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132-625: Early in August 2007, the subprime crisis began to spread to sectors outside mortgage and real-estate finance. The ECB began distributing funds through a discount window or fine-tuning operation . By August 9, the ECB lent €95 billion ($ 112 billion in the days conversion) to EU banks, and the Fed distributed $ 12 billion through repo operations. The Term Auction Facility formed a significant part of such global efforts, and empirical results indicate that it had

264-434: A run on the shadow banking system that began in mid-2007, which adversely affected the functioning of money markets. Examples of vulnerabilities in the private sector included: financial institution dependence on unstable sources of short-term funding such as repurchase agreements or Repos; deficiencies in corporate risk management; excessive use of leverage (borrowing to invest); and inappropriate usage of derivatives as

396-745: A "classic" boom-bust credit cycle was a narrowing of the difference between subprime and prime mortgage interest rates (the "subprime markup") between 2001 and 2007. In addition to considering higher-risk borrowers, lenders had offered progressively riskier loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences. To produce more mortgages and more securities, mortgage qualification guidelines became progressively looser. First, "stated income, verified assets" (SIVA) loans replaced proof of income with

528-457: A "statement" of it. Then, "no income, verified assets" (NIVA) loans eliminated proof of employment requirements. Borrowers needed only to show proof of money in their bank accounts. "No Income, No Assets" (NINA) or Ninja loans eliminated the need to prove, or even to state any owned assets. All that was required for a mortgage was a credit score. Types of mortgages became more risky as well. The interest-only adjustable-rate mortgage (ARM) allowed

660-414: A "willful disregard" for a borrower's ability to pay. Nearly 25% of all mortgages made in the first half of 2005 were "interest-only" loans. During the same year, 68% of "option ARM" loans originated by Countrywide Financial and Washington Mutual had low- or no-documentation requirements. At least one study has suggested that the decline in standards was driven by a shift of mortgage securitization from

792-506: A 38 percent (or $ 9.5 billion) subsidy. As of June 30, 2012 , $ 467 billion had been allotted, and $ 416 billion spent, according to a literature review on the TARP. Among the money committed, includes: The Congressional Budget Office released a report in January 2009, reviewing the transactions enacted through the TARP. The CBO found that through December 31, 2008, transactions under

924-626: A January 2012, review, it was reported that AIG still owed around $ 50 billion, GM about $ 25 billion and Ally about $ 12 billion. Break even on the first two companies would be at $ 28.73 a share versus then-current share price of $ 25.31 and $ 53.98 versus then-current share price of $ 24.92, respectively. Ally was not publicly traded. The 371 banks that still owed money include Regions ($ 3.5 billion), Zions Bancorporation ($ 1.4 billion), Synovus Financial Corp. ($ 967.9 million), Popular, Inc. ($ 935 million), First BanCorp of San Juan, Puerto Rico ($ 400 million) and M&T Bank Corp. ($ 381.5 million). Some in

1056-453: A balance, up from 6% in 1970. Free cash used by consumers from home equity extraction doubled from $ 627 billion in 2001 to $ 1,428 billion in 2005 as the housing bubble built, a total of nearly $ 5 trillion over the period. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $ 10.5 (~$ 14.6 trillion in 2023) trillion. From 2001 to 2007, U.S. mortgage debt almost doubled, and

1188-574: A booming market until 2007, when they were hit by widespread foreclosures on the underlying loans. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses. TARP does not allow banks to recoup losses already incurred on troubled assets, but officials expect that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and

1320-424: A building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages . These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for

1452-527: A foreign bank, U.S. savings banks or credit unions, U.S. broker-dealers, U.S. insurance companies, U.S. mutual funds or other U.S. registered investment companies, tax-qualified U.S. employee retirement plans, and bank holding companies. The President was to submit a law to cover government losses on the fund, using "a small, broad-based fee on all financial institutions". To participate in the bailout program, "...companies will lose certain tax benefits and, in some cases, must limit executive pay . In addition,

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1584-403: A frequent commenter on TARP related issues, also pointed to excessive misinformation and erroneous analysis surrounding the U.S. toxic asset auction plan. Removing toxic assets would also reduce the volatility of banks' stock prices. This lost volatility would hurt the stock price of distressed banks. Therefore, such banks would only sell toxic assets at above market prices. On April 19, 2009,

1716-819: A long-term trend of rising housing prices had encouraged borrowers to assume risky mortgages in the anticipation that they would be able to quickly refinance at easier terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., borrowers were unable to refinance. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices fell, and adjustable-rate mortgage (ARM) interest rates reset higher. As housing prices fell, global investor demand for mortgage-related securities evaporated. This became apparent by July 2007, when investment bank Bear Stearns announced that two of its hedge funds had imploded. These funds had invested in securities that derived their value from mortgages. When

1848-423: A number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending , and speculation), overbuilding during the boom period, risky mortgage products, increased power of mortgage originators, high personal and corporate debt levels, financial products that distributed and perhaps concealed

