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Appendix
AThe Government’s Actions in Support of the Housing and Financial Markets
The turmoil in the housing and financial markets has generated a series of policy responses from various parts of the government—the Federal Reserve, the Department of the Treasury, and other agencies. Some responses have stemmed from existing authority, others from recent legislation. The tables in this appendix briefly describe the major policy actions taken by each entity.
Many of the actions taken by the Federal Reserve derive from section 13(3) of the Federal Reserve Act. That section gives the central bank broad authorities in “unusual and exigent circumstances” to extend credit directly to an “individual, partnership, or corporation.” That authority has been used in a variety of new and innovative programs in recent months to provide more than $1 trillion in financial support to banks, corporations, money market funds, and other institutions (see Table A-1).
Actions Taken by the Federal Reserve in Support of the Housing and
Financial Markets as of December 31, 2008
Action Funding Description Committed
to DatePotentiala Reduction in Interest Rates n.a. n.a. The target for the federal funds rate (the interest banks charge on loans to other banks) was reduced 10 times between September 2007 and December 2008, falling from 5.25 percent to between 0 and 0.25 percent. Loans to Financial Institutions Primary and Secondary Credit Programs 94 Unknown Through the primary and secondary credit programs, the Federal Reserve disburses short-term loans to banks and other institutions that are legally allowed to accept monetary deposits from consumers. The term of the loan may be as long as 90 days. Term Auction Facility 450 600 The Term Auction Facility (TAF) allows banks and other financial institutions to pledge collateral in exchange for a loan from the Federal Reserve. The interest rate on the loan is determined by auction; such auctions are conducted biweekly for loans with a maturity of either 28 or 84 days. The maximum size of each auction is $150 billion, although most recent auctions have been considerably smaller. Takeover of Bear Stearns
Backed assets to facilitate takeover of Bear Stearns by JP Morgan Chase29 29 The Federal Reserve created Maiden Lane I, a limited liability company (LLC), to acquire certain assets of Bear Stearns at a cost of $29 billion. The LLC will manage those assets to maximize the likelihood that the investment is repaid and to minimize disruption to financial markets. The current value of the portfolio on the Federal Reserve’s balance sheet is $27 billion. Support for AIG
Acquired control of nearly 80 percent of the insurance company83 113 The Federal Reserve agreed to loan AIG $60 billion and acquired control of nearly 80 percent of the company. In addition, the Federal Reserve Bank of New York bought $19.5 billion of residential mortgage-backed securities from AIG's portfolio through an LLC and another $24.5 billion of collateralized debt obligations (CDOs) on which AIG wrote contracts for credit default swaps through another LLC. (CDOs are complex financial instruments that repackage assets such as mortgage bonds, buyout loans, and other debt—including other CDOs—into new securities. A credit default swap is a type of insurance arrangement in which the buyer pays a premium at periodic intervals in exchange for a contingent payment in the event that a third party defaults. The size of the premium paid relative to the contingent payment generally increases with the likelihood of default.) Support for Short-Term Corporate Borrowing
Commercial Paper Funding Facility334 1,800 The Commercial Paper Funding Facility (CPFF) finances the purchase of commercial paper (securities sold by large banks and corporations to obtain funding to meet short-term borrowing needs, such as payroll) directly from eligible issuers. Securities purchased by this program may be backed by assets or unsecured; they must be highly rated, denominated in U.S. dollars, and have a maturity of three months. The program is in effect through April 30, 2009. Support for Money Market Mutual Funds Money Market Investor Funding Facility 0 540 The Money Market Investor Funding Facility (MMIFF) is designed to restore liquidity to money markets by purchasing certificates of deposit and commercial paper from money market mutual funds. The authority to purchase assets is in effect through April 30, 2009. Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility24 Unknown The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provides funding to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds under certain conditions. The program is intended to assist money market funds that hold such paper in meeting demands for redemptions by investors and to foster liquidity in the ABCP market specifically and money markets generally. The program is in effect through April 30, 2009. Support for Primary Dealers Term Securities Lending Facility and
