Congressional Oversight Panel; Printed from http://cop.senate.gov.

About the Financial Crisis

Overview

What Happened?

The U.S. and the other global economic powers have been grappling to contain a financial crisis that began with the collapse of the subprime lending market since the middle of 2007.  This crisis rapidly expanded to encompass both the financial markets and the broader real economy, resulting in the highest domestic unemployment rate in fourteen years.  

An outline of the events of the past few months highlights the depth and breadth of the crisis:

  • Credit markets have tightened, and when available, credit is more expensive for all borrowers.
  • In September, the federal government took control of the two largest mortgage financing intermediaries, generally known as Fannie Mae and Freddie Mac. 
  • The largest U.S. commercial bank, Citigroup, and the largest U.S. insurance company, AIG, have both received substantial infusions of capital from the U.S. government, and the government now holds a controlling stake in AIG.  
  • Two major investment banks, Bear Stearns and Merrill Lynch, have disappeared in mergers.  One major investment bank, Lehman Brothers, has filed for protection under the bankruptcy laws.  The two largest remaining investment banks, Goldman Sachs and Morgan Stanley, have transformed themselves into bank holding companies to avoid the fate of their former peers. 
  • The largest thrift savings banks, Washington Mutual and IndyMac, were taken over by their regulator to prevent their insolvencies 
  • The Federal Deposit Insurance Corporation has placed 171 banks, with combined assets of $116 billion, on the problem list as of September 30, 2008.
  • All three major U.S.-based auto companies recently appealed to Congress for aid.  On December 19, 2008, Treasury agreed to make $13.4 billion available in loans to GM and Chrysler.
  • In 2008, U.S. stock markets suffered their deepest losses since the 1930s.

The Response

In response to the financial crisis, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), authorizing the Treasury Department to establish the Troubled Assets Relief Program (TARP) to commit up to $250 billion in taxpayer dollars, to be followed by another $100 billion upon request of the Treasury and another $350 billion if approved by Congress. 

EESA’s purposes are to “restore liquidity and stability to the financial system of the United States . . . in a manner that:

  • Protects home values, college funds, retirement accounts, and life savings;
  • Preserves homeownership and promotes jobs and economic growth;
  • Promotes overall returns to the taxpayers of the United States; and
  • Provides public accountability.”

Treasury has used its authority under the Act to commit over $350 billion towards:

  • the Capital Purchase Program (CPP),
  • Systemically Significant Failing Institutions (SSFI) Program,
  • Automotive Industry Financing Program, and
  • Targeted Investment Program. 

Treasury has also developed an Asset Guarantee Program providing guarantees for assets held by systemically significant financial institutions facing a high risk of losing market confidence.  In addition, Treasury has used TARP funds to provide $20 billion in credit protection for the $200 billion Term Asset-Backed Securities Lending Facility (TALF) that will support the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

This is not the full extent of the federal government’s actions to date.  Treasury has worked in coordination with the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and other financial regulators.  The Federal Reserve and FDIC initiated a number of programs that lend or guarantee loans to a host of financial actors, including corporations, investment banks and others.  These actors traditionally relied on lending from private parties, but these credit markets have dried up over the past few months.

About the Congressional Oversight Panel

Pursuant to Section 125 of the EESA, Congress created the Congressional Oversight Panel (COP) to “review the current state of financial markets and the regulatory system.”  COP is empowered to hold hearings, review official data, and write reports on the efficacy of actions taken by Treasury and financial institutions to improve the economy.  Through regular reports, COP will oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interest of the American people.  In addition, Congress has instructed COP to produce a special report on regulatory reform that will analyze “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.”