EVERYTHING YOU WANTED TO KNOW ABOUT THE BAILOUT BUT WERE AFRAID TO ASK!!

8/4/2019 EVERYTHING YOU WANTED TO KNOW ABOUT THE BAILOUT BUT WERE AFRAID TO ASK!!

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The Bailout ReviewNovember 19, 2008

This weeks edition will provide an update to issues featured in the previous Weekly Bailout Review and report on new developments since November 11.

The United States Government

The Treasury Department

Last week the Department of the Treasury (Treasury) provided information on efforts toimprove market conditions via press releases and several public presentations.

Financial Rescue Package and Economic UpdateOn November 12, Treasury Secretary Henry M. Paulson, Jr. provided an update onfinancial markets, the Financial Rescue Package, and future strategies to address theeconomic crisis. The Government will move its efforts away from purchasing troubledassets, which was the original intention of the program but has not received much tractionsince the approval of the EESA. He stated:

Over these past weeks we have continued to examine the relative benefits of purchasingilliquid mortgage-related assets. Our assessment at this time is that this is not the most

effective way to use TARP funds, but we will continue to examine whether targeted formsof asset purchase can play a useful role, relative to other potential uses of TARPresources, in helping to strengthen our financial system and support lending.

In the days following Mr. Paulsons remarks, many news organizations and governmentofficials criticized the strategy to move away the programs original intentions. Forexample, The Wall Street Journal published the article Bailing on the Bailout: TreasuryShifts Focus, which stated:

Demand for the rescue funds is clearly outstripping supply, and yesterday's shift inemphasis didn't dispel an impression that more than a year-and-a-half since the problemsemerged, the government doesn't have a handle on the evolving economic problems.Though Mr. Paulson announced the shift yesterday, he began signaling the aims of TARPwere changing in early October, just a week after the law creating it was enacted.

Secretary Paulson began his November 12 remarks reviewing the steps taken to stabilizethe financial markets and how the actions by the Government have clearly helpedstabilize it. While he admitted that there is a lot of progress needed, he also said thatU.S. financial system is no longer at the tipping point it was before the recent actionstaken by the Federal Reserve, FDIC and Treasury, such as the Capital Purchase Program.


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Paulson said market turmoil will not abate until the biggest part of the housingcorrection is behind us. Our primary focus must be recovery and repair. He mentionedthe following actions taken to avoid preventable foreclosures and keep mortgagefinancing available:

Establishment of the HOPE NOW Alliance (a coalition of mortgage servicers,investors and counselors)

HUD created new programs to complement existing FHA options, and torefinance a larger number of struggling borrowers into affordable FHA mortgages

Prevented the failure of Fannie Mae and Freddie Mac

In response to Fannie Maes record loss, Paulson said that the Treasury closely monitorsthe performance of both Fannie Mae and Freddie Mac, and both are performing withinthe range of their expectations. He reiterated that the new President and Congress, whowill now be deciding role government should play in the housing market, should makethe governments support either explicit or non-existent. In addition, their involvementmust be structured to resolve the conflict between public and private purposes.Policymakers must address the issue of systemic risk. Secretary Paulson also mentionedthat he will outline his views on long term reform during the weeks ahead.

After explaining why Treasury is moving away from the strategy to purchase troubledassets, Paulson highlighted Treasurys three strategies moving forward:

Further Strategies for Building Capital in Financial Institutions : The Treasury iscurrently evaluating programs which would further leverage the impact of aTARP investment by attracting private capital, potentially through matchinginvestments. Treasury will also consider capital needs of non-bank financialinstitutions not eligible for the current capital program, which will provide bothbenefits and challenges. For example, many of those institutions are not directlyregulated, which makes protecting the taxpayer more difficult. Regardless of thestructure, the new program must not begin until the first program is complete andthe results have been examined.

Strategies to Support Consumer Access to Credit outside the Banking System : Theilliquidity in the non-bank consumer finance sector, specifically the asset-backedsecuritization market, is raising the cost and reducing the availability of car loans,student loans and credit cards. Treasury hopes to increase investment usingTARP to offer private investors access to federal financing while protectingtaxpayers' investment. Though the program Treasury is evaluating is focused onconsumer financing, it might support new commercial and residential mortgage-backed securities lending as well.


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Strategies to Mitigate Mortgage Foreclosures: According to Paulson, now thatwe are not planning to purchase illiquid mortgage assets, we must find anotherway to meet that commitment. He identified the mortgage modification protocolFDIC Chairman Bair developed with IndyMac Bank as the model to follow, aswell as the Streamlined Industry-Wide Modification program announced onNovember 11 by Treasury, FHFA, the GSEs, HUD and the Hope Now alliance.Paulson pointed out that there has been significant work to design and evaluate anumber of proposals to induce further modifications. Each of these would,however, require substantial government subsidies.

Moving forward, President-elect Obamas transition team will be briefed on all futureactions with respect to Treasurys three strategies. Paulson also mentioned steps taken ata global level to address the economic instability and the role the U.S. plays. Foradditional information on Secretary Paulsons speech, please see the official transcript(Found Here ).

Is Treasury Using Bailout Funds to Increase Foreclosure Prevention, as CongressIntended?On November 14, Interim Assistant Secretary Neel Kashkari spoke before the HouseSubcommittee on Domestic Policy, which is part of the Committee on Oversight andGovernment Reform. Chairman Dennis Kucinich (D-OH) began the discussion byaddressing whether Treasury is using the Bailout to increase foreclosure prevention,which was its original intention.

During his opening remarks (full transcript Found Here ) Representative Kucinich calledfor the hearing to remain focused on explanation. He said:

I hope that todays hearing will permit us a thorough examination of the basis for Treasurys decision to ignore the foreclosure prevention objective of the Troubled Asset

Relief Program. As Congress may soon receive a request for the second installment of $350 billion toward the TARP, and as we are on the eve of a new Administration whichwill have the opportunity to reconsider Secretary Paulsons decision, it would be helpfulto Members of Congress and to the next Administration to understand the viewpoints and assess the judgment of the current TARP leadership, before deciding to entrust to themthe remainder of the bailout funds and continue their policies.

Rep. Kucinich highlighted several areas of concern in the movement away frompurchasing troubled assets, and states why an explanation is necessary. Rep. Kucinichcommented that there is a general consensus that resolving the financial crisis relies onaddressing the mortgage crisis. In his opinion, the Treasury has passed theresponsibility back to the private sector and inadequate government efforts.Foreclosures continue to grow as do re-defaults, which occur when the loan modification
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received by the borrower does not address both problems of affordability and negativeequity, according him. Foreclosure is delayed but not prevented.

Kashkaris statement to the subcommittee reiterated much of what Secretary Paulsonaddressed on November 12. He provided an update on Treasurys actions to stabilize thefinancial markets reiterating the three objectives: stabilize the housing market, preventavoidable foreclosures, and protect taxpayers. He then commented on the effectivenessof the governments actions and the Treasurys commitment to transparency.

Kashkari provided an update on the Capital Purchase Program and the reasons forimplementing the program, and then addressed the housing/mortgage crisis. He said wehave worked aggressively to avoid preventable foreclosures, keep mortgage financingavailable and develop new tools to help homeowners. He provided the following threeaccomplishments as examples:

1. Establishment of HOPE NOW Alliance in October 2007 : An estimated 2.5 millionhomeowners have been helped since July 2007. Now, industry is helping 200,000homeowners a month avoid foreclosure

2. Prevented the failure of Fannie Mae and Freddie Mac : We have stabilized theGSEs and limited systemic risk.

3. Streamlined Loan Modification Program : Potentially hundreds of thousandsmore struggling borrowers will be enabled to stay in their homes.

Regarding TARPs priorities, Kashkari reiterated the three mentioned by SecretaryPaulson on November 12. He concludes his remarks by saying that the Treasury willwork towards the goals Secretary Paulson outlined, but the foremost objective is toensure sufficient capital to thaw credit to consumers and businesses. For his fulltestimony, please see the Treasury press release ( Found Here ).

Tom Deutsch, Deputy Executive Director of the American Securitization Forum,provided a statement to the subcommittee with the message that:

Industry participants have been and will continue to deploy aggressive and streamlined efforts to prevent as many avoidable foreclosures as possible. But macro economic forcesbearing down on an already troubled housing market are simply too strong for private

sector loan modification initiatives alone to counteract the nationwide increase inmortgage defaults and foreclosures.

