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Current US efforts

The cost projections of the bailout

"COULD the worst financial crisis in history really also be one of the cheapest? America’s Troubled Asset Relief Programme (TARP), created at the height of the crisis in 2008, will end up costing taxpayers less than 1% of GDP, Treasury officials now believe. By comparison, previous systemic banking crises have on average cost 13% of GDP to resolve, according to estimates by the International Monetary Fund. “This is a pretty good return on investment,” Ben Bernanke, chairman of the Federal Reserve, told Time.

It is not just the Americans who are bullish on bail-outs. Officials around the world believe this crisis will be cheaper than past calamities. In its pre-budget report in December, the British government reckoned its rescue scheme would end up costing just £8 billion ($13 billion), barely 0.5% of GDP—an astonishing feat since its potential exposure to Lloyds Banking Group and Royal Bank of Scotland alone approaches 20% of GDP.

TARP authorised the federal government to deploy up to $700 billion to save the financial system. The final bill was always assumed to be lower, though how much lower has become ever more striking. In August Barack Obama’s budget office pencilled in a cost of $341 billion. In the administration’s next budget, due in a few weeks, that will be revised down to $117 billion (see chart 1). The administration thinks the final number will end up being closer to $90 billion.

Almost all of that will be explained by lossmaking investments in carmakers—General Motors, Chrysler and their financing arms—and AIG, and by subsidies to homeowners to help modify their mortgages. The administration may have designed a special levy on banks to recoup the costs of TARP (see article) but it actually stands to make money on its investment in them, from dividends, warrants and fees for never-used guarantees.

This picture is incomplete, however. Much of the support to the financial sector went not through TARP but through other agencies. The Federal Reserve has so far profited handsomely on its emergency loans to banks: it will remit a record profit to the Treasury for 2009. The Federal Deposit Insurance Corporation made money on its bank-bond guarantees. Its deposit fund has been exhausted by the toll of failed lenders, but it expects to recover those costs from future fees on banks.

The picture surrounding Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that own or insure half of American residential mortgages, is grimmer. The Treasury has already injected $111 billion into them to maintain their solvency. Officials say they will need more but nothing like the $400 billion originally authorised (that limit was eliminated late last year, but only out of an abundance of caution, they say). Edward Pinto, an independent consultant, is more pessimistic: he estimates support for the GSEs and the Federal Housing Administration, which guarantees a growing share of new mortgages, will ultimately amount to $330 billion-440 billion.

The government’s accounting, typically for bail-outs, also takes a narrow view of the fiscal cost of a crisis. First, it excludes the far larger impact of the recession on government revenue, as well as the costs of fiscal stimulus. Second, no account is taken of non-cash subsidies, like the value of government guarantees that would have cost far more in the private market (assuming they could have been purchased at all).

The final cost also depends on when the totting-up is done. Usually, the longer a government has to dispose of assets acquired during a crisis, the better the recovery rate. Even so, experience varies widely. Five years after its 1991 crisis Sweden had recovered almost all its costs, whereas Finland had recouped very little (see chart 2).

America could yet escape with a modest bill. It did not experience a simultaneous currency crisis, a big contributor to the costliest episodes of the past. Officials argue that because America relies more on securities markets and less on banks than other countries, its crisis was rooted more in illiquidity than in insolvency. The prices of banks’ shares plunged and their access to financing dried up, they say, because their assets were shrouded in uncertainty, not because they were obviously insolvent. “If you follow Bagehot’s rule—ie, ‘lend freely against good collateral at a penalty rate’—you will make money,” says Lewis Alexander, a Treasury official.

Furthermore, policymakers in America and elsewhere do seem to have learned from history. They generally followed what the IMF and others have identified as “best practice”: rapid application of loan guarantees to end panic, targeted bank recapitalisation to restore solvency, and transparency about banks’ health, which restores investor confidence and enables banks to raise private capital.

For all that, they may still be being too optimistic. Carmen Reinhart of the University of Maryland, who has studied financial crises intensively, says policymakers chronically underestimate the extent of bad loans in the financial system and therefore the scale of bail-out costs. The amount of aid the financial system ultimately needs depends on the long-term performance of the economy, which in turn rests partly on how successfully the system is cleansed of bad debts.

