The Cost of Government Financial Interventions, Past and Present

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Between March and September 2008, the federal government intervened financially with private
corporations on three occasions, resulting in the government receiving significant debt and equity
considerations. The firms affected were Bear Stearns, Fannie Mae and Freddie Mac, and AIG.
Dissatisfaction with the case-by-case approach to addressing the ongoing financial turmoil led
Treasury to propose a more comprehensive approach on September 19, 2008. On October 3,

2008, the Emergency Economic Stabilization Act (EESA, P.L. 110-343) was signed into law,

authorizing the Troubled Assets Relief Program (TARP). TARP gave Treasury the option of
purchasing or insuring up to $700 billion of assets from financial firms. On October 14, 2008,
Treasury announced it was shifting its focus towards direct capital injections into banks through
the purchase of preferred shares. Treasury’s announced “capital purchase plan” was for
purchasing up to $250 billion in financial firms’ preferred stock under the TARP authority, with
approximately $187.5 billion actually purchased as of December 31, 2008.
In addition to the general capital purchase plan, there have been several other case-by-case
interventions since the passage of the EESA. The initial $85 billion AIG loan from mid-
September was first augmented and then revamped into a combination package of a $60 billion
line of credit, $40 billion in preferred share purchases, up to $20.9 billion in commercial paper
purchases, and up to $52.5 billion in troubled asset purchases. Citigroup received an additional
$20 billion in preferred share purchases after an initial $25 billion, along with federal guarantees
to cover losses on a $306 billion pool of assets. The U.S. automakers also received financial
assistance through TARP, with a $5 billion preferred share purchase from GMAC, up to $14.4
billion in loans to GM and up to $4 billion in loans promised to Chrysler.
These interventions have prompted questions regarding the taxpayer costs and the sources of
funding. The sources of funding are relatively straightforward—primarily the Federal Reserve
(Fed) and the U.S. Treasury. The costs, however, are difficult to quantify at this stage. In most of
the interventions, many of the financial outflows that are possible have yet to occur, and the
ultimate value of the debt and equity considerations received from the private firms is uncertain.
At this point, the federal government has the option to own nearly 80% of Fannie Mae, Freddie
Mac, and AIG. Depending on the final proceeds from the various debt and equity considerations,
the federal government may end up seeing a positive fiscal contribution from the recent
interventions, as was the case in some of the past interventions summarized in the tables at the
end of this report. The government may also suffer significant losses, as has also occurred in the
past.
This report will be updated as warranted by legislative and market events.

Introduc tion ..................................................................................................................................... 1
Where Has the Money Come From?...............................................................................................1
The Cost of Financial Interventions................................................................................................2
Recent Financial Interventions........................................................................................................2
Troubled Assets Relief Program (TARP)..................................................................................2
TARP Capital Purchase Program........................................................................................3
U.S. Automakers.......................................................................................................................3
Citigroup ...................................................................................................................... ............. 4
American International Group (AIG)........................................................................................4
Fannie Mae and Freddie Mac....................................................................................................5
Bear Stearns..............................................................................................................................5
Table 1. Summary of Current and Historical Financial Interventions by the Federal
Gove rnme nt .................................................................................................................................. 6
Author Contact Information............................................................................................................8

2008, the Emergency Economic Stabilization Act (EESA, P.L. 110-343) was signed into law,

authorizing the Troubled Assets Relief Program (TARP). TARP gave Treasury the option of
purchasing or insuring up to $700 billion of assets from financial firms. On October 14, 2008,
Treasury announced a Capital Purchase Program, under which it would use the TARP authority to
purchase banks’ preferred stock rather than the mortgage-related assets that had previously been
the primary focus. Other interventions under TARP have included a restructuring of the support
for AIG, preferred share purchase and asset guarantees for Citigroup, and loans and preferred
share purchase to support U.S. automakers.
These interventions have prompted questions regarding the taxpayer costs and the sources of
funding. The sources of funding are relatively straightforward; the costs, however, are difficult to
quantify at this stage. Many of the financial outflows that are possible have yet to occur, and the
ultimate value of the debt and equity considerations received from the private firms is uncertain.
At this point, the federal government has the option to own nearly 80% of Fannie Mae, Freddie
Mac, and AIG, as well as loans to, and preferred stock holdings in, a large number of institutions.
Depending on the final proceeds from the various debt and equity considerations, the federal
government may end up seeing a positive fiscal contribution from the recent interventions, as was
the case in some of the past interventions summarized in the tables at the end of this report. The
government may also suffer significant losses, as has also occurred in the past.

