels pre-crisis. However, as the risk associated with U.S.
subprime assets became known in the summer of 2007, this reversed drastically, with record outflow numbers being reached in
Q1 2009.
FIGURE 35: FOREIGN ASSETS IN THE UNITED STATES, NET CAPITAL FLOW 512

G. Financial Update

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511 International Monetary Fund, WEO Database: April 2010 (Instrument: Gross Domestic
Product, Constant Prices, Percent Change, Frequency: Annual) (online at www.imf.org/external/
pubs/ft/weo/2010/01/weodata/index.aspx) (accessed Aug. 10, 2010).
512 Federal Reserve Bank of St. Louis, Series BOPIN: Foreign Assets in the U.S.: Net, Capital
Inflow {+} (Instrument: U.S. International Transactions, Frequency: Quarterly) (online at
www.research.stlouisfed.org) (accessed Aug. 10, 2010).

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Each month, the Panel summarizes the resources that the federal government has committed to economic stabilization. The following financial update provides: (1) an updated accounting of the
TARP, including a tally of dividend income, repayments and warrant dispositions that the program has received as of June 30,

114
2010; and (2) an updated accounting of the full federal resource
commitment as of July 28, 2010.
1. The TARP
a. Program Snapshot 513
As of July 30, 2010, Treasury was committed to spend up to $475
billion of TARP funds through an assortment of programs. Of this
amount, $393.8 billion had been spent under the $475 billion 514
ceiling and $203.9 billion in TARP funds have been repaid. There
have also been $5.8 billion in losses, leaving $184.1 billion in TARP
funds currently outstanding.
During the month of July, Treasury received $377.1 million in
full repayments from Fulton Financial Corporation and Green City
Bancshares for its CPP investments. To date, a total of 78 institutions have fully repurchased their CPP preferred shares. Of the institutions that have fully repaid, 39 repurchased their warrants for
common shares that Treasury received in conjunction with its preferred stock investments. Treasury sold the warrants for common
shares for 13 other institutions at auction.
In total, $22.9 billion in income has been earned by the TARP
through warrant repurchases, additional notes, dividends and interest paid on investments. For further information on TARP profit
and loss, please see Figure 37.
b. Program Updates

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Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. As part of this legislation, the ceiling on the amount of TARP funds that can be allocated
to programs was reduced from $698.7 billion to $475 billion. While
a large portion of the savings can be taken from unallocated funds,
there were several notable program changes. The Small Business
Lending Fund (SBLF), a proposed $30 billion TARP program that
was never launched, was eliminated. The Term Asset-Backed Securities Loan Facility (TALF) program was reduced $15.7 billion from
the $20 billion committed, leaving $4.3 billion in TARP funds com513 Treasury Transactions Report, supra note 313; U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of June 30, 2010 (July 15, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/
June%202010%20Dividends%20and%20Interest%20Report.pdf) (hereinafter ‘‘Treasury Cumulative Dividends and Interest Report’’).
514 The original $700 billion TARP ceiling was reduced by $1.3 billion as part of the ‘‘Helping
Families Save Their Homes Act of 2009.’’ The authorized total commitment level was later reduced to $475 billion as part of the Frank-Dodd Financial Reform Bill that was signed into law
on July 21, 2010. 12 U.S.C. § 5225(a)–(b); Helping Families Save Their Homes Act of 2009, Pub.
L. No. 111–22, § 402(f) (reducing by $1.26 billion the authority for the TARP originally set under
EESA at $700 billion). On June 30, 2010, the House & Senate Conference Committee agreed
to reduce the amount authorized under the TARP from $700 billion to $475 billion as part of
the Dodd-Frank Wall Street Reform and Consumer Protection Act. See Dodd-Frank Wall Street
Reform and Consumer Protection Act, supra note 162, at § 1302. On July 21, 2010, President
Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. White
House, Remarks by the President at Signing of Dodd-Frank Wall Street Reform and Consumer
Protection Act (online at www.whitehouse.gov/the-press-office/remarks-president-signing-doddfrank-wall-street-reform-and-consumer-protection-act).

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115
mitted to the TALF.515 The ceiling for the Public-Private Investment Program (PPIP) was reduced by $8 billion, leaving $22.4 billion in TARP funds committed to the program. Treasury also reduced the $48.8 billion in TARP funds dedicated to foreclosure
mitigation efforts by $3.2 billion. For further detail on TARP reductions, please see Figure 36 below.
TARP Foreclosure Mitigation Efforts
Treasury has reduced its intended total allocation for the foreclosure mitigation programs by only $3.2 billion, from $48.8 billion
to $45.6 billion. The revised program total of $45.6 billion is comprised of $11 billion for the FHA Refinance Program, $4.1 billion
for the HFA Hardest Hit Fund and $30.6 billion for the remaining
Making Home Affordable (MHA) programs.516
Citigroup Stock Sale
On July 23, 2010, the Treasury Department authorized Morgan
Stanley, as its sales agent, to sell another block of up to 1.5 billion
shares of Citigroup stock that Treasury received through its CPP
investment in Citigroup. Treasury first sold 1.5 billion shares of
Citigroup stock between April 26 and May 26, 2010 at a weighted
price of $4.12. During the second sale period, May 26 to June 30,
2010, only 1.1 billion of the 1.5 billion shares authorized for sale
were sold at a weighted price of $3.90. A third selling period
opened on July 23, 2010. Treasury intends to sell another 1.5 billion shares by September 30, 2010. Thus far, Treasury has earned
a 24 percent premium on the Citigroup shares it has sold at market.517