America chose not to buy bad loans off its banks. Instead, banks are earning their way out of the mess, helped in part by the Fed’s ultra-low interest rates. Although policymakers deserve credit for the speed and scale of their response to the crisis, it is too soon to conclude that they have broken with the past. In 1996 the cost of Japan’s bail-out was pegged at 3% of GDP; it now stands at 14%. And as Ms Reinhart observes: “We don’t know yet whether we’re Japan or not.”

That so huge a crisis might be resolved at such a low price suggests three things: policymakers have been smarter than their predecessors; their numbers are incomplete; or they are too optimistic. Chances are it will be a bit of all three.

Fed likely to extend bailout programs

Source: Fed Signals No Rush to Exit From Stimulus as Recession Ends Bloomberg, Aug. 13, 2009

Federal Reserve policy makers signaled they will avoid any rush to end their unprecedented efforts to promote lending as they seek to strengthen the economic recovery that economists say is now under way.

The Fed’s Open Market Committee extended by a month the scheduled end to a $300 billion program to buy U.S. Treasuries, aiming for a “smooth transition in markets.” Officials in their statement yesterday retained a pledge to keep interest rates near a record low for an “extended period” even as they judged that the economy is “leveling out.”

The statement suggests Chairman Ben S. Bernanke and his colleagues will stretch into 2010 their bigger initiative to buy as much as $1.45 trillion of housing debt, currently due to end this year. Officials may as soon as today postpone the December expiration of their initiative to restart the market for asset- backed securities, analysts said.

“The Fed knows its liquidity programs are essential to investor optimism, so it is not going to do anything to jeopardize the good mood” in financial markets, said Christopher Low, chief economist at FTN Financial in New York. “The Fed is always the last one to acknowledge that a recovery has begun because it cannot afford to be wrong.”

Policy makers noted signs of improvement in the economy, saying “household spending has continued to show signs of stabilizing.” The Fed also said financial markets, have “improved further in recent weeks,” after the central bank pumped $1 trillion into the banking system.

Geithner asks for higher U.S. debt limit

Source: Geithner asks Congress for higher U.S. debt limit Reuters, August 7, 2009

"U.S. Treasury Secretary Timothy Geithner formally requested that Congress raise the $12.1 trillion statutory debt limit on Friday, saying that it could be breached as early as mid-October.

"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters.

A Treasury spokeswoman declined to comment on the letter.

Treasury officials earlier this week said that the debt limit, last raised in February when the $787 billion economic stimulus legislation was passed, would be hit sometime in the October-December quarter. Geithner's letter said the breach could be two weeks into that period, just as the 2010 fiscal year is getting underway.

The latest request comes as the Treasury is ramping up borrowing to unprecedented levels to fund stimulus and financial bailout programs and cope with a deep recession that has devastated tax revenues.

It is expected to issue net new debt of as much as $2 trillion in the 2009 fiscal year ended September 30 and up to $1.6 trillion in the 2010 fiscal year, according to bond dealer forecasts."

Rep Sherman criticizes Section 1204

  • Source: Representative Brad Sherman's (D-CA) press release

In his questioning of Secretary Geithner before the Financial Services Committee today, Congressman Brad Sherman (D-CA) focused on the new bailout authority included in the 618 page legislative proposal submitted by the Treasury Department.

Sherman described Geithner’s proposal as “TARP on steroids”. He noted that Section 1204 of the proposal allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.

Sherman compared Geithner’s proposal to the Troubled Asset Relief Program (TARP), the $700 billion Wall Street bailout adopted last year. Sherman noted that TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch. TARP contained some limits on executive compensation and an array of special oversight authorities. Section 1204 contains absolutely no limits on executive compensation and no special oversight.

Sherman asked Secretary Geithner whether he would accept a $1 trillion limit on the new bailout authority; if the executive branch wanted to spend more, it would have to come back to Congress. Geithner rejected a $1 Trillion limit, insisting that the executive branch be able to respond without coming back to Congress.

Finally, Sherman noted that both TARP and the Treasury proposal have vague provisions under which taxpayers might possibly recover any money lost through a special tax on the financial services industry. Sherman noted that under the Treasury proposal, only the very largest institutions could benefit from a bailout, but the special tax, if ever collected, would fall chiefly on medium-sized institutions.

