Archive for the ‘bailout’ Category

The Senate Agriculture Committee just passed a bill regulating the derivatives market. Summary here. The legislation imposes clearing and trading requirements and real-time reporting of derivatives trades. It provides exceptions for some businesses like electric cooperatives which have argued that hedging business risks are important. It also tackles the moral hazard problem that the possibility of bailouts creates. (That is, if banks feel that the government will bail them out when they lose money, they take more risks since the downside is smaller for them). If the bill becomes law, the Federal Reserve Board and the Federal Deposit Insurance Corp. will be prohibited from providing any federal funds to businesses who are involved in derivative deals. This seems to imply that banks engaging in naked swaps transactions would have to spin off their swap dealer desks or be out in the cold in a crisis when others might be receiving bailouts. Of course, in a  crisis, laws change, and if no one spins off their desks, we are unlikely to let all banks go under (see Fall 2008).

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While we the people — through we the government – own the majority of GM and AIG, and a small share of most US banks, we completely own the GSE’s, that is the Government Sponsored Enterprises Fannie May and Freddie Mac. These institutions need a new charter, one that does not give executives and stockholders high pay and dividends when things go well and leave taxpayers footing the bill when they do not.

On Friday, the Republicans on the Committee on Financial Services have released a set of bullet points called “Goals and Principles for GSE Reform.” While the devil in legislation is in the details (not to say it isn’t also sometimes in the title too), the main points are right on track. The critical weak link in the release is: what is the mechanism that insures that we the taxpayers will not be bailing out these institutions again? Still, I am used to Barney Frank saying mostly the right things (post-crisis), and this document is on target and good to see. It makes one wonder what is taking the House so long to get a program in place?  Oh, that’s right, I forgot, the parties can’t even agree on what to order for lunch.

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TARP and the Federal Reserve’s actions during the finance crisis and recession have been extensive.  Keeping track of all the policies that have been implemented has been mind boggling.  But now there is a Pew Foundation project and webpage devoted to keeping track of what businesses or investors have gotten subsidies and how big they were/are, often in terms of current or recent subsidy rates.

TARP map SubsidyScope.com

TARP Capital Purchase Program (CPP) recipient institutions by county (Source: Pew Charitable Trusts - SubsidyScope.com; click on the map to go to their site)

The subsidy rate (or cash subsidy) is based on the difference between what the government pays (and/or the market value of what it commits to pay) and the market value of what it receives in return. For example, if TARP gives money and lines of credit to AIG in exchange for an 80% ownership stake in AIG, the subsidy rate is based on the cost of the program – the money given and the market price the government would have had to pay to buy that conditional line of credit from the market – and the market value of 80% of AIG at its post-bailout value (a subsidy rate of 1 is pure gift, a negative subsidy would make money for the government). Having been involved in valuation of TARP holdings, I know first-hand how difficult it is to evaluate the direct subsidy involved in a bailout many months later.  The current AIG subsidy rate is around 60%. But what is really important for evaluating whether the cost of different programs were worth their costs are the initial subsidy rates of the programs at the time they were undertaken. (more…)

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The Economist coverThe Economist recently published another article about the declining estimates of the costs of the Troubled Asset Relief Program (TARP). The article, here, notes that TARP may end up making the taxpayers money. The article quotes (my former colleague at Treasury) Lewis Alexander saying

If you follow Bagehot’s rule—ie, ‘lend freely against good collateral at a penalty rate’—you will make money.


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One of the big stories of the bailout of AIG was that it indirectly bailed out institutions with direct exposure to AIG, such as those having sold insurance on the quality of AIG’s debt (through the use of credit default swaps). One large beneficiary of this bailout was Goldman Sachs, which had written billions of dollars of such insurance (oops!) and happened to be the ex employer of then Treasury secretary Paulson (during the crisis Paulson asked for and got fed information from Goldman after getting his ethics requirement that he not deal with or communicate with Goldman waived).  While this all looks pretty suspect, Goldman has repeatedly claimed that they had this exposure hedged, so maybe there was no incentive to distort the information they gave Paulson. But as far as I know, Goldman has never said who they had this agreement with, allowing us to see whether their own counterparty would have been able to make good if AIG did not get bailed out. That is, my own suspicion, given that Goldman has never stated the name of their counterparty, is that anyone writing this insurance for Goldman was probably writing it for others and was probably not going to be able to pay if AIG went under. Also, it is now clear that Goldman objected to having any AIG debt written down as the government tried to find an alternative to a full bailout. Anyway, this story has been good gossip so far, but without many facts, only conspiracy theories. Now, some answers may be on the way. Treasury Secretary Geithner, who headed the NY Fed at the time, has accepted an invitation to testify before Congress on

Wednesday, January 27, 2010, at 10:00 a.m. in Room 2154 of the Rayburn House Office Building . . .[to] examine the collapse and federal rescue of AIG, in particular the compensation of AIG credit default swap counterparties . . . [and]. the role of the New York Federal Reserve Bank and other Federal agencies in AIG’s failure to disclose to the public the counterparty payments.

Should be interesting.

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Last week I had the opportunity to opine on this question at a lively conference on the financial crisis sponsored by the Federal Reserve Bank of Chicago and the World Bank.  Since I spoke about things I’ve been meaning to blog about for some time, I decided to post the transcript here.  Apologies that the tone is more Fed-esque than the usual posting, but here goes…

Where do we go from here?

“You never want a serious crisis to go to waste.  And what I mean by that is an opportunity to do things you think you could not do before.”  Rahm Emanuel, Feb. 2009

I would like to touch briefly on two issues in answer to the question posed for this session:  first, the integration of housing finance into the financial and regulatory mainstream; and second, the need to modernize budgetary and regulatory accounting.   I chose these topics for several reasons: they are important; they get less attention than is deserved; and I have thought quite a bit about them from both an academic and policy perspective. (more…)

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” ‘Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,’ said Camden R. Fine, president of the Independent Community Bankers.” — New York Times, Sept 22, 2009

We learn today from the New York Times that the FDIC — the independent government agency that insures your bank accounts — is effectively insolvent. It is going to ask insured banks to prepay three years worth of deposit insurance premiums in order to raise $45 billion to replenish the FDIC insurance fund. (more…)

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