Statement of the Shadow Financial Regulatory Committee on Treasury Mismeasurement of the Costs of Federal Financial Stability Programs

On April 13, 2012, the US Department of the Treasury released new cost estimates for the Troubled Asset Relief Program (TARP) as part of a series of charts describing the combined impact of Treasury, Federal Reserve, and FDIC financial-stability programs. Looking principally at actual and projected contractual cash flows, the document concludes that: “Overall, the […]

Statement of the Shadow Financial Regulatory Committee on Bank Bailouts and Borrower Bailouts

Bailout policies are interconnected, and one policy can increase or decrease the effectiveness of another. The government is currently considering alternative means of assisting banks: buying assets (including the creation of an aggregator bank) and offering various forms of downside guarantee against loss on some assets. Whatever form of support the government adopts, it will create an interest (either as a buyer or as an insurer) in sub-prime mortgages and related securities.

The Last Trillion-Dollar Commitment – The Destruction of Fannie Mae and Freddie Mac

The government takeover of Fannie Mae and Freddie Mac was necessary because of their massive losses on more than $1 trillion of subprime and Alt-A investments, almost all of which were added to their single-family book of business between 2005 and 2007. The most plausible explanation for the sudden adoption of this disastrous course–disastrous for them and for the U.S. financial markets–is their desire to continue to retain the support of Congress after their accounting scandals in 2003 and 2004 and the challenges to their business model that ensued. Although the strategy worked–Congress did not adopt strong government-sponsored enterprise (GSE) reform legislation until the Republicans demanded it as the price for Senate passage of a housing bill in July 2008–it led inevitably to the government takeover and the enormous junk loan losses still to come.

A matched preferred stock plan for government assistance

The US government is considering broad-based assistance to stem the financial crisis. Hank Paulson, Treasury secretary, and Ben Bernanke, Fed chairman, have proposed the establishment of an entity that would purchase subprime-related assets from troubled financial institutions. A broad-based approach is needed, but this is not the best way of achieving policymakers’ objectives. Government injections […]

Statement of the Shadow Financial Regulatory Committee on The Regulation of Investment Banking

The Shadow Committee congratulates federal policy makers for not providing direct financial support to assist in the resolution of Lehman Brothers. Nonetheless, the federal government’s financial assistance extended to J.P. Morgan’s rescue of Bear Stearns last March, coupled with the opening  of the Fed’s discount window to primary dealers, has generated a widespread view that […]