In his statement, Mr. Deutsch addressed the following topics:

Current economic and housing market conditions, and the challenges thoseconditions impose on efforts to prevent foreclosures via loan modifications
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The goals, progress and limitations of industry loan modification initiativestargeting securitized residential mortgage loans to date

Additional efforts underway within the securitization industry to further facilitateand streamline the loan modification process

Perspectives on additional steps that we believe the federal government shouldconsider to expand opportunities to modify and refinance troubled mortgage loansthrough the Troubled Asset Relief Program (TARP), to avoid foreclosures and tohelp stabilize the broader housing market

For details on the first three topics, please see the transcript of his testimony ( FoundHere).

Regarding the recommended expansion of opportunities under TARP, Mr. Deutschprovided the following:

Federal Guaranty of Loan Modification Redefault Risk Direct Purchase of Loans Out of Securitization Trusts Provide Lending or Guarantee Facilities for Servicer Advances

Professor Michael Barr provided the following recommendations for the next steps toresolve the mortgage crisis. According to Professor Barr, these steps are currently underthe existing authorities, so the government should not wait any longer to helphomeowners.

1. Guarantee home mortgages in exchange for real restructuring2. Pay servicers to restructure loans.3. Let the FDIC act now4. Enlist Fannie Mae and Freddie Mac5. Bolster FHA

For additional details, please see his full testimony ( Found Here ).

In addition, the following individuals also testified before the committee:

Professor Anthony B. Sanders ( Found Here )Ms. Alys Cohen ( Found Here )Larry B. Litton, Jr. ( Found Here )Mr. Stephen S. Kudenholdt ( Found Here )

GSE, HOPE NOW Streamlined Loan Modification ProgramOn November 11, Kashkari (full transcript Found Here ) joined the following officials toannounce a new streamlined modification program.:
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James B. Lockhart, FHFA Director & Oversight Board Chairman ( Found Here ) Brian Montgomery, FHA Commissioner ( Found Here ) Faith Schwartz, HOPE NOW ( Found Here ) Michael Heid, Wells Fargo

Kashkari reiterated one of Secretary Paulsons statements that there is no silver bullet toaddress the housing downturn. The Government must look at all the tools that will helphomeowners and increase the availability of mortgage finance. According to Kashkari,since last year, Treasury has worked with leading housing counselors, mortgageservicers and investors through the HOPE NOW Alliance to reach and help homeownerswho both want to keep their homes and have the basic financial wherewithal to do so.After developing several tools together, the industry is now helping over 200,000homeowners a month avoid foreclosure with a loan workout.

The FHFA, GSEs and HOPE NOW relied heavily on the IndyMac model, for whichKashkari commends FDIC Chairman Sheila Bair for her leadership in developing, tocreate the new streamlined loan modification program. The framework not only helpshomeowners, but also providers, because it frees up resources so they can address allborrowers.

Kashkari commends FHFA Director James Lockhart, the FHFA, and the GSEs FannieMae and Freddie Mac for taking the lead in developing and adopting the streamlined loanmodifications program and helping establish the new industry standards.

Director Lockhart provided additional information on the program, including thefollowing figures:

Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages,about 58% of all single family mortgages, which represent 20% of seriousdelinquencies

Private label securities represent less than 20% of the mortgages but 60% of theserious delinquencies.

He asked that private label MBS servicers and investors rapidly adopt the program as theindustry standard. Director Lockhart provided the following details of the program:

Target the highest risk borrower who has missed three payments or more, ownsand occupies the property as a primary residence, and has not filed forbankruptcy.

Fast-track method of getting troubled borrowers to an affordable monthlypayment.
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Affordable = a first mortgage payment, including homeowner association dues, of no more than 38 percent of the households monthly gross income.

Ways to reach the affordable payment: reducing the mortgage interest rate,extending the life of the loan or even deferring payment on part of the principal.

When unable to create an affordable payment with this streamlined program, theservicer will further evaluate the borrowers situation through a customizedprocess.

According to Lockhart:

Fannie Mae and Freddie Mac will soon issue specific guidance to their servicersimplementing this program requiring implementation by December 15th. To encourage

participation, servicers will receive a fixed payment of $800 for each loan modified through this program.

Tax WindfallOn September 30, Treasury issued a five-sentence notice that significantly changedfederal tax policy on banks, but received remarkably little attention in the press andCongress. The release came just one day after the House of Representatives defeatedBushs initial bailout bill, and also one day after Wachovia agreed to be acquired byCitigroup.

While the public paid almost no attention to the notice, corporate tax lawyers quicklyrealized the enormous implications of the document: Administration officials had just

given American banks a windfall of as much as $140 billion, according to theWashington Post. The Post calls the notice a sweeping change to two decades of taxpolicy.

Under the notice, the IRS changed Section 382 of the tax code, a provision that limitedthe kind of tax shelter banks received under corporate mergers. Section 382 was passedby Congress in 1986 to end perceived abuse of the tax system. The Post reports that thisabuse came at the hands of companies sheltering their profits from taxation by acquiringshell companies whose only real value was the losses on their books. The firms wouldavoid paying taxes by using the acquired companys losses to offset their own.

Conservative economists and Republican administration officials long criticized the law.Kenneth W. Gideon, an assistant Treasury secretary for tax policy under George H.W.Bush, said this has never been a good economic policy. For the last two decades,opponents of the law have attempted to overturn it.

When the IRS did just this, Congress was occupied with the Bush administrations $700billion bailout request. When lawmakers began discovering the change, the Post reports,some legislators were furious. And many immediately began to question the legality of


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the move. According to the Post , some congressional staff members have privatelyconcluded the notice was illegal, but have worried that saying so publicly could unravelseveral recent bank mergers made possible by the change.

George K. Yin, the former chief of staff of the Joint Committee on Taxation, thenonpartisan congressional authority on taxes told the Post:

Did the Treasury Department have the authority to do this? I think almost every taxexpert would agree that the answer is no. They basically repealed a 22 year-old law that Congress passed as a backdoor way of providing aid to banks.

However, Treasury spokesman Andrew C. DeSouza said that the administration had thelegal authority to issue the notice as part of its power to interpret the tax code and provide

legal guidance to companies.

Many observers also question the administrations motives in releasing the notice just oneday after the announcement of Wachovias acquisition by Citigroup. The change toSection 382 gave financial institutions much more incentive to acquire distressed banks.Wells Fargo, which had previously expressed interest in Wachovia, renewed talks withthe troubled bank after the change. Despite Citigroups previous agreement to take overWachovia, Wells Fargo went on to acquire the bank instead. Analysts then dubbed thetax change the Wells Fargo Ruling, and law firm Jones Day said it could be worth asmuch as $25 billion for Wells Fargo.

Over the next month, two more bank mergers took place and reaped the benefits of thenew law. PNC took over National City, reportedly saving about $5.1 billion, or aboutthe total amount that it spent to acquire the bank, according Robert L. Willens, aprominent corporate tax expert quoted in the Post. Willens also estimated that BancoSantander made about $2 billion in of its take over of Sovereign Bancorp. Corporate taxexperts have estimated that the change to Section 382 could cost taxpayers between $105and $140 billion.

Many ultimately believe that the Treasury Department overstepped its bounds inchanging Section 382. Senator Charles Grassley (R-IA), ranking member on the SenateFinance Committee, was particularly outraged according to the Post . Senator Charles

Schumer (D-NY) has also expressed concerns, but neither senator will go so far as to callthe notice illegal. The Post reports that many aides remain torn about speaking out, asno one wants to be blamed for ruining these mergers and creating a new GreatDepression.


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Federal Housing Finance Agency

On November 17, the Federal Housing Finance Agency (FHFA) released a report thatsaid federal housing finance agencies hold or guarantee more than half of thegovernment's total debt. Fannie Mae, Freddie Mac and the 12-member Federal HomeLoan Bank system control $6.8 trillion of the entire national debt of $10.6 trillion.

The FHFA was created over the summer shortly before the collapse and governmentseizure of Fannie Mae and Freddie Mac. It now oversees the two companies through agovernment conservatorship, and as well as the 12 home loan banks. According to theFHFA report, these 14 government-sponsored enterprises purchased or guaranteed nearly87% of new mortgages made during the second quarter of 2008. Freddie Mac and FannieMae own or guarantee nearly half of all U.S. mortgages.