In the recent interventions, there have been two primary sources of immediate funding: the ¹
Federal Reserve (Fed) and the U.S. Treasury. Under its founding statute, the Fed has the
authority to loan money “in unusual and exigent circumstances” to “any individual, partnership,
or corporation” provided five members of the Board of Governors of the Federal Reserve system ²
agree. This authority has been cited in three of the interventions in 2008, namely Bear Stearns,
AIG, and Citigroup. The source of money loaned under this section derives from the Fed’s general
control of the money supply, which is essentially unlimited subject to the statutory mandates of ³
maintaining stable inflation and promoting economic growth. Because the profits of the Fed are
overwhelmingly remitted to the Treasury, the indirect source of the funds is the Treasury. In the
case of Fannie Mae and Freddie Mac, the direct source of funding is the Treasury, pursuant to the ⁴
statutory authority granted in the Housing and Economic Recovery Act of 2008. In the case of

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the Troubled Assets Relief Program, the direct source of funding is the Treasury, pursuant to the ⁵
statutory authority granted in the Emergency Economic Stabilization Act of 2008. Treasury
finances these activities by issuing bonds and increasing the federal debt.

Determining the cost of government interventions, particularly those currently in progress, is not
straightforward. Assistance often comes in forms other than direct monies from the Treasury,
including loan guarantees, lines of credit, or preferred stock purchases. Such assistance may have
little or no up-front cost to the government, although loan guarantees in legislation are scored by
the Congressional Budget Office (CBO) as an up front budgetary cost. This score reflects the fact
that a loan guarantee, which can be thought of as a sort of insurance, has value even if it is never
used. Many insurance policies are never used, but individuals and companies purchase them to
reduce the risk of loss. In many past cases, the value to various companies of federal guarantees
was to enable them to access the private credit markets, issuing bonds or obtaining bank loans
that they would not otherwise have been able to obtain. In other past cases, the federal guarantee
resulted in a lower interest rate on the bonds or loans.
Depending on the conditions attached to each specific intervention and how events proceed
thereafter, the government may see a net inflow of funds from the actions taken, rather than a net
outflow. Even with a net inflow of funds, however, intervention may have a cost if this inflow is
less than the benefit that could have been derived from expending the funds for another purpose.
The summaries below address the maximum amounts promised in federal assistance and attempt
to quantify the amounts that have actually been disbursed. There are also other, more diffuse costs
that could be weighed. For example, many would argue that the cost to the taxpayers of any
intervention should be weighed against the potential costs of financial system instability resulting
from inaction, or that one intervention may lead to more private sector risk-taking, and thus
necessitate additional future interventions (moral hazard). Such costs, however, are even harder to
quantify than the realized cost of the interventions. This report acknowledges but does not
attempt to address them.

As the government intervened in 2008 to prevent the failure of troubled financial firms, market
conditions seemed to get worse instead of better. After the initial AIG intervention, Treasury
argued that a more comprehensive solution was needed to restore financial calm. It proposed
creating a Troubled Assets Relief Program to purchase up to $700 billion of troubled assets from
financial firms as a way to restore investors’ confidence in the health of the financial sector. It
was argued that financial firms would be unable to replenish their capital (by selling equity to
private investors) unless certain assets were transferred to the government. Once financial