1980-533: A number that is believed to have risen to 12 million by November 2008. By September 2010, 23% of all U.S. homes were worth less than the mortgage loan. Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property. Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during

2112-544: A potential weakness in the financial position of the borrowing bank. Hence, the need for a new monetary policy tool emerged and TAF provided just what they needed to banks. The Fed used the TAF as a trial of this type of monetary tool, later adding additional facilities such as the Term Securities Lending Facility when it had proved its success and usefulness. The final Term Auction Facility auction

2244-402: A record level of nearly 40% of homes purchased were not intended as primary residences. David Lereah, National Association of Realtors 's chief economist at the time, stated that the 2006 decline in investment buying was expected: "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market." Housing prices nearly doubled between 2000 and 2006,

2376-421: A set spending limit, $ 250 billion at the start of the program, with which it will purchase the assets and then either sell them or hold the assets and collect the coupons . The money received from sales and coupons will go back into the pool, facilitating the purchase of more assets. The initial $ 250 billion could be increased to $ 350 billion upon the president 's certification to Congress that such an increase

2508-405: A short list of criteria based on a secret ratings system they use to gauge this. The New York Times stated: "The criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive" because the criteria appears to favor the financially best off banks and banks too big to let fail . Some lawmakers are upset that

2640-538: A strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns. On December 11, 2007, the Fed lowered its discount rate to 4.75%, but due to the lack of borrowing from the discount window in the previous weeks, and a lack of liquidity after the 2007 credit crunch , the Federal Reserve and several other central banks opened their short term lending windows , hoping to alleviate

2772-438: A tightly controlled duopoly to a competitive market in which mortgage originators held the most sway. The worst mortgage vintage years coincided with the periods during which Government Sponsored Enterprises (specifically Fannie Mae and Freddie Mac) were at their weakest, and mortgage originators and private label securitizers were at their strongest. In a Peabody Award -winning program, NPR correspondents considered why there

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2904-454: A tool for taking excessive risks. Examples of vulnerabilities in the public sector included: statutory gaps and conflicts between regulators; ineffective use of regulatory authority; and ineffective crisis management capabilities. Bernanke also discussed " Too big to fail " institutions, monetary policy, and trade deficits. During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying

3036-672: A vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being "flipped" (sold) for a profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties. One 2017 NBER study argued that real estate investors (i.e., those owning 2+ homes) were more to blame for

3168-493: A wide range of collateral . Auctions held on December 17 and December 20 released $ 20 billion each in the form of 28- and 35-day loans, respectively. On the December 17th Auction, bids began at 4.17% and ended with a rate of 4.65%, substantially below the discount rate. The Fed received over $ 63 billion in bids and released the full $ 20 billion to 93 different institutions. As part of an effort to increase dollar liquidity around

3300-494: A year or two of appreciation. As a result of the depreciating housing prices, borrowers' ability to refinance became more difficult. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default. As more borrowers stopped making their mortgage payments, foreclosures and the supply of homes for sale increased. This placed downward pressure on housing prices, which further lowered homeowners' equity . The decline in mortgage payments also reduced

3432-481: Is down from 83,000 the prior September but well above the 2000–2006 average of 21,000 completed foreclosures per month. Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words,

3564-668: Is still outstanding, some of which has been converted to common stock, from just under $ 125 million down to $ 7,000. Sums loaned to entities that have gone into, and in some cases emerged from bankruptcy or receivership are provided. Additional sums have been written off, for example Treasury's original investment of $ 854 million in Old GM. The May 2015 report also detailed other costs of the program, including $ 1.157 billion "for financial agents and legal firms" $ 142 million for personnel services, and $ 303 million for "other services". The banks agreeing to receive preferred stock investments from

3696-503: The 2007–2008 financial crisis to help it decide which banks to provide special help for and which to not as part of its capitalization program authorized by the Emergency Economic Stabilization Act of 2008. It was being used to classify the nation's 8,500 banks into five categories, where a ranking of 1 means they are most likely to be helped and a 5 most likely to not be helped. Regulators were applying

3828-883: The American Recovery and Reinvestment Act (ARRA). The collapse of the United States housing bubble and high interest rates led to unprecedented numbers of borrowers missing mortgage repayments and becoming delinquent. This ultimately led to mass foreclosures and the devaluation of housing-related securities . The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies . Despite being highly rated, most of these financial instruments were made up of high-risk subprime mortgages . While elements of

3960-652: The Congressional Budget Office (CBO) stated that total disbursements would be $ 431 billion, and estimated the total cost, including grants for mortgage programs that have not yet been made, would be $ 24 billion. On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial , essentially ending the program. Through the Treasury, the US Government actually booked $ 15.3 billion in profit, as it earned $ 441.7 billion on

