Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Author:Timothy F. Geithner [Geithner, Timothy F.]
Language: eng
Format: epub, mobi
Tags: Biography & Autobiography, Business, Political, Business & Economics, Government & Business
ISBN: 9780804138604
Google: rrTwAgAAQBAJ
Amazon: B00IN73B9E
Publisher: Crown
Published: 2014-05-12T00:00:00+00:00

TALF Revived Consumer Lending Markets

Consumer Asset-Backed Securities Issuance

The markets for auto loans, credit cards, and other consumer credit (excluding mortgages) that could be packaged into securities averaged nearly $20 billion per month in 2007 before grinding to a halt after Lehman fell. The Fed-Treasury TALF program brought these securitization markets back to life. They averaged about $13 billion per month after TALF launched in March 2009.

Source: U.S. Treasury Department.

THE IMPLOSION of the economy was not the only source of instability in the financial system.

The ad hoc, inconsistent crisis response of 2008—which was mostly but not entirely a result of the limits on the Fed’s and Treasury’s authority before TARP—had added to the pervasive uncertainty about what remained at risk and what we might do next. Even where we had authority to act, we had not established clear rules of the game. Investors were not only unsure how to evaluate the health of institutions during a financial crisis and an economic collapse; they were also unsure how the U.S. government might handle institutions that started falling into the abyss. Bank shareholders had no idea whether they would face substantial dilution, or a government nationalization that could wipe them out. Creditors were still worried about Lehman-style defaults and WaMu-style haircuts. We hadn’t fully committed to removing catastrophic risk from the system, and we had adjusted our approach so often that our commitments wouldn’t necessarily be trusted, anyway. There was a general sense that the U.S. government might not have the will or even the ability to do what was necessary to end the crisis.

Our Columbus Day interventions had been helpful, but not all-powerful. By limiting its guarantees to the new (but not existing) senior debts of commercial banks and bank holding companies (but not nonbanks), the FDIC had left creditors with exposure to debt that was outside that circle of protection at risk of serious losses. And because the initial TARP capital injections were in preferred rather than common stock, the market saw them more as additional medium-term debt for the banks than as permanent loss-absorbing capital. The system’s capital—its defense against insolvency in case of serious losses—still seemed inadequate. That was a problem, because major banks still had huge piles of distressed assets on their books, and were still anticipating huge losses. Citi announced an $8 billion fourth-quarter loss. Bank of America wrote down even more losses to account for Merrill’s deteriorating mortgage portfolio.

These illiquid assets were another major source of uncertainty. Reasonable people could disagree about their true value, and it mattered whether they would be worth 90 cents or 75 cents on the dollar in a calmer market. But their value in the current market was deeply distressed, often less than 50 cents on the dollar, because almost nobody was buying them. Bank balance sheets are opaque, and in such fragile and turbulent times, investors and lenders tended to assume the worst about assets and institutions. Imagine you had to sell your house tomorrow in a market where no one could get a mortgage.

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