Charting the Financial Crisis

Home , Capital Purchase Program, Financial crisis, Great Recession, Hope Now Alliance, Jason Furman, Savings and loan crisis

CHARTING THE FINANCIAL CRISIS

U.S. Strategy and Outcomes

at BROOKINGS Introduction

The global nancial crisis of 2007-2009 and subsequent Great Recession constituted the worst shocks to the United States economy in generations. Books have been and will be written about the housing bubble and bust, the nancial panic that followed, the economic devastation that resulted, and the steps that various arms of the U.S. and foreign governments took to prevent the Great Depression 2.0. But the story can also be told graphically, as these charts aim to do.

What comes quickly into focus is that as the crisis intensi ed, so did the government’s response. Although the seeds of the harrowing events of 2007-2009 were sown over decades, and the U.S. government was initially slow to act, the combined eorts of the Federal Reserve, Treasury Department, and other agencies were ultimately forceful, exible, and eective. Federal regulators greatly expanded their crisis management toolkit as the damage unfolded, moving from traditional and domestic measures to actions that were innovative and sometimes even international in reach. As panic spread, so too did their eorts broaden to quell it. In the end, the government was able to stabilize the system, re-start key nancial markets, and limit the extent of the harm to the economy.

No collection of charts, even as extensive as this, can convey all the complexities and details of the crisis and the government’s interventions. But these gures capture the essential features of one of the worst episodes in American economic history and the ultimately successful, even if politically unpopular, government response.

1 Antecedents of the Crisis

2 ANTECEDENTS

In the years leading up to the crisis, the underlying performance of the U.S. economy had eroded in important ways.

3 ANTECEDENTS Because the growth of productivity and the labor force had slowed in the decade before the crisis, the potential economic growth rate was falling. Average growth in real potential GDP (August 2018 estimate) 5% Contribution to potential GDP from: Productivity growth Labor force growth 4

1975 1980 1985 1990 1995 2000 2005 2008

Sources: Congressional Budget Ofce, “An Update to the Economic Outlook: 2018 to 2028”; internal calculations 4 ANTECEDENTS Overall prime-age participation in the labor force had been falling, as the participation of women slowed and men’s continued a decades-long decline. Civilian labor force participation rates for people ages 25-54, indexed to January 1990=100 106

Women, ages 25-54 104

102

100 All people, ages 25-54

Men, ages 25-54 96

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Source: Bureau of Labor Statistics via Haver Analytics 5 ANTECEDENTS Income growth for the top 1 percent had risen sharply, driving income inequality to levels not seen since the 1920s. Cumulative growth in average income since 1979, before transfers and taxes, by income group +300%

Top 1 percent +250 of households

+200

+150

+100 81st to 99th percentiles of households

+ 50

Middle 60 percent Bottom 20 percent – 50 of households of households

1970 1975 1980 1985 1990 1995 2000 2005 2008

Source: Congressional Budget Ofce, “The Distribution of Household Income, 2014” 6 ANTECEDENTS Household debt as a share of income had risen to alarming heights.

Aggregate household debt as a share of disposable personal income (after taxes) 140%

120

100

40 Mortgage debt

Consumer debt 0

1970 1975 1980 1985 1990 1995 2000 2005 2008

Sources: Federal Reserve Board Financial Accounts of the United States; Federal Reserve Board, “Household Debt-to-Income Ratios in the Enhanced Financial Accounts” 7 ANTECEDENTS

Meanwhile, the fnancial system was becoming increasingly fragile.

8 ANTECEDENTS A “quiet period” of relatively low bank losses had extended for nearly 70 years and created a false sense of strength. Two-year historical loan-loss rates 10%

1920 1930 1940 1950 1960 1970 1980 1990 2000 2008

Sources: Federal Deposit Insurance Corp.; Federal Reserve Board; International Monetary Fund 9 ANTECEDENTS The “Great Moderation” — two decades of more stable economic outcomes with shorter, shallower recessions and lower infation — had added to complacency. Quarterly real GDP growth +20%

+15

+10

+ 5

– 5

–10

–15

1970 1975 1980 1985 1990 1995 2000 2005 2008

Source: Bureau of Economic Analysis via Federal Reserve Economic Data 10 ANTECEDENTS Long-term interest rates had been falling for decades, refecting decreasing infation, an aging workforce, and a substantial rise in global savings. Benchmark interest rates, monthly 20%

30-year fxed mortgage rate

5 10-year Treasury 2-year Treasury

1970 1975 1980 1985 1990 1995 2000 2005 2008

Sources: Federal Reserve Board and Freddie Mac via Federal Reserve Economic Data 11 ANTECEDENTS Home prices across the country had been rising rapidly for nearly a decade.

Real Home Price Index, percentage change from 1890 +100%

+ 80 Home prices had increased modestly through several boom-and-bust cycles since the 1970s, but started a much more dramatic rise in the late 1990s. + 60

+ 40

+ 20

1970 1975 1980 1985 1990 1995 2000 2005 2008

Source: U.S. Home Price and Related Data, Robert J. Shiller, Irrational Exuberance 12 ANTECEDENTS Credit and risk had migrated outside the regulated banking system.

Credit market debt outstanding, by holder, as a share of nominal GDP 250% Q1 1980 Q1 2008 31% Nonbank Financials 64% Broker-Dealers 200 69% Banks 36%

150 GSEs

ABS 100 MMF

Insurers

1970 1975 1980 1985 1990 1995 2000 2005 2008

Source: Federal Reserve Financial Accounts of the United States Notes: GSE: government-sponsored enterprise (including Fannie Mae and Freddie Mac); ABS: asset-backed securities; MMF: money market funds 13 ANTECEDENTS The amount of fnancial assets fnanced with short-term liabilities had also risen sharply, increasing the vulnerability of the fnancial system to runs. Net repo funding to banks and broker-dealers $2.00 trillion

1.75

The use of repo funding tripled 1.50 in the decade prior to 2008.

1.25

1.00

0.75

0.50

0.25

1970 1975 1980 1985 1990 1995 2000 2005 2008

Source: Federal Reserve Board Financial Accounts of the United States 14 ANTECEDENTS The regulatory capital regime for the U.S. fnancial system was inadequate.

Tier 1 common equity as a percent of risk-weighted assets Tangible common equity to tangible assets ratio 14% 4.0% Wells Fargo 3.5 Goldman Sachs Morgan 12 Stanley Citi Tier 1 common equity 3.0 JPMorgan 10 Chase Merrill Lynch All U.S. fnancial institutions 2.5 Bank of America 8 2.0 Lehman Bear Estimated Stearns 6 Largest U.S. bank capital and funding holding companies 1.5 ratios, Q4 2007 Commercial bank 4 1.0 Investment bank

2 The pre-crisis capital ratios Some institutions more did not refect the growing risks. 0.5 dependent on short-term funding were more leveraged. 0 0

’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 0% 10% 20% 30% 40% 50% 60% Reliance on short-term funding* Sources: Capital ratios: Federal Reserve Bank of New York‘s Research and Statistics Group; tangible common equity to tangible assets: company reports *Determined by share of fnancial assets pledged 15 The Arc of the Crisis

16 ARC OF THE CRISIS The fnancial crisis unfolded in several phases.

Bank credit default swap spreads and Libor-OIS 500 basis points Increasing Stress Early Breaking the Panic Escalation and Resolution

400

300

200 Bank CDS spreads

100

Libor-OIS spread 0

2007 2008 2009

Source: Bloomberg. Note: Credit default swap spreads are equal-weighted averages of JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs. 17 ARC OF THE CRISIS Home prices peaked nationally in the summer of 2006, then fell rapidly — eight major cities had declined more than 20 percent by March 2008.