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markets stabilized, Treasury would be able to sell these assets, recouping some or perhaps all (if
asset prices rose above their purchase price) of the costs.
On October 3, 2008, the Emergency Economic Stabilization Act (EESA, Division A of P.L. 110-
343) was signed into law, creating TARP. In addition to an asset purchase program, P.L. 110-343
included an insurance program providing federal guarantees for troubled assets in return for
premiums paid by companies. It also allowed the government to take an equity stake in
companies participating in the asset purchase program. P.L. 110-343 provided broad discretion to
the Treasury to design the parameters of the program, making it difficult to evaluate the ultimate
costs of the program at this time.
Under the Credit Reform Act and P.L. 110-343, CBO has projected that the total net cost to the
government of the $700 billion outlaid under TARP will be approximately $185 billion in net ⁷
present value terms. CBO makes this estimate by comparing the price paid by the government to
acquire assets under TARP to the present discounted value of future income accruing to the
government from the assets plus future proceeds from the sale of the assets, using a discount rate
that has been adjusted for the risks inherent in holding the assets being purchased.
On October 14, 2008, Treasury announced its ongoing focus would be to inject capital directly
into financial institutions through the purchase of preferred stock rather than purchasing the
troubled assets that had previously been the focus of the program. Treasury also announced that
nine large banks were participating in the initial preferred share purchase, which amounted to
$125 billion. Treasury indicated that an additional $125 billion was being reserved for preferred
share purchases from smaller banks. As of December 31, 2008, approximately $62.5 billion of the ⁸
$125 billion for smaller banks had been used.
In addition to the general capital purchase program, the purchase of preferred shares under TARP
has been a component of several of the specific interventions detailed below.
On December 20, 2008, the U.S. Treasury announced it was providing support through
TARP to General Motors and Chrysler. The package included up to $13.4 billion in a
secured loan to GM and $4 billion in a secured loan to Chrysler. In addition, up to $1
billion was lent to GM for its participation in a rights offering by GMAC, GM’s former
financing arm which is now becoming a bank holding company. GMAC also received a
$5 billion capital injection through preferred share purchases. As of December 31, 2008,
the Treasury reports that $10.4 billion had been disbursed to GM, $5 billion to GMAC, ⁹
and $4 billion to Chrysler. The secured loans to the automakers are contingent on their

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producing plans for long-term profitability by March 31, 2009 at which point the loans
can be called if these plans are judged unsatisfactory.
On November, 23, 2008, the Treasury, Federal Reserve, and FDIC announced a joint intervention
in Citigroup, which had previously been a recipient of $25 billion in funding under TARP’s
general capital purchase program. This specific intervention consisted of an additional $20 billion
purchase of preferred shares under TARP and a government guarantee for a pool of $306 billion
in Citigroup assets. The guarantee is in place for 10 years for residential assets and 5 years for
non-residential assets. Should there be losses on the pool, Citigroup will exclusively bear up to
the first $29 billion. Any additional losses will be split between Citigroup and the government,
with Citigroup bearing 10% of the losses and the government bearing 90%. The first $5 billion of
government’s losses would be borne by the Treasury using TARP funds; the next $10 billion
would be borne by the FDIC; all further losses would be borne by the Fed through a non-recourse
loan. Citigroup will pay the federal government a fee for the guarantee in the form of preferred
stock. The assets will remain on Citigroup’s balance sheet, and Citigroup will receive the income
stream generated by the assets.
On September 16, 2008, the Fed announced that it was taking action to support AIG, a federally
chartered thrift holding company with a broad range of businesses, primarily insurance
subsidiaries, which are state-chartered. This support took the form of a secured two-year line of
credit with a value of up to $85 billion. The interest rate on the loan was relatively high,
approximately 11.5% on the date it was announced. AIG also was to pay interest on the amount of
the credit line that it did not access. In addition, the government received warrants to purchase up
to 79.9% of the equity in AIG. On October 8, the Fed announced that it would lend AIG up to a
further $37.8 billion against investment-grade securities held by its insurance subsidiaries. These
securities had been previously lent out and were not available as collateral at the time of the
original intervention. AIG also announced that it had applied to the Fed’s general Commercial
Paper Facility and was approved to borrow up to $20.9 billion.
The financial support for AIG was restructured in early November 2008. The restructured
financial support includes
• A $60 billion loan from the Fed, with the term lengthened to five years and the
interest rate reduced by 5.5%.
• $40 billion in preferred share purchase through the TARP Capital Purchase
Program. These shares pay a 10% dividend.
• $52.5 billion total in asset purchases by the Fed through two Limited Liability
Corporations (LLCs) known as Maiden Lane II and Maiden Lane III. AIG is
contributing an additional $6 billion for the LLCs and will bear the first $6
billion in any losses on the asset values. Any gains from these LLCs will be
shared between the government and AIG.
• $20.9 billion in possible lending through the Fed’s commercial paper facility.
This was unchanged from the previous approval.