TSLF Options Program172 200 The Term Securities Lending Facility (TSLF) offers to lend Treasury securities held by the Federal Reserve for a one-month term in exchange for other types of securities held by the 17 financial institutions, known as primary dealers, that trade directly with the Federal Reserve. The TSLF Options Program (TOP) offers options on short-term TSLF loans that will be made on a future date. (An option is a contract written by a seller that conveys to the buyer the right—but not the obligation—to buy or sell a particular asset.) Primary Dealer Credit Facility 37 Unknown The Primary Dealer Credit Facility (PDCF) provides overnight loans in exchange for eligible collateral to financial institutions that trade directly with the Federal Reserve. The program is in effect through April 30, 2009. Support for the Mortgage Market Purchases of the debt of the housing-
related government-sponsored enterprises15 100 The Federal Reserve will purchase up to $100 billion in debt issued by three government-sponsored enterprises (GSEs)—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—through competitive auctions over the next several quarters. Purchases of mortgage-backed securities 0 500 Over the next several quarters, the Federal Reserve will purchase up to $500 billion in mortgage-backed securities (MBS) issued by GSEs and the Government National Mortgage Association (Ginnie Mae). The MBS purchases are expected to begin in early January. Support for Consumer and Small Business Lending
Term Asset-Backed Securities Loan Facility0 200 Through the Term Asset-Backed Securities Loan Facility (TALF), the Federal Reserve Bank of New York will lend up to $200 billion to holders of certain AAA-rated asset-backed securities (consumer and small business loans), and the Troubled Asset Relief Program will provide $20 billion of credit protection (protection against debtors that do not pay because of insolvency or protracted default) for those loans. The TALF is expected to begin lending in February 2009; the authority expires on December 31, 2009. Assistance to Citigroup 0 234 The Federal Reserve will absorb 90 percent of any losses resulting from the federal government’s guarantee of a pool of Citigroup’s assets after payouts have been made by Citigroup, the Troubled Asset Relief Program, and the Federal Deposit Insurance Corporation. Currency Swaps At least 500 Unlimited In response to strong demand for dollars from abroad, the Federal Reserve has contracted with 14 foreign central banks to make U.S. dollars available temporarily. After a specified period of time, the original amounts of dollars will be returned in exchange for the foreign currency. Source: Congressional Budget Office based on information from the Federal Reserve.
Note: n.a. = not applicable.
Activities of the Federal Reserve are not directly recorded in the federal budget. Rather, each year its net earnings—generated by interest on its holdings of securities; income from foreign currency holdings; fees received for services provided to institutions that accept monetary deposits from consumers (such as check clearing, funds transfers, and automated clearinghouse operations); and interest on loans to such institutions—are remitted to the Treasury and recorded in the budget as revenues. That income is typically in the range of $20 billion to $30 billion a year.1
Thus, recent actions by the Federal Reserve to address the turmoil in the markets may affect federal revenues through their impact on the amount of earnings that the Federal Reserve remits to the Treasury. Those earnings would be diminished by any losses incurred if creditors were unable to repay loans or if the assets acquired proved to be worth less than the cost to acquire them. Although the Federal Reserve loaned more than $1 trillion in 2008 through its various programs, it does not intend to subsidize borrowers by paying more for assets than they are worth, and it has structured the transactions to minimize the chance of losses to its portfolio. Losses are possible, however; for example, the Federal Reserve has already written down—by about $2 billion—the value of the assets it acquired in the takeover of Bear Stearns.
The Department of the Treasury
Most of the actions taken by the Treasury were authorized by recent legislation. At the end of July, the Housing and Economic Recovery Act of 2008 (Public Law 110-289) authorized actions to provide support for the housing market. Among the provisions of that act was the authority for the Director of the Federal Housing Finance Agency (FHFA) and the Secretary of the Treasury to place Fannie Mae and Freddie Mac into conservatorship and take ownership interest in each company.2
In early October, the Emergency Economic Stabilization Act of 2008 (Division A of P.L. 110-343) established the Troubled Asset Relief Program (TARP), authorizing the Treasury to purchase $700 billion in assets to alleviate the crisis in credit markets (see Table A-2). The first $350 billion is now available for obligation; the second $350 billion will become available if the Administration requests it and the Congress does not take action to deny that request.