+10% U.S. peak: U.S. change by March 2008: –9.0% July 2006

–10

–20 Change, July 2006–March 2008 Detroit –22.5% San Francisco –22.6 –30 Miami –23.1 Tampa –23.4 Los Angeles –24.4 San Diego –25.6 –40 Phoenix –26.6 Las Vegas –27.7

–50

2006 2007 2008

Sources: S&P CoreLogic Case-Shiller Home Price Indexes for 20 individual cities and National Home Price Index via Federal Reserve Economic Data 18 ARC OF THE CRISIS Stress in the fnancial system built up gradually over late 2007 and early 2008, as mortgage troubles and recession fears increased. Libor-OIS spread 400 basis points

350

Bank of America announces intent to buy Countrywide Financial, 300 the troubled mortgage lender, Jan. 11, 2008 250 Banks and GSEs start reporting billions in losses in November 2007, and warn of dividend cuts and a need Stock markets plunge 200 for more capital; stocks fall Jan. 21–24, 2008, amid recession fears

Bank of England provides JPMorgan Chase 150 emergency credit to Northern rescues Bear Stearns Rock, a troubled mortgage with emergency support lender, Sept. 14, 2007 from Federal Reserve, 100 March 14, 2008 BNP Paribas freezes three funds on 50 Aug. 9, 2007, amid Libor-OIS fragile ABCP markets spread

2007 2008 2009

Source: Bloomberg Note: GSE: government-sponsored enterprise 19 ARC OF THE CRISIS Investors were fearful that Fannie Mae and Freddie Mac might soon be swamped by losses . . . Stock price of Fannie Mae and Freddie Mac $80 a share

New York Attorney General subpoenas 70 Freddie Mac Fannie Mae and Freddie Mac, Nov. 7, 2007, in mortgage fraud investigation. Morgan Stanley takes $3.7 billion loss on subprime mortgage exposure; other big banks 60 also warn of huge writedowns.

50 Fannie Mae reports $1.4 billion loss on Nov. 9, 2007, amid Fannie Mae and Freddie Mac Fannie Mae deteriorating loan delinquencies. guaranteed half of all U.S. 40 mortgages, or nearly $4.4 trillion worth of debt. 30 As the housing market deteriorated, deepening losses at both GSEs sparked investor 20 concerns of insolvency, driving their share prices lower. Freddie Mac reports 10 $2 billion net loss and low capital reserves, Nov. 20, 2007 0

2007 2008 2009

Source: The Center for Research in Security Prices via Wharton Research Data Services 20 ARC OF THE CRISIS . . . and raised similar concerns about the nation’s largest banks and investment banks. S&P 500 Financials index level and average of six big banks’ CDS spreads, in basis points 600

S&P 500 Financials 500

400

300

200

100 Average bank CDS spread

2007 2008 2009

Source: Bloomberg. Note: Credit default swap spreads are equal-weighted averages of JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs. 21 ARC OF THE CRISIS The rise in losses, the fear of further losses, and the liquidity pressures on the system pushed the price of fnancial assets down and added to concerns about the solvency of the fnancial system.

More fnancial institutions look weak Economic or asset price growth slows

A self-reinforcing People run from weak Economic cycle of fear fnancial institutions growth slows

Financial institutions unload assets in fre sale Banks lend less and people spend less Asset prices decline further 22 ARC OF THE CRISIS Yet the economic forecasts suggested a modest and manageable slowdown in economic growth. The reality was far worse. Real GDP, percent change from preceding quarter, SAAR, and Philadelphia Fed surveys of professional forecasters +6% Professional Forecasters’ Professional Forecasters’ Professional Forecasters’ GDP forecast, Aug. 2008 GDP forecast, Aug. 2007 GDP forecast, Feb. 2008

–3

–6 Actual GDP

–9 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 2010

Sources: Bureau of Economic Analysis via Federal Reserve Economic Data (data update of August 29, 2018); Philadelphia Federal Reserve Survey of Professional Forecasters, 3Q 2007 and 1Q and 3Q 2008 23 The U.S. Strategy

24 U.S. STRATEGY Among the key elements of the U.S. policy response were:

Use of the Fed’s lender of last resort authorities beyond the banking system, for investment banks and funding markets.

An expansive use of guarantees to prevent runs on money funds and a broad array of fnancial institutions.

An aggressive recapitalization of the fnancial system, in two stages, backed by expanded FDIC guarantees.

A powerful use of monetary and fscal policy to limit the severity of the recession and restore economic growth.

A broad mix of housing policies to prevent failure of the GSEs, slow the fall of home values, lower mortgage rates, and aid in refnancings.

An extension of dollar liquidity to the global fnancial system, combined with international cooperation and Keynesian stimulus.

25 U.S. STRATEGY The U.S. government’s initial response to the crisis was gradual, and the tools were limited and antiquated because they were designed for traditional banks.

TOOLS AVAILABLE NO AUTHORITY

FDIC • To intervene to manage the • Resolution authority for banks, failure or nationalize nonbanks. with systemic risk exemption to • To guarantee the broader allow FDIC to provide broader liabilities of the fnancial system. guarantees. • Deposit insurance for banks. • To inject capital into the fnancial system. Federal Reserve • For the Fed to purchase assets • Discount window lending for other than Treasuries, Agencies banks, and in extremis for other and Agency MBS. institutions. • To inject capital or guarantee • Swap lines for foreign central the GSEs. banks.

26 U.S. STRATEGY But the response became more forceful and comprehensive as the crisis intensifed and Congress provided new emergency authority. Increasing Stress Early Breaking the Panic 400 basis points Escalation and Resolution TAF (Fed) TAF extension TSLF (Fed) 350 PDCF (Fed) AIG stabilization (Fed, Treasury) 300 Money market guarantees (Treasury) Systemic AMLF (Fed) fnancial CPFF (Fed) policies 250 Bank debt, deposit insurance (TLGP, TAG) (FDIC) Capital Purchase Program (CPP) (Treasury) TALF (Fed, Treasury) 200 Bank Stress Tests (Fed) PPIP (Treasury)

150 Monetary and Fed Funds interest rate cuts (Fed) fscal policies Quantitative Easing (Fed) Stimulus Act (Bush) Recovery Act (Obama) 100 Fannie Mae, Freddie Mac conservatorship (FHFA) Housing MBS Purchase Program (Treasury) HAMP (Treasury) 50 HARP (FHFA) International Central bank swap lines (Fed) Swap lines expanded (Fed) 0

2007 2008 2009

Source: Libor-OIS: Bloomberg 27 U.S. STRATEGY The U.S. government deployed a mix of systemic policies to stabilize fnancial institutions and markets . . .

Liquidity programs to keep fnancial institutions operating and credit fowing to consumers and businesses.

Guarantee programs to support critical funding markets for fnancial institutions.

Government interventions to prevent the failure of systemic institutions.

Recapitalization strategies to address the solvency questions hovering over the fnancial system.