Thus, the medium-sized institutions will be at a competitive disadvantage for two reasons. First, the largest institutions will be able to borrow money more cheaply because their creditors will believe that if the institution is unable to pay, the taxpayers will. Second, if there ever is a bailout benefitting a very large financial institution, the tax will be imposed on the medium-sized institutions.


The banks have begun to pay back the money they borrowed: according to a recent Congressional Budget Office report, $369 billion is outstanding, with $70 billion repaid by 32 institutions.

See also TARP.

Troubled assets may still pose risk

Source: Troubled Assets May Still Pose Risk New York Times, August 11, 2009

"The Treasury Department’s $700 billion bailout program has stabilized the banking system, but it has done little to prod banks to fully deal with the troubled loans on their books, a Congressional oversight panel said in a report to be released Tuesday.

The Troubled Asset Relief Program was originally conceived as a program for the government to buy troubled and unsalable mortgages and mortgage-backed securities.

But the Treasury has never actually used the program to buy assets, in part because it was faster to invest money directly into the nation’s banks and in part because banks have not wanted to sell their problem loans and book the loss in their value.

“The nation’s banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell,” the panel said in its latest monthly report.

As a result, it warned, many banks could find themselves short of capital if the economy suffered another downturn and their losses on troubled loans soared.

In an encouraging note, the panel said 18 of the 19 biggest bank holding companies would probably have enough capital even if economic and financial conditions deteriorated more than they have already. That conclusion essentially backed up the results of the Federal Reserve’s stress tests in April.

But it warned that thousands of small and medium-size banks, which it defined as those with assets of $600 million to $100 billion, might find themselves short a total of $21 billion if the conditions matched its worst-case assumptions."

Source: Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil Bloomberg, August 13, 2009

"If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.

Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly. The problem with relying on management’s intentions is that they may be even less reliable.

At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them."

GMAC gets third bailout

"And you thought the bailouts were over and market discipline might be restored. Not a chance – the bailouts will continue, come hell or high water. The latest demonstration of this is GMAC, where the government will now be majority owner. GMAC has officially been nationalized. Now the government is running auto financing in addition to running the companies making the cars.

Below is a quote from the Financial Times. Notice the parts I have bolded.

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

Global bailouts

EU Commission guidelines on restructuring aid to banks

Source: European Commission Communication explaining its approach to assessing restructuring aid. Brussels, 23rd July 2009

The European Commission has agreed a Communication explaining its approach to assessing restructuring aid given by Member States to banks. The approach is based on three fundamental principles:

  • i) aided banks must be made viable in the long term without further state support
  • ii) aided banks and their owners must carry a fair burden of the restructuring costs and
  • iii) measures must be taken to limit distortions of competition in the Single Market

The guidelines, which are in force until 31 December 2010, explain in particular how the Commission intends to apply these principles in the context of the current systemic financial crisis, with a view to contributing to the return to viability of the European banking sector.

Competition Commissioner Neelie Kroes said: "The financial crisis may not be over yet, but we need to start working seriously with Member States to restructure European banks. We need to make banks viable again without state support and to re-invigorate competition in the Single Market. The guidelines adopted today will be a useful tool for banks and Member States by explaining the criteria the Commission will apply to restructuring aid for banks in the current period. It complements our previous guidance on state guarantees, recapitalisation and the treatment of impaired assets".

The Commission has to deal with a large number of individual cases of bank restructuring, which follow from bank rescue aid measures approved on the condition that a restructuring plan would be submitted within six months. In order to foster transparency, predictability and equality of treatment between Member States, the Commission has issued guidelines to clarify its approach, the criteria it will base its assessment upon and the type of information required to guide this assessment. These guidelines are based on Article 87.3b) of the EC Treaty, which authorises state aid in case of a serious disturbance in the economy. They will be temporary and apply until the end of 2010. After that date, the normal rules on rescue and restructuring, based on Article 87.3c) of the Treaty (aid for the development of certain economic activities or areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest) should resume.

Financial stability

The Commission Communication on bank restructuring complements the guidance on the assessment of state aid for banks that the Commission has adopted since the beginning of the financial crisis concerning guarantees, recapitalisation and the treatment of impaired assets (see IP/08/1495 , IP/08/1901 and IP/09/322 respectively). These previous guidelines have explained in particular under which conditions banks are required to submit a restructuring plan. The new Communication outlines how the Commission will use competition rules to support financial stability. Banks' return to viability is the best guarantee for stability and for their sustained ability to lend to the economy.