4092-628: The Federal takeover of Fannie Mae and Freddie Mac ). The cost of the S&;L crisis amounted to 3.2 percent of GDP during the Reagan/Bush era, while the GDP percentage of the TARP cost was estimated at less than 1 percent. The primary purpose of TARP, according to the Federal Reserve, was to stabilize the financial sector by purchasing illiquid assets from banks and other financial institutions. However,

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4224-583: The Obama administration outlined the conversion of the TARP loans to common stock . The program was run by the Treasury's new Office of Financial Stability . According to a speech made by Neel Kashkari , the fund would be split into the following administrative units: Eric Thorson was the Inspector General of the US Department of the Treasury and was responsible for the oversight of

4356-724: The United States Department of the Treasury to establish and manage TARP under a newly created Office of Financial Stability became law October 3, 2008, the result of an initial proposal that ultimately was passed by Congress as H.R. 1424 , enacting the Emergency Economic Stabilization Act of 2008 and several other acts. On October 8, the British announced their bank rescue package consisting of funding, debt guarantees and infusing capital into banks via preferred stock. This model

4488-502: The commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments. The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to

4620-463: The mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. Troubled Asset Relief Program The Troubled Asset Relief Program ( TARP ) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President George W. Bush . It

4752-470: The shadow banking system . These entities were not subject to the same regulations as depository banking. Further, shadow banks were able to mask the extent of their risk taking from investors and regulators through the use of complex, off-balance sheet derivatives and securitizations. Economist Gary Gorton has referred to the 2007–2008 aspects of the crisis as a " run " on the shadow banking system. The complexity of these off-balance sheet arrangements and

4884-549: The "Asset Guarantee Program." The report indicated that the program would likely not be made "widely available." On January 15, 2009, the Treasury issued interim final rules for reporting and record keeping requirements under the executive compensation standards of the Capital Purchase Program (CPP). Six days later, the Treasury announced new regulations regarding disclosure and mitigation of conflicts of interest in its TARP contracting. On February 5, 2009,

5016-551: The $ 426.4 billion invested. TARP allowed the United States Department of the Treasury to purchase or insure up to $ 700 billion of "troubled assets," defined as "(A) residential or commercial obligations will be bought, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that

5148-553: The 25.9% drop between 1928 and 1933 when the Great Depression occurred. From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S. As of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure compared to 1.5 million, or 3.5%, in September 2011. During September 2012, 57,000 homes completed foreclosure; this

5280-500: The Congressional Oversight Panel concluded that the Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The COP found the Treasury paid $ 254 billion, for which it received assets worth approximately $ 176 billion, for a shortfall of $ 78 billion. The COP's valuation analysis assumed that "securities similar to those issued under the TARP were trading in

5412-515: The ECB and the SNB in amounts of $ 20 billion and $ 4 billion, respectively. One might question why such a facility is needed in the presence of a discount window where financial institutions can freely borrow directly from the Fed with the same terms as the Term Auction facility. It is argued that banks were reluctant to borrow from the discount window during the financial crisis as that might signal

Term auction facility - Misplaced Pages Continue

5544-509: The FDIC and the Federal Reserve have also agreed to guarantee a $ 306 billion portfolio of assets owned by Citigroup. The CBO also estimated the subsidy cost for transactions under TARP. The subsidy cost is defined as, broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions, where the assets in question were valued using procedures similar to those specified in

5676-535: The Federal Credit Reform Act (FCRA), but adjusting for market risk as specified in the EESA. The CBO estimated that the subsidy cost of the $ 247 billion in transactions before December 31, 2008, amounts to $ 64 billion. As of August 31, 2015, TARP is projected to cost approximately $ 37.3 billion total—significantly less than the $ 700 billion originally authorized by Congress. The May 2015 report of

5808-662: The Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). The initial size of the Public Private Investment Partnership was projected to be $ 500 billion. Economist and Nobel Prize winner Paul Krugman had been very critical of this program arguing the non-recourse loans lead to a hidden subsidy that will be split by asset managers, banks' shareholders and creditors. Banking analyst Meredith Whitney argued that banks will not sell bad assets at fair market values because they are reluctant to take asset write downs. Economist Linus Wilson,

5940-693: The Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress". In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The targeted assets can be collateralized debt obligations , which were sold in

6072-645: The Senate approved changes to the TARP that prohibited firms receiving TARP funds from paying bonuses to their 25 highest-paid employees. The measure was proposed by Christopher Dodd of Connecticut as an amendment to the $ 900 billion economic stimulus act then waiting to be passed. On February 10, the newly confirmed Secretary of the Treasury Timothy Geithner outlined his plan to use the remaining $ 300 billion or so in TARP funds. He intended to direct $ 50 billion towards foreclosure mitigation and use

6204-447: The TARP but expressed concerns about the difficulty of properly overseeing the complex program in addition to his regular responsibilities. Thorson called oversight of TARP a "mess" and later clarified this to say "The word 'mess' was a description of the difficulty my office would have in providing the proper level of oversight of the TARP while handling its growing workload, including conducting audits of certain failed banks and thrifts at