28 U.S. STRATEGY

As the crisis intensifed, the U.S. government’s liquidity programs expanded along several dimensions:

• Domestic to International • Traditional to Novel • Institutions to Markets

29 U.S. STRATEGY The Federal Reserve initially deployed its traditional lender of last resort tools to provide liquidity to the banking system . . . Federal Reserve discount window usage Term Auction Credit Facility (TAF) usage $600 billion $600 billion

Use of the Term Auction 500 Fed’s discount 500 Credit Facility window . . . so the Fed 400 Banks were reluctant to 400 initiated TAF in borrow from the Fed’s a similar role, discount window over fear and opened it it would signal they were in to both 300 fnancial trouble . . . 300 domestic and foreign banks.

200 Foreign banks 200 U.S. banks

100 100

0 0

2007 2008 2009 2010 2007 2008 2009 2010

Sources: Federal Reserve Board; internal calculations 30 U.S. STRATEGY . . . and then expanded its tools to support dealers and funding markets.

Securities lent to dealers: Term Securities Lending Facility Primary Dealer Credit Facility (PDCF) loans $600 billion $600 billion

Term Securities Primary Dealer 500 Lending Facility 500 Credit Facility

The Fed established the . . . and then created the 400 TSLF to promote liquidity 400 PDCF to provide in U.S. Treasury bonds emergency liquidity to and other important investment banks, which collateral markets . . . did not have access to 300 300 the discount window.

200 200

100 100

0 0

2007 2008 2009 2010 2007 2008 2009 2010

Source: Federal Reserve Board via Federal Reserve Economic Data Note: PDCF includes loans extended to select other broker-dealers. 31 U.S. STRATEGY The Fed and Treasury also introduced programs to support the commercial paper market, a key source of funding to fnancial institutions and businesses . . . Overnight issuance as a share of outstanding commercial paper 15%

Anxious investors Commercial Paper Funding Facility (CPFF) demanded ultra-short AMLF and money market established by Fed, Oct. 7, 2008 12 terms for commercial guarantees Sept. 19, 2008 paper as concerns their Fed establishes ABCP Money holdings were tainted by Market Mutual Fund Liquidity Facility; Treasury announces troubled MBS caused temporary guarantee program Asset-Backed liquidity to evaporate. for money market mutual funds Commercial Paper 9 (ABCP) Lehman Bankruptcy Commercial Paper

Sept. 15, 2008

BNP Paribas freezes three Master Liquidity Enhancement Conduit (MLEC) funds over MBS concerns, On Oct. 15, 2007, Treasury facilitates plan for private banks Aug. 9, 2007 to support the ABCP market; it is never implemented 0

2007 2008 2009

Source: Federal Reserve 32 U.S. STRATEGY . . . and helped restart the asset-backed securitization market, an important source of funding for credit cards, auto loans, and mortgage lending. Asset-backed securities (ABS) issuance, TALF-eligible issuance, and amount pledged to TALF $70 billion Lehman bankruptcy TALF, which becomes operational in After the frm’s collapse in March 2009, had an immediate efect September 2008, the ABS on restoring market function market was nearly frozen 60 PPIP, introduced in February 2009, also supported the market

50 Early crisis average Total issuance level Amount pledged to TALF

40 Post-TALF and PPIP average

ABS market nearly frozen 0

2007 2008 2009 2010 2011

Sources: Total issuance level: Bloomberg; amount pledged to TALF: Federal Reserve Board 33 U.S. STRATEGY

The U.S. government put in place a mix of guarantees to backstop critical parts of the fnancial system.

34 U.S. STRATEGY Treasury agreed to guarantee about $3.2 trillion of money market fund assets to stop the run on prime money market funds. Daily U.S. money market fund fows +$ 90 billion

+ 60 Prime institutional money market funds fows + 30

– 30 Treasury opens guarantee program Sept. 29, 2008 Treasury announces money – 60 market fund guarantees Lehman bankruptcy Sept. 19, 2008 Sept. 15, 2008 – 90 Reserve Primary Fund “breaks the buck” Sept. 16, 2008 The fund held some short-term Lehman debt that became worthless after the bankruptcy – 120

– 150

August 2008 September October November December

Sources: iMoneyNet; internal calculations based on “Runs on Money Market Mutual Funds,” American Economic Review 35 U.S. STRATEGY The FDIC expanded its deposit insurance coverage limits on consumer and business accounts in an efort to prevent bank runs . . . Share of total deposits FDIC insured Amounts guaranteed by TAG Program 62% $900 billion FDIC guarantees non-interest bearing accounts through the Transaction Account Guarantee Program, Oct. 14, 2008 800 60 . . . and mitigated 700 concerns that they would abruptly 58 withdraw funds 600 from accounts, 53% 59% which had often 56 FDIC-insured 500 exceeded the deposits $100,000 coverage limit. 54 400 Increased coverage gave consumers and 300 52 businesses more confdence that their money was safe . . . 200 50 $100,000 Temporary $250,000 100 FDIC insurance increase to made coverage $250,000 permanent 48 0

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

Sources: Federal Deposit Insurance Corp., “Crisis and Response: An FDIC History, 2008–2013”; U.S. Treasury Department, “Reforming Wall Street, Protecting Main Street” 36 U.S. STRATEGY . . . and by agreeing to guarantee new fnancial debt, the FDIC helped institutions obtain more stable funding. Senior unsecured U.S. bank debt issuance under TLGP (DGP)* Average-weighted CDS spread for six big banks $400 billion 500 basis points

350 FDIC bank debt Bank CDS guarantees spreads 400 300

Nonbanks 250 300 TLGP Debt Guarantee Program introduced Oct. 14, 2008 200 Bank holding 200 150 companies

100 100 50 Traditional 0 banks 0

2008 2009 2010 2011 2012 2007 2008 2009

Sources: Debt issuance: Federal Deposit Insurance Corp.; internal calculations; CDS spreads: Bloomberg *Debt Guarantee Program covered debt issued by both the parent company and its afliates 37 U.S. STRATEGY The U.S. government moved to strengthen the capital in the fnancial system as the crisis intensifed and Congress provided emergency authority.

Encouraged the biggest institutions to raise private capital early in the crisis.

Injected substantial government capital into the banking system as the crisis worsened.

Stabilized the most troubled banks with additional capital and asset ringfence guarantees.

Conducted stress tests to complete the recapitalization of the fnancial system.

38 U.S. STRATEGY As losses worsened early in the crisis, U.S. policymakers urged fnancial institutions to raise private capital. Private capital raised between Jan. 1, 2007 and Oct. 13, 2008, for the nine banks receiving initial government investments Private capital raised, billions Common equity Preferred equity Other Tier 1 BANKS Citigroup $43.2

Bank of America 33.5

JPMorgan Chase 25.9

Wells Fargo 8.5

INVESTMENT BANKS Private capital raised Goldman Sachs $13.0 before government investments Morgan Stanley 15.4 Jan. 1, 2007 to Oct. 13, 2008 Merrill Lynch 23.4

TRUST AND PROCESSING BANKS BNY Mellon $0

State Street 4.1

Sources: Goldman Sachs; Bloomberg 39 U.S. STRATEGY Then, as panic followed the collapse of Lehman Brothers, Treasury made large capital investments in the biggest banks using new authority from Congress . . . Private and government capital raised between Oct. 14, 2008 and May 6, 2009, the day before stress test results were released Capital raised, Government Government Targeted Private Private billions preferred equity Investment Program capital preferred equity other Tier 1 BANKS Citigroup* $59.2

Bank of America 35.0

JPMorgan Chase 25.0 Private common equity Wells Fargo 37.7

INVESTMENT BANKS Government Goldman Sachs $15.8 and private capital raised Morgan Stanley 10.0 Oct. 14, 2008 to $10 billion goes to Bank of America May 6, 2009 Merrill Lynch 10.0 after acquisition of Merrill Lynch

TRUST AND PROCESSING BANKS BNY Mellon $3.0

State Street 2.0

Source: Goldman Sachs *Citigroup ultimately also converted approximately $58 billion of government and other preferred stock into common shares 40 U.S. STRATEGY . . . and used additional funds to make direct government investments in hundreds of smaller banks. Prinicipal outstanding for government bank capital investments Distribution of banks receiving government capital investments $300 billion Banks receiving funds: by asset size Less than $1 to $10 Over $10 $1 billion billion billion Government capital investments 250 in banks 473 banks 177 57

By the end of 2008, more 200 than 200 banks had received funds under the Banks receiving funds: by state Capital Purchase Program. 1 to 10 11 to 20 21 to 30 31 to 71 Overall, $205 billion would 150 be distributed to 707 banks. An additional $40 billion was split between Citigroup 100 and Bank of America under the Targeted Investment Program.