Stress test

In this context, the Communication emphasises that in order to devise strategies for a sustainable future, banks will have to stress test their business. This requires a diagnosis of the bank's strengths and weaknesses, which may lead to revisiting the business model of the bank, disclosing and dealing with impaired assets, withdrawing from loss making activities or even considering absorption by a viable competitor or orderly winding up.

The Communication makes clear that aided banks and their capital holders must bear adequate responsibility for their past behaviour and contribute to the restructuring of the bank as much as possible with their own resources. This requires in particular that the state is correctly remunerated for the aid it gives. Where this is not possible immediately due to market circumstances, such burden-sharing will be required at a later stage.

Finally, the Communication analyses the distortions of competition resulting from the state aid to banks and presents measures to limit them. Distortions may come from prolonging the bank's inadequate or excessively risky past behaviour and/or from maintaining its market presence to the detriment of competitors. Large state support may require some adjustments including structural measures, such as divestitures (which can be spread over a number of years in the current crisis), or behavioural measures, such as constraints on acquisitions or on aggressive pricing and marketing strategies funded by state aid. Given the number of simultaneous restructuring cases, this analysis will pay particular attention to national market structures, in order to preserve the integrity and contestability of the Single Market.

The full text of the Communication is available here.

For further details see MEMO/09/350.

UK £585bn bank bailout scheme

"The (UK) Treasury has picked a former management consultant and private equity boss to take charge of its mammoth £585bn bank bailout scheme.

Stephan Wilcke, former head of European financial services at Apax Partners, will join the Asset Protection Agency on Monday as an "enforcer" to oversee how banks manage their toxic assets.

Wilcke will lead a team of up to 50 staff entrusted with negotiating the price banks must pay for government insurance of the toxic assets. The scheme, set up in January, has been hit by long delays amid wrangling with the part-nationalised banks.

Royal Bank of Scotland (RBS) agreed to insure £325bn of toxic assets with the scheme, while Lloyds Banking Group wanted to include loans worth £260bn but has more recently been trying to limit its potential exposure.

Wilcke, who will be paid £140,000 a year, has experience of the complex financial products that got the banks into such trouble. His most recent job was with the investment group Cairn Capital, a hedge fund set up by former RBS bankers that was heavily involved in the markets for collateralised debt obligations and mortgage-backed securities. He takes over from Jeremy Bennett, who helped create the scheme and agreed to act as chief executive until it was established.

Lord Myners, the City minister, said: "The Asset Protection Scheme is a central part of the government's efforts to stabilise the financial sector and promote the flow of credit in the economy. The announcement of the APA's chief executive is an important milestone as we move towards implementation of the scheme."

Alistair Darling, the chancellor, is understood to want a speedy settlement to provide a solid base for banks to begin lending again. Lloyds is keen to escape at least some of the APS, which it views as overly costly. But it has yet to convince the Treasury that it can assess its exposure to risky assets, or that the continuing recession will not make the situation worse.

Eric Daniels, Lloyds' chief executive, is hoping to prove to the Treasury and Financial Services Authority, the main City regulator, that a plan to find £25bn of extra capital from private investors should allow the bank to exit the APS entirely.

Stephen Hester, chief executive of RBS, has held talks with investors about a cash call of £3bn-£4bn to limit the APS costs.

Critics of the APS fear that while banks cover the first 10% of losses, it leaves 90% in the hands of taxpayers and also gives banks little incentive to limit the losses.

Government will compel Lloyds and RBS to lend £27bn to SMEs

"Lloyds Banking Group and Royal Bank of Scotland (RBS) are to be instructed by the Government to lend £27 billion to small and medium-sized enterprises (SMEs) amid a fresh dispute over why they say they cannot meet lending targets promised to the Treasury at the time of the taxpayer bailout, The Times has learnt.

Lord Myners, the City Minister, will demand that the chief executives of the two banks comply with that promise when they are called to account by the Treasury’s Lending Panel, which is to meet soon.

The Treasury says that it has gathered evidence of significant loan demand from creditworthy businesses that the banks are failing to satisfy and it is concerned that the banks are pricing loans at unattractive rates.

It is understood that Lord Myners will deliver the demand to Stephen Hester, the chief executive of RBS, and Eric Daniels, the chief executive of Lloyds, at a meeting of the Treasury Lending Panel within a fortnight.