Fannie MaeOn November 17, Fannie Mae (Fannie) returned to the long-term debt market after takinga hiatus in October to raise $2 billion. Banks were the main buyers of the $1 billion of five-year notes and $1 billion of three-year notes that carried the same maturity and termsof existing debt sold last summer. The mortgage finance company had to pay a higherrisk premium than it had when it sold similar securities this summer, indicating thatbuyers of its debt remain cautious about the company's future.

The auction was a way for the mortgage company to gauge investor demand for its debt,which froze in October. The deepening of the credit crisis last month forced Fannie andits smaller sibling, Freddie Mac (Freddie), to cancel issuance of long-term bonds.Freddie also scrapped its debt offering scheduled for November.

Fannies third-quarter regulatory filing was released on November 10, reporting a $29billion loss in the third quarter of 2008, compared with $2.3 billion in the second quarterof 2008. The loss was attributed to a $21.4 billion non-cash charge to establish avaluation allowance against deferred tax assets, as well as a $9.2 billion in credit-relatedexpenses arising from the ongoing deterioration in mortgage credit conditions anddeclining home prices.

The filing also revealed that Fannie has been having trouble raising money since July.International investors have shied away from debt and mortgage securities issued byFannie and Freddie. This lack of buyers, Fannie said in its filing, made it difficult "toissue debt securities with maturities greater than one year."

Freddie MacOn November 14, Freddie Mac reported a $25.3 billion quarterly loss as the housingslump worsened, forcing the second-largest provider of U.S. home loan funding to drawon a $100 billion Treasury Department lifeline. The company attributed much of the


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record loss to a write down of tax-related assets, essentially conceding it will not return toprofitability soon.

After tentative signs that the housing market was stabilizing in the second quarter,conditions worsened "dramatically" during July through September. "The percentagedecline in home prices was particularly large in California, Florida, Arizona and Nevada,where Freddie Mac has significant concentrations of mortgage loans," the company said.The company identified rising unemployment rate as the main culprit for the worseninghousing market.

A $14.3 billion charge for deferred tax assets pushed the company's net worth to anegative $13.7 billion at the end of the third quarter, and shareholder equity to a negative$13.8 billion. Freddie submitted a request to the Treasury Department to provide $13.8billion to erase this shareholder equity deficit last week, and expects to receive the moneyby November 29. This is the first request to tap the $100 billion each promised by theTreasury Department to Fannie and Freddie.

Paul Miller, and analyst at Friedman Billings Ramsey, recently estimated that Freddiecould post losses totaling $20 billion to $40 billion next year, forcing Treasury to infusebetween $30 billion to $50 billion in 2009. This would also prevent Freddie from beingpublicly traded until 2010.

Emergency Economic Stabilization Act (EESA)The Three Bailout Programs

Troubled Asset Auction Program (TARP)

Though initially conceived as the cornerstone program, Secretary Paulson announced onNovember 12 that the government will move its efforts away from purchasing troubledassets, which was the original intention of the program but it has not received muchtraction since the approval of the EESA.

Help for consumers Credit cards Car loans Student loans

New report suggests credit cards will hit new low next year.


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Contract Awards Incumbent Award

Date

Award Amount

(000)Designated Financial AgentsCustodian Bank of NY Mellon 10/14/2008 N/ASecurities Asset Mgmt Services Not yet awarded.Whole Loan Asset Mgmt Svcs Not yet awarded.

Investment Management Consultant Ennis Knupp 10/11/2008 $2,495Legal Advisor Simpson, Thacher

and Bartlett10/12/2008 $300

Internal Controls PriceWaterhouseCoopers

10/16/2008 $191

Auditing Ernst & Young 10/18/2008 $492

Human Resources Lindholm & Assoc. N/A N/A

More details on the Bailout contractors can be found in Bailout Procurements .

Bailout: Lack of Oversight and the Treasurys ResponseIn addition to the recent criticism regarding Secretary Paulsons announcement to changedirection under the EESA and move away from purchasing toxic assets under TARP, thelevel of transparency has come into question. On November 13, The Washington Post published the article Bailout Lacks Oversight Despite Billions Pledged, criticizing thegovernments efforts in the area of independent oversight. The article claims that on alllevel of oversight, the government has not fulfilled the requirements written into the

EESA. These levels include the following:

1. Special Investigator General2. Five-Member Congressional Oversight Panel3. Financial Stability Oversight Board

Currently, the Special Inspector General position is vacant, and Eric M. Thorson, theTreasury Department's inspector general, is fulfilling the duties. According to the Post, these duties that should end up being the responsibility of an office of 100 are currentlybeing performed by a few dozen people out of Thorsons office who are splitting theirtime with their current positions.

The Special Inspector General has a budget of $50 million to perform the audits andinvestigations necessary to ensure the money under the EESA is spent properly. $290billion of the total $700 billion has already been committed while this oversight positionremains vacant.

The Post article also points out that Congress has failed to nominate candidates for thefive-member Congressional Oversight Panel, which is supposed to investigate how
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Secretary Paulson uses his authority. The panel also watches the impact of the programon the financial markets and mortgage crisis.

Finally, the Post criticizes the Financial Stability Oversight Board because two of its fivemembers are Secretary Paulson and the Federal Reserve Chairman Ben Bernanke. Thearticle questions whether policymakers can conduct oversight of themselves.

The same day, November 13, Treasury issued a press release in response to theWashington Post article. Treasury defended its attempts to provide oversight andtransparency. For the full text of the release, please see Treasurys website ( Found Here ).The main topics addressed in the press release are:

Treasury worked with Congress to put strong oversight and transparencyprovisions in the bill and every reporting requirement in the statute has been fullymet on time. All reports have been published on the Treasury's website.

The Special Inspector General for the program has to be confirmed by the Senate.The Administration is working to identify a qualified candidate.

GAO has been on site from the beginning as Treasury has implemented theEESA. Within days of the bill being signed, the Acting Comptroller Generalspoke with Secretary Paulson and with Interim Assistant Secretary Kashkari.GAO staff typically meets with Treasury staff several times a week. They haveaccess to contract files as soon as each contract is completed, and they often begintheir review of those files within 24 hours of a contract signing.

The Financial Stability Oversight Board was organized and met within days of thebill's enactment, well before the statutory deadline. The board met within 4 daysof enactment, and has met 4 times in the 5 weeks since EESA was enacted.Meetings have been held both to review overall implementation of EESA as wellas to consider establishment of the Capital Purchase Program and TARP'sinvestment in American International Group.

Treasury has provided regular briefings to staff from the Congressional oversightcommittees and leadership offices on its implementation of the legislation.

The Post article mentions that Neil M. Barofsky is the leading candidate for the SpecialInspector General position as reported in last weeks edition of FedSources FederalWeekly Bailout Review . On November 17 he appeared before the Senate FinanceCommittee as the Presidents nominee for the Special Inspector General for the TroubledAsset Relief Program (TARP).

During the hearing (testimony Found Here ), Mr. Barofsky spoke to his experience as anAssistant United States Attorney in the Southern District of New York and variousaspects of his professional background that prepared and qualifies him for the position.For example, he was asked to supervise the Mortgage Fraud Group established to respond
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to mortgage fraud cases in the Southern District of New York. In addition, as supervisorof this group, he oversaw the investigation into the Credit Default Swaps market.

In addition he was formerly an Assistant United States Attorney. While in this position,he was a lead prosecutor investigating and prosecuting fraud committed at Refco, Inc. inthe amount of $2.4 billion.

Mr. Barofsky states he would be committed as the Special Inspector General for TARP toensuring the rules and regulations are followed and preventing waste, fraud, and abuse.To accomplish this goal, he states that an efficient and effective audit program as well asan investigative arm would all need to be established.

During his statement (testimony Found Here ) at the hearing, Senator Max Baucus(Chairman of the Committee on Finance) states to Mr. Barofsky, You are also going toconfront the harsh reality that almost half the $700 billion is already out the doorFor awhile, you are going to be playing catch-up. Youll be looking back at Treasurys use of about $290 billion dollars in about 43 days. In addition, he states that as SpecialInspector General, he will be expected to report to the committee every 120 days andinform Congress if he is denied requested information.

