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  • Congressional Oversight Panel on the Global Impact of TARP

    In its latest study of the impact of the federal government's bailout efforts the Congressional Oversight Panel looks beyond US borders. The COP August report focuses on the international impact of TARP, and finds that US rescue efforts provided some significant benefits overseas. From the report: 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. COP Chair Elizabeth Warren discusses the report's key findings: Read the full report here .

  • COP June Report: The AIG Rescue

    The Congressional Oversight Panel 's June Report is now out, and in it the members of the panel are critical of the federal government's rescue of AIG in September, 2008. First, the panel argues that the Hank Paulson led Treasury Department did not do its due diligence in examining all the options it had before it committed $85 billion of taxpayer funds to keep the insurance giant from collapsing. But their bigger criticism comes with the actual rescue plan, which COP members say shifted the burden of AIG's failings from its creditors to all taxpayers and "distorted the marketplace by transforming highly risky derivative bets into fully guaranteed payment obligations." From the report: In the ordinary course of business, the costs of AIG‟s inability to meet its derivative obligations would have been borne entirely by AIG‟s shareholders and creditors under the well-established rules of bankruptcy. But rather than sharing the pain among AIG‟s creditors – an outcome that would have maintained the market discipline associated with credit risks – the government instead shifted those costs in full onto taxpayers out of a belief that demanding sacrifice from creditors would have destabilized the markets. The result was that the government backed up the entire derivatives market, as if these trades deserved the same taxpayer backstop as savings deposits and checking accounts. One consequence of this approach was that every counterparty received exactly the same deal: a complete rescue at taxpayer expense. Among the beneficiaries of this rescue were parties whom taxpayers might have been willing to support, such as pension funds for retired workers and individual insurance policy holders. But the across-the-board rescue also benefitted far less sympathetic players, such as sophisticated investors who had profited handsomely from playing a risky game and who had no reason to expect that they would be paid in full in the event of AIG‟s failure. Other beneficiaries included foreign banks that were dependent on contracts with AIG to maintain required regulatory capital reserves. Some of those same banks were also counterparties to other AIG CDSs. Here is COP chair Elizabeth Warren discussing the key findings of the June report: Read the full report here .

  • Brad DeLong Gives Credit to Bush and Obama Administrations for Avoiding Larger Economic Turmoil

    Brad DeLong has been sharply critical of politicians(and members of the media, and some fellow economists). And if he ran the country, he would have done things differently than those in power over the last couple of years. For example, he writes at Project Syndicate and on his blog , he would have let Lehman Brothers and AIG fail. And he would have nationalized Fannie Mae and Freddie Mac. But even as he disagrees with those moves taken or not taken, he gives the Bush and Obama Administrations passing grades for their work in economic policy over the last 30 months: Thus it is worth stepping back and asking: What would the economy look like today if policymakers had acceded to the populist demand of no support to the bankers? What would the economy look like today if Congressional Republican opposition to the Troubled Asset Relief Program (TARP) program had won the day? What would the economy have looked like today had Senators Nelson, Snowe, and company done to Obama's discretionary deficit-spending plan what their predecessors did to Clinton's in 1993 and blocked it? The only point of reference is the Great Depression itself. That is the only time in more than a century when (a) a financial crisis caused a widespread, lengthy, and prolonged reinforcing chain of bank failures, and (b) the government by and large washed its hands--neither intervened on a large scale itself nor passed the baton to a consortium of private banks (usually, in the U.S., headed by Morgan) to support the system as a whole. It is now 19 months after Bear Stearns failed and was taken over by JP MorganChase, with the assistance of up to $30 billion of Federal Reserve money on March 16, 2008. Industrial production now stands 14% below its peak in 2007. By contrast, 19 months after the Bank of United States, with 450,000 depositors, failed on December 11, 1930 – the first major bank collapse in New York since the Knickerbocker Trust failure during the panic and depression of 1907 – industrial production, according to the Federal Reserve index, was 54% below its 1929 peak. Read What Would Have Happened If World Governments Had Washed Their Hands of the Financial Crisis? here .

  • 'Dear Mr. Liddy'

    The New York Times printed a resignation letter that Jake DeSantis , an executive Vice President in American International Group's financial products unit, sent to AIG CEO Edward Liddy yesterday. I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage. After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself. I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down. DeSantis says he received a bonus payment last week of $742,006.42. That is after taxes. Or at least after taxes so-far. The taxed amount may rise if the House bill calling for a 90% tax on the bonuses becomes law. Whatever the final amount, DeSantis he will donate it "directly to organizations that are helping people who are suffering from the global downturn." Read the full letter here .
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  • AIG Day in Video (Update)

    It was an all day affair for the House Financial Services Subcommittee on , and in case you missed it, here's video of AIG CEO Edward Liddy's opening statement. (You can read the prepared remarks in this earlier post .) Members of the subcommittee then spent the rest of the day taking turns questioning, grilling, and/or advising Mr. Liddy. Here's Rep. Gary Ackerman (D-NY) taking his turn: Meanwhile, President Obama spoke with reporters on the White House lawn. Take a look at the AIG bonus contract that is at the center of all of the controversy. You can read it here .

  • AIG's Liddy to Speak Before House Subcommittee

    American Insurance Group 's bonus payouts continue to be this week's lead story, and today AIG CEO Edward Liddy is the punching bag star witness in front of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises . At the moment, he is waiting in the wings as members of the committee listen to the testimony of regulators. But the subcommittee has just released Liddy's prepared opening remarks. Liddy employs the all too popular "mistakes were made" defense, and he says that he is aware that the patience of American taxpayers is "wearing thin." Where that patience is especially thin is on the question of compensation. I am personally mindful both of the environment in which we are operating and the President's call for a more constrained compensation system. At the same time, we are essentially operating AIG on behalf of the American taxpayer so that we can maximize the amount of money we pay back to the American government. In order to do that, we have to continue to manage our business as a business--taking account of the cold realities of competition for customers, for revenues and for employees. Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful. You can read Liddy's statement here . You can read his letter to Treasure Secretary Timothy Geithner here . And MSNBC is providing a live feed from the hearing: Visit msnbc.com for Breaking News , World News , and News about the Economy

  • TNR Profile Lawrence Summers

    National Economic Council Director Lawrence Summers made the rounds on the Sunday morning television programs to both chastise AIG for handing out bonuses, and to defend the Obama Administration for its inability to prevent such behavior. He says the lesson is that "we don't have a satisfactory regulatory regime." Here he is on CBS's Face the Nation : It is interesting to see Summers trotted out in this role. While he is highly regarded for his sharp mind and grasp of all details of economic theory, Summers has sometimes stumbled as a public figure, especially in his tenure as president at Harvard. In the April edition of The New Republic , Noam Scheiber unpacks the personality of the White House's "economic oracle." Scheiber charts Summers's rise, from his MIT undergraduate days (when he chose economics over physics in part because "bad economists" can still find interesting work) to his current place in the Obama Administration, in an extensive profile. The article is short on outright crticism of Summers, but long on detail. Read it here .