2008 2009 2010 2011 2012 2013 2014

Sources: Timeline of funds outstanding: TARP Tracker; banks receiving funds, by asset size: U.S. Treasury, “Troubled Asset Relief Program: Two Year Retrospective”; banks receiving funds, by state: internal calculations based on TARP Investment Program transaction reports, August 8, 2018 41 U.S. STRATEGY The government expanded its tools with additional capital injections and asset guarantees for the most troubled banks, Citigroup and Bank of America. Asset Guarantee Program (AGP), Citigroup assets, and “ringfence” loss responsibility structure 700 basis points 1st Loss 2nd Loss 3rd Loss Tail Loss Pool of Citigroup Citigroup Citigroup Citigroup Citigroup Citigroup assets: $39.5 bil. $0.6 bil. $1.1 bil. $24.5 bil. 600 CDS $301 billion Treasury FDIC Fed spreads $5.0 bil. $10.0 bil. $220.4 bil. 500 Citigroup AGP announced Nov. 24, 2008 Other Citigroup 400 exits AGP Home and repays MBS, mortgage TARP funds commercial loans Dec. 23, real estate $175.1 300 2009 $76.3 billion billion 200

100 Citigroup AGP asset pool fnalized Nov. 17, 2009 0

2007 2008 2009 2010

Sources: Asset Guarantee Program terms: Special Inspector General for TARP, “Extraordinary Financial Asisstance Provided to Citigroup, Inc.”; CDS spreads: Bloomberg 42 U.S. STRATEGY The government provided emergency loans, capital, and guarantees to AIG to prevent a disorderly failure that would have disrupted the fnancial system. Outstanding commitment to AIG In fall of 2010, AIG spins of AIA subsidiary in $200 billion a $20.5 billion IPO and MetLife acquires ALICO for $16.2 billion Recapitalization closes, Jan. 14, 2011: Fed loans are paid of and remaining interests transferred to Treasury which receives 92% of AIG common stock; Treasury commits $30 billion more; (Maiden Lane II and III remain with Fed) Fed restructures its commitment, including a $25 billion credit facility cut in exchange for $150 preferred stakes in AIG’s foreign life insurance subsidiaries AIA and ALICO Government makes $40 billion TARP investment from Treasury; Treasury cuts its $23 billion proft Fed authorizes Maiden Lane II and III to purchase stake to 77% by after Treasury sells fnal AIG’s mortgage-related assets, Nov. 10, 2008 selling $5.8 billion in shares in AIG, Dec. 2012 stock, May 2011 $100 Fed commits additional $37.8 billion Oct. 8, 2008 Final securities sold from Maiden Lane II Feb. 28, 2012 Fed establishes $85 billion credit Final securities facility Sept. 16, 2008, taking an 79.9 sold from percent equity stake in AIG Maiden Lane III $50 August 2012

In a series of stock sales, Government Treasury cuts its AIG stake to 22% committments to AIG March-Sept. 2012 0

2009 2010 2011 2012

Source: U.S. Treasury Note: Repayments occurred over the lifetime of the commitment. Any reduction in the commitment, however, is not refected until the January 2011 recapitalization transaction. 43 U.S. STRATEGY As confdence in banks further eroded, government “stress tests” increased transparency, helping regulators and investors make credible loss projections . . . Two-year historical loan-loss rates for commercial banks SCAP capital shortfall, May 7, 2009

10% BIGGEST CAPITAL RAISES NEEDED 9.1% Bank of America $33.9

Fed’s loss estimates for the Wells Fargo $13.7 8 stress test were higher than peak losses in the Great Depression GMAC $11.5

6 Citigroup $5.5 billion*

*$58.1 billion was raised by converting preferred shares into equity 4 SMALLER CAPITAL RAISES NEEDED $2.5 Regions Financial $2.2 SunTrust Banks 2 $1.8 Morgan Stanley $1.8 KeyCorp $1.1 Fifth Third Bank $0.6 PNC Financial 0 No additional capital was needed at ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 ’00 ’10 nine other intitutions

Sources: Federal Deposit Insurance Corp.; Federal Reserve Board; International Monetary Fund Note: The 19 largest bank holding companies at the time were subject to the Supervisory Capital Assessment Program (SCAP). 44 U.S. STRATEGY . . . and accelerated the return of private capital.

Private capital raised, May 7, 2009, through Dec. 31, 2010 Private capital raised, billions Common equity Preferred equity Other Tier 1 BANKS Bank of America $32.8

JPMorgan Chase 9.8

Citigroup 25.4

Wells Fargo 20.9

INVESTMENT BANKS Private capital raised Goldman Sachs $0 after stress test results released Morgan Stanley 6.9 May 7, 2009 through Merrill Lynch — Acquired by Bank of America Dec. 31, 2010

TRUST AND PROCESSING BANKS BNY Mellon $2.8

State Street 2.3

Source: Goldman Sachs 45 U.S. STRATEGY Indeed, the U.S. recapitalized its banking system more quickly and aggressively than Europe. Capital raised each year $120 billion U.S. Banks ~90% of 2008-16 capital was raised 2008-10

100

60 European Banks ~50% of 2008-16 capital was raised 2008-10

2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Goldman Sachs 46 U.S. STRATEGY

Alongside programs designed to address the systemic problems in the fnancial system, the Fed and Treasury put in place a forceful mix of monetary policy and fscal stimulus.