Chairman Baucus provides an update on the actions taken by the Treasury since theTARP program was established, including the recent events of Secretary Paulsonchanging the direction of the program. During his statement, he outlines severalquestions the committee intends to get answered

1. We are going to find out why the first plan was rejected and a new plan wasdeveloped.

2. What is the theory behind the new plan for providing equity to these financialestablishments?

3. What exactly are the agreements with the financial institutions who have receivedTARP funds?

4. And what conflict of interest standards were followed?

He concludes with the following statement:

I pledge to you that I will push to get you confirmed in the coming days. Half the moneyis gone. And it is way past the time when you should have been on the job overseeing the

program. I hope that you will be on the job by the end of this week.

Mr. Barofsky will appear before the Senate Committee on Banking, Housing, and UrbanAffairs on November 19 at 9:30 a.m. According to the Associated Press , it is thiscommittee, of which Senator Christopher Dodd is the Chairman, which will submit a
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recommendation to the full Senate as to whether to confirm him for the position of Special Inspector General for TARP.

Capital Purchase Program (CPP)

As the first program executed under EESA, CPP is a joint decision by Treasury, theFederal Reserve and the Federal Deposit Insurance Corporation (FDIC) to buy equitystakes in the U.S. banking system. Banks of all size are covered under the $250 billionplan. Half of the allotment was used to buy $125 billion in preferred stock in the ninelargest banks in the U.S.

Nine Largest Banks Bailout ($B)

J. P. Morgan Chase $25Citigroup $25Wells Fargo $25Bank of America $15Goldman Sachs $10Morgan Stanley $10Merrill Lynch $10Bank of New York Mellon $3State Street $2

The remaining $125 billion is allocated for equity investments in possibly thousands of small and medium-sized banks. Treasury Secretary Paulson noted that Treasury hasreceived interest from a broad group of banks of all sizes, and sufficient capital hasbeen allocated so that all qualifying banks can participate.

Approximately $51.08B has been allocated to 45 regional banks (if all maximum fundsindicated are approved). 18 banks are either under application or are developing plans toparticipate but have not yet applied.

Regional Banks Bailout ($B)

PNC 7.7U.S. Bancorp (USB) (Preliminary approval) 6.6CapitalOne 3.55SunTrust 3.5Regions Financial 3.5


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Fifth Third Bancorp 3.45

BB&T 3.1KeyCorp 2.5Comerica 2.25Marshall & Ilsley Corp. (MI) (Preliminary approval) 1.7Northern Trust 1.5Huntington Bancshares 1.4Zions Bancorp 1.4Popular Inc. (Preliminary approval) 0.95First Horizon National 0.866

E*Trade Financial Corp. (ETFC) (Under application) 0.8Associated Banc-Corp 0.530Webster Financial Corp 0.4City National 0.395Fulton Financial Corp. (FULT) (Under application) 0.375TCF Financial Corp. 0.361Valley National Bancorp 0.33East West Bancorp, Inc. (Preliminary approval) 0.316UCBH 0.298Whitney Holding Corp. (WTNY) (Plans to apply) 0.282FirstMerit (Under application) 0.08 - 0.250Trustmark Corp. (TRMK) (Preliminary approval) 0.215Umpqua Holdings 0.214Washington Federal 0.2International Bancshares Corp.(IBOC)

(Eligible after amendmentssecured) 0.2

First Midwest Bancorp Inc. (FMBI) (Preliminary approval) 0.193Pacific Capital Bancorp (PCBC) (Preliminary approval) 0.188

First Niagara Financial Group 0.186Old National Corp. 0.16The Bank Holdings Inc. (TBHS) (Under application) 0.005-0.015Western Alliance Bancorporation 0.14Banner Corp. (BANR) (Preliminary approval) 0.124Signature Bank (SBNY) (Under application) 0.120


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Taylor Capital Group Inc. (TAYC) (Under application) 0.105

Midwest Banc Holdings, Inc. 0.086First Financial Bancorp (FFBC) (Preliminary approval) 0.08Columbia Banking Systems Inc.(COLB)

(Preliminary approval) 0.077

Nara Bancorp, Inc. (Preliminary approval) 0.067American West Bancorp (AWBC) (Plans to apply) 0.057NewBridge Bancorp (NBBC) (Under application) 0.052First Community Bancshares Inc.(FCBC)

0.043

Heritage Commerce Corp. (HTBK) (Preliminary approval) 0.04Simmons First National Corp.(SFNC)

(Preliminary approval) 0.04

Cascade Financial Corporation 0.039West Bancorp (seeking shareholder approval for)

0.012 - 0.036HF Financial 0.025Heritage Financial Corp. (HFWA) (Preliminary approval) 0.024Bank of Commerce 0.017Provident Bancshares 0.016

Pamrapo Bancorp Inc. (PBCI) (Plans to apply) 0.011Broadway Financial Corp. 0.009Capital Pacific Bancorp (CPBO) (Preliminary approval) 0.004Sterling Bancshares Under applicationFrontier Financial Corp. Under applicationSouth Financial Group Inc. (TSFG) Under applicationCoBiz Financial Inc. (COBZ) Plans to applyBridge Bancorp (BDGE) (Under shareholder approval)Mackinac Financial Corp. (MFNC) Plans to participate

Firms participating in CPP must adopt Treasurys standards for executive compensation.The deadline for all qualified and interested publicly-held institutions to apply for CPPwas November 14. The program will not be implemented on a first-come-first-servedbasis. All transactions implemented by the Treasury under CPP must be publiclyannounced within 48 hours of execution.


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AIG has received $40 billion from a $100 billion fund that requires residential approval.So far, AIG is the only recipient from this fund.

Programs for Systemically Significant Failing Institutions

This plan will provide assistance to certain failing firms and will be negotiated on case-by-case basis. The plan is still under development, but will include executivecompensation guidelines similar to those under the Capital Purchase Program. Thisprogram will provide more detail about what constitutes a golden parachute clause inorder to prohibit any payments to senior executives who leave a firm in question.

Auto Industry

Leaders of The Big Three automakers (General Motors Corp, Ford Motor Co andChrysler) are seeking funds to save the industry from collapse. Democratic leaders areworking to quickly pass new legislation during the lame-duck Congressional session, butthe idea of offering a bailout to the auto industry has met with objections from both sidesof the aisle.

On November 17, House and Senate Democrats unveiled competing versions of a plan tostart funneling $25 billion to U.S. automakers before the end of the year. Both proposalswould draw money from the $700 billion bailout, and mirror many of its rules such aslimits on executive pay.

In the Senate, Carl Levin (D-MI) introduced a bill that would allow the government tooffer bridge loans to automakers and parts suppliers amid "extraordinary and exigentcircumstances" that have prevented the industry from receiving credit. The Wall Street

Journal reports that according to the draft, those circumstances threaten "a systemicadverse effect on the economy." Sen. Levins proposal would require automakers tosubmit a detailed plan for revamping their businesses and building more fuel-efficientmodels.

Senate Banking Committee Chairman Christopher Dodd (D-CT) called a hearing onNovember 18. Executives of the Big Three and the head of the United Auto WorkersUnion were called to testify before the Committee, the first of several hearings on theindustry. The hearing included testimony from Ford CEO Alan Mulally, Chrysler CEORobert Nardelli, GM CEO Richard Wagoner, and United Auto Workers (UAW)President Ron Gettelfinger. Sen. Debbie Stabenow, D-MI also appeared before thecommittee. During his testimony, GM CEO Wagoner told the committee that a bailout isneeded to save the U.S. economy from "catastrophic collapse."

In the House, Speaker Nancy Pelosi (D-CA) drafted a bill with the help of Rep. BarneyFrank (D-MA), chairman of the House Financial Services Committee and a key architect


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of the Treasury rescue program. Pelosis plan is far more demanding on the industry,giving the government veto power over major business decisions. Automakers wouldonly receive part of the $25 billion upfront. To receive the remaining funding, eachcompany would have to submit a "plan for long-term viability and internationalcompetitiveness" by March 31, or face having the first loan called back. Those planswould have to include how the automakers will restructure debt, cut costs and meet fueleconomy standards. Rep. Frank has summoned the chief executives of GM, Ford andDaimler-Chrysler, and the head of UAW, to testify at a House Financial ServicesCommittee hearing on November 19.