The 79.9% equity position of the government in AIG remains essentially unchanged after the
restructuring of the intervention. As of December 31, 2008, the Fed reported that $38.9 billion
had been lent directly to AIG, while the two LLCs supporting AIG have purchased at total of ¹⁰
$46.9 billion in assets. The $40 billion in preferred share purchase through TARP was
completed on November, 25, 2008. As of November 5, 2008, AIG indicated it had borrowed
$15.3 billion from the Fed’s commercial paper facility.
On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and ¹¹
Freddie Mac into conservatorship. As part of this conservatorship, Fannie Mae and Freddie Mac
have signed contracts to issue new senior preferred stock to the Treasury, which has agreed to
purchase up to $100 billion of this stock from each of them. The Treasury agreed to make open
market purchases of Fannie Mae- and Freddie Mac-issued mortgage-backed securities. Treasury
has said that it expects to profit from the spread between the interest rate that it pays to borrow
money through bonds and the mortgage payments on the mortgage-backed securities. Fannie Mae
and Freddie Mac will guarantee payment of the securities. Treasury agreed that if the companies
have difficulty borrowing money, which has apparently not been the case to date, Treasury will
create a Government Sponsored Enterprise Credit Facility to provide liquidity to them, secured by
mortgage-backed securities (MBS) pledged as collateral. There are no specific limits to these
purchases or loans, but they are subject to the statutory limit on the federal government’s debt. In
return for the Treasury support, each company issued the Treasury $1 billion of senior preferred
stock without additional compensation, as well as warrants (options) to purchase up to 79.9% of
each company’s common stock. Treasury’s authority to provide financial support will terminate
December 31, 2009. According to CBO, Treasury had purchased $14 billion of preferred shares
and $71 billion of mortgage-backed securities as of December 31, 2008.
On a risk-adjusted present value basis, CBO estimates that Fannie Mae’s and Freddie Mac’s
combined liabilities exceeded their assets by $200 billion at the time of conservatorship – a gap
that will be bridged with federal funds. In addition, CBO projects that, going forward, the entities
will undertake new business with a cumulative net cost to the government of $104 billion in risk-
adjusted present value terms (assuming no further policy change to the entities’ business ¹²
activities).
On March 16, 2008, JPMorgan Chase agreed to acquire the investment bank Bear Stearns. As part
of the agreement, the Fed lent $28.82 billion to a Delaware limited liability corporation (LLC)
that it created to purchase financial securities from Bear Stearns. These securities are largely
mortgage-related assets. The interest and principal will be repaid to the Fed by the LLC using the
funds raised by the sale of the assets. The Fed’s loan will be made at an interest rate set equal to