47 U.S. STRATEGY As the Fed funds rate neared zero, the Fed made large-scale asset purchases to drive down long-term interest rates — a policy known as quantitative easing. Fed Funds target rate or range and 10-year Treasury rate Net asset purchases, monthly 6% +$200 billion Treasuries Fed asset GSE debt purchases 5 Fed funds target rate +150 MBS Upper bound

4 10-year Treasury rate +100

3 + 50

2 0

1 QE 1 QE 2 QE 3 – 50 QE 1 QE 2 QE 3

0 Target range –100 ’07 ’08 ’09 ’10 ’11 ’12 ’07 ’08 ’09 ’10 ’11 ’12

Sources: Target rate: Federal Reserve Board; 10-year Treasury: Federal Reserve Board via Federal Reserve Economic Data; monthly asset purchases: Haver Analytics 48 U.S. STRATEGY The U.S. passed the frst fscal stimulus very early in the crisis. But at $168 billion, it was relatively small and needed time to take efect. Quarterly efect of fscal stimulus measures on GDP +4.0% Estimated impact on GDP from fscal legislation +3.5 Pre-Recovery Act Recovery Act Post-Recovery Act +3.0

+2.5 Unemployment Compensation Extension Act Nov. 21, 2008 +2.0 Housing and Economic Recovery Act (HERA) +1.5 July 31, 2008 Supplemental Appropriations Act +1.0 June 30, 2008

Economic Stimulus +0.5 Act of 2008 Feb. 13, 2008

2007 2008 2009 2010 2011 2012

Sources: Council of Economic Advisers; Congressional Budget Ofce; Bureau of Economic Analysis; calculations by Jason Furman Note: $168 billion represents the combined stimulus from pre–Recovery Act measures through 2012. 49 U.S. STRATEGY The Recovery Act of 2009 provided a larger mix — $712 billon — of temporary tax cuts and spending increases, ofsetting some but not all of the fall in GDP. Quarterly efect of fscal stimulus measures on GDP +4.0% Estimated impact on GDP from fscal legislation +3.5 Pre-Recovery Act Recovery Act Post-Recovery Act +3.0

+2.5

+2.0 American Recovery and Reinvestment Act of 2009 +1.5 Feb. 17, 2009

+1.0

+0.5

2007 2008 2009 2010 2011 2012

Sources: Council of Economic Advisers; Congressional Budget Ofce; Bureau of Economic Analysis; calculations by Jason Furman Note: $712 billion represents the stimulus from the Recovery Act through 2012. 50 U.S. STRATEGY A further $657 billion from a series of smaller post-Recovery Act measures added to the level of economic support . . . Quarterly efect of fscal stimulus measures on GDP +4.0% Estimated impact on GDP Continuing Unemployment Compensation Extension Act; Extension Act FAA Air Transportation; Small Business Jobs Act from fscal legislation April 2010 July-Sept. 2010 +3.5 Pre-Recovery Act Tax Relief Act Dec. 2010 Temporary Extension Act; Recovery Act Hiring Incentives to Restore VOW Act; Temporary Post-Recovery Act Employment Act March 2010 Payroll Tax Cut +3.0 Continuation Act Worker, Homeowner and Nov.-Dec. 2011 Business Assistance Act; Middle-Class Tax +2.5 Defense Appropriations Act Relief and Job Nov.-Dec., 2009 Creation Act Feb. 2012 +2.0

Supplemental +1.5 Appropriations Act June 2009

+1.0

+0.5

2007 2008 2009 2010 2011 2012

Sources: Council of Economic Advisers; Congressional Budget Ofce; Bureau of Economic Analysis; calculations by Jason Furman Note: $657 billion represents the combined stimulus from post–Recovery Act measures through 2012. 51 U.S. STRATEGY . . . but even as the federal government ramped up stimulus, state and local cutbacks worked against the efort. Real state and local government purchases during recoveries, 1960-2015, indexed to quarterly level at trough 130

In past recessions, Average across state and local recessionary periods 120 governments from 1960-2007 increased spending during recoveries. 1991 110

2001 100

90 2009

During the recovery from the fnancial crisis, 80 however, state and local governments cut spending sharply, working against federal eforts.

70 Years from trough

–6 –5 –4 –3 –2 –1 0 +1 +2 +3 +4 +5 +6 +7 +8

Sources: Bureau of Economic Analysis; internal calculations Note: Average does not include the 1980 recession owing to overlap with the 1981–82 recession. 52 U.S. STRATEGY

The government put in place a series of housing programs:

• To lower mortgage rates and ensure the availability of credit • Help reduce mortgage foreclosures • Help struggling borrowers refnance mortgages to take advantage of lower rates

53 U.S. STRATEGY The government’s housing programs brought down mortgage rates and reduced foreclosures but were not powerful enough to contain the damage. 30-year fxed mortgage rate Foreclosure completions, quarterly average of annual fgure 7% Home prices peak Quantitative easing Fed announces MBS purchase 700,000 July 2006 plan known as QE1, Nov. 25, 2008

HAMP March 4, 2009, Treasury announces Home 6 Afordable Modifcation Program 600 HARP FHFA’s Home Afordable Refnance Program begins, April 1, 2009 5 Hope Now 30-year fxed 500 Oct. 10, 2007 Treasury and HUD mortgage rate facilitate creation Left scale of private loan Fannie Mae, Freddie Mac 4 modifcation conservatorship Sept. 7, 2008 400 program FHFA takes control of GSEs MBS purchase program Treasury announces plan to purchase securities, 3 FDIC-IndyMac 300 modifcations also on Sept. 7 Program implemented Aug. 20, 2008, for failed 2 IndyMac Bank 200

1 100 Foreclosure completions 0 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Mortgage rates: Freddie Mac via Federal Reserve Economic Data; foreclosure completions: CoreLogic 54 U.S. STRATEGY Government support of Fannie Mae and Freddie Mac kept mortgage credit fowing and stabilized the housing market after private issuers pulled back. Mortgage-related securities issuance Spread between FNMA 30-year current coupon MBS and 10-year Treasury

$300 billion Fannie Mae, Freddie Mac Fed QE 1 Fed announces it will buy 300 basis points conservatorship Sept. 6, 2008 GSE debt and GSE-backed MBS, Nov. 25, 2008 Senior Preferred Stock Purchase Agreements (SPSPAs) First SPSPA Amendment increases commitment GSEs receive capital backstop of up to $100 billion, Sept. 26 to $200 billion per GSE, May 6, 2009 250 250 GSE MBS Left scale Private market MBS Left scale Agency MBS spread Right scale 200 200 Second SPSPA Amendment increases commitment again, Dec. 24, 2009 150 150

100 100

50 50

0 0

2006 2007 2008 2009 2010 2011

Sources: MBS issuance: Securities Industry and Financial Markets Association; agency MBS spread: Bloomberg 55 U.S. STRATEGY Loan modifcation programs, including HAMP, directly or indirectly helped nearly 9.9 million struggling homeowners with their mortgages. Mortgages receiving modifcation aid, April 1, 2009, through November 30, 2016 700,000 Streamlined Revised HAMP rules, March 2010, to encourage some principal write-downs; administrative made FHA-issued mortgages eligible for servicer modifcation incentives processes, August 600 and October 2009 Revised HAMP rules September 2010: Made unemployment insurance eligible as available income; allowed homeowners to take 6-month deferments of payments; increased servicer incentives; allowed for modifcations of 2nd liens; provided more fexibility on debt-to-income 500 determinations; included some investor-owned properties. Established HAMP Tier 2, October 2011, which facilitated modifcations for non-GSE borrowers 400 Streamline HAMP launched, Private sector July 2013, which allowed modifcations for seriously 300 modifcations delinquent borrowers with documentation limitations

200 Foreclosure completions

100 FHA loss mitigation HAMP permanent 0 modifcations

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Dept. of Housing and Urban Development (FHA loss mitigation); U.S. Treasury (HAMP modifcations); HOPE Now Alliance (HOPE Now modifcations; CoreLogic (foreclosure completions, quarterly average of annual rate) Note: Modifcations through Nov. 2016; other program results through 2016. 56 U.S. STRATEGY The HARP program lowered mortgage rates, encouraged refnancings, and helped “underwater” homeowners avoid foreclosure. Loans refnanced through the Home Afordable Refnancing Program 700,000