6336-468: The TARP to Congress stated that $ 427.1 billion had been disbursed, total proceeds by April 30, 2015, were $ 441.8 billion, exceeding disbursements by $ 14.1 billion, though this included $ 17.7 billion in non-TARP AIG shares. The report predicted a total net cash outflow of $ 37.7 billion (excluding non-TARP AIG shares), based on the assumption the TARP housing programs' ( Hardest Hit Fund , Making Home Affordable and FHA refinancing) funds are fully taken up. Debt

6468-692: The TARP totaled $ 247 billion. According to the CBO's report, the Treasury had purchased $ 178 billion in shares of preferred stock and warrants from 214 U.S. financial institutions through its Capital Purchase Program (CPP). This included the purchase of $ 40 billion of preferred stock in AIG, $ 25 billion of preferred stock in Citigroup, and $ 15 billion of preferred stock in Bank of America. The Treasury also agreed to lend $ 18.4 billion to General Motors and Chrysler. The Treasury,

6600-548: The Treasury Secretary in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money. On November 12, 2008, Paulson indicated that reviving

6732-437: The Treasury include Goldman Sachs Group Inc. , Morgan Stanley , J.P. Morgan Chase & Co. , Bank of America Corp. (which had just agreed to purchase Merrill Lynch ), Citigroup Inc. , Wells Fargo & Co. , Bank of New York Mellon and State Street Corp. The Bank of New York Mellon is to serve as master custodian overseeing the fund. The U.S. Treasury maintains an official list of TARP recipients and proceeds to

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6864-505: The Treasury itself. The concept of future gains from troubled assets comes from the hypothesis in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate. The Emergency Economic Stabilization Act of 2008 (EESA) requires financial institutions selling assets to TARP to issue equity warrants (a type of security that entitles its holder to purchase shares in

6996-448: The U.S. Treasury will provide the remaining assets. The second program was called the legacy securities program, which would buy residential mortgage backed securities (RMBS) that were originally rated AAA and commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) which were rated AAA. The funds would come in many instances in equal parts from the U.S. Treasury's TARP monies, private investors, and from loans from

7128-412: The U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014. U.S. household net worth declined by nearly $ 13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012. U.S. housing prices fell nearly 30% on average and

7260-443: The U.S. financial and economic system that contributed to the crisis. These assumptions included: 1) Housing prices would not fall dramatically; 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in

7392-486: The U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012. One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product ". Europe also continued to struggle with its own economic crisis , with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012. As of January 2018, U.S. bailout funds had been fully recovered by

7524-440: The amount of mortgage debt per household rose more than 63%, from $ 91,500 to $ 149,500, with essentially stagnant wages. Economist Tyler Cowen explained that the economy was highly dependent on this home equity extraction: "In the 1993–1997 period, home owners extracted an amount of equity from their homes equivalent to 2.3% to 3.8% GDP. By 2005, this figure had increased to 11.5% GDP." This credit and house price explosion led to

7656-415: The bill limits ' golden parachutes ' and requires that unearned bonuses be returned." The fund had an Oversight Board so that the U.S. Treasury cannot act in an arbitrary manner. There was also an inspector general to protect against waste, fraud and abuse. CAMELS ratings (US supervisory ratings used to classify the nation's 8,500 banks) were being used by the United States government in response to

7788-683: The boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay. Mortgage fraud by lenders and borrowers increased enormously. The Financial Crisis Inquiry Commission reported in January 2011 that many mortgage lenders took eager borrowers' qualifications on faith, often with

7920-403: The bubble (and declines in the bust) were most pronounced. In these states, investor delinquency rose from around 15% in 2000 to over 35% in 2007 and 2008. Economist Robert Shiller argued that speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address

8052-412: The bubble. Further, this greater share of income flowing to the top increased the political power of business interests, who used that power to deregulate or limit regulation of the shadow banking system. According to Robert J. Shiller and other economists, housing price increases beyond the general inflation rate are not sustainable in the long term. From the end of World War II to the beginning of

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8184-455: The capital markets at fair values" and employed multiple approaches to cross-check and validate the results. The value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. For example, the COP found that the Treasury bought $ 25 billion of assets from Citigroup on October 14, 2008, however, the actual value was estimated to be $ 15.5, creating

8316-432: The capitalization program will end up culling banks in their districts. However, The Wall Street Journal suggested that some lawmakers are actively using TARP to funnel money to weak regional banks in their districts. Academic studies have found that banks and credit unions located in the districts of key Congress members had been more likely to win TARP money. Known aspects of the capitalization program "suggest that

8448-441: The company issuing the security for a specific price), or equity or senior debt securities (for non-publicly listed companies) to the Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares, or will agree not to vote the stock. This measure was designed to protect the government by giving the Treasury the possibility of profiting through its new ownership stakes in these institutions. Ideally, if