Republicans remain skeptical. "I don't know where you stop once you get started downthat path," said House Minority Whip Roy Blunt (R-MO). On November 16, Sen.Richard Shelby (R-AL) appeared on Meet the Press and called the U.S. auto industry a"dinosaur" whose demise would simply be stalled by a bailout. "I don't believe the $25billion they're talking about will make them survive," said Shelby, the senior Republicanon the Senate Banking, Housing and Urban Affairs Committee. "It's just postponing theinevitable."

Democrats are clearly more supportive of aiding the industry, but there are still concernsabout the viability of the Big Three on both sides of the aisle. Senator Charles Schumer(D-NY) has said he wants "some assurance that they're not going to come back and ask for more money six months from now."

On November 16, President-elect Barack Obama appeared on the CBS show 60 Minutesin support of aid to the industry, but emphasized that he did not support providingunlimited funding. Obama said:

my hope is that over the course of the next week, between the White House and Congress, the discussions are shaped around providing assistance but making sure that that assistance is conditioned on labor, management, suppliers, lenders, all of thestakeholders coming together with a plan what does a sustainable U.S. auto industrylook like?"

The Washington Post also reports that the UAW plans to seek an additional $25 billion inpublic funds to cover the first payments to a union-run trust that will take over retiree

pensions and health benefits from the car companies. Alan Reuther, the union'slegislative director, said this aid could help free up additional lending to the automakers."Private lenders are reluctant step forward because they see this big liability out there," hesaid.

The Bush administration does not support using bailout funds to aid automakers. OnNovember 12, White House spokesman Tony Fratto said the Treasury program isworking to deal with the financial crisis, and that is what it ought to continue doing." On


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November 17, White House press secretary Dana Perino issued a statement saying theWhite House does not want U.S. automakers to fail." Perino said the administrationbelieve[s] this assistance should come from the program created by Congress that wasspecifically designed to assist the automakers from the $25 billion Department of Energy loan program."

Similarly, Treasury Secretary Henry Paulson said at a media briefing on November 12that the bailout program should only be used "to deal with the financial industry." WhilePaulson believes the industry is "critical to the country," federal aid must take intoconsideration the "long-term viability" of the Big Three.

Federal Reserve

Interagency Statement on Meeting the Needs of Creditworthy BorrowersOn November 12, the Board of Governors of the Federal Reserve System (FRB), theFederal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of theCurrency (OCC), and the Office of Thrift Supervision (OTS) issued a joint press releaseurging banks to continue lending responsibly to creditworthy borrowers. There are fourkey principles that banks are expected to adhere to listed in the release.

Lending to creditworthy borrowers is the first key principle. The primary role of banks isto serve as intermediaries of credit to businesses, consumers, and creditworthyborrowers. Underwriting restrictions must not be excessively tightened in the face of the economic turmoil. Maintaining a healthy credit relationship with businesses,consumers, and creditworthy borrowers is critical for banking institutions, not only tohelp restore a sound economy, but also to promote the financial success of theinstitutions.

The second principle is strengthening capital. A strong capital position affects thecapacity and willingness of banks to lend during fluctuating market conditions. Banksmust reassess the priority given to distributing dividends. The press release stipulatedthat supervisors would continue to review the dividend policies and would take action if dividend policies were found to be inconsistent with sound capital and lending policies.

The third principle concerns banks and mortgage borrowers. Banks are expected to focuson avoiding preventable foreclosures through systemic, proactive, and streamlinedmortgage loan modification protocols. Banking organizations must also be willing toimplement effective and sound loan modification programs.

The last principle involves the structuring of compensation policies. Banks mustregularly review their management compensation policies to ensure they remainconsistent with the long-run objectives of the organization as well as sound lending andrisk management practices.


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Borrowing from the FedOn November 13, CNN Money reported that according to reports from the FederalReserve, financial institutions have borrowed less from the Fed. The Fed reported thatcommercial banks borrowed $95.4 billion dollars a day on average. This is 13.3% lessthan the $110 billion a day borrowed last week during the emergency lending window. Arecord high of $111.9 billion a day was reached the previous week.

Under the emergency discount window, the Fed offers overnight funding forcommercial banks at a rate slightly higher than its 1.0% targeted funds rate. The discountrate is currently 1.25%. The Fed opened the discount window after the collapse of BearStearns in March to help prevent other financial institutions from failing. Investmentbanks averaged $64.9 billion in borrowing during the past week, a 15.7% decline from$77 billion the week before.

Under the Commercial Paper Funding Facility (CPFF), the Fed revealed that thegovernment purchased $14 billion in short term corporate debt over the past week, downfrom $100 billion bought last week.

The critical short-term business lending market has only increased by $288 million in thepast week, despite the $14 billion the Fed has pumped into the credit system.

AIGAccording to American International Group (AIG), the firm currently owes thegovernment $83.6 billion. The numbers in Table 1.1 do not reflect the terms of AIGsnew bailout, which will not go into effect for more than a week.

AIG Debt to Government as of November 13, 2008

Amount ($B) Source$63 From the $85 (B) Bridge Loan

$20.20 From the Fed's $37.8 (B) Lending Facility$0.40 Other

Total: $83.60

It is anticipated that the government will restructure AIGs bailout deal in the next fewweeks. The deal will make an estimated $152.5 billion available to AIG.


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AIGs Projected Restructured Bailout

Amount ($B) Source$40.0 Treasury Loan$60.0 Fed Loan$23.5 Other New Funding Facility$30.0 Other New Funding Facility

Total: $153.50

On November 14, the Washington Post reported that AIG plans on paying $503 millionin deferred compensation to its top employees. Deferred compensation is a common toolused by organizations to retain top employees, and allows the employee to wait untilretirement, when he or she is presumably in a lower tax bracket, to collect his or her fullsalary while simultaneously avoiding being taxed yearly.

AIG spokesman Nicholas Ashooh said that in an effort to keep top talent fromabandoning AIG, more than 6,000 employees are covered by AIG deferred compensationplans. Ashooh stressed that the funds are not from the government.

Bernankes Remarks at Fifth European Central Banking ConferenceOn November 14, Chairman Bernanke spoke at the Fifth European Central BankingConference The Euro at Ten: Lessons and Challenges in Frankfurt, Germany.Bernankes encouraged central banks to continue increasing the availability of liquiditywhile maintaining close relationships with each other.

Bernanke attributed the worldwide economic deceleration to the constriction of availablecredit to households and businesses, and the inadequacy to meet the strong demand fordollar funding, both domestic and abroad. The increase of foreign dollar investments inlatter years and the significant role the dollar plays in international trade, foreign directinvestment, and financial transactions are key reasons why Bernanke urged the banks tocoordinate a response to the dollar shortage. As a result of deteriorating conditions infunding markets, many foreign financial institutions are without sufficient access toshort-term dollar financing because they rely on interbank and other wholesale markets toobtain dollars.

The Federal Reserve has implemented is a currency swap line to help ease the shortage.The currency swap line allows each collaborating central bank to draw down balancesdenominated in its foreign partners currency. Eliminating limits on the sizes of itsswap lines with specific central banks has helped improve the distribution of liquidityaround the globe.


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Bernanke stressed that central banks around the world can address the disruptions incredit markets and promote a vibrant global economy through a collaborative effort.

Term Auction FacilityOn November 18, the Federal Reserve posted the results of the auction of $150 billion in28-day credit through its Term Auction Facility held on November 17:

Results from Term Auction FacilityStop-out rate: 0.510 percent

Total propositions submitted: $104.478 billionTotal propositions accepted: $104.478 billion

Bid/cover ratio: 0.7Number of bidders: 80

The stop-out rate shown above applies to all awarded loans, which will settle onNovember 20, 2008 and will mature on December 18, 2008.

Institutions that submitted winning bids were contacted by their respective ReserveBanks by 11:30 a.m. EST on November 18 and had until 12:30 p.m. EST on the sameday to inform their local Reserve Bank of any error.

FDIC

Temporary Liquidity Guarantee ProgramFDIC approved GE Capital to participate in the Temporary Liquidity Guarantee Program,assuring federal backing of up to $139 billion of its debt. GE Capital has severalbusinesses ranging from providing loans to midsized companies to investing incommercial real estate. GE has since taken several steps to improve its liquidity and hasin fact moved to scale back its exposure to financial services.