Actions Taken by the Treasury in Support of the Housing and Financial Markets as of December 31, 2008
Action Disbursements Subsidyb (Credit
basis)Description To Date Potentiala Troubled Asset Relief Program 247 700 64 The Emergency Economic Stabilization Act of 2008 (Division A of P.L. 110-343) granted authority to the Treasury to purchase $700 billion in assets through a new program, the Troubled Asset Relief Program (TARP). The second $350 billion will become available if the Administration requests it and the Congress does not take action to deny that request. As of December 31, the program had disbursed $247 billion. The subsidy cost estimated by the Congressional Budget Office—about $64 billion to date—is computed using the modified credit reform procedure (that is, accounting for market risk) specified in P.L. 110-343. Housing-Related Tax Provisions 0 12 n.a. The Housing and Economic Recovery Act of 2008 (P.L. 110-289) authorized a refundable tax credit for first-time home buyers (to be repaid, without interest, over a 15-year period) and contained other housing-related tax provisions. Purchases of Obligations and Securities Issued by Fannie Mae and Freddie Mac 71 Unlimited -1 The Housing and Economic Recovery Act of 2008 authorized the Department of the Treasury to buy obligations and securities issued by Fannie Mae and Freddie Mac. About $71 billion of residential mortgage-backed securities (securities whose value is derived from an underlying pool of mortgages) had been purchased as of December 31, 2008. Authority to make such market purchases expires on December 31, 2009. The subsidy cost recorded in the budget is computed using standard credit reform procedures. Conservatorship for Fannie Mae and Freddie Mac 14 200 n.a. The Treasury received senior preferred equity shares and warrants in exchange for any future contributions necessary to keep the two entities solvent. (Preferred equity shares provide a specific dividend to be paid before any dividends are paid to common stockholders and take precedence over common stock in the event of a liquidation; a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price.) Temporary Guarantee Program for Money Market Funds Unknown 3,000 n.a. The Treasury will guarantee investors’ shares as of September 19, 2008. The guarantee is in effect through April 30, 2009, but can be extended through September 18, 2009. Participating funds pay a fee of 1.5 or 2.2 basis points times the number of shares outstanding. (A basis point is one-hundredth of a percentage point.) Supplemental Financing Program 259 Unlimited n.a. The Treasury is borrowing from the public to assist the Federal Reserve. Source: Congressional Budget Office based on information from the Department of the Treasury.
Note: n.a. = not applicable.
a. “Potential disbursements” refers to the maximum amount of spending under the program or the maximum amount of outstanding assets available for guarantee.
b. “Subsidy,” broadly speaking, refers to the purchase cost minus the present value of any estimated future earnings from holding those assets and the proceeds from the eventual sale of them.
As of December 31, the program had disbursed $238 billion to banks and other institutions in exchange for shares of preferred stock and warrants. (Preferred stock refers to shares of equity that provide a specific dividend to be paid before any dividends are paid to common stockholders and that take precedence over common stock in the event of a liquidation; a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price.) The program will also finance up to $17.4 billion in loans for General Motors and Chrysler (the automakers have received $9 billion already) and $6 billion in assistance related to GMAC, a financial services company.
Funds have also been pledged for additional capital purchases. Furthermore, the TARP is responsible for $20 billion in credit protection (protection against debtors that do not pay because of insolvency or protracted default) for the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) and $5 billion in credit protection for assets held by Citigroup. In total, the funds already disbursed and those committed but not yet disbursed are likely to consume all of the first $350 billion available under the TARP.
Spending for some programs conducted by the Treasury will be recorded in the budget on a discounted present-value basis rather than on a cash basis.3 For those programs, the budget records the cost of the subsidy provided—that is the cost resulting from interest subsidies, potential defaults on that lending, and other factors.
A few other agencies have also taken actions in response to the turmoil in the markets, either through existing authority or on the basis of recent legislation. The Federal Deposit Insurance Corporation (FDIC) temporarily raised the limit on insurance coverage—from $100,000 to $250,000—as a result of a provision in the Emergency Economic Stabilization Act of 2008. Through existing authority to reduce systemic risks to the economy, the FDIC established a program to enhance liquidity by guaranteeing debt issued by financial institutions as well as certain deposits in checking accounts and other non-interest-bearing accounts; it will also provide assistance to Citigroup using that existing authority (see Table A-3).
Actions Taken by Other Agencies in Support of the Housing and Financial Markets as of December 31, 2008
Action To Date Potentiala Description Federal Deposit Insurance Corporation Temporarily Raised the Basic Limit on Insurance Coverage from $100,000 to $250,000 per Depositor n.a. 700 The Emergency Economic Stabilization Act of 2008 (Division A of P.L. 110-343) temporarily raised the limit on deposit insurance through December 31, 2009. That action is estimated to increase the amount of insured deposits by about $700 billion, or 15 percent. Temporary Liquidity Guarantee Program n.a. 1,450 The Temporary Liquidity Guarantee Program has two components. The first—the debt guarantee program—aims to enable participating institutions to borrow and lend money more readily. It fully protects certain newly issued senior unsecured debt (securities that are not backed by collateral and have priority over all other debt in ranking for payment in the event of default) with a maturity of more than 30 days, including promissory notes, commercial paper (securities sold by large banks and corporations to meet short-term needs, such as payroll), and interbank funding. The guarantee applies to debt that is issued by June 30, 2009, and matures no later than June 30, 2012. Participating institutions pay fees based on the maturity of the debt. To date, the Federal Deposit Insurance Corporation (FDIC) has guaranteed $258 billion of new debt; potential guarantees could total $1 trillion.