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c. Income: Dividends, Interest, Repayments, and Warrant Sales
As of July 30, 2010, a total of 78 institutions have completely repurchased their CPP preferred shares. Of these institutions, 39
have repurchased their warrants for common shares that Treasury
received in conjunction with its preferred stock investments; Treasury sold the warrants for common shares for 13 other institutions
at auction. Bar Harbor Bancshares and Discover Financial Services
repurchased their warrants for $250,000 and $172 million, respectively. In addition, Treasury receives dividend payments on the
preferred shares that it holds, usually five percent per annum for
the first five years and nine percent per annum thereafter.518 To
date, Treasury has received approximately $22.8 billion in net in515 The TARP’s commitment to the TALF program has been 1:10 ratio of the Federal Reserve
obligation. The Treasury is responsible for reimbursing the Federal Reserve for loan-losses associated with the program. At the time of the TARP program reductions, $43 billion in loans were
outstanding under the TALF program. Therefore, as of August 10, 2010 the TARP commitment
to the TALF program was $4.3 billion.
516 The $4.4 billion reduction from the $50 billion previously available to HAMP includes $1.3
billion in funds allocated for the ‘‘Helping Families Save Their Homes Act of 2009’’ (a reduction
taken in May 2009 which also reduced the TARP ceiling from $700 billion to $698.7 billion) and
$3.1 billion in HAMP taken in July 2010 in conjunction with the Dodd-Frank Wall Street Reform and Consumer Protection Act’s imposition of a new $475 billion TARP ceiling.
517 As of July 30, 2010, 2.6 million shares of Treasury’s Citigroup stock have been sold with
net proceeds of $2.03 billion as compared to the $8.5 billion cost to Treasury for these shares.
Treasury Transactions Report, supra note 313.
518 See, e.g., Securities Purchase Agreement for Public Institutions, supra note 306.

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116
come from warrant repurchases, dividends, interest payments and
other considerations deriving from TARP investments.519
d. TARP Accounting
FIGURE 36: TARP ACCOUNTING (AS OF JULY 30, 2010)
[Dollars in billions] xi

Program

Capital Purchase
Program (CPP)
Targeted Investment Program
(TIP) ...............
Asset Guarantee
Program (AGP)
AIG Investment
Program
(AIGIP) ............
Auto Industry Financing Program (AIFP) ....
Auto Supplier
Support Program
(ASSP) xvii ......
Term
Asset-Backed
Securities Loan
Facility (TALF)
Public-Private Investment Program (PPIP) xx
Small Business
Lending Fund
(SBLF) ............
SBA 7(a) Securities Purchase
Home Affordable
Modification
Program
(HAMP) ...........
Hardest Hit Fund
(HHF) ..............
FHA Refinance
Program .........
Community Development
Capital Initiative (CDCI) .....
Total ..........

Original
Program
Commitment

Dodd-Frank
Program
Adjustments

Current
Maximum
Amount
Available

Total
Repayments/
Reduced
Exposure

Actual
Funding

$204.9

$0

$204.9

$204.9

40.0

0

40.0

Funding
Currently
Outstanding

Total
Losses

Funding
Available

xii ($147.3)

xiii ($2.3)

$55.3

$0

40.0

(40.0)

0

0

0

0

0

0

5.0

0

5.0

5.0

xiv (5.0)

69.8

0

69.8

xv 49.1

0

0

49.1

20.7

81.3

0.1

81.4

81.3

(10.8)

xvi (3.5)

67

0

3.5

(3.1)

0.4

0.4

(0.4)

0

0

0

20.0

(15.7)

xviii 4.3

xix 0.1

0

0

0.1

4.2

30.4

(8.0)

22.4

11.0

xxi (0.4)

0

10.6

11.8

30.0

xxii (30.0)

N/A

N/A

N/A

N/A

N/A

N/A

1

(0.6)

xxiii 0.4

0.23

0

0

0.23

0.17

xxiv 46.7

xxv (16.2)

30.5

0.25

0

0

0.25

30.25

2.1

2.0

xxvi 4.1

1.5

0

0

1.5

2.6

0

xxvii 11.0

11.0

0

0

0

0

11

0.8

0
($60.5)

xxviii 0.8

0.04
393.82

0
(203.9)

0
(5.8)

0.04
184.12

0.76
81.48

xxix 535.5

$475

rfrederick on DSKD9S0YB1PROD with HEARING

xi U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending July 30, 2010 (Aug. 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xii Total amount repaid under CPP includes $8.5 billion Treasury received as part of its sales of Citigroup common stock. As of July 30,
2010, Treasury has sold 2.6 billion Citigroup common shares for $10.5 billion in gross proceeds. In June 2009, Treasury exchanged $25 billion
in Citigroup preferred stock for 7.7 billion shares of the company’s common stock at $3.25 per share. Therefore, Treasury received $2 billion
in net proceeds from the sale of Citigroup common stock. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for
the
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf). Total CPP repayments also
includes amounts repaid by institutions that exchanged their CPP investments for investments under the Community Development Capital Initiative. For more details on the companies who are now participating in the CDCI, see footnote xviii.

519 Treasury Cumulative Dividends and Interest Report, supra note 513; Treasury Transactions Report, supra note 313. Treasury also received an additional $1.2 billion in participation
fees from its Guarantee Program for Money Market Funds.

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rfrederick on DSKD9S0YB1PROD with HEARING

