AIG Commitments. Represents realized gains on a cash-in/cash-out basis (not including financing or administrative costs). Includes repayments, other income, and canceled commitments in excess of disbursements and commitments over the life of the programs from September 2008 to December 2012. On a cash basis, Treasury realized a gain of $5.0 billion overall, while the FRBNY realized a gain of $17.7 billion. Note that Treasury’s holdings of AIG common shares consisted of shares acquired in exchange for preferred stock purchased with TARP funds (TARP shares) and shares received from the trust created by the FRBNY for the benefit of Treasury as a result of the FRBNY loan to AIG (non-TARP shares). Treasury managed the TARP shares and non-TARP shares together, and disposed of them pro-rata in proportion to its holdings. In addition, as noted above, the official TARP estimates include financing costs (Treasury borrowing). A cash-in/cash-out basis (without financing or administrative costs) is used here in order to present the results of the Treasury and Federal Reserve assistance to AIG on a combined basis. Source: U.S. Treasury Department AIG Wrap-Up and New York Federal Reserve Bank of New York AIG Financial Information.
TARP Housing Programs. The CBO May 2013 figure is an estimate of total amount disbursed over the programs’ lifetimes. OMB currently estimates a $38 billion cost, assuming that all funds currently allocated to the programs are disbursed. Source: Congressional Budget Office.
Fannie/Freddie Conservatorship. $188 billion gross preferred stock purchase agreement disbursements net of $55 billion of dividends through December 31, 2012, and projected dividends through FY2023 of $220 billion, adjusted for FY2014 Mid-Session Review. Source: Office of Management and Budget FY2014 Budget and Mid-Session Review.
Money Market Fund Guarantee and State and Local HFA Initiative. Reflects Treasury estimates of income/costs.
Treasury MBS purchases. Represents taxpayers’ total cash returns of $250 billion from MBS portfolio through sales, principal, and interest, which exceeds initial investment by $25 billion. The program generated a negative subsidy of $12 billion on a Federal Credit Reform Act basis. Source: U.S. Treasury Press Release “Treasury Completes Wind Down of Mortgage-Backed Securities Investment, Generates $25 Billion Positive Return for Taxpayers,” March 19, 2012.
FDIC
Transaction Account Guarantee. The FDIC collected $1.2 billion in fees, net of estimated TAG losses on failures of $2.1 billion as of December 31, 2012. Does not include Temporary Unlimited Coverage for Noninterest-Bearing Transaction Accounts under the Dodd-Frank Act.
Temporary Liquidity Guarantee Program. FDIC collected $10.4 billion in fees, net of estimated TLGP losses on failures of $153 million as of December 31, 2012. Includes FDIC portion of $425 million termination fee from Bank of America, and proceeds from Citigroup TruPS provided in consideration for ring fence.
3 Chairman Bernanke pursue such aggressive monetary policy actions: A central objective of post-crisis monetary policy is to get the nominal interest rate below the nominal rate of GDP growth, which will help facilitate a softer deleveraging, or what the hedge fund manager Ray Dalio describes as a “beautiful deleveraging.” The Fed was able to deploy monetary policy that helped accomplish that objective.
4 resolution authority to allow the orderly wind-down of failing financial firms: Though it is a significant enhancement to our pre-crisis toolkit, the new statutory resolution authority will not make the system invulnerable to damaging runs and contagion. While resolution authority may be effective in the case of an idiosyncratic failure, it may be less effective in addressing a panic. For instance, if resolution is triggered by a run on a systemically important firm, many other firms are likely to be experiencing at least some liquidity problems; the act of putting one firm into resolution may cause the creditors and counterparties of other firms to accelerate the rate at which they are pulling back. Committing to protect short-term debt will help slow the run, but it may not solve the problem—and will create the incentive for creditors to shorten the maturity of their exposure to banks as risk increases, thus making the broader system more vulnerable. That’s why an array of firefighting tools in addition to resolution authority, such as liquidity facilities and broad-based guarantees, are needed to stem broad-based, systemic panics when they occur.
5 The principles of effective crisis response: There are lots of different types of financial crises. The principles described here are most relevant in financial crises that follow long booms in private credit in developed economies that retain the ability to borrow in their own currency and have banking systems of a manageable size relative to GDP. Emerging economies, or countries such as Greece and Ireland with unsustainable fiscal positions or banking systems many times the size of their economies, face a different set of challenges that may require a different set of policy responses, as well as a different mix of financing and restructuring.
6 tempting to try to maximize the immediate losses: Guarantees can be designed lots of different ways, and many have argued that it would be better to extend them only to short-term borrowing and never to long-term senior debt. The risk in this approach is that it strengthens the incentives for banks to fund themselves with short-term debt in the future, increasing their vulnerability to runs.
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