GE spokesman Russel Wilkerson said that the eligibility of GE Capital for the FDICstemporary liquidity guarantee program will enable the company to source its debtcompetitively with other financial institutions and is part of a very clear plan to to

strengthen our liquidity plan through this volatile time.

On November 17, Bloomberg reported that the FDIC may revise a $1.4 trillion debt-insurance program. The FDIC is considering charging different fees depending on thematurity of the debt rather than the previously proposed standard fee to insure all eligiblesenior unsecured debt.


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Several small banks are angered by the FDICs initiative. Former FDIC ChairmanWilliam Isaac calls the idea complicated and convoluted. Banks are automaticallyenrolled in the program unless they opt out. They have until December 5 to notify theFDIC. The FDIC is scheduled to have a board meeting on November 21 at 2 p.m. todiscuss and vote on the final rule.

Failed BanksThe 19 failed banks as reported by the FDIC in 2008 are listed below:

Banks Closing Date

Security Pacific Bank, LosAngeles, CA

November 7, 2008

Franklin Bank, SSB, Houston, TX November 7, 2008Freedom Bank, Bradenton, FL October 31, 2008Alpha Bank & Trust, Alpharetta,GA

October 24, 2008

Meridian Bank, Eldred, IL October 10, 2008Main Street Bank, Northville, MI October 10, 2008Washington Mutual Bank,Henderson, NV and WashingtonMutual Bank FSB, Park City, UT

September 25, 2008

Ameribank, Northfork, WV September 19, 2008Silver State Bank, Henderson, NVEn Espaol

September 5, 2008

Integrity Bank, Alpharetta, GA August 29, 2008The Columbian Bank and Trust,Topeka, KS

August 22, 2008

First Priority Bank, Bradenton, FL August 1, 2008First Heritage Bank, NA, NewportBeach, CA

July 25, 2008

First National Bank of Nevada,Reno, NV

July 25, 2008

IndyMac Bank, Pasadena, CA July 11, 2008First Integrity Bank, NA, Staples,MN

May 30, 2008

ANB Financial, NA, Bentonville,AR

May 9, 2008

Hume Bank, Hume, MO March 7, 2008


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Douglass National Bank, KansasCity, MO

January 25, 2008

Regular deposit accounts are now insured up to $250,000 as part of the new financialrescue package enacted in early October. The limit on individual retirement accounts heldin banks remains at $250,000.

SEC

There has been much discussion regarding the regulatory authority for credit defaultswaps (Please see: Credit Default Swaps: Increasing Transparency). The Securities andExchange Commission (SEC), in conjunction with the Commodity Futures TradingCommission (CFTC) and the Federal Reserve are currently in discussions concerningregulation of these volatile financial instruments. SEC Chairman Christopher Cox hascalled on Congress to appoint a committee to modify the current dysfunctionalpatchwork of our regulatory system. Reuters also reports that Cox supports similarconsolidation in the banking industry where a half-dozen federal regulators overlap notonly with each other but also with state bank regulatory agencies.

The Presidents working group on Financial Markets press release can be found here.

The SEC is expected to vote on rules aimed at limiting conflicts of interest at credit ratingfirms on November 19. The rules would bar rating companies from having the sameofficials negotiate fees with clients and then rate the debts of those clients. Currently,credit rating companies make money by charging fees to the companies whose credit isbeing rated. The SEC has requested public comment regarding stricter rules for creditrating agencies, which have drawn blame for exacerbating the credit crunch by givinghigh ratings to risky mortgage-related products.

The Wall Street Journal reports that Chairman Cox, who plans to step down once the newadministration is in office, has highlighted several more items for review. As of now, itis unclear what changes will be implemented before his departure.

The SEC will hold the Second Mark-to-Market Roundtable on Friday, November 21.FedSources will cover the event and publish a special report.

CFTC

Commodity Futures Trading Commission (CFTC) Chairman Walter Lukken hassuggested that the new administration consider a sweeping overhaul of regulatorypractices for the financial industry, according to The Wall Street Journal . He is callingfor the creation of three regulators to replace the CFTC and the SEC.
http://www.ustreas.gov/press/releases/hp1272.htmhttp://www.ustreas.gov/press/releases/hp1272.htm


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These regulators would focus on risk, market integrity and investor protection. The risk regulator would police the financial system for vulnerabilities that could reverberateamong companies and lead to serious economic repercussions. The market-integrityregulator would oversee the safety and soundness of exchanges and key financialinstitutions. The investor-protection regulator would protect investors and businessconduct across all firms.

Chairman Lukken said, Regulation by objective rather than function will ensure that allproducts and institutions are properly overseen based on identified public risks ratherthan futile difficult determinations of whether an instrument is a security, a future, or aswap contract. A complete rewrite of the securities and futures laws is required,exemplified by the fact that the lack of adaptability in the current rules-based regulatoryapproach led, in part, to the economic crisis.

SEC Chairman Cox disagrees with Chairman Lukkens suggestions, having called for theunification of the CFTC and SEC in late October. CFTC Commissioner Bart Chiltonclaims there is logical strength to Chairman Coxs idea, but thinks that a merger of thetwo agencies would be difficult due to the two agencies different mandates.

Recession?

Key indicators imply that the economy is in recession. Most economists agree that theeconomy is in a recession, however Reuters reports official data showing that [the U.S.is in a recession] will not come out until January.

Reuters reported the results of The National Association of Business Economists' poll of 50 professional forecasters. The survey found that real gross domestic product wasexpected to fall 2.6% in the fourth quarter and slump 1.3% in the first three months of 2009. Almost all of the economists surveyed believe the U.S economy is already inrecession. Half of them estimated the downturn started in the fourth quarter of 2007 or inthe first quarter of 2008.

The financial sector has announced more jobs cuts. Citigroup plans to eliminate 53,000more jobs, bringing the current year total to 75,000, about 20% of its workforce.JPMorgan Chase plans to cut 10-15% of its staff. Fidelity Investments will begin lay offsof 2.9% of its workforce later this month. Goldman Sachs has cut 10% of its workforce,reducing the total number of employees to the lowest figure since 2006.

Last week the slump spread to the technology industry. Sun Microsystems Inc.announced it plans to lay off 18% of its workforce, about 6,000 employees. Intel revisedits fourth quarter earnings forecast by 20%.


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Recent bankruptcy filings and job cuts demonstrate how this economic crisis is differentfrom others in recent years. The retail sector is no longer the employer of last resort forthe newly unemployed, according to The Wall Street Journal. Last week Circuit Cityfiled for bankruptcy, a few weeks after announcing that it would close 600 stores andeliminate 6,800 jobs.

Circuit City is the latest of 14 retail chains to file for bankruptcy protection in the pastyear. Many were forced into bankruptcy when they could not find financing. Other retailcompanies that filed for Chapter 11 are:

Liquidation Number of Employees at Time of

FilingMervyns 18,000Linens n Things 17,500Friedmans, Inc. 3,500Whitehall Jewelers 2,900Sharper Image 2,200Wicker Furniture 1,500Shoe Pavilion 1,400Reorganization Number of Employees at Time of

FilingFortunoff 2,400Goodys Family Clothing 9,900Steve & Barrys 9,700To Be Determined Number of Employees at Time of

Filing Circuit City 43,000Boscovs 9,500(Source: Retail Losses Sap a Jobs Safety Net, November 11, 2008 in The Wall Street Journal)

The Wall Street Journal reported that roughly one of every 10 Americans is employed inthe retail sector. But since November 2002, about a fourth of all jobs that have been lostabout 320,000 in allhave been in retail. The overall U.S. unemployment rate of 6.5% does not include about 209,000 retail workers whose jobs have been reduced topart-time status.


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Global Aspects

Recession

The Euro zone has fallen into its first recession. Eurostat, the European Unionsstatistical office, reported that gross domestic product in the region fell in the quarterending in September. Only France escaped recession with a 0.1 % GDP increase in thethird quarter due to consumer spending.

Angel Gurria, head of the Organization for Economic Cooperation and Development(OECD), suggested that to help boost the Euro zone economy, which could be flat oreven contract next year, governments should consider discretionary fiscal packages ontop of automatic higher budgetary social spending, called automatic stabilisers.