xiii Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1
million), as losses on the Transactions Report. Therefore, Treasury’s net current CPP investment is $55.3 billion due to the $2.3 billion in
losses thus far. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug.
3, 2010) (online at www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xiv Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available, Treasury did not receive a repayment in the same sense as with other investments. Treasury did receive other income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 36.
xv AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn down $7.54 billion of the $29.8 billion
made available on April 17, 2009. This figure also reflects $1.6 billion in accumulated but unpaid dividends owed by AIG to Treasury due to
the restructuring of Treasury’s investment from cumulative preferred shares to non-cumulative shares. American International Group, Inc., Form
10–K
for
the
Fiscal
Year
Ending
December
31,
2009,
at
45
(Feb.
26,
2010)
(online
at
www.sec.gov/Archives/edgar/data/5272/000104746910001465/a2196553z10-k.htm); U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions
Report
for
Period
Ending
July
30,
2010,
at
20
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xvi The $1.9 billion settlement payment represents a $1.6 billion loss on Treasury’s Chrysler Holding Investment. This amount is in addition
to losses connected to the $1.9 billion loss from the $4.1 billion debtor-in-possession credit facility, or Chrysler DIP Loan. U.S. Department of
the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of Original Chrysler Loan (May 17, 2010) (online at
www.financialstability.gov/latest/pr_05172010c.html).
xvii On April 5, 2010 and April 7, 2010, Treasury’s commitment to lend to the GM SPV and the Chrysler SPV respectively under the ASSP
ended. In total, Treasury received $413 million in repayments from loans provided by this program ($290 million from the GM SPV and $123
million from the Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this program. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending July 30, 2010, at 19 (Aug. 3, 2010) (online
at www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xviii The TARP’s commitment to the TALF program has been 1:10 ratio of the Federal Reserve obligation. The program was originally intended to be a $200 billion initiative, and the TARP was responsible for the first $20 billion in loan-losses, if any were incurred. The loan is
incrementally funded. At the time of the TARP program reductions, $43 billion in loans was outstanding under the TALF program. Therefore,
as of July 30, 2010, the TARP commitment to the TALF program was $4.3 billion, representing 10 percent of the total program size. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury to reduce TALF credit protection to $4.3 billion. Board of Governors of the Federal Reserve System, Federal Reserve announces agreement with the Treasury Department regarding a reduction of credit protection
provided
for
the
Term
Asset-Backed
Securities
Loan
Facility
(TALF)
(July
20,
2010)
(online
at
www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
xix As of July 28, 2010, Treasury provided $105 million to TALF LLC. This total includes accrued payable interest. Federal Reserve Bank of
New York, Factors Affecting Reserve Balances (H.4.1) (July 29, 2010) (online at www.federalreserve.gov/releases/h41/).
xx On July 19, 2010, Treasury released its third quarterly report on the Legacy Securities Public-Private Investment Partnership. As of June
30, 2010, the total value of assets held by the PPIP managers was $16 billion. Of this total, 85 percent was non-agency Residential
Mortgage-Backed Securities and the remaining 15 percent was Commercial Mortgage-Backed Securities. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program Update—Quarter Ended March 31, 2010 (Apr. 20, 2010) (online at
www.financialstability.gov/docs/External%20Report%20-%2003-10%20Final.pdf).
xxi As of July 30, 2010, $368 million in capital repayments had been made by PPIP participants. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010) (online at
financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxii As part of the TARP commitment reductions detailed by Treasury, the full $30 billion dedicated to the SBLF was eliminated and the
program no longer exists under the TARP. Panel staff discussions with Treasury staff.
xxiii In July, Treasury made $41 million in additional purchases under the SBA 7(a) Securities Purchase Program. As of July 30, 2010,
Treasury’s purchases totaled $206 million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
July
30,
2010,
at
19
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxiv The original funding amount allotted for the Home Affordable Modification Program (HAMP) was $50 billion. In May 2009, this amount
was reduced by $1.3 billion as part of the ‘‘Helping Families Save Their Homes Act of 2009.’’ Panel staff discussions with Treasury staff.
xxv The overall reduction in HAMP funding reflects $11 billion in funds redirected towards the FHA refinance program, $2 billion in funds
that will be used as part of the Hardest Hit Fund (HHF) expansion for unemployed borrowers, $1.3 billion in spending authority that was reallocated as part of the ‘‘Helping Families Save Their Homes Act of 2009,’’ (see footnote xiv) and $3.1 billion in general program reductions.
Panel staff discussions with Treasury staff.
xxvi As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, an additional $2 billion in TARP funds was committed to
mortgage assistance for unemployed borrowers. Panel staff discussions with Treasury staff.
xxvii Panel staff discussions with Treasury staff.
xxviii On July 30, 2010, Guaranty Capital Corporation and University Financial Corp, Inc. exchanged their subordinated debenture investments from the CPP for an equivalent investment amount under the Community Development Capital Initiative (CDCI). Treasury made an additional $10.2 million investment in University Financial Corp, Inc. as part of the company’s exchange. As of July 30, 2010, Treasury’s total
current investment under the CDCI is $36.1 million. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
Period
Ending
July
30,
2010,
at
19
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxix Last month, the Panel reported that committed funds under TARP were $520.3 billion. Treasury’s accounting for ‘‘total planned investments’’ as of June 30, 2010 was $536.6 billion. These two totals differ because the Panel’s accounting of Treasury commitments for Consumer and Business Lending Initiative programs included $20 billion for TALF, $15 billion for Unlocking SBA Lending, and $780 million for
the CDCI. Treasury recorded $20 billion for TALF, $30 billion for the Small Business Lending Fund, and $1 billion each for the CDCI and the
SBA 7(a) securities purchase program. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report—June 2010
(July 12, 2010) (online at financialstability.gov/docs/105CongressionalReports/June%202010%20105(a)%20Report_Final.pdf); Congressional
Oversight Panel, July Oversight Report: Small Banks in the Capital Purchase Program, at 112 (July 14, 2010) (online at
cop.senate.gov/documents/cop-071410-report.pdf).

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118
FIGURE 37: TARP PROFIT AND LOSS
[Dollars in millions]

TARP Initiative

Dividends xxx
(as of
6/30/10)

Total ....................................
CPP .....................................
TIP .......................................
AIFP .....................................
ASSP ...................................
AGP .....................................
PPIP ....................................
Bank of America Guarantee

$15,858
9,428
3,004
xxxv 3,060
–
366
–
–

Interest xxi
(as of
6/30/10)

$884
38
–
802
15
–
29
–

Warrant
Repurchases xxii
(as of
7/30/10)

Other
Proceeds
(as of
6/30/10)

$7,214
5,943
1,256
15
–
0
–
–

Losses xxiii
(as of
7/30/10)

$4,719
xxxiv 2,026

–
–
xxvi 101
xxxvii 2,234
xxxviii 82
xxxix 276

($5,822)
(2,334)
....................
(3,488)
....................
....................
....................
....................