8580-437: The crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally. While the housing and credit bubbles were growing, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds , also known as

8712-566: The crisis first became more visible during 2007, several major financial institutions collapsed in late 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession. Most notably, Lehman Brothers , a major mortgage lender, declared bankruptcy in September 2008 . There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were

8844-450: The crisis than subprime borrowers: "The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors" and that "credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high-risk [subprime] borrowers was virtually constant for all debt categories during this period." The authors argued that this investor-driven narrative

8976-405: The crisis were dramatic. Between January 1 and October 11, 2008, owners of stocks in U.S. corporations suffered about $ 8 trillion in losses, as their holdings declined in value from $ 20 trillion to $ 12 trillion. Losses in other countries averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of

9108-501: The crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels." There are several "narratives" attempting to place the causes of the crisis into context, with overlapping elements. Five such narratives include: Underlying narratives #1-3 is a hypothesis that growing income inequality and wage stagnation encouraged families to increase their household debt to maintain their desired living standard, fueling

9240-494: The date of the Bear Stearns bailout. One of the more difficult issues that the Treasury faced in managing TARP was the pricing of the troubled assets. The Treasury had to find a way to price extremely complex and sometimes unwieldy instruments for which a market did not exist. In addition, the pricing had to strike a balance between efficiently using public funds provided by the government and providing adequate assistance to

9372-413: The day of the announcement rising by over six percent with the shares of bank stocks leading the way. P-PIP has two primary programs. The Legacy Loans Program will attempt to buy residential loans from bank's balance sheets. The Federal Deposit Insurance Corporation (FDIC) will provide non-recourse loan guarantees for up to 85 percent of the purchase price of legacy loans. Private sector asset managers and

9504-479: The economy had stabilized, the government sold its bank stock to private investors or the banks, and is estimated to have received approximately the same amount previously invested. In 1984, the government took an 80 percent stake in the nation's then seventh-largest bank Continental Illinois Bank and Trust. Continental Illinois made loans to oil drillers and service companies in Oklahoma and Texas. The government

9636-460: The effects of the TARP have been widely debated in large part because the purpose of the fund is not widely understood. A review of investor presentations and conference calls by executives of some two dozen US-based banks by The New York Times found that "few [banks] cited lending as a priority. Further, an overwhelming majority saw the program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for

9768-519: The finance industry's opaque faulty risk pricing methodology. Among the important catalysts of the subprime crisis were the influx of money from the private sector, the banks entering into the mortgage bond market, government policies aimed at expanding homeownership, speculation by many home buyers, and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2–28 loan , that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in

9900-580: The financial industry have been accused of not using the loaned dollars for its intended reason. Others further abused investors after the TARP legislation was passed by telling investors their money was invested in the federal TARP financial bailout program and other securities that did not exist. Neil Barofsky , Special Inspector General for the Troubled Asset Relief Program (SIGTARP), told lawmakers, "Inadequate oversight and insufficient information about what companies are doing with

10032-596: The financial industry, moral hazard lay at the core of many of the causes. In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the following causes: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of

10164-574: The financial institutions benefit from government assistance and recover their former strength, the government will also be able to profit from their recovery. Another important goal of TARP was to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets. Increased lending equates to "loosening" of credit, which

10296-405: The financial institutions that need it. The Act encouraged the Treasury to design a program using market mechanisms to the extent possible. This had led to the expectation that the Treasury would use a reverse auction to price assets. Theoretically, the system would create a market price from bidders that would want to sell at the highest possible price, but also be able to make a sale, therefore

10428-512: The first $ 250 billion allotted to the program. The first allocation of the TARP money was primarily used to buy preferred stock, which was similar to debt in that it gets paid before common equity shareholders. This had led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently. In the original plan, the government would buy troubled (also known as 'toxic') assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan

10560-875: The form of various financial models used to evaluate credit risk; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the shadow banking system and derivatives markets was not needed. Economists surveyed by the University of Chicago during 2017 rated the factors that caused the crisis in order of importance: 1) Flawed financial sector regulation and supervision; 2) Underestimating risks in financial engineering (e.g., CDOs); 3) Mortgage fraud and bad incentives; 4) Short-term funding decisions and corresponding runs in those markets (e.g., repo); and 5) Credit rating agency failures. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis

10692-592: The future." The article cited several bank chairmen as stating that they viewed the money as available for strategic acquisitions in the future rather than to increase lending to the private sector, whose ability to pay back the loans was suspect. PlainsCapital chairman Alan B. White saw the Bush administration's cash infusion as "opportunity capital", noting, "They didn't tell me I had to do anything particular with it." Moreover, while TARP funds have been provided to bank holding companies, those holding companies have only used

10824-419: The government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. As banks gain increased lending confidence, the interbank lending interest rates (the rates at which the banks lend to each other on a short-term basis) should decrease, further facilitating lending. TARP will operate as a "revolving purchase facility." The Treasury will have