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the discount rate (2.5% when the terms were announced, but fluctuating over time) for a term of ¹³
10 years, renewable by the Fed. In addition, JPMorgan Chase extended a $1.15 billion loan to
the LLC that will have an interest rate equal to 4.5 percentage points above the discount rate.
Thus, in order for the principal and interest to be paid off, the assets will need to appreciate
enough or generate enough income so that the rate of return on the assets exceeds the weighted
interest rate on the loans (plus the operating costs of the LLC). The interest on the loan will be
repaid out of the asset sales, not by JPMorgan Chase.
Any difference between the proceeds and the amount of the loans will produce a profit or loss for
the Fed, not JPMorgan Chase. Because JPMorgan Chase’s $1.15 billion loan was subordinate to
the Fed’s $28.8 billion loan, if there are losses on the $29.95 billion assets, the first $1.15 billion
of losses will be borne, in effect, by JPMorgan Chase. If the assets appreciate in value by more
than operating expenses, the Fed will make a profit on the loan. If the assets decline in value by
less than $1.15 billion, the Fed will not suffer any direct loss on the loan. Any losses beyond
$1.15 billion will be borne by the Fed. By the end of 2008, these assets had suffered ¹⁴
approximately $3 billion in losses.
Table 1. Summary of Current and Historical Financial Interventions by the
Federal Government
^{Beneficiary Action}^Financial^Commitment^{Final Cost to Treasury}
^{Unknown (Treas}^ury
^{U.S. Banks/TAR}^{P Capital}^Purchase^{of pre}^ferred^{Up to $2}⁵⁰^billion^{receives dividends on}
^Purchase^Program^shares^annou^{nced; $1}^87.5^billion^{stock, plus sale value of}
^{(October 1}^{4, 2}⁰⁰⁸⁾^{in actual outlays}^{stock at the e}^{nd of the}
^program.)
^{Unknown (Treas}^ury
^{U.S. Automakers}^{Secured Loan}^{Up to $1}^{3.4 billion}^{receives interest}^{on the}
^{(December 1}^{9, 2}⁰⁰⁸⁾^annou^nced^{loans as well as stock}
^warrants.)
^{Unknown (Treas}^ury
^GMAC^Purchase^{of pre}^ferred^$5^billi^{on direct to GMAC;}^{up to $}¹^{billion through}^{receives dividends on}^{stock, interest on the}^loan,
^{(December 2}^{9, 2}⁰⁰⁸⁾^{shares; sec}^{ured loan}^{General Motors.}^{plus sale value of stock at}
^{the end of t}^he^program.)
^$45^{billion total through}^{Unknown (Treas}^ury^{receives dividends on}
^Purchase^{of pre}^ferred^{TARP ($25 billion through}^{stock, plus sale value of}
^shares^{initial Capita}^{l Purchase}^{stock at the e}^{nd of the}^Citigroup
^Program)^program.)^{(October 1}^{4, 2}⁰⁰^8;
^{November 23, 20}⁰⁸⁾^{Unknown (}^Governme^nt
^Guara^{ntee of asset}^pool^{Up to $2}^49.3^billion^{receives pr}^eferr^{ed stock as}
^{fee for the}^guara^ntee.)