The Wall Street Journal reported on November 18 that European auto makers are seekingaid as sales decline. European car sales dropped 15% in October, the sixth consecutivemonth of decline since October 2007. The European Union is currently drafting aninvestment plan likely to run to tens of billions of euros. The European Investment Bank is developing a loan package contingent on developing greener vehicles.

France has escaped recession, but retains a fragile hold on a healthy economy that isbased on consumer spending. French auto maker Renault will reduce global productionby 25% in the fourth quarter 2008 and temporarily close plants in Romania, Spain andFrance, reported The Wall Street Journal. Peugeot plans to reduce production by 30%during the same time period.

Germany, Europes largest economy, fell into recession in the third quarter when its grossdomestic product (GDP) slipped more than twice the 0.2% forecast. According to

Reuters , a top German official said the outlook for the final three months of 2008 is notmuch better. This comment was met with demands for the government to increase astimulus package it expects to generate investments and contracts of up to 50 billioneuros ($63.12 billion).

After meeting with executives of General Motors and its German unit, Opel, GermanChancellor Angela Merkel agreed to consider the automakers request. Opel, with

26,000 employees in Germany, wants refinancing guarantees of 1 billion in bank loansas a contingency plan in case GM is forced to withdraw financial support because of theirown financial problems.

German politicians have ruled out a comprehensive bailout for the auto industry,although production cuts have been announced by Volkswagen AGs Audi, BMW AGand Daimler AG. BMW plans to lay off 8,100 workers, reported The Wall Street

Journal.


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By far the largest stimulus plan is a two year package exceeding half a trillion dollarspassed by the Chinese government. The $586 billion program represents 16% of Chinaseconomic output in 2007. The Financial Times called the program a reflection of mounting anxiety in Beijing that Chinas economy is cooling much more quickly thanwas initially expected given a shrinking international market and its own real estatemarket problems. The Wall Street Journal reported that Chinas growth has dropped toits lowest in five years. Bankruptcies and unemployment are increasing throughoutsouthern China, one of the countrys major manufacturing zones.

The infrastructure package seems like a last resort after the government has already cutinterest rates three times, eliminated quotas for bank lending and introduced ways to helpnew homeowners and some exporters. The package will include some projects alreadybudgeted, such as plans to rebuild the areas damaged by Mays earthquake. Othertargeted areas include low income housing, upgrading companies to more advancedtechnology, improving irrigation in rural areas, raising pensions and social programs, andimproving water and waste treatment in urban areas.

Countries around the globe have put together bailout packages with different priorities.

Country BailoutPackage (B)

Bailout Allocations

Australia $24.42 The government introduced a $10.4b package, along with

the $8b committed to buy residential mortgage-backedsecurities on behalf of small banks and non-bank lendersscalded by the meltdown of the global financial system. A$6b package is being devoted to bailing out the autoindustry. On Nov 7, the government announced a $22mbailout to keep ABC Learning solvent and preventchildcare centers from closing before Dec 31.

France 380 320b to guarantee bank lending and 40b to providecapital to banks in need. 10.5b ($13.9b) has been devotedto Credit Agricole, Societe Generale and BNP Paribas.

400m has been planned to aid Frances carmakers.

Germany 500 The package consists of a 400b financial marketstabilization fund to guarantee loans and 80b torecapitalize the banking sector through the governmenttaking stakes in banks. Additionally, 20b is being setaside to cover losses.

Netherlands 210 ING is to receive a $13.4b (approx. 10b) governmentcash injection. 200b in loan guarantees are being offeredto Dutch banks.


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Russia $200 Russia's bailout package for its economy is worth $200b.The money is channeled through the state developmentbank, VEB. Thus far, $50bn has been spent. VEB awardedabout $10b of the $50b by Oct 23. Rusal, the aluminumand mining branch of Oleg Deripaska's holding company,Basic Element, was awarded $4.5b. Alfa Group, aninvestment company, was given a $2b letter of credit.TNK-BP, partly owned by Alfa, will receive $9b.

Sweden $207 Sweden has guaranteed new medium-term liabilities of banks up to a level of 1.5 trillion crowns ($205b). It is alsoputting 15bn crowns ($1.9b) into a fund that will be used incase a bank needs emergency capital.

Switzerland $65 Regulators set up a $60b fund to absorb troubled assetslingering on UBS books. UBS has also been providedwith an additional $5.36b in capital.

U.K. 59 In early October, the government introduced an $87bn(59b) bailout plan and has spent $64b (37b) forcontrolling stakes in three U.K. banks: Royal Bank of Scotland, HBOS and Lloyds TSB (to merge), Barclays.

U.S. $700 $700b to purchase troubled assets from financialinstitutions. So far the government has planned to purchaseup to $250b of senior preferred shares under the CapitalPurchase Plan (CPP). The rest is TBD.

The European Commission proposed plans for tighter regulation of credit rating agenciesthrough a legally binding central register and surveillance system in Europe.According to Reuters, European Union Internal Market Commissioner Charlie McCreevycriticized credit rating agencies such as Moodys, Standard & Poors and Fitch forplaying a role in the global financial crisis. Agencies have been criticized for assigninginflated ratings to products whose value was questionable.

Regulation recommendations include:

Prohibition on advisory services Can not rate financial instruments if they lack sufficient quality information Must publish an annual transparency report Must create an internal process to review the quality of their ratings Should appoint at least three independent directors to their boards who may not be

compensated on the business performance of the rating agency Must use a different rating category for the structured securities which have

been accused of worsening the subprime mortgage crisis


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A Standard & Poors spokesman said that many of the proposed requirements are alreadystandard practice.

International Monetary Fund

The International Monetary Fund (IMF) has announced that, in addition to relaxinglending requirements, it is ready to lend up to $100 billion in new aid to developingcountries. Over the next three years, loans will be available through its InternationalBank for Reconstruction and Development. Loans to developing countries will increaseto more than $35 billion this year. Last year this type of aid totaled $13.5 billion. Thisyears ceiling for such aid was budgeted at $16 billion before the global economic crisisendangered poorer and middle-income states.

The IMF is seeking a rapidly increasing amount of extra funding to help resolve theworld financial crisis, commented Managing Director Dominique Strauss-Kahn at a newsconference on a visit to Libya. Reuters reported that Strauss-Kahn told the BBC thisweek his organization was likely to need at least $100 billion in extra funding over thenext six months in order to help countries out of the mire.

Emerging markets, mostly in eastern and central Europe, are now at the greatest risk asinvestors withdraw funds. Serbia, Belarus and Turkey are reported to be talking to theIMF about either rescue or standby packages.

So far, the IMF has confirmed $15.7 billion to Hungary, $2.1 billion to Iceland and a$16.4 billion standby arrangement to Ukraine. Pakistan has been approved for a $7.6billion loan, far less than the $10-15 billion the country insists it needs to survive.

World Bank

Last week the World Bank Group announced new initiatives to substantially increasefinancial support for developing countries, including the launch or expansion of fourfacilities for the crisis-hit private sector that is critical to employment, recovery andgrowth. The International Bank for Reconstruction and Development plans to makenew commitments of up to US$100 billion over the next three years.

The press release also announced that the World Bank is expediting grants and long-term, interest-free loans to the worlds 78 poorest countries, 39 of which are in Africa.Donors last year pledged US$42 billion for the International Development Association,the World Banks fund for these countries.

In addition to helping cash-strapped governments, the Bank is stepping up its support tothe private sector through the launch or expansion of four initiatives by the IFC, its


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private sector arm. Combining IFC funds and money mobilized from various sourcesincluding governments and other International Financial Institutions, these new IFCfacilities are expected to total around $30 billion over the next three years and addressproblems experienced by the private sector due to the global financial crisis. Theyinclude:

Expanded trade finance program: IFC plans to double its Global Trade FinanceProgram from US$1.5 billion to US$3.0 billion. The trade guarantees issuedunder the program will have an average tenor of six months, thereby supportingup to US$18 billion for short-term trade finance over the next three years. Theexpanded facility would benefit participating banks based in 66 countries,including some of the worlds 78 poorest countries. The program offers bankspartial or full guarantees covering the payment risk in trade related transactions.

Bank Recapitalization Fund: IFC plans to launch a global equity fund torecapitalize distressed banks, as more bank failures would further damageeconomic activity, thus worsening poverty in developing countries. IFC expects toinvest US$1 billion over three years with at least US$2 billion provided by otherinvestors.

