The Term Asset-Backed Securities Loan Facility (TALF) (U.S. GFC)

In the fall of 2008, the securitization market, which was the major provider of credit for consumers and small businesses, came to a near halt. Investors in this market abandoned not only the residential mortgage-backed securities that triggered the financial crisis but also consumer and business asset-backed securities (ABS), which had a long track record of strong performance, and commercial mortgage-backed securities (CMBS). Also, the unprecedented widening of spreads for these securities rendered new issuance uneconomical, and the shutdown of the securitization market threatened to exacerbate the downturn in the economy. On November 25, 2008, the Federal Reserve (the Fed) thus announced the Term Asset-Backed Securities Loan Facility (TALF). TALF was launched on March 3, 2009, to help stabilize funding markets for issuers in the securitization market. The TALF extended term loans, collateralized by the securities, to buyers of certain high-quality asset-backed securities. By reopening the ABS market, the Fed intended to ultimately support the provision of credit to consumers and small businesses. Instead of directly participating in the securitization market, the Fed encouraged private investors to do so by providing them with liquidity and only took risk in the loss of the value of ABS. In aggregate, the Fed issued 2,152 loans, totaling $71.1 billion. The volume of outstanding loans peaked in March 2010 at$48.2 billion. Loans secured by nonmortgage ABS totaled $59 billion, and loans secured by legacy CMBS totaled$12 billion. The original expiration date for the TALF of December 31, 2009, was extended to March 31, 2010, for loans against ABS and legacy CMBS, and until June 30, 2010, for loans against newly issued CMBS. On October 29, 2014, the final outstanding TALF loan was repaid in full, and in the following month, a total of $745.7 million in accumulated fees and income was paid to the Treasury (90%) and the Federal Reserve Bank of New York (10%)

The United Kingdom\u27s Asset-backed Securities Guarantee Scheme (U.K. GFC)

The key structures of housing finance in the UK in the years leading up to the global financial crisis of 2007-09 consisted of retail deposits, secondary market funding and wholesale interbank lending. Although retail deposits were the major funder of UK mortgages, secondary market funding, which included covered bonds and residential mortgage-backed securities (RMBS), accounted for 31% of UK mortgage lending in 2006. In 2007, the collapse of the U.S. subprime mortgage market triggered a financial shock, and the shock quickly traveled beyond national borders. Regardless of differences in the UK mortgage market, investors’ concern over the prospects of the U.S. housing market influenced their perception of UK mortgage-backed assets. And with the UK RMBS market substantially reliant on overseas investors, their concern contributed to a downturn in the UK market. In a November 2008 report on mortgage finance by Sir James Crosby, it was argued that “[w]ithout intervention, the market in mortgage-backed securities won\u27t return any time soon …” and that “the inability to refinance existing mortgage-backed funding and the continuing pressures in wholesale funding markets … [were] really hitting the banks’ capacity to make new loans …”. In response to this report, HM Treasury announced a £50 billion guarantee scheme for asset-backed securities (the Scheme) on January 19, 2009 and launched this Scheme on April 22, 2009. The Scheme, in which HM Treasury provided a guarantee for eligible newly issued RMBS, represented an extension of the 2008 Credit Guarantee Scheme for unsecured debt issuance by UK incorporated banks and building societies. The Scheme aimed to support residential mortgage lending in the UK economy. The Scheme closed on December 31, 2009, without having been used

Guarantees and Capital Infusions in Response to Financial Crises A: Haircuts and Resolutions

After the mortgage market meltdown in mid-2007 and during the financial crisis in 2008, major financial institutions around the world were on the verge of collapsing one after another. Faced with these troubles, the government had to respond quickly to contain the crisis as efficiently as possible. It was, however, limited in resources, time, and experience. To make matters worse, the complexity and opaqueness of the financial market and these institutions greatly affected the government’s ability to design an efficient and consistent method to contain the crisis. Shortly after Lehman Brothers filed for bankruptcy on September 15, 2008, American International Group (AIG) was also in deep trouble and close to failure when the Federal Reserve decided to bailout the institution. Washington Mutual (WaMu) and Wachovia were also facing collapse due to their exposure in risky mortgage products around the same time. WaMu