Although the Treasury will not disclose how it could force the banks to increase their lending, it is understood that Lord Myners is convinced that there is sufficient demand from small and medium-sized enterprises to justify the lending target.

The Treasury is concerned that the banks are hoarding funds that should be used to help business to grow instead of extending loans. It is also worried that the lenders are deliberately pricing loans at artificially high levels to suppress lending.

RBS has committed to extend loans to businesses worth £16 billion by March. Lloyds has pledged to offer £11 billion in the same time frame.

During the six-month period to June, RBS’s corporate lending book shrank by £18 billion and RBS business loans fell by £7 billion. However, it is believed that bankers have told the Treasury that they are unlikely to meet the corporate lending targets.

Lord Myners is expected to see executives from all of Britain’s main banks within a fortnight as part of the regular set of Lending Panel meetings held at the Treasury and hosted by the peer. Alongside executives, Lord Myners and Treasury officials, the banks’ credit managers are also invited to attend."

IMF puts global bailout total at $12 trillion

London Telegraph, August 8, 2009

The staggering total is is equivalent to around a fifth of the entire globe's annual economic output and includes capital injections pumped into banks in order to prevent them from collapse, the cost of soaking up so-called toxic assets, guarantees over debt and liquidity support from central banks. Although much of the total may never be called on, the potential outlay still dwarfs any previous repair bill for the global economy.

The IMF calculations, produced ahead of the two-year anniversary of the crisis, underline the continually mounting cost. Most of the cash has been handed over by developed countries, for whom the bill has been $10.2 trillion, while developing countries have spent only $1.7 trillion − the majority of which is in central bank liquidity support for their stuttering financial sectors."

IMF studies how to pay for financial sector rescues

Last September, leaders of the Group of Twenty (G-20) industrial and emerging market countries, meeting in Pittsburgh, asked the IMF to prepare a “range of options” for “how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions” to counteract financial sector crises.

IMF First Deputy Managing Director John Lipsky leads the Fund group tasked with preparing the report.

In this interview, Lipsky explains how the IMF will go about its work as it studies various approaches. The final report will be presented to the G-20 Leaders next June, with a preliminary version to be discussed at the G-20 Finance Ministers meeting in April. IMF Survey online: There’s a lot of interest in the work that the Fund is doing on taxation of the financial sector. What exactly is this about?

First of all, I want to be clear about the subject and scope of our report. We are responding to the G-20 Leaders’ request for an analysis of the various ways in which the financial sector could help to defray the costs of public sector crisis support. Since you mentioned “taxation,” I would stress that while this may provide a convenient shorthand reference for the project, our report will encompass other possible funding sources, including some that resemble user fees.

Although we will focus principally on the funding challenges posed by potential future crises, we also will examine the efforts underway to recoup the cost of the current crisis. Of course, there are many links between these two, but the analytical approach—and the appropriate policy choices—inevitably will differ in each case.

At the same time, our study will examine which institutions and/or activities should be included, and in the case of future crises, whether a fund should be created in advance of any prospective use. In analyzing the various policy options, important considerations will include bolstering systemic efficiency and effectiveness, including by removing existing distortions and by avoiding the introduction of new ones.

IMF Survey online: What do you see as the main challenges for this work?

At its heart, our analysis will address how to fund the direct financial sector support that could be required in a potential financial crisis. Assessing this need will require analysis of the spillover effects—that is, externalities—that financial sector activities pose for the rest of the economy. At an analytical level, the burdens resulting from financial crises can be addressed through taxation, or regulation, or a mix of the two. Thus, a key question that our analysis will have to confront is the appropriate balance between these two basic policy options.

For example, a more tightly regulated financial system presumably would be more stable, and therefore would create less prospective risk. In this case, the potential burden of public sector support should be lower, as would be the possible need for funding.

However, a financial system that was severely constrained with regard to permitted activity likely would provide fewer services and could even reduce overall output.

Unfortunately, the academic literature provides little practical guidance for finding an optimal balance between financial regulation and crisis mitigation. Thus, we will be breaking new ground. Of course, this makes the work not only potentially important, but also intellectually challenging and even exciting.

The challenges are somewhat daunting, however. The issue is situated at the intersection of macroeconomics, regulatory economics, and public finance. We need to take into account the tightly integrated and complex nature of contemporary financial markets. We will have to be aware of the regulatory changes currently being discussed by G-20 members at the Financial Stability Board. We will have to consider in practical terms how possible measures could be implemented internationally without creating perverse incentives.