Total

$22,853
15,101
4,260
389
116
2,600
110
276

xxx U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of June 30, 2010 (July 15, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/June%202010%20Dividends%20and%20Interest%20Report.pdf).
xxxi Id.
xxxii U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010)
(online at www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxiii Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses on the Transactions Report. A third institution, UCBH Holdings, Inc., received $299 million in TARP funds and is currently in
bankruptcy proceedings. Finally, as of May 26, 2010, the banking subsidiary of TARP recipient Midwest Banc Holdings, Inc. ($89.4 million)
was in receivership. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending July 30, 2010
(Aug. 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxiv This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. The net proceeds account for Treasury’s exchange in June 2009 of $25 billion in Citigroup preferred shares for 7.7 billion shares of the company’s common stock at $3.25 per
share. On May 26, 2010, Treasury completed the sale of 1.5 billion shares of Citigroup common stock at an average weighted price of $4.12
per share. On June 30, 2010, Treasury announced the sale of 1,108,971,857 additional shares of Citigroup stock at an average weighted price
of $3.90 per share. Treasury opened a third selling period on July 23, 2010, with plans to sell another 1.5 billion shares by September 30,
2010. As of July 30, 2010, Treasury has received $10.5 billion in gross proceeds from these sales. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxv This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred
shares. The dividend total also includes a $748.6 million senior unsecured note from Treasury’s investment in General Motors. Information
provided by Treasury.
xxxvi This represents the total proceeds from additional notes. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report
for
the
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxvii As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP,
Treasury received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks for trust preferred securities in June 2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving
Treasury with a $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. At the end of Citigroup’s participation in the FDIC’s TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxviii As of June 30, 2010, Treasury has earned $61.1 million in membership interest distributions from the PPIP. Additionally, Treasury has
earned $20.6 million in total proceeds following the termination of the TCW fund. U.S. Department of the Treasury, Cumulative Dividends and
Interest
Report
as
of
June
30,
2010
(July
15,
2010)
(online
at
financialstability.gov/docs/dividends-interest-reports/June%202010%20Dividends%20and%20Interest%20Report.pdf); U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xxxix Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never
reached an agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee
had been in place during the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal
Reserve, and $92 million to the FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America Corporation, Termination Agreement, at 1–2 (Sept. 21, 2009) (online at
www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-%20executed.pdf).

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e. Rate of Return
As of August 4, 2010, the average internal rate of return for all
public financial institutions that participated in the CPP and fully
repaid the U.S. government (including preferred shares, dividends,
and warrants) was 9.9 percent. The internal rate of return is the
annualized effective compounded return rate that can be earned on
invested capital.

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119
f. Warrant Disposition
FIGURE 38: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY
REPAID CPP FUNDS AS OF AUGUST 4, 2010

rfrederick on DSKD9S0YB1PROD with HEARING

Institution

Old National
Bancorp ......
Iberiabank Corporation ......
Firstmerit Corporation ......
Sun Bancorp,
Inc ..............
Independent
Bank Corp.
Alliance Financial Corporation ......
First Niagara
Financial
Group ..........
Berkshire Hills
Bancorp,
Inc. .............
Somerset Hills
Bancorp ......
SCBT Financial
Corporation
HF Financial
Corp ............
State Street ....
U.S. Bancorp ...
The Goldman
Sachs
Group, Inc.
BB&T Corp. .....
American Express Company ...........
Bank of New
York Mellon
Corp ............
Morgan Stanley
Northern Trust
Corporation
Old Line Bancshares Inc.
Bancorp Rhode
Island, Inc.
Centerstate
Banks of
Florida Inc.
Manhattan
Bancorp ......
CVB Financial
Corp ............
Bank of the
Ozarks ........
Capital One Financial .......
JP Morgan
Chase & Co.

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Investment Date

Warrant
Repurchase
Date

Warrant
Repurchase/Sale
Amount

Panel’s Best
Valuation
Estimate at Repurchase Date

Price/
Estimate
Ratio

IRR
Percent

12/12/2008

5/8/2009

$1,200,000

$2,150,000

0.558

9.3

12/5/2008

5/20/2009

1,200,000

2,010,000

0.597

9.4

1/9/2009

5/27/2009

5,025,000

4,260,000

1.180

20.3

1/9/2009

5/27/2009

2,100,000

5,580,000

0.376

15.3

1/9/2009

5/27/2009

2,200,000

3,870,000

0.568

15.6

12/19/2008

6/17/2009

900,000

1,580,000

0.570

13.8

11/21/2008

6/24/2009

2,700,000

3,050,000

0.885

8.0

12/19/2008

6/24/2009

1,040,000

1,620,000

0.642

11.3

1/16/2009

6/24/2009

275,000

580,000

0.474

16.6

1/16/2009

6/24/2009

1,400,000

2,290,000

0.611

11.7

11/21/2008
10/28/2008
11/14/2008

6/30/2009
7/8/2009
7/15/2009

650,000
60,000,000
139,000,000

1,240,000
54,200,000
135,100,000

0.524
1.107
1.029

10.1
9.9
8.7

10/28/2008
11/14/2008

7/22/2009
7/22/2009

1,100,000,000
67,010,402

1,128,400,000
68,200,000

0.975
0.983

22.8
8.7

1/9/2009

7/29/2009

340,000,000

391,200,000

0.869

29.5

10/28/2008
10/28/2008

8/5/2009
8/12/2009

136,000,000
950,000,000

155,700,000
1,039,800,000

0.873
0.914

12.3
20.2

11/14/2008

8/26/2009

87,000,000

89,800,000

0.969

14.5

12/5/2008

9/2/2009

225,000

500,000

0.450

10.4

12/19/2008

9/30/2009

1,400,000

1,400,000

1.000

12.6

11/21/2008

10/28/2009

212,000

220,000

0.964

5.9

12/5/2008

10/14/2009

63,364

140,000

0.453

9.8

12/5/2008

10/28/2009

1,307,000

3,522,198

0.371

6.4

12/12/2008

11/24/2009

2,650,000

3,500,000

0.757

9.0

11/14/2008

12/3/2009

148,731,030

232,000,000

0.641

12.0

10/28/2008

12/10/2009

950,318,243

1,006,587,697

0.944

10.9

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120
FIGURE 38: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY
REPAID CPP FUNDS AS OF AUGUST 4, 2010—Continued
Institution

TCF Financial
Corp ............
LSB Corporation .............
Wainwright
Bank &
Trust Company ...........
Wesbanco
Bank, Inc. ...
Union First
Market
Bankshares
Corporation
(Union
Bankshares
Corporation)
Trustmark Corporation ......
Flushing Financial Corporation ......
OceanFirst Financial Corporation ......
Monarch Financial Holdings, Inc. ....
Bank of America ..............