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^Beneficiary^Action^{Financial Commitment}^{Final Cost to Treasury}
^{Unknown (}^Governme^nt
^{Five-Year Secured Loan}^{Up to $6}^{0 billion against}^{receives interest}^{on loan}
^{from the Federal Reserve}^{the gene}^{ral assets of AI}^G^{plus stock war}^{rants o}ⁿ^u^p
^{to 79.9% of A}^{IG’s eq}^uity.)
^{Unknown (Treas}^ury^AIG
^Purchase^{of pre}^ferred^$40^{billion through TARP}^{receives dividends on}^{stock, plus sale value of}^{(September 16,}²⁰⁰^8;
^stock^{stock at the e}^{nd of the}^{November, 10,}²⁰⁰⁸⁾
^program.)
^{Asset Purc}^{hase t}^hrough^{Unknown (The Fed L}^LC
^{LLC controlled by the}^{Up to $5}^{2.5 billion}^{receives relatively ill}^iquid
^{Federal Reserve}^assets.)
^{Commercial Paper}^{Up to $2}^{0.9 billion}^{Unknown (I}^nterest^{is paid}
^Purchase^{by t}^{he Fed}^{to the Fed)}
^{Unknown (Treas}^ury
^{Senior Preferred Stock}^{Initial commitment, $10}⁰^billi^{on each; ultimately, no}^{receives $}¹^{billion (each)}
^Purchase^{set limit}^{of prefe}^{rred stock and}¹⁰^%
^{accrual on t}^{he stock.)}
^{Fannie Mae a}^{nd Freddie}
^{Unknown (Treas}^ury^Mac
^Purchase^{of Mortgage-}^{receives interest}^{on any}^{(September 7,}²⁰⁰⁸⁾
^{Backed Securities issued by}^{No set limit}^{MBS purc}^{hased a}^{nd may}
^{the compa}^nies^{sell the securities in t}^he
^futu^re.)
^{Unknown (Treas}^ury
^{Credit Facil}^ity^{No set limit; col}^lateralize^d^{receives interest}^{on any}
^{loans taken.)}
^{Bear Stearns}^{Asset Purc}^{hase t}^hrough^{Unknown (The Federal}
^{(March 14,}²⁰⁰⁸⁾^{LLC controlled by the}^$28.8^billion^{Reserve LLC r}^eceived
^$29.9⁵^billi^{on in relatively}
^{Federal Reserve}^ill^{iquid assets.)}
^{U.S. A}^irlines^{None ex}^{cept implicit value}
^{P.L. 107-4}²^{Loan Gua}^rantee^s^{Up to $1}^{0 billion}^{of loan guarantees;}^unde^r
^{(September 22,}²⁰⁰¹⁾^$2^billi^{on in loans made.}
^{Savings and Loan Failures}^{Savings and Loan Failures}^{and Insolvency}^{of Federal}^{Full faith and credit backing}^{of Federal Savings and}
^{P.L. 101-7}³^{Savings and Loan I}^nsu^rance^{Loan Ins}^ura^nce^$15^{0 billion.}
^{(August 9,}¹⁹⁸⁹⁾^Corporation^Corporation
^Chrysler
^{P.L. 96-18}⁵^{Loan Gua}^rantee^s^$1.5^billi^on^$31^{1 million profit from}
^(January^7,^{sale of warrants.}
¹⁹⁸⁰⁾
^{New York City}^$1.65^{billion in guaranteed}^{None, exce}^{pt the}^implicit
^{P.L. 95-33}⁹^{Loan Gua}^rantee^s^bonds^{value of loan guara}^ntee.
^{(August 9,}¹⁹⁷⁸⁾
^{New York City}^{None, exce}^{pt the}^implicit
^{P.L. 94-14}³^{Short-Term Loans}^$2.3^billi^on^{cost of the risk of loan.}

^{(December 9,}¹⁹⁷⁵⁾

^Beneficiary^Action^{Financial Commitment}^{Final Cost to Treasury}
^$12^{5 million loan}^$3^billi^{on net loss after}
^{Penn Cent}^ral^{Loan Gua}^rantee^{s in th}^e^guarantee^s;^{sale of ownership sta}^ke
^{P.L. 93-23}⁶^{wake of Railroad}^$7^billi^{on in federal}^{plus the}^{implicit value of}
^(January^{2, 1}⁹⁷⁴⁾^Bankru^ptcy^{loan guarantee.}
^{operating su}^bsidies
^$25^{0 million of loans}
^Lockheed^guaranteed^{for five year}^s^$31^{million profit from sale}
^{P.L. 92-70}^{Loan Gua}^rantee^s^{with three}^{year re}^newal;^{of warrants less}^{the lost}
^{(August 9,}¹⁹⁷¹⁾^guarantee^and^{value of loan guara}^ntee.
^{commitment fees c}^harged
^Source:^CRS
^Bai^r^{d We}^bel ^{N. Er}^{ic W}^e^iss
^Aⁿ^a^l^ystⁱⁿ^Fi^na^ncⁱ^a^l^E^c^oⁿ^o^mⁱ^c^s^Sp^{ecialist i}ⁿ^Fiⁿ^aⁿ^c^{ial Eco}ⁿ^o^m^ics
^b^w^ebel^@^c^r^s^.l^oc.g^ov^{, 7-}⁰⁶⁵²^e^w^ei^s^s^@^c^rs^.l^oc.g^o^v^{, 7-}⁶²⁰⁹
^{Marc L}^a^bon^t^e
^Specialis^{t i}ⁿ^Macroecon^o^mⁱ^c^P^o^licy
^m^l^abon^t^e^@^c^rs^.l^oc.g^o^v^{, 7-}⁰⁶⁴⁰