600 HARP 2.0, Oct. 2011, eased representation and warranty requirements to increase pool of eligible borrowers and increase 500 Raised loan-to-value ceiling, servicer participation July 2009, to allow somewhat deeper underwater borrowers to refnance 400 Streamlined administrative processes, August and October 2009 HARP refnancings 300

200 Foreclosure completions

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Federal Housing Finance Agency; foreclosure completions: CoreLogic 57 U.S. STRATEGY The government’s programs helped millions of homeowners, but were slow to take efect and reached a limited number of people threatened by foreclosure. Homeowners assisted through crisis-era loan modifcation programs and other foreclosure prevention actions 12 million Special refnancings Loan modifcations Other borrower assistance 9.5 million 9.2 million 5.7 million 10 PROGRAMS PROGRAMS PROGRAMS Through HARP Completed HAMP All trial and Through FHFA HomeSaver 2017 8 refnances permanent loan 2017 advance; repayment modifcations plans; forbearance FHFA Streamline plans; and refnances HOPE NOW foreclosure Proprietary alternatives 6 FHA Streamline modifcations Through refnances Through 2012 2012 FHA Loss mitigation GSE FHFA interventions Through HAMP-like 2017 modifcations STATE AND LOCAL 4 through GSEs HOUSING FINANCE AGENCY INITIATIVES Mortgages and fnanced units Through 2 2012

Sources: Making Home Afordable program performance reports; HOPE NOW; Federal Housing Finance Agency foreclosure prevention reports and refnance reports; U.S. Department of Housing and Urban Development housing scorecards; Federal Housing Finance Agency aggregate reports; Center for American Progress, “A House America Bond for State Housing Finance Agencies” 58 U.S. STRATEGY Even though the crisis started in the United States, its impact reverberated around the world — and the response required U.S. policymakers to work closely with their global counterparts to:

Establish central bank swap lines to address dollar funding shortages

Coordinate monetary policy to send powerful message to the markets

Arrange for IMF support for emerging countries afected by the crisis

59 U.S. STRATEGY The Federal Reserve established swap lines with more than a dozen foreign central banks to ease funding pressures arising from a shortage of dollars. Central bank liquidity swaps $600 billion Swap line limits By Oct. 14, 2008, the Fed had ECB expanded currency swap lines to Brazil, Mexico, essentially unlimited amounts with 500 New Zealand, Japan four central banks: ECB, Switzerland South Korea, Singapore and the Banks of England and Japan. added Oct. 28-29, 2008 Other countries Limited swap lines were arranged 400 with 10 other central banks: Billions Canada $30 300 Australia, Denmark, Australia $30 Norway, Sweden added Sept. 24, 2008 Sweden $30 Japan, Bank of Brazil $30 200 England, Canada added Sept. 18, 2008 Mexico $30 South Korea $30 Fed establishes swap 100 lines with the ECB Singapore $30 and Switzerland Dec. 12, 2007 Denmark $15 Norway $15 0 New Zealand $15 2008 2009 2010

Sources: Central bank liquidity swaps: Federal Reserve Board, internal calculations; maximum commitments: National Bureau of Economic Research, “Central Bank Dollar Swap Lines and Overseas Funding Costs” 60 U.S. STRATEGY The Federal Reserve and the world’s major central banks orchestrated a coordinated interest rate cut. Central bank target interest rates for each country (month-end) 6% target rate United Kingdom On Oct. 8, 2008, the Fed joins the European Central United States Bank, the Bank of England, 5 and the central banks of Canada, Sweden and Switzerland in cutting interest rates. 4 Canada

3 European Union

Switzerland 1

Japan 0

2005 2006 2007 2008 2009 2010 2011 2012

Source: Bloomberg 61 U.S. STRATEGY The G-20 agreed in April 2009 to establish a $500 billion lending facility, allowing the IMF to provide substantial aid to countries afected by the crisis. IMF credit outstanding for all members

100 billion SDRs Asian Global fnancial fnancial crisis crisis

80 IMF expands emerging market support by $500 billion April 2009 Members agree to establish a $500 billion lending facility at G-20 60 summit held in London

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17

Source: International Monetary Fund 62 Outcomes

63 OUTCOMES The severity of the stress of the 2008 fnancial crisis was, in some respects, worse than in the Great Depression. Stock market prices from peak Nominal house prices from peak Decline in household wealth 0% 0% 0%

Stock market House prices Household –10 3 years wealth – 5 from peak 1 year from peak – 5 –20 Great Great Depression Depression –10 –30 –6.2% –6.0% –10 –40 Great –15 Depression Financial –42.7% Crisis –50 –18.3% Financial –15 Crisis –20 –14.8% –60 Financial Crisis –57.8% –70 –25 –20 Peak 1 2 Peak 1 2 3 Peak 1 Year later Year later Year later

Sources: Stock prices: The Center for Research in Security Prices via Wharton Research Data Services; housing prices: U.S. home price and related data, Robert J. Shiller, Irrational Exuberance; GD household wealth: Mishkin (1978); GR household wealth: Financial Accounts of the United States 64 OUTCOMES The U.S. government response ultimately stopped the panic and stabilized the fnancial system . . . Bank CDS spreads and Libor-OIS spread 500 basis points

400 Bank CDS spreads Libor-OIS spread

300

200

100

2007 2008 2009 2010

Source: Bloomberg Note: Credit default swap spreads are equal-weighted averages of JPMorgan Chase, Citigroup, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs. 65 OUTCOMES . . . and allowed the economy to slowly begin digging out of a deep recession. Treasury, Federal Reserve, and FDIC exposures; real GDP and employment, year-over-year percent change (monthly) $7 trillion +6%

Real GDP 6 Year-over-year change Right scale +4

5 +2

4 0 3 Government Employment commitments Year-over-year –2 2 Left scale change Right scale Guarantees Other programs –4 1 TARP Fed liquidity

0 –6

2008 2009 2010

Sources: U.S. government exposures: U.S. Treasury, Federal Reserve Board; Federal Deposit Insurance Corp.; Federal Housing Finance Agency; Congressional Oversight Panel, “Guarantees and Contingent Payments in TARP and Related Programs” via Federal Reserve Bank of St. Louis; internal calculations. Real GDP: Macroeconomic Advisers; Haver Analytics. Employment: Bureau of Labor Statistics; internal calculations 66 OUTCOMES The response helped restart the credit markets and bank lending so that fnancing was once again cheaper and easier to obtain. Consumer asset-backed security (ABS) spreads Net respondents tightening standards 700 basis points –20%

600 0

500

+20 400 Credit more AAA auto available ABS spread 300 AAA +40 credit card ABS spread 200

+60 100 Credit less available 0 +80

2007 2008 2009 2010 2007 2008 2009 2010

Sources: ABS: J.P. Morgan. Lending standards: Federal Reserve Board, senior loan ofcer opinion survey on bank lending practices 67 OUTCOMES The surge in housing foreclosures stabilized and began to decline, and home prices eventually began to recover. Foreclosures as a percent of total loans S&P CoreLogic Case-Shiller U.S. National Home Price Index 5% 200

4 180 Foreclosure Home prices inventory

3 160

2 140

1 120

0 100 Jan. 2000 = 100

2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013

Sources: Foreclosure inventory: Mortgage Bankers Association, Bloomberg; home price index: S&P CoreLogic Case-Shiller U.S. National Home Price Index, not seasonally adjusted, via Federal Reserve Economic Data 68 OUTCOMES U.S. job growth rebounded, although it was slower than after other recent recessions. Change in total nonfarm employment, percentage from trough +25%