10956-472: The government may be loosely defining what constitutes healthy institutions. [... Banks] that have been profitable over the last year are the most likely to receive capital. Banks that have lost money over the last year, however, must pass additional tests. [...] They are also asking if a bank has enough capital and reserves to withstand severe losses to its construction loan portfolio, nonperforming loans and other troubled assets." Some banks received capital with

11088-466: The government on a TARP website. Note that foreign-owned U.S. banks were not eligible. Beneficiaries of TARP include the following: Of these banks, JPMorgan Chase & Co., Morgan Stanley, American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., BB&T Corp, Wells Fargo & Co. and Bank of America repaid TARP money. Most banks repaid TARP funds using capital raised from

11220-506: The government, when interest on loans is taken into consideration. A total of $ 626B was invested, loaned, or granted due to various bailout measures, while $ 390B had been returned to the Treasury. The Treasury had earned another $ 323B in interest on bailout loans, resulting in an $ 109B profit as of January 2021. The immediate cause of the crisis was the bursting of the United States housing bubble which peaked in approximately 2006. An increase in loan incentives such as easy initial terms and

11352-500: The homeowner to pay only the interest (not principal) of the mortgage during an initial "teaser" period. Even looser was the "payment option" loan, in which the homeowner has the option to make monthly payments that do not even cover the interest for the first two- or three-year initial period of the loan. Nearly one in 10 mortgage borrowers in 2005 and 2006 took out these "option ARM" loans, and an estimated one-third of ARMs originated between 2004 and 2006 had "teaser" rates below 4%. After

11484-572: The housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in MBS reported significant losses. Defaults and losses on other loan types also increased significantly as

11616-463: The housing bubble in 1997, housing prices in the US remained relatively stable. The bubble was characterized by higher rates of household debt and lower savings rates, slightly higher rates of home ownership, and of course higher housing prices. It was fueled by low interest rates and large inflows of foreign funds that created easy credit conditions. Between 1997 and 2006 (the peak of the housing bubble),

11748-505: The initial period, monthly payments might double or even triple. The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARMs even to those with credit ratings that merited a conforming (i.e., non-subprime) loan. Mortgage underwriting standards declined precipitously during

11880-567: The issuance of equity securities and debt not guaranteed by the federal government. PNC Financial Services, one of the few profitable banks without TARP money, planned on paying their share back by January 2011, by building up its cash reserves instead of issuing equity securities. However, PNC reversed course on February 2, 2010, by issuing $ 3 billion in shares and $ 1.5-2 billion in senior notes in order to pay its TARP funds back. PNC also raised funds by selling its Global Investment Services division to crosstown rival The Bank of New York Mellon . In

12012-658: The larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives. In the U.S., the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to address some of the causes of the crisis. The crisis can be attributed to several factors, which emerged over

12144-581: The laws of the United States and if they have "significant operations" in the United States. The Treasury would need to define what institutions will be included under the term "financial institution" and what will constitute "significant operations". Companies that sell their bad assets to the government must have provided warrants so that the government would benefit from future growth of the companies. Certain institutions seemed to be guaranteed participation. These included: U.S. banks, U.S. branches of

12276-516: The loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. The losses experienced by financial institutions on their mortgage-related securities impacted their ability to lend, slowing economic activity. Interbank lending dried-up initially and then loans to non-financial firms were affected. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in

12408-620: The money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering. In its October 2011 quarterly report to Congress, SIGTARP reported "more than 150 ongoing criminal and civil investigations". SIGTARP had already achieved criminal convictions of 28 defendants (19 had already been sentenced to prison), and civil cases naming 37 individuals and 18 corporate/legal entities as defendants. It had recovered $ 151 million, and prevented $ 553 million going to Colonial Bank , which failed. The first TARP fraud case

12540-402: The mortgages themselves and the various financial instruments created by pooling groups of mortgages into one security to be bought on the market. This category probably included foreclosed properties as well. Real estate and mortgage-related assets (and securities based on those kinds of assets) were eligible if they originated (that is, were created) or were issued on or before March 14, 2008,

12672-568: The post on March 30, 2011. The Treasury retained the law firms of Squire, Sanders & Dempsey and Hughes, Hubbard & Reed to assist in the administration of the program. Accounting and internal controls support services have been contracted from PricewaterhouseCoopers and Ernst and Young under the Federal Supply Schedule. The Act's criterion for participation stated that "financial institutions" will be included in TARP if they are "established and regulated" under

12804-425: The price must set a low enough price to be competitive. The Treasury was required to publish its methods for pricing, purchasing, and valuing troubled assets no later than two days after the purchase of their first asset. The Congressional Budget Office (CBO) used procedures similar to those specified in the Federal Credit Reform Act (FCRA) to value assets purchased under the TARP. In a report dated February 6, 2009,