We also will have to be mindful of the near-term difficulties still facing the financial sector, so as to avoid the danger that any proposed measures could unduly jeopardize the sectors’ recovery. Adding to the challenges, any eventual policy decisions in this area will involve judgments about fairness and efficiency—issues that inherently are difficult and often contentious.

As is self-evident, we will require a wide range of practical and conceptual expertise. To accomplish this task, we are drawing on the really impressive capabilities of our Fiscal Affairs Department, the Monetary and Capital Markets Department, and our Research Department. In fact, the staff team working on this project is absolutely world class.

That does not diminish the difficulties of finding the right solutions. Not the least of the challenges we face is a tight timetable; the final report to the G-20 Leaders is due in June 2010 and we will present a preliminary version to G-20 Finance Ministers in April.

IMF Survey online: What measures are you focusing on—and are there any you have ruled out?

At this stage, we have ruled nothing out. We will look at various taxes, the formation of resolution funds, and the possibility of capital charges or the creation of contingent capital requirements. The latter term refers to debt finance that converts into equity in pre-specified circumstances related to stress, and that potentially could prevent some bank failures. Of course, even before we look to use the tax system to fund crisis resolution, we need to ask whether current tax rules favor excessive risk-taking, and if so, how such problems could be corrected.

IMF Survey online: What about the idea of a Tobin tax on foreign currency transactions, or a more general financial transactions tax, which some have proposed?

Of course we will examine all worthwhile proposals. However, the original “Tobin tax” proposal—first suggested by the late Nobel laureate James Tobin—was limited to foreign exchange transactions, and was intended to reduce the volume of such transactions, not to raise revenue. While some contemporary advocates of a transaction tax view it as a means to shrink the size of the financial sector, others are looking to such a measure as a possible source of finance for development purposes. Whatever the merits of this approach, and the worthiness of the overall goal, this is not exactly the issue that the G-20 Leaders asked us to analyze.

IMF Survey online: There are clearly strong views on the topics that you are exploring. How do you plan to take them into account?

Clearly, these are issues that have attracted widespread attention, and they merit broad consultation. Already, we are engaging the views of interested observers and recognized experts in the area. We envision this process to include official institutions, academics, financial market participants, civil society organizations, and all others with an interest in contributing to the discussion.

IMF Survey online: We are seeing some examples of banks that received substantial support during the crisis that are now making arrangements to repay governments for that support. How will the IMF take this into account?

We currently are surveying the G-20 countries regarding the types of public support already extended to financial institutions, and the repayments that have been made and are expected to be made in the future. The amount of temporary support being made available to the financial sector surely will have some relation to the net cost to the public of such actions, rather than just the gross cost. Moreover, it will be important to examine the incidence of proposed fund-raising measures, in order to understand as much as possible their ultimate economic impact, and not just their first-round effects.

Irish bailout

Ireland requested an international bailout on Sunday to tackle its banking and budget crisis. Following are some details of how it will work.


The European Union safety net consists of the European Financial Stability Mechanism (EFSM), which can lend up to 60 billion euros, and the European Financial Stability Facility (EFSF), which is backed by 440 billion euros worth of euro zone government guarantees. EU finance ministers said in a statement that Ireland would receive aid from both facilities.

The head of the International Monetary Fund said on Sunday the IMF was also ready to help Ireland with a multi-year loan. The IMF has indicated previously that it would be ready to provide up to 50 percent of what Europe was providing.

Ireland could also benefit from bilateral contributions. The ministers said Britain and Sweden, which are not in the euro zone, had indicated on Sunday they were ready to consider offering bilateral loans.


Money from the EFSM would be paid out first, but EFSF cash and IMF involvement help the EU avoid a situation where one country uses up all the funds available under the EFSM.

The EFSM is available to all 27 EU members while the EFSF will lend only to the 16 countries of the euro zone.


The mechanism has never been used before, but EU officials have estimated it would take three to five weeks from the application for assistance and the first disbursement of money.

The bailout will build on a four-year fiscal plan which the Irish government is about to unveil. Dublin was also planning to return to bond markets in January so having a bailout in place before the end of the year would remove that deadline.