Investment Date

Warrant
Repurchase
Date

Warrant
Repurchase/Sale
Amount

Panel’s Best
Valuation
Estimate at Repurchase Date

Price/
Estimate
Ratio

IRR
Percent

1/16/2009

12/16/2009

9,599,964

11,825,830

0.812

11.0

12/12/2008

12/16/2009

560,000

535,202

1.046

9.0

12/19/2008

12/16/2009

568,700

1,071,494

0.531

7.8

12/5/2008

12/23/2009

950,000

2,387,617

0.398

6.7

12/19/2008

12/23/2009

450,000

1,130,418

0.398

5.8

11/21/2008

12/30/2009

10,000,000

11,573,699

0.864

9.4

12/19/2008

12/30/2009

900,000

2,861,919

0.314

6.5

1/16/2009

2/3/2010

430,797

279,359

1.542

6.2

12/19/2008

2/10/2010

260,000

623,434

0.417

6.7

520 10/28/2008;

3/3/2010

1,566,210,714

1,006,416,684

1.533

6.5

11/14/2008
12/12/2008

3/9/2010
3/10/2010

15,623,222
11,320,751

10,166,404
11,458,577

1.537
0.988

18.6
32.4

1/16/2009

3/11/2010

6,709,061

8,316,604

0.807

30.1

11/14/2008

3/31/2010

4,500,000

5,162,400

0.872

6.6

11/21/2008

4/7/2010

18,500,000

24,376,448

0.759

8.5

12/12/2008

4/7/2010

1,488,046

1,863,158

0.799

15.9

12/31/2008
11/14/2008

4/29/2010
5/4/2010

324,195,686
183,673,472

346,800,388
276,426,071

0.935
0.664

8.7
10.8

11/14/2008

5/18/2010

5,571,592

5,955,884

0.935

8.3

10/28/2008

5/20/2010

849,014,998

1,064,247,725

0.798

7.8

12/23/2008

6/2/2010

3,116,284

3,051,431

1.021

8.2

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521 1/9/2009;

rfrederick on DSKD9S0YB1PROD with HEARING

522 1/14/2009

Washington
Federal Inc./
Washington
Federal Savings & Loan
Association
Signature Bank
Texas Capital
Bancshares,
Inc. .............
Umpqua Holdings Corp. ..
City National
Corporation
First Litchfield
Financial
Corporation
PNC Financial
Services
Group Inc. ..
Comerica Inc ..
Valley National
Bancorp ......
Wells Fargo
Bank ...........
First Financial
Bancorp ......

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121
FIGURE 38: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY
REPAID CPP FUNDS AS OF AUGUST 4, 2010—Continued
Institution

Sterling Bancshares, Inc./
Sterling
Bank ...........
SVB Financial
Group ..........
Discover Financial Services
Bar Harbor
Bancshares
Total ......

Investment Date

Warrant
Repurchase
Date

Warrant
Repurchase/Sale
Amount

Panel’s Best
Valuation
Estimate at Repurchase Date

Price/
Estimate
Ratio

IRR
Percent

12/12/2008

6/9/2010

3,007,891

5,287,665

0.569

10.8

12/12/2008

6/16/2010

6,820,000

7,884,633

0.865

7.7

3/13/2009

7/7/2010

172,000,000

166,182,652

1.035

17.1

1/16/2009

7/28/2010

250,000

518,511

0.482

6.2

..............................

....................

$7,198,328,217

$7,314,904,102

0.984

9.9

520 Investment

date for Bank of America in CPP.
521 Investment date for Merrill Lynch in CPP.
522 Investment date for Bank of America in TIP.

FIGURE 39: VALUATION OF CURRENT HOLDINGS OF WARRANTS AS OF AUGUST 4, 2010
[Dollars in millions]
Warrant Valuation
Stress Test Financial Institutions with
Warrants Outstanding

Low
Estimate

High
Estimate

Best
Estimate

Citigroup .................................................................................................................
SunTrust Banks, Inc. ..............................................................................................
Regions Financial Corporation ................................................................................
Fifth Third Bancorp .................................................................................................
Hartford Financial Services Group, Inc. .................................................................
KeyCorp ...................................................................................................................
AIG ...........................................................................................................................
All Other Banks .......................................................................................................

$18.37
18.17
14.04
105.62
418.43
24.13
303.91
738.31

$1,132.91
357.33
227.13
404.39
768.39
178.94
1,873.31
1,860.14

$121.87
133.59
83.66
195.68
514.10
76.01
1,093.38
1,158.34

Total ...............................................................................................................

