The Cost of Government Financial Interventions, Past and Present (CRS Report for Congress)
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| Release Date |
Revised Jan. 30, 2009 |
| Report Number |
RS22956 |
| Report Type |
Report |
| Authors |
Baird Webel, Analyst in Financial Economics; Marc Labonte, Specialist in Macroeconomic Policy; N. Eric Weiss, Specialist in Financial Economics |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
In response to ongoing financial turmoil, the federal government intervened financially with private corporations on a large scale that resulted in the government receiving significant debt and equity considerations three times from the beginning of 2008 until the middle of September 2008. The firms affected were Bear Stearns, Fannie Mae and Freddie Mac, and AIG. Dissatisfaction with the case-by-case approach that had been pursued up to that point led to Treasury's decision to propose a more comprehensive solution to the turmoil on September 19, 2008. On October 3, 2008, 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 purchasing up to $250 billion in financial firms' preferred stock under the TARP authority. These interventions have prompted questions regarding the taxpayer costs and the sources of funding. The sources of funding are relatively straightforward, the Federal Reserve (Fed) and the U.S. Treasury. The costs, however, are difficult to quantify at this stage. In most of the interventions, all 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.