Historical bailout reports

Large investors pan stimulus

Investment News, August 4, 2009

"The majority of large U.S. companies and financial institutions believe that government programs designed to stimulate spending and lending have done little to improve the economy, according to a study released today.

According to the Greenwich Market Pulse survey, from Greenwich Associates of Stamford, Conn., 52% of more than 400 institutional investors it polled believed that the $787 billion economic package passed this year was ineffective. Fully 26% of respondents said the stimulus was effective, and 22% were neutral.

Meanwhile, 75% of respondents believed the auto industry bailout was ineffective, 8% considered it effective, and the rest were neutral.

But they still have faith in Federal Reserve Chairman Ben Bernanke. For instance, 64% of respondents thought his performance during the economic crisis was good, 24% thought he did an average job, and 12% cited his performance as poor.

In comparison, 29% ranked Treasury Secretary Timothy Geithner’s performance during the economic crisis as good, 29% ranked his performance as average, and 42% ranked his performance as poor.

All respondents, meanwhile, thought Congress did a poor job in its handling of the financial crisis.

When ranking President Obama’s response to the economic crisis, 31% said it was good, 22% said it was average, and 47% said it was poor.

In addition, 67% of firms believed that health care reform proposals wouldn't be effective, 24% said they would be effective, and 9% were neutral.

When asked if they would support another round of fiscal stimulus, 75% of respondents said they wouldn’t, 9% said they would, and 16% were neutral.

Greenwich Associates surveyed 458 institutional investors, pension funds, endowments and large companies in North America, Europe and Asia. Surveys were conducted on the Internet from July 17 to 24.

Report on Wall Street banks' bailouts says US Treasury misled public

"The US Treasury misled the public over the health of struggling Wall Street banks receiving emergency funds at the height of the financial crisis, creating unrealistic expectations and undermining popular trust in bailout efforts, according to an official audit.

An inspector general appointed to oversee the US government's banking bailout has singled out president Bush's treasury secretary, Henry Paulson, for painting an excessively rosy picture of the condition of institutions such as Bank of America, Citigroup and Merrill Lynch when the government pumped $125bn (£70bn) into America's ten top banks in September last year.

At the time, Paulson described the banks as "healthy institutions" and said that an injection of government cash would kick-start lending in the economy. But officials in both the Treasury and the Federal Reserve had private concerns that some of them were teetering close to a financial collapse.

"The Treasury may have created unrealistic expectations about the institutions' condition and their ability to increase lending," says a report today by the inspector general, Neil Barofsky, who adds that the Treasury and the bail-out program "lost credibility when lending at those institutions did not in fact increase".

He continues: "Accuracy and transparency will enhance the credibility of government programs like TARP [the troubled asset repurchase plan] and restore taxpayer confidence in the policy makers who manage them; inaccurate statements, on the other hand, could have unintended long-term consequences that could damage the trust that the American people have in their government."

The Federal Reserve's chairman, Ben Bernanke, and the head of the Federal Deposit Insurance Corporation, Sheila Bair, are criticised for similarly optimistic remarks in the findings, which will add to a vigorous debate about the handling of the credit crunch in the final months of Bush administration.

As the global financial system wobbled in the fallout from the collapse of Lehman Brothers last year, the US government summoned the bosses of America's top banks to Washington and told them that they were getting injections of Treasury money, whether they liked it or not.

Paulson and Bernanke opted to pump funds into all ten of the country's top banks to avoid creating "haves" and "have nots" that would highlight those considered to be in a more perilous state. In doing so, they tried to talk up the condition of every big institution.

Several banks, including Goldman Sachs, JP Morgan and Morgan Stanley, have since repaid government aid and freed themselves from restrictions over dividend payouts, bonuses and the recruitment of foreign staff. But others, such as Citigroup and Bank of America, are still dependant on Treasury support.

The Treasury responded to the criticism by saying that utterances by Paulson and his colleagues should be considered "in light of the unprecedented circumstances in which they were made".

"Paulson's Gift"

"Paulson’s Gift" Pietro Veronesi, University of Chicago, NBER & CEPR and Luigi Zingales, University of Chicago, NBER & CEPR, November 5, 2008

"We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial system. We estimate that the revised Paulson plan increased the value of banks’ financial claims by $109 billion at a taxpayers’ cost of $112 -135 billions, creating no value in the banking sector.