$1,640.98

$6,802.54

$3,376.62

2. Federal Financial Stability Efforts

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a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has undertaken
through the TARP, the federal government has engaged in a much
broader program directed at stabilizing the U.S. financial system.
Many of these initiatives explicitly augment funds allocated by
Treasury under specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or operate in tandem
with Treasury programs, such as the interaction between PPIP and
TALF. Other programs, like the Federal Reserve’s extension of
credit through its Section 13(3) facilities and SPVs and the FDIC’s
Temporary Liquidity Guarantee Program, operate independently of
the TARP.
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly classified
the resources that the federal government has devoted to stabilizing the economy through myriad new programs and initiatives as
outlays, loans, or guarantees. With the reductions in funding for

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122
certain TARP programs, the Panel calculates the total value of
these resources to be over $2.6 trillion. However, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received, no warrants
are exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs considered
here, as do the mechanisms providing protection for the taxpayer
against such risk. As discussed in the Panel’s November report, the
FDIC assesses a premium of up to 100 basis points on TLGP debt
guarantees.523 In contrast, the Federal Reserve’s liquidity programs are generally available only to borrowers with good credit,
and the loans are over-collateralized and with recourse to other assets of the borrower. If the assets securing a Federal Reserve loan
realize a decline in value greater than the ‘‘haircut,’’ the Federal
Reserve is able to demand more collateral from the borrower. Similarly, should a borrower default on a recourse loan, the Federal Reserve can turn to the borrower’s other assets to make the Federal
Reserve whole. In this way, the risk to the taxpayer on recourse
loans only materializes if the borrower enters bankruptcy. The only
loan currently ‘‘underwater’’—where the outstanding principal loan
amount exceeds the current market value of the collateral—is the
loan to Maiden Lane LLC, which was formed to purchase certain
Bear Stearns assets.
FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JULY 28, 2010) i
[Dollars in billions]
Treasury
(TARP)

Program

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Total ...............................................................................
Outlays xli ..............................................................
Loans .....................................................................
Guarantees xlii .......................................................
Repaid and Unavailable TARP Funds ...................
AIG xliii ...........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Citigroup ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Purchase Program (Other) ..............................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Capital Assistance Program .........................................
TALF ................................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
PPIP (Loans) lii ..............................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
523 November

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$475
237.6
24.2
4.3
208.9
69.8
xliv 69.8
0
0
25
xlvii 25
0
0
30.3
xlviii 30.3
0
0
N/A
4.3
0
0
1 4.3
0
0
0
0

Federal
Reserve

$1,475.7
1,302.6
173.1
0
0
89.3
xlv 25.7
xlvi 63.6
0
0
0
0
0
0
0
0
0
0
38.7
0
li 38.7
0
0
0
0
0

FDIC

Total

$702.9
188.4
0
514.5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Oversight Report, supra note 68, at 36.

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$2,653.6
1,728.6
197.2
518.8
208.9
159.1
95.5
63.6
0
25
25
0
0
30.3
30.3
0
0
xlix N/A
43
0
38.7
4.3
0
0
0
0

123
FIGURE 40: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JULY 28, 2010) i—
Continued
[Dollars in billions]
Treasury
(TARP)

Program

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PPIP (Securities) ...........................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Making Home Affordable Program/Foreclosure Mitigation ........................................................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Automotive Industry Financing Program .....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Auto Supplier Support Program ...................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
SBA 7(a) Securities Purchase ......................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Community Development Capital Initiative .................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Temporary Liquidity Guarantee Program ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Deposit Insurance Fund ...............................................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Other Federal Reserve Credit Expansion ....................
Outlays ..................................................................
Loans .....................................................................
Guarantees ............................................................
Repaid TARP Funds .......................................................

Federal
Reserve

liii 22.4

7.5
14.9
0
45.6
liv 45.6

0
0
lv 67.1

59.0
8/1
0
0.4
0
lvi 0.4
0
lvii 0.4
0.4
0
0
lviii 0.78
0
0.78
0
0
0
0
0
0
0
0
0
0
0
0
0
lxiii 208.9

FDIC

Total

0
0
0
0

0
0
0
0

22.4
7.5
14.9
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,347.7
lxi 1,276.9
lxii 70.8
0
0

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
514.5
0
0
lix 514.5
188.4
lx 188.4
0
0
0
0
0
0
0

45.6
45.6
0
0
67.1
59.0
8.1
0
0.4
0
0.4
0
0.4
0.4
0
0
0.78
0
0.78
0
514.5
0
0
514.5
188.4
188.4
0
0
1,347.7
1,276.9
70.8
0
208.9

xl All data in this figure is as of July 28, 2010, except for information regarding the FDIC’s Temporary Liquidity Guarantee Program (TLGP).
That data is as of June 30, 2010.
xli The term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of
debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). These values were calculated using (1) Treasury’s actual
reported expenditures, and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury statements and
GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to further change. Outlays used here represent investment and asset purchases—as well as commitments to make investments and asset
purchases—and are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit reform’’ basis.
xlii Although many of the guarantees may never be exercised or exercised only partially, the guarantee figures included here represent the
federal government’s greatest possible financial exposure.
xliiiAIG received an $85 billion credit facility from the Federal Reserve Bank of New York (FRBNY) (reduced to $60 billion in November
2008, to $35 billion in December 2009, and then to $34 billion in May 2010). A Treasury trust received Series C preferred convertible stock in
exchange for the facility and $0.5 million. The Series C shares amount to 79.9 percent ownership of common stock, minus the percentage
common shares acquired through warrants. In November 2008, Treasury received a warrant to purchase shares amounting to 2 percent ownership of AIG common stock in connection with its Series D stock purchase (exchanged for Series E noncumulative preferred shares on
4/17/2009). Treasury also received a warrant to purchase 3,000 Series F common shares in May 2009. Warrants for Series D and Series F
shares represent 2 percent equity ownership, and would convert Series C shares into 77.9 percent of common stock. However, in May 2009,
AIG carried out a 20:1 reverse stock split, which allows warrants held by Treasury to become convertible into 0.1 percent common equity.
Therefore, the total benefit to the Treasury would be a 79.8 percent voting majority in AIG in connection with its ownership of Series C convertible shares. U.S. Government Accountability Office, Troubled Asset Relief Program: Status of Government Assistance Provided to AIG (Sept.
2009) (GAO–09–975) (online at www.gao.gov/new.items/d09975.pdf). Additional information was also provided by Treasury in response to Panel
inquiry.
xliv This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). As
of July 12, 2010, AIG had utilized $47.5 billion of the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Troubled
Assets
Relief
Program
Monthly
105(a)
Report—June
2010
(July
12,
2010)
(online
at
www.financialstability.gov/docs/105CongressionalReports/June%202010%20105(a)%20Report_Final.pdf).