12936-446: The price of the typical American house increased by 124%. Many research articles confirmed the timeline of the U.S. housing bubble (emerged in 2002 and collapsed in 2006–2007) before the collapse of the subprime mortgage industry. From 1980 to 2001, the ratio of median home prices to median household income (a measure of ability to buy a house) fluctuated from 2.9 to 3.1. In 2004 it rose to 4.0, and by 2006 it hit 4.6. The housing bubble

13068-550: The psychology that fuels them, they're going to keep forming." Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values. Warren Buffett testified to the Financial Crisis Inquiry Commission : "There was the greatest bubble I've ever seen in my life...The entire American public eventually was caught up in a belief that housing prices could not fall dramatically." In

13200-465: The remainder of the mortgage's term. The US home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher. Borrowers who would not be able to make the higher payments once the initial grace period ended, were planning to refinance their mortgages after

13332-414: The rest to help fund private investors to buy toxic assets from banks. Nevertheless, this highly anticipated speech coincided with a nearly 5 percent drop in the S&P 500 and was criticized for lacking details. Geithner announced on March 23, 2009, a Public-Private Investment Program (P-PIP) to buy toxic assets from banks' balance sheets. The major stock market indexes in the United States rallied on

13464-439: The rise in subprime lending and the increase in housing speculation. Investors, even those with "prime", or low-risk, credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted. The crisis had severe, long-lasting consequences for

13596-629: The risk of mortgage default, monetary and housing policies that encouraged risk-taking and more debt, international trade imbalances , and inappropriate government regulation. Excessive consumer housing debt was in turn caused by the mortgage-backed security , credit default swap , and collateralized debt obligation sub-sectors of the finance industry , which were offering irrationally low interest rates and irrationally high levels of approval to subprime mortgage consumers due in part to faulty financial models. Debt consumers were acting in their rational self-interest, because they were unable to audit

13728-487: The risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account

13860-471: The same time that efforts are underway to nominate a special inspector general." Neil Barofsky , an Assistant United States Attorney for the Southern District of New York , was nominated to be the first Special Inspector General for the Troubled Asset Relief Program (SIGTARP). He was confirmed by the Senate on December 8, 2008, and was sworn into office on December 15, 2008. He stepped down from

13992-409: The second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay. Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes

14124-520: The securities held, as well as the interconnection between larger financial institutions, made it virtually impossible to re-organize them via bankruptcy, which contributed to the need for government bailouts. Some experts believe these shadow institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing

14256-533: The securitization market for consumer credit would be a new priority in the second allotment. On December 19, 2008, President Bush used his executive authority to declare that TARP funds could be spent on any program that Paulson, deemed necessary to alleviate the 2007–2008 financial crisis . On December 31, 2008, the Treasury issued a report reviewing Section 102, the Troubled Assets Insurance Financing Fund, also known as

14388-675: The strain on interbank lending markets . In the federal funds market the Fed, along with the Bank of Canada , Bank of England , the European Central Bank and the Swiss National Bank , decided to implement a new monetary instrument the following day. This program, known in the US as the Term Auction Facility , enables the Fed to auction a set amount of funds to depository institutions , against

14520-481: The systemic ramifications of domestic regulatory actions. Federal Reserve Chair Ben Bernanke testified in September 2010 regarding the causes of the crisis. He wrote that there were shocks or triggers (i.e., particular events that touched off the crisis) and vulnerabilities (i.e., structural weaknesses in the financial system, regulation and supervision) that amplified the shocks. Examples of triggers included: losses on subprime mortgage securities that began in 2007 and

14652-542: The understanding the banks would try to find a merger partner. To receive capital under the program banks are also "required to provide a specific business plan for the next two or three years and explain how they plan to deploy the capital". TARP allowed the Treasury to purchase both "troubled assets" and any other asset the purchase of which the Treasury determined was "necessary" to further economic stability. Troubled assets included real estate and mortgage-related assets and securities based on those assets. This included both

14784-552: The value of mortgage-backed securities, which eroded the net worth and financial health of banks. This vicious cycle was at the heart of the crisis. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes,

14916-681: The value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $ 500,000 for each senior executive". The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using

15048-478: The value of these securities dropped, investors demanded that these hedge funds provide additional collateral. This created a cascade of selling in these securities, which lowered their value further. Economist Mark Zandi wrote that this 2007 event was "arguably the proximate catalyst" for the financial market disruption that followed. Several other factors set the stage for the rise and fall of housing prices, and related securities widely held by financial firms. In

15180-429: The world, the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly. On December 11, the ECB held a simultaneous auction, in dollars, and awarded $ 10 billion at the rate determined by the Fed's auction. To facilitate the provision of U.S.-dollar liquidity by these other central banks, the Fed arranged currency swap lines with