We compare the cost of Paulson’s plan with the costs of alternative solutions that would have achieved the same objective in term of solvency of the banking system. We find that the revised Paulson plan is the most expensive for the taxpayers, second only to the original Paulson plan.

The biggest beneficiaries of this massive redistribution were the debtholders of financial institutions, especially those of the three former investment banks and of Citigroup. The equity holders just broke even."

Bailout trackers bailout tracker

New York Times bailout summary


In recent months, the federal government has intervened in the nation's economy in unprecedented ways. Those actions have raised citizens' awareness about the role of subsidies in the economy and heightened concerns about their size and scope. However, it is hard to find comprehensive data on the financial interventions in a single, easy-to-use Web site.

To fill this gap, Subsidyscope — an initiative of The Pew Charitable Trusts — is pulling together data on the financial institutions that are receiving benefits from the various federal programs so users can understand how and where taxpayer dollars are being spent.

WSJ bailout tracker

See a breakdown of the funds by program. Click the column headers in the table to sort by company, state, amount and more.

BBC "Follow the money"

Since the markets began to tumble in 2008, governments around the world have spent almost $11 trillion bailing out failing banks and trying to repair the financial system.

Find out how the money was spent and what it means for the taxpayers who have funded it.

"Great government momentum trade"

Meridith Whitney on the "Great government momentum trade" Financial Times Alphaville, May 12, 2009

"What happened was the government — I call this the great government momentum trade — the government enabled the banks to have better than expected, better than even the banks could organically deliver, first-quarter earnings. That looks like it could continue into the second-quarter and the third-quarter. The banks rallied from well below tangible book multiples to almost two times tangible book multiples. It was something, even though I said it was going to happen, I couldn’t believe it with my own eyes because the underlying core earnings power of these banks is negligible...

...Last year you had the market impact the economy and this year you’re going to have the economy impact the markets. So however manufactured these earnings are going to be you’re still going to have unemployment come in worse than expected, you’re still going to have consumer defaults worse than expected and you’re still going to have consumers not spend money … More people are going to lose their jobs and have less available credit lines to spend and that’s a ruse (?) that no great government momentum trade can really guard against.

I will be the first to admit I don’t know the rules, what the government’s going to do. I mean, I think that on a core basis I absolutely would not own these stocks. When the market turns, and I think that stocks are grossly overvalued, when the market turns and how it turns hard and fast investors are going to be furious. The saddest thing is that how this thesis I had would play out is tangible book values would increase because the government bought back agency paper, remember, and relaxed FASB rules, so tangible book values would increase and so you saw money start to come in. Now the long-only money’s coming in and the long-only money came in last year and they got their heads chopped off. You’re going to see the same thing happen. The biggest danger we face here, from a market point perspective, is having the retail investor shut out for a protracted period of time. They just feel abused again and lied to again."

Themes from bailouts

From the many bailouts over the course of the 20th century, certain principles and lessons have emerged that are consistent:[1][2][3][4]

  • Central banks provide loans to help the system cope with liquidity concerns, where banks are unable or unwilling to provide loans to businesses or individuals. Lending into illiquidity, but not insolvency, was articulated at least as early as 1873, in Lombard Street, A Description of the Money Market, by Walter Bagehot.
  • Let insolvent institutions (i.e., those with insufficient funds to pay their short-term obligations) fail in an orderly way.
  • Understand the true financial position of key financial institutions, through audits or other means. Ensure the extent of losses and quality of assets are known and reported by the institutions.[5]
  • Banks that are deemed healthy enough (or important enough) to survive require recapitalization, which involves the government providing funds to the bank in exchange for preferred stock, which receives a cash dividend over time.[6]
  • If taking over an institution due to insolvency, take effective control through the board or new management, cancel the common stock equity (i.e., existing shareholders lose their investment), but protect the debt holders and suppliers.
  • Government should take an ownership (equity or stock) interest to the extent taxpayer assistance is provided, so that taxpayers can benefit later. In other words, the government becomes the owner and can later obtain funds by issuing new common stock shares to the public when the nationalized institution is later privatized.
  • A special government entity is created to administer the program, such as the Resolution Trust Corporation.
  • Prohibit dividend payments, to ensure taxpayer money are used for loans and strengthening the bank, rather than payments to investors.
  • Interest rate cuts, to lower lending rates and stimulate the economy.


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