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 grappled to contain a financial crisis since the middle of 2007 that began with the collapse of the subprime lending market. 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 highlights the depth and breadth of the crisis:

  • Credit markets tightened, and where available, credit became more expensive for all borrowers
  • In September 2008, 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, American International Group (AIG), 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, disappeared in mergers, and one major investment bank, Lehman Brothers, filed for bankruptcy protection
  • The largest thrift savings banks, Washington Mutual and IndyMac, were taken over by their regulator to prevent their insolvencies
  • The Federal Deposit Insurance Corporation 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 appealed to Congress for possible financial aid
  • 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 had traditionally relied on lending from private parties.