Infrastructure Crisis Facility: This new IFC facility would provide roll-overfinancing and help recapitalize existing, viable, privately-funded infrastructureprojects facing financial distress. IFC expects over three years to invest aminimum of US$300 million and mobilize between US$1.5 billion and US$10billion from other sources.

IFC Advisory Services: To address the mounting needs of clients, IFC isrefocusing existing advisory services programsbanking for small and mediumenterprises, leasing, microfinance, housing, investment policy and promotion, andbusiness operation and regulation--to make them better geared to helping clientsin the current crisis. IFC estimates a financing need of at least US$40 million overthree years.

G20 Summit

Leaders of the G20 nations met in Washington, D.C. this past weekend to develop anaction plan for an economic recovery. Each country has an agenda for stimulusprograms, reforms including restrictions on executive pay and global regulationstandards.

The Financial Times reported that a globally coordinated fiscal stimulus is emerging asa unifying theme to the conference. Five of the worlds six largest economies have


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already enacted packages. The Washington Post published snapshots of each participantin the November 13 edition.

The transition in the American presidency has dampened hopes for progress. The lameduck Bush administration has opposed the strict regulation promoted by Europeanleaders. Bush also disagreed with the root causes of the crisis, something, greed andsomething else expressed by the members.

President-elect Barack Obama did not attend the conference because he felt that hispresence would be inappropriate. He did, however send two representatives, formerSecretary of State Madeleine Albright and former Republican Representative Jim Leach.

The group agreed on the following definition of root causes of the current crisis:

During a period of strong global growth, growing capital flows, and prolonged stabilityearlier this decade, market participants sought higher yields without an adequateappreciation of the risks and failed to exercise proper due diligence. At the same time,weak underwriting standards, unsound risk management practices, increasingly complexand opaque financial products, and consequent excessive leverage combined to createvulnerabilities in the system. Policy-makers, regulators and supervisors, in someadvanced countries, did not adequately appreciate and address the risks building up in

financial markets, keep pace with financial innovation, or take into account the systemicramifications of domestic regulatory actions.

While rejecting protectionism, the group acknowledged that more needs to be done tostabilize financial markets and support economic growth and stressed the impact onemerging nations. Many emerging market economies, which helped sustain the worldeconomy this decade, are still experiencing good growth but increasingly are beingadversely impacted by the worldwide slowdown.

Recognizing that a broader policy response is needed, based on closer macroeconomiccooperation, to restore growth, avoid negative spillovers and support emerging marketeconomies and developing countries, the following action list was released:

Continue our vigorous efforts and take whatever further actions are necessary tostabilize the financial system.

Recognize the importance of monetary policy support, as deemed appropriate todomestic conditions.

Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate,while maintaining a policy framework conducive to fiscal sustainability.


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Help emerging and developing economies gain access to finance in currentdifficult financial conditions, including through liquidity facilities and programsupport. We stress the International Monetary Fund's (IMF) important role incrisis response, welcome its new short-term liquidity facility, and urge theongoing review of its instruments and facilities to ensure flexibility.

Encourage the World Bank and other multilateral development banks (MDBs) touse their full capacity in support of their development agenda, and we welcomethe recent introduction of new facilities by the World Bank in the areas of infrastructure and trade finance.

Ensure that the IMF, World Bank and other MDBs have sufficient resources tocontinue playing their role in overcoming the crisis.

White House Fact Sheet summarizing the G20 agreements: Common Principles toGuide Financial Market Reform

Strengthening transparency and accountability by enhancing required disclosureon complex financial products; ensuring complete and accurate disclosure byfirms of their financial condition; and aligning incentives to avoid excessive risk-taking.

Enhancing sound regulation by ensuring strong oversight of credit ratingagencies; prudent risk management; and oversight or regulation of all financialmarkets, products, and participants as appropriate to their circumstances.

Promoting integrity in financial markets by preventing market manipulation andfraud, helping avoid conflicts of interest, and protecting against use of thefinancial system to support terrorism, drug trafficking, or other illegal activities.

Reinforcing international cooperation by making national laws and regulationsmore consistent and encouraging regulators to enhance their coordination andcooperation across all segments of financial markets.

Reforming international financial institutions (IFIs) by modernizing theirgovernance and membership so that emerging market economies and developingcountries have greater voice and representation, by working together to betteridentify vulnerabilities and anticipate stresses, and by acting swiftly to play a keyrole in crisis response.


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G20 Action Plan

The leaders approved an Action Plan that sets forth a comprehensive work plan toimplement these principles, and asked finance ministers to work to ensure that the ActionPlan is fully and vigorously implemented.

Address weaknesses in accounting and disclosure standards for off-balance sheetvehicles;

Ensure that credit rating agencies meet the highest standards and avoid conflictsof interest, provide greater disclosure to investors, and differentiate ratings forcomplex products;

Ensure that firms maintain adequate capital, and set out strengthened capitalrequirements for banks' structured credit and securitization activities;

Develop enhanced guidance to strengthen banks' risk management practices, andensure that firms develop processes that look at whether they are accumulatingtoo much risk;

Establish processes whereby national supervisors who oversee globally activefinancial institutions meet together and share information; and

Expand the Financial Stability Forum to include a broader membership of emerging economies.

The leaders instructed finance ministers to make specific recommendations in thefollowing areas:

Avoiding regulatory policies that exacerbate the ups and downs of the businesscycle;

Reviewing and aligning global accounting standards, particularly for complexsecurities in times of stress;

Strengthening transparency of credit derivatives markets and reducing theirsystemic risks;

Reviewing incentives for risk-taking and innovation reflected in compensationpractices;

Reviewing the mandates, governance, and resource requirements of the IFIs; and Defining the scope of systemically important institutions and determining their

appropriate regulation of oversight.

The finance ministers are charged with consulting the work of relevant bodies, includingthe International Monetary Fund (IMF), an expanded Financial Stability Forum (FSF),and standard setting bodies.


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Seven areas were defined with actions items organized for immediate action by March31, 2009, and medium-term actions without a due date. The defined areas are:

Strengthening Transparency and Accountability Enhancing Sound Regulation Prudential oversight Risk Management Promoting Integrity in Financial Markets Reinforcing International Cooperation Reforming International Financial Institutions

The entire text of the G20 Declaration can be found here .

The G20 is made up of the following countries:

G7 Countries Britain Canada France Germany Italy Japan United States

BRIC Brazil Russia India China

Remaining Countries Argentina Australia European Union, represented by the rotating Council presidency, and the

European Central Bank Indonesia Mexico Saudi Arabia South Africa South Korea Turkey
http://www.whitehouse.gov/news/releases/2008/11/20081115-1.htmlhttp://www.whitehouse.gov/news/releases/2008/11/20081115-1.html


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Unregulated Players

Credit Default Swaps

On November 14, the Federal Reserve, SEC and CFTC signed a memorandum of understanding to provide oversight of the credit-default swap (CDS) market. There iscurrently no central authority for the credit-derivatives market, and The Wall Street

Journal recently reported a brewing turf war developing among Federal regulators overthe issue. The agreement does not alter agency oversight mandates, but seeks to ensureconsistent rules for central counterparties that fall under the domain of one or the other.

Credit default swaps are financial instruments used to speculate on a companys ability torepay debt. CDS contracts were originally created to protect bondholders against default.Should a company default on its debt, the buyer is paid the face value of the CDS inexchange for the underlying securities or the cash equivalent. According to The WallStreet Journal , the buyer of a CDS contract essentially pays premiums and the selleragrees to pay back the principal if the issuer of the bonds doesnt. But CDS is notinsurance, and an investor is not required to own the underlying bonds. So an investorcan purchase a CDS as a way to make a bearish bet on a company or to offset risks(The Wall Street Journal).

The CDS market exploded when investors started buying and selling the credit protectionwithout ever owning the underlying bonds. Due to the nature of credit derivatives, it isimpossible to precisely measure the size of the market, but the Washington Post reportsthat estimates in the industry range from about $35 - $55 trillion.

Lawmakers and some regulators have identified CDS as a potential source of systemicfinancial risk. SEC Chairman Christopher Cox said that the virtually unregulated over-the-counter market in credit default swaps has played a significant role in the creditcrisis. Cox encouraged Congress to pass new legislation to further rein in the CDSmarket, which he said provided a significant opportunity for market manipulation.During the hearing on h

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