15312-635: The years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers. Lending standards deteriorated particularly between 2004 and 2007, as the government-sponsored enterprise (GSE) mortgage market share (i.e. the share of Fannie Mae and Freddie Mac , which specialized in conventional, conforming , non-subprime mortgages) declined and private securitizers share grew, rising to more than half of mortgage securitizations. Subprime mortgages grew from 5% of total originations ($ 35 billion) in 1994, to 20% ($ 600 billion) in 2006. Another indicator of

15444-522: The years leading up to the crisis, the U.S. received large amounts of foreign money from fast-growing economies in Asia and oil-producing/exporting countries. This inflow of funds combined with low U.S. interest rates from 2002 to 2004 contributed to easy credit conditions, which fueled both housing and credit bubbles . Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of

15576-458: Was 127% at the end of 2007, versus 77% in 1990. While housing prices were increasing, consumers were saving less and both borrowing and spending more. Household debt grew from $ 705 billion at year end 1974, 60% of disposable personal income, to $ 7.4 trillion at yearend 2000, and finally to $ 14.5 trillion in midyear 2008, 134% of disposable personal income. During 2008, the typical US household owned 13 credit cards, with 40% of households carrying

15708-648: Was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981. Furthermore, nearly four million existing homes were for sale, of which roughly 2.2 million were vacant. This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels. A report in January 2011 stated that U.S. home values dropped by 26% from their peak in June 2006 to November 2010, more than

15840-427: Was a component of the government's measures in 2009 to address the subprime mortgage crisis . The TARP originally authorized expenditures of $ 700 billion. The Emergency Economic Stabilization Act of 2008 created the TARP. The Dodd–Frank Wall Street Reform and Consumer Protection Act , signed into law in 2010, reduced the amount authorized to $ 475 billion (approximately $ 648 billion in 2023). By October 11, 2012,

15972-507: Was a market for low-quality private label securitizations. They argued that a "Giant Pool of Money" (represented by $ 70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income-generating investments had not grown as quickly. Investment banks on Wall Street answered this demand with financial innovation such as

16104-486: Was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis . The crisis led to a severe economic recession , with millions losing their jobs and many businesses going bankrupt . The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and

16236-459: Was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for

16368-630: Was brought by the SEC on January 19, 2009, against Nashville-based Gordon Grigg and his firm ProTrust Management. The latest occurred in March 2010, with the FBI claiming Charles Antonucci, the former president and chief executive of the Park Avenue Bank, made false statements to regulators in an effort to obtain about $ 11 million from the fund. The nearest parallel action the federal government has taken

16500-607: Was closely followed by the rest of Europe, as well as the U.S Government, who on the October 14 announced a $ 250bn (£143bn) Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $ 700bn Troubled Asset Relief Program. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: "(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten

16632-509: Was conducted on March 8, 2010. The maximum balance of outstanding loans peaked at $ 483 billion in March 2009, while profits to the Fed on the facility passed $ 700 million in that year. Converting loans of varying length to a standard 28-days, a total of $ 6.18 trillion was loaned through TAF, making it one of the most significant of the Fed’s stabilization efforts. 2007 subprime mortgage financial crisis The American subprime mortgage crisis

16764-476: Was estimated to have lost $ 1 billion because of Continental Illinois, which ultimately became part of Bank of America . The $ 24 billion for the estimated subsidy cost of TARP was less than the government's cost for the savings and loan crisis of the late 1980s, although the subsidy cost does not include the cost of other "bailout" programs (such as the Federal Reserve 's Maiden Lane Transactions and

16896-586: Was in investments made by the Reconstruction Finance Corporation (RFC) in the 1930s. The RFC, an agency chartered during the Herbert Hoover administration in 1932, made loans to distressed banks and bought stock in 6,000 banks, totalling $ 1.3 billion. The New York Times, citing finance experts on October 13, 2008, noted that, "A similar effort these days, in proportion to today's economy, would be about $ 200 billion." When

17028-631: Was more accurate than blaming the crisis on lower-income, subprime borrowers. A 2011 Fed study had a similar finding: "In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default." The Fed study reported that mortgage originations to investors rose from 25% in 2000 to 45% in 2006, for Arizona, California, Florida, and Nevada overall, where housing price increases during

17160-409: Was more pronounced in coastal areas where the ability to build new housing was restricted by geography or land use restrictions. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. US household debt as a percentage of annual disposable personal income

17292-418: Was necessary. The remaining $ 350 billion may be released to the Treasury upon a written report to Congress from the Treasury with details of its plan for the money. Congress then had 15 days to vote to disapprove the increase before the money will be automatically released. Privately held mortgages would be eligible for other incentives, including a favorable loan modification for five years. The authority of

17424-638: Was scratched when United Kingdom's Prime Minister Gordon Brown came to the White House for an international summit on the global credit crisis. Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, planned a package of three measures consisting of funding, debt guarantees and infusing capital into banks via preferred stock. The objective was to directly support banks' solvency and funding; in some economists' view, effectively nationalizing many banks. This plan seemed attractive to

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