+20

1981 +15 Employment fell much more during the 2008 crisis than +10 in other recent 1990 recessions. 2008 + 5 2001

Job growth resumed at about the same rate – 5 as the recovery from the 2001 recession, and has lasted for more than eight years. Years since –10 employment trough

–3 –2 –1 0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10

Source: Bureau of Labor Statistics 69 OUTCOMES The pace of the recovery in the U.S. was slow, as is typical following a severe fnancial crisis. Percentage change in real GDP from peak +50%

+40

+30 1981-82

20 1990

2001 +10

2007 Q4 0

– 10 0 1 2 3 4 5 6 7 8 9 10 Years after GDP peak Source: Bureau of Economic Analysis via Federal Reserve Economic Data 70 OUTCOMES . . . although growth has been stronger than in many European countries. Real GDP, percentage change from 4th quarter 2007

+ 6% United States + 4 Germany

+ 2 France 0

– 2 United Kingdom – 4

– 6 Italy

– 8 Spain

–10

2008 2009 2010 2011 2012 2013

Source: Organisation for Economic Co-operation and Development 71 OUTCOMES Financial crises are typically costly to economic output, but the U.S. strategy was able to limit the damage compared to other crises.

How bad was the drop in GDP? How long was the recession? How fast was the recovery? Decline in output peak to trough Duration of recession Recovery of output to (real GDP per capita) previous peak –9.6% –5.25% 2.9 1.5 7.3 5.5 years years years years

63 fnancial crises in advanced economies, 1857 to 2013 U.S. fnancial crisis

Sources: National Bureau of Economic Research, “Recovery from Financial Crises: Evidence from 100 Episodes”; Bureau of Economic Analysis via Federal Reserve Economic Data, internal calculations 72 OUTCOMES In fact, U.S. taxpayers made a proft on the fnancial rescue. Income or cost of fnancial stability programs, in billions

Capital Investments Liquidity/Credit Markets GSEs +$94.3 GSE Debt Purchases +$12.9 AIG 22.7 CPFF 6.1 CPP 21.5 TAF 4.1 Citigroup 6.6 PPIP 3.9 Bank of America 3.1 TALF 2.1 GMAC/Ally 2.4 TSLF 0.8 CDCI 0.3 ML 0.8 Chrysler Financial 0.0 PDCF 0.6 Chrysler –1.3 ABCP/MMLF 0.5 GM –10.5 Section 7a 0.0

FDIC Resolution Guarantee Programs Cumulative Income, +$45.4 TLGP/DGP +$10.2 2008-10 MMF Guarantee 1.2

TAG –0.9 DIF Losses, 2008-10 –77.5

Sources: U.S. Treasury; Federal Deposit Insurance Corp.; Federal Reserve Board; Federal Housing Finance Agency; Congressional Research Service, “Costs of Government Interventions in Response to the Financial Crisis: A Retrospective.” Notes: All fgures are reported on a nominal basis. GSE debt purchases as of end of Q3 2013. 73 OUTCOMES Compared to initial projections and prior crises, the U.S. response was more efective for the taxpayer . . . Direct fscal cost/revenue of fnancial crisis situations, as a share of GDP

+ 2% +0.78% of GDP 0 –2.4% Total direct – 2 of GDP fnancial return to the taxpayer IMF estimate of Average cost of Cost of the U.S. – 4 from the the cost of U.S. recent crises in savings and fnancial rescue, response to the emerging and loan crisis 2008-9 developed 2007-16 – 6 Financial Crisis countries

– 8 –10.0% –10 of GDP

–12 –12.7% of GDP

–14

Sources: Average of recent crises: National Bureau of Economic Research, “Recovery from Financial Crises: Evidence from 100 Episodes”; IMF: International Monetary Fund, “Companion Paper — The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis”; savings and loan crisis: Federal Deposit Insurance Corp., “The Cost of the Savings and Loan Crisis: Truth and Consequences”, Bureau of Economic Analysis; U.S. 2007-2016: Federal Reserve Board, U.S. Treasury Department, Federal Housing Finance Agency, Federal Deposit Insurance Corp., Bureau of Economic Analysis, internal calculations 74 OUTCOMES . . . especially relative to the cost of interventions taken by other governments during the global fnancial crisis. Cumulative direct fscal revenues/cost of fnancial crisis interventions, 2007-16, as a share of each country’s 2016 GDP +1.0%

+0.5

United –0.5 Italy France States –0.19% +0.05% +0.78%

United –1.0 Kingdom –0.63%

–1.5 Germany –1.39% –2.0 EU –1.75%

Sources: Eurostat; U.S. Treasury; Federal Deposit Insurance Corp.; Federal Reserve Board; Federal Housing Finance Agency; Bureau of Economic Analysis; internal calculations 75 OUTCOMES Today the fnancial system has signifcantly more capital and would be better able to withstand losses in the event of a severe economic downturn. CET1 and Tier 1 common equity as percent of risk-weighted assets 14 %

12 Bank capital levels

10 All institutions 8

6 Bank holding companies with more than $500 billion in assets Long after the fnancial 4 crisis, banks have continued to increase their capital, pushed in large part by more stringent regulatory 2 requirements.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Federal Reserve Bank of New York‘s Research and Statistics Group Note: Capital ratio is based on tier 1 common equity pre-2014 and common equity tier 1 (CET1) as of 2015, and is a combination of the two during 2014. 76 OUTCOMES Stronger regulations on risk are applied to a much broader share of the U.S. fnancial system.

Q4 2007 Q4 2017 of the fnancial system of the fnancial system 41% faced leverage restrictions 92% faced leverage restrictions GSEs remain under No leverage restrictions government conservatorship

$13.0 trillion $7.4 trillion $18.8 trillion $8.8 trillion Depository Government Sponsored Depository Government Institutions Enterprises Institutions Sponsored Enterprises

$4.6 trillion Asset-Backed Securities $3.2 trillion $4.7 trillion $1.9 tn Broker-Dealers Broker- Finance Dealers Co.’s $1.2 tn $1.5 tn ABS Fin. Co.’s $31.8 trillion total fnancial assets $33.5 trillion total fnancial assets

Source: Federal Reserve Financial Accounts of the United States 77 OUTCOMES Nonetheless, the emergency authorities available in the U.S. are still too limited to allow an efective response to a severe crisis.

PRE-CRISIS TOOLS POST-CRISIS TOOLS • Limited reach of prudential limits on • Much stronger capital requirements leverage • Much stronger liquidity requirements • Limited protections from deposit insurance • Much stronger funding requirements • Poor emergency authority • Resolution authority for large fnancial failures • No ability to inject capital into banks • No resolution authority for largest banks or investment banks POST-CRISIS LIMITATIONS • No authority to stabilize GSEs • Limitations on Fed emergency lending • No emergency FDIC guarantees without ESSENTIAL CRISIS AUTHORITIES Congressional action. • Fed emergency lending • No authority to inject capital • Broader FDIC guarantees • GSE conservatorship • Capital injections

78 OUTCOMES This was a terribly damaging crisis. It did not need to be that bad.

The damage illustrates the costs of running a fnancial system with weak oversight, and of going into a crisis without the essential tools for aggressive early action to prevent disaster.

The recovery was slow and fragile, made slower by the premature shift to tighter fscal policy.

Even after repairing the immediate damage, the U.S. economy still faces a number of longer-term challenges, with causes that predated the crisis.

