Wall Street and the Financial Crisis: Anatomy of a Financial Collapse


G. Administrative and Legislative Actions

In response to the financial crisis, Congress and the Executive Branch have taken a number of actions. Three that have brought significant changes are the Troubled Asset Relief Program, Federal Reserve assistance programs, and the Dodd-Frank Wall Street and Consumer Protection Act.

Troubled Asset Relief Program (TARP). On October 3, 2008, Congress passed and President Bush signed into law the Emergency Economic Stabilization Act of 2008, P.L. 110- 343. This law, which passed both Houses with bipartisan majorities, established the Troubled Asset Relief Program (TARP) and authorized the expenditure of up to $700 billion to stop financial institutions from collapsing and further damaging the U.S. economy. Administered by the Department of the Treasury, with support from the Federal Reserve, TARP funds have been used to inject capital into or purchase or insure assets at hundreds of large and small banks.

The largest recipients of TARP funds were AIG, Ally Financial (formerly GMAC Financial Services), Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, PNC Financial Services, U.S. Bancorp, and Wells Fargo, as well as Chrysler, and General Motors. Most have repaid all or a substantial portion of the TARP funds they received.

Although initially expected to cost U.S. taxpayers more than $350 billion, the Congressional Budget Office estimated in November 2010, that the final cost of the TARP program will be approximately $25 billion. |101|

Federal Reserve Emergency Support Programs. In addition, as the financial crisis began to unfold, the Federal Reserve aggressively expanded its balance sheet from about $900 billion at the beginning of 2008, to more than $2.4 trillion in December 2010, to provide support to the U.S. financial system and economy. Using more than a dozen programs, through more than 21,000 individual transactions, the Federal Reserve provided trillions of dollars in assistance to U.S. and foreign financial institutions in an effort to promote liquidity and prevent a financial collapse. |102| In some instances, the Federal Reserve created new programs, such as its Agency Mortgage Backed Securities Purchase Program which purchased more than $1.25 trillion in mortgages backed by Fannie Mae, Freddie Mac, and Ginnie Mae. |103| In other instances, it modified and significantly expanded existing programs, such as by lowering the quality of collateral it accepted for access to and increasing lending by the discount window.

Dodd-Frank Act. On July 21, 2010, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. This law, which passed both Houses with bipartisan majorities, expanded the authority of regulatory agencies to try to prevent future financial crises. Among other provisions, the law:

    – established a Financial Stability Oversight Council, made up of federal financial regulators and others, to identify and respond to emerging financial risks;

    – established a Consumer Financial Protection Bureau to strengthen protections of American consumers from abusive financial products and practices;

    – restricted proprietary trading and investments in hedge funds by banks and other large financial institutions;

    – prohibited sponsors of asset backed securities from engaging in transactions that would involve or result in a material conflict of interest with investors in those securities;

    – established procedures to require nonbank firms whose failure would threaten U.S. financial stability to divest some holdings or undergo an orderly liquidation;

    – strengthened regulation of credit rating agencies;

    – strengthened mortgage regulation, including by clamping down on high cost mortgages, requiring securitizers to retain limited liability for securities reliant on high risk mortgages, banning stated income loans, and restricting negative amortization loans;

    – required better federal regulation of mortgage brokers;

    – directed regulators to require greater capital and liquidity reserves;

    – required regulation of derivatives and derivative dealers;

    – required registration of certain hedge funds and private equity funds;

    – authorized regulators to impose standards of conduct that are the same as those applicable to investment advisers on broker-dealers who provide personalized investment advice to retail customers; and

    – abolished the Office of Thrift Supervision.


101. 11/2010 "Report on the Troubled Asset Relief Program," prepared by the Congressional Budget Office, http://www.cbo.gov/ftpdocs/119xx/doc11980/11-29-TARP.pdf. [Back]

102. "Usage of Federal Reserve Credit and Liquidity Facilities," Federal Reserve Board, available at http://www.federalreserve.gov/newsevents/reform_transaction.htm. [Back]

103. "Agency Mortgage-Backed Securities Purchase Program," Federal Reserve Board, available at http://www.federalreserve.gov/newsevents/reform_mbs.htm. [Back]

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F. Government Sponsored Enterprises H. Financial Crisis Timeline

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