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124
xlv As part of the restructuring of the U.S. government’s investment in AIG announced on March 2, 2009, the amount available to AIG
through the Revolving Credit Facility was reduced by $25 billion in exchange for preferred equity interests in two special purpose vehicles, AIA
Aurora LLC and ALICO Holdings LLC. These SPVs were established to hold the common stock of two AIG subsidiaries: American International
Assurance Company Ltd. (AIA) and American Life Insurance Company (ALICO). As of July 28, 2010, the book value of the Federal Reserve
Bank of New York’s holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.5 billion and $9.3 billion in preferred equity, respectively.
Hence, the book value of these securities is $25.7 billion, which is reflected in the corresponding table. Federal Reserve Bank of New York,
Factors Affecting Reserve Balances (H.4.1) (July 29, 2010) (online at www.federalreserve.gov/releases/h41/).
xlvi This number represents the full $34 billion that is available to AIG through its revolving credit facility with the FRBNY ($25.1 billion
had been drawn down as of July 28, 2010) and the outstanding principal of the loans extended to the Maiden Lane II and III SPVs to buy
AIG assets (as of July 28, 2010, $14.1 billion and $15.5 billion, respectively). The amounts outstanding under the ML2 and ML3 facilities do
not reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans to the SPVs, reducing
the taxpayers’ exposure to losses over time. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (July 29, 2010) (online at www.federalreserve.gov/releases/h41/); Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on
Credit
and
Liquidity
Programs
and
the
Balance
Sheet,
at
17
(Oct.
2009)
(online
at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December 1, 2009, AIG entered into an agreement with FRBNY to
reduce the debt AIG owes FRBNY by $25 billion. In exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the debt ceiling on the loan facility from $60 billion to $35 billion. American International Group, Inc., AIG Closes Two Transactions
That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online at
phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1). The maximum available amount from the
credit facility was reduced from $34.1 billion to $34 billion on May 6, 2010, as a result of the sale of HighStar Port Partners, L.P. Board of
Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at
17 (May 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201005.pdf).
xlvii Treasury is currently in the process of selling its 7.7 billion shares of Citigroup common shares. See Endnote xxiv, supra (discussing
the details of the sales of Citigroup common stock to date). U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for
the
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xlviii This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment in Citigroup identified
above, $147.3 billion in repayments that are in ‘‘repaid and unavailable’’ TARP funds, and losses under the program. This figure does not
account for future repayments of CPP investments and dividend payments from CPP investments. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
xlix On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in need of further capital
from Treasury. GMAC, however, received further funding through the AIFP. Therefore, the Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
www.financialstability.gov/latest/tg_11092009.html).
l This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of July 28, 2010, TALF LLC had drawn only $105
million of the available $4.3 billion. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (July 29,
2010) (online at www.federalreserve.gov/releases/h41/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
the
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf). On June 30, 2010, the Federal Reserve ceased issuing loans collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3 billion in
TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been settled ($12 billion in CMBS and
$59 billion in non-CMBS). Earlier, it ended its issues of loans collateralized by other TALF-eligible newly issued and legacy ABS on March 31,
2010. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed Aug. 10, 2010); Term Asset-Backed Securities Loan Facility: CMBS (online at
www.newyorkfed.org/markets/cmbs_operations.html) (accessed Aug. 10, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities
Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/talf_operations.html) (accessed Aug. 10, 2010).
li This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans
under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan (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). Since there was
only $43 billion in TALF loans outstanding when the program closed, Treasury is currently responsible for reimbursing the Federal Reserve
Board up to $4.3 billion in losses from these loans. Thus, the Federal Reserve’s maximum potential exposure under the TALF is $38.7 billion.
lii It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance Corporation, FDIC Statement on the Status of the
Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/news/news/press/2009/pr09084.html); Federal Deposit Insurance Corporation,
Legacy Loans Program—Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html). The sales
described in these statements do not involve any Treasury participation, and FDIC activity is accounted for here as a component of the FDIC’s
Deposit Insurance Fund outlays.
liii This figure represents Treasury’s final adjusted investment amount in PPIP. As of July 30, 2010, Treasury reported commitments of
$14.9 billion in loans and $7.5 billion in membership interest associated with PPIP. On January 4, 2010, Treasury and one of the nine fund
managers, TCW Senior Management Securities Fund, L.P. (TCW), entered into a ‘‘Winding-Up and Liquidation Agreement.’’ Treasury’s final investment amount in TCW totaled $356 million. Following the liquidation of the fund, Treasury’s initial $3.33 billion obligation to TCW was reallocated among the eight remaining funds on March 22, 2010. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report
for
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
liv Of the $30.5 billion in TARP funding for HAMP, $28.8 billion has been allocated as of July 30, 2010. However, as of June 30, 2010, only
$247.5 million in non-GSE payments have been disbursed under HAMP. See Endnotes xiv and xv, supra (discussing the details of adjustments
to TARP funding for HAMP). Disbursement information provided by Treasury staff in response to a Panel inquiry; U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
lv A substantial portion of the total $81.3 billion in loans extended under the AIFP have since been converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion) represents Treasury’s current obligation under the AIFP after repayments and losses. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending July 30, 2010 (Aug. 3, 2010) (online at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
lvi This figure represents Treasury’s total adjusted investment amount in the ASSP. U.S. Department of the Treasury, Troubled Asset Relief
Program
Transactions
Report
for
Period
Ending
July
30,
2010
(Aug.
3,
2010)
(online
at
www.financialstability.gov/docs/transaction-reports/8-3-10%20Transactions%20Report%20as%20of%207-30-10.pdf).
lvii Treasury conversations with Panel staff (July 21, 2010).
lviii This information was provided by Treasury staff in response to a Panel inquiry.
lix This figure represents the current maximum aggregate debt guarantees that could be made under the program, which is a function of
the number and size of individual financial institutions participating. $304.1 billion of debt subject to the guarantee is currently outstanding,
which represents approximately 59.1 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance
Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (June 30, 2010) (online at
www.fdic.gov/regulations/resources/tlgp/total_issuance06-10.html). The FDIC has collected $10.4 billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under TLGP Debt Program (June 30, 2010) (online at www.fdic.gov/regulations/resources/tlgp/fees.html).

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125

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lx This figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth
quarters of 2008, the first, second, third, and fourth quarters of 2009, and the first quarter of 2010. 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); 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); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO)
Report
to
the
Board:
DIF
Income
Statement
(First
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO)
Report
to
the
Board:
DIF
Income
Statement
(Second
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s
(CFO)
Report
to
the
Board:
DIF
Income
Statement
(Third
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO)
Report
to
the
Board:
DIF
Income
Statement
(Fourth
Quarter
2009)
(online
at
www.fdic.gov/about/strategic/corporate/cfo_report_4thqtr_09/income.html); Federal Deposit Insurance Corporation, Chief Financial Officer’s (CFO)
Report
to
the
Board:
DIF
Income
Statement
(First
Quarter
2010)
(online
at
www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_10/income.html);. This figure includes the FDIC’s estimates of its future losses under
loss-sharing agreements that it has entered into with banks acquiring assets of insolvent banks during these seven quarters. Under a
loss-sharing agreement, as a condition of an acquiring bank’s agreement to purchase the assets of an insolvent bank, the FDIC typically
agrees to cover 80 percent of an acquiring bank’s future losses on an initial portion of these assets and 95 percent of losses of another portion of assets. See, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement—Whole Bank, All Deposits—Among
FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and Compass Bank, at 65–66 (Aug. 21, 2009) (online
at www.fdic.gov/bank/individual/failed/guaranty-tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that
there were approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009. Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since there is a published loss estimate for these agreements,
the Panel continues to reflect them as outlays rather than as guarantees.
lxi Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet accounts for these facilities
under Federal agency debt securities and mortgage-backed securities held by the Federal Reserve. Board of Governors of the Federal Reserve
System, Factors Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/releases/h41/) (accessed Aug. 3, 2010). Although the
Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from its liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the Balance
Sheet, at 2 (Nov. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf).
On September 7, 2008, Treasury announced the GSE Mortgage Backed Securities Purchase Program (Treasury MBS Purchase Program). The
Housing and Economic Recovery Act of 2008 provided Treasury the authority to purchase Government Sponsored Enterprise (GSE) MBS. Under
this program, Treasury purchased approximately $214.4 billion in GSE MBS before the program ended on December 31, 2009. As of June
2010, there was $170.5 billion still outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio by
Month (online at www.financialstability.gov/docs/June%202010%20Portfolio%20by%20month.pdf) (accessed Aug. 3, 2010). Treasury has received $50.1 billion in principal repayments and $11.8 billion in interest payments from these securities. U.S. Department of the Treasury,
MBS
Purchase
Program
Principal
and
Interest
Received
(online
at
www.financialstability.gov/docs/June%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf) (accessed August 3,
2010).
lxii Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary credit, central bank liquidity
swaps, primary dealer and other broker-dealer credit, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, net portfolio holdings of Commercial Paper Funding Facility LLC, seasonal credit, term auction credit, and the Term Asset-Backed Securities Loan Facility. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (July 29, 2010) (online at
www.federalreserve.gov/releases/h41/).
lxiii Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, TARP resources cannot be allocated to programs that
were not established prior to June 25, 2010. Also, any TARP funds that have been repaid may not be used to fund additional TARP commitments. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, at § 1302 (2010).

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126
SECTION THREE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part of
the Emergency Economic Stabilization Act (EESA) and formed on
November 26, 2008. Since then, the Panel has produced 21 oversight reports, as well as a special report on regulatory reform,
issued on January 29, 2009, and a special report on farm credit,
issued on July 21, 2009. No hearings have been held since the release of the Panel’s July 2010 report.

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Upcoming Reports and Hearings
The Panel will release its next oversight report in September.
With the Dodd-Frank financial regulatory overhaul signed into law
in late July, Treasury’s authority to commit new funds or to establish new programs under the TARP has expired. To accompany this
official ‘‘end’’ of the TARP, the Panel’s September report will provide a summary view of the TARP’s accomplishments, and shortcomings, since its inception in October 2008, and discuss Treasury’s
plan for the program in the coming months and years. The Panel’s
last report to take a broad view of the TARP as a whole was published in December 2009.

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127
SECTION FOUR: ABOUT THE CONGRESSIONAL
OVERSIGHT PANEL

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In response to the escalating financial crisis, on October 3, 2008,
Congress provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and
promote economic growth. Congress created the Office of Financial
Stability (OFS) within Treasury to implement the TARP. At the
same time, Congress created the Congressional Oversight Panel to
‘‘review the current state of financial markets and the regulatory
system.’’ The Panel is empowered to hold hearings, review official
data, and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact
of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress instructed the Panel to produce
a special report on regulatory reform that analyzes ‘‘the current
state of the regulatory system and its effectiveness at overseeing
the participants in the financial system and protecting consumers.’’
The Panel issued this report in January 2009. Congress subsequently expanded the Panel’s mandate by directing it to produce a
special report on the availability of credit in the agricultural sector.
The report was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations
(AFL–CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law
at Harvard Law School, to the Panel. With the appointment on November 19, 2008, of Congressman Jeb Hensarling to the Panel by
House Minority Leader John Boehner, the Panel had a quorum and
met for the first time on November 26, 2008, electing Professor
Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel.
Effective August 10, 2009, Senator Sununu resigned from the
Panel, and on August 20, 2009, Senator McConnell announced the
appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, to fill the vacant seat. Effective
December 9, 2009, Congressman Jeb Hensarling resigned from the
Panel and House Minority Leader John Boehner announced the appointment of J. Mark McWatters to fill the vacant seat. Senate Minority Leader Mitch McConnell appointed Kenneth Troske, Sturgill
Professor of Economics at the University of Kentucky, to fill the vacancy created by the resignation of Paul Atkins on May 21, 2010.

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