79 Acknowledgments

This chart book was produced as part of an efort led by Ben S. Bernanke, Timothy F. Geithner, and Henry M. Paulson Jr. to examine the U.S. government’s interventions in the 2007-09 fnancial crisis, a joint project of the Yale School of Management, Program on Financial Stability and Brookings Institution, Hutchins Center on Fiscal and Monetary Policy.

Chart Book Project Advisors: Timothy F. Geithner and Nellie Liang

Chart Book Project Director: Eric Dash Data Visualization: Seth W. Feaster Project Manager: Deborah McClellan

Lead Data Analyst: Ben Henken

We wish to thank the following individuals and organizations:

Brookings/Hutchins: David Wessell, Director; Jefrey Chang, Vivien Lee

Yale Program for Financial Stability: Andrew Metrick, Program Director; Alec Buchholtz, Anshu Chen, Greg Feldberg,

Aidan Lawson, Christian McNamara, David Tam, Daniel Thompson, Chase Ross, Rosalind Z. Wiggins

Golden Triangle Strategies: Emily Cincebeaux, Bill Marsh, Melissa Wohlgemuth

Others: Charlie Anderson, Matthew Anderson, Christie Baer, Michael S. Barr, Monica Boyer, Jason Furman, Robert Jackson,

Annabel Jouard, Katherine Korsak, Vivek Manjunath, Drew McKinley, Patrick Parkinson, Wilson Powell III, Ernie Tedeschi

Data sources: CoreLogic®, a property data and analytics company: Goldman Sachs; HUD; iMoneyNet; JPMorgan Chase; SIFMA

80 Notes

Slide 6: Re-created with data underlying Figure 10, “The Distribution of Household Income, 2014,” Congressional Budget O ce (2018), https://www.cbo.gov/publication/53597. See link for denitions of income and income groups.

Slide 7: Based on Figure 1, Panel 1, Michael Ahn, Michael Batty, and Ralf Meisenzahl, “Household Debt-to-Income Ratios in the Enhanced Financial Accounts,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, January 11, 2018, https://doi.org/10.17016/2380-7172.2138.

Slide 12: Based on Figure 3.1, U.S. home price and related data, Robert J. Shiller, Irrational Exuberance, 3rd edition, Princeton University Press, 2015, as updated by the author, http://www.econ.yale.edu/~shiller/data.htm.

Slide 14: Based on Exhibit 1, Gary Gorton and Andrew Metrick, “Who Ran on Repo?” (2012), http://faculty.som.yale.edu/garygorton/documents/whorancompleteoctober4.pdf.

Slide 30: Based on charts 5 and 6, William English and Patricia Mosser, “Classic Lender of Last Resort Programs,” Preliminary Discussion Draft, September 11–12, 2018, https://som.yale.edu/the-global-nancial-crisis. Notes

Slide 32: Based on Figure 7, Lorie Logan, William Nelson, Patrick Parkinson, “Novel Lender of Last Resort Programs,” Preliminary Discussion Draft, September 11–12, 2018, https://som.yale.edu/the-global-nancial-crisis.

Slide 33: Based on Figure 11, Lorie Logan, William Nelson, Patrick Parkinson, “Novel Lender of Last Resort Programs,” Preliminary Discussion Draft, September 11–12, 2018, https://som.yale.edu/the-global-nancial-crisis.

Slide 35: Based on Panel A, Lawrence Schmidt, Allan Timmermann, and Russ Wermers, “Runs on Money Market Mutual Funds,” American Economic Review, 106 (9): 2625-57, 2016, https://www.aeaweb.org/articles?id=10.1257/aer.20140678.

Slide 36: Left panel: Based on Slide 4, “Reforming Wall Street, Protecting Main Street,” U.S. Treasury, July 2012, https://www.treasury.gov/connect/blog/Documents/20120719_DFA_FINAL5.pdf. RIght panel: Based on Figure 2.4 in “Crisis and Response: An FDIC History, 2008–2013,” Federal Deposit Insurance Corp. (2017).

Slide 37: Traditional banks include depository institutions and associated pooled funding trusts. Bank holding companies include bank holding companies, savings and loan holding companies, nancial holding companies, and their funding a liates. Nonbanks include nonbank entities and their a liates. Notes

Slide 43: Based on U.S. Treasury data and AIG infographic and timeline, https://www.treasury.gov/initiatives/nancial-stability/TARP-Programs/aig/Pages/default.aspx.

Slides 49, 50, 51: Based on Figure 3, Jason Furman, “Fiscal Policy,” Preliminary Discussion Draft, September 11–12, 2018, https://som.yale.edu/the-global-nancial-crisis.

Slide 55: Monthly mortgage-related securities issuance gures may not match annual gures reported by the Securities Industry and Financial Markets Association on its website owing to a methodological dierence in the reporting of each series.

Slide 56: Based on the gure “Mortgage Aid Extended More than 9.9 Million Times, Outpacing Foreclosures,” December 2016 Housing Scorecard, https://www.hud.gov/sites/documents/SCORECARD_2016_12_508C.PDF.

Slide 58: Based on Table 2, “Housing Programs,” forthcoming paper, Michael Barr, Neel Kashkari, Andreas Lehnert, and Phillip L. Swagel, September 11–12, 2018, https://som.yale.edu/the-global-nancial-crisis. Some homeowners may have participated in more than one program; the sum of homeowners helped across all categories does not necessarily reect the number of unique borrowers helped. Notes

Slide 62: Maximum commitments were taken from Table 2, Linda S. Goldberg, Craig Kennedy, and Jason Miu“Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs,” NBER working paper 15763, (2010), http://www.nber.org/papers/w15763.pdf.

Slide 64: The stock market is measured by total market value as reported by the Center for Research in Security Prices and is shown to nancial crisis trough. House prices are shown to three years after peak. Household wealth is a comparison between the change in the annual average (in nominal terms) of household wealth from 1929 to 1930, and the change in the nominal level of household wealth from Q1 2008 to Q1 2009. Estimates of real household net worth (wealth) during the Great Depression were taken from Table 1, Frederic S. Mishkin, “The Household Balance Sheet and the Great Depression,” The Journal of Economic History, Vol. 38, No. 4 (December 1978), pp. 918-937, https://www.jstor.org/stable/2118664.

Slide 66: Guarantees: Reects the U.S. Treasury’s maximum commitments under the Temporary Guarantee Program for Money Market Funds and the FDIC’s maximum commitments under the two components of the Temporary Liquidity Guarantee Program, the Debt Guarantee Program, and the Transaction Account Guarantee Program.

Troubled Asset Relief Program (TARP): Reects principal outstanding for TARP programs including bank support programs, credit market programs, auto industry support, assistance to American International Group, and housing programs. Notes

Federal Reserve Liquidity Programs: Reects loan amounts outstanding under credit and liquidity programs established by the Federal Reserve Board. These include discount window lending (primary credit, secondary credit, and seasonal credit), term auction credit, the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Commercial Paper Funding Facility, and central bank liquidity swaps. Also reects the value of outstanding securities lent through the Term Securities Lending Facility.

Other Programs: Reects the Federal Reserve, FDIC, and Treasury’s commitments under the Asset Guarantee Program; Federal Reserve Board assistance to Maiden Lane companies and support to American International Group; Treasury support for Fannie Mae and Freddie Mac through the senior preferred stock purchase agreements, as well as the face value of Treasury’s total mortgage-backed securities (MBS) portfolio at the end of each month, from October 2008 to March 2012.