The second component provides full guarantees for certain checking and other non-interest-bearing accounts through December 31, 2009. Participating institutions also pay fees for this guarantee, which could total $450 billion.Assistance to Citigroup 0 10 The FDIC may absorb up to $10 billion in losses resulting from the federal government’s guarantee of a pool of Citigroup’s assets after payouts have been made by Citigroup and the Troubled Asset Relief Program. As a fee for the guarantee, the FDIC will receive $3 billion in preferred stock (shares of equity that provide a specific dividend to be paid before any dividends are paid to common stockholders and that take precedence over common stock in the event of a liquidation). Department of Housing and Urban Development Redevelopment of Abandoned and Foreclosed Homes 0 4 The Housing and Economic Recovery Act of 2008 (P.L. 110-289) provided $4 billion in funding to state and local governments to purchase and rehabilitate foreclosed and abandoned homes. HOPE for Homeowners Program 0 1 The HOPE for Homeowners program permits home mortgages to be refinanced through private lenders with a guarantee from the Federal Housing Administration. The new loans must have a loan-to-value ratio that is no greater than 90 percent of the property’s appraised value. FHA Secure n.a. 1 FHA Secure was a temporary initiative to permit lenders to refinance non-FHA (Federal Housing Administration) adjustable-rate mortgages. The program has made about 4,000 loans since fall 2007 and expired on December 31, 2008. Federal Housing Finance Agency Conservatorship for Fannie Mae and
Freddie Macn.a. n.a. The Federal Housing Finance Agency and the Treasury took control of these two government-sponsored enterprises (GSEs) on September 6, 2008. Under the current circumstances, the Congressional Budget Office (CBO) views Fannie Mae and Freddie Mac as governmental entities. Streamlined Modification Program Unknown Unknown The Streamlined Modification Program is intended to avoid foreclosures by creating a fast-track method for reducing monthly payments on mortgages. The program will restrict payments to 38 percent of a household’s gross monthly income by reducing the interest rate, extending the life of the loan, or deferring principal. That policy applies to loans held by Fannie Mae and Freddie Mac and was launched on December 15, 2008. National Credit Union Administration Credit Union Homeowners Affordability Relief Program and Credit Union System Investment Program 0 41 These two loan programs are operated through the National Credit Union Administration’s Central Liquidity Facility and are financed by borrowing from the Federal Financing Bank. The Credit Union Homeowners Affordability Relief Program (CU HARP) will provide subsidized funding intended to help credit unions modify mortgages. The Credit Union System Investment Program (CU SIP) seeks to facilitate lending by shoring up corporate credit unions (which primarily provide financial resources and services to other credit unions). Temporary Corporate Credit Union Liquidity Guarantee Program 1 Unknown The Temporary Corporate Credit Union Liquidity Guarantee Program guarantees certain unsecured debt of participating corporate credit unions that was or will be issued between October 16, 2008, and June 30, 2009. Such debt must mature by June 30, 2012. Participating institutions pay annualized fees for the guarantees. Source: Congressional Budget Office based on information from the Federal Deposit Insurance Corporation, the Department of Housing and Urban Development, the Federal Housing Finance Agency, and the National Credit Union Administration.
Note: n.a. = not applicable.
a. “Potential disbursements” refers to the maximum amount of spending under the program or the maximum amount of outstanding assets available for guarantee.
The Department of Housing and Urban Development (HUD) has established several programs in an attempt to reduce foreclosures and address other issues in the housing market. Many of those programs were created by the Housing and Economic Recovery Act of 2008, but HUD has also used existing authority to create the FHA Secure program.
FHFA, under authority granted by the Housing and Economic Recovery Act of 2008, placed Fannie Mae and Freddie Mac under conservatorship. In addition, FHFA is planning to use its existing authority to create a program to streamline the loan modification process.
Financial turmoil has also affected credit unions. As a result, the National Credit Union Administration has created programs (under existing authority) to ensure the liquidity of its member institutions.
The Federal Reserve is now paying interest on required reserves and excess balances held on behalf of financial institutions. The interest paid on those deposits is linked to the federal funds rate; the Congressional Budget Office estimates that the Federal Reserve will incur interest costs of less than $5 billion in 2009. Authorization to pay interest on such reserves came from the Emergency Economic Stabilization Act of 2008, which advanced the effective date of a provision of the Financial Services Regulatory Relief Act of 2006 that was slated to take effect in 2011.
Conservatorship is the legal process in which an entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition.
The Administration is accounting for capital purchases made under the TARP on a cash basis rather than the present-value basis that was specified in the Emergency Economic Stabilization Act of 2008. That treatment will show more outlays than under CBO’s treatment for the TARP this year and then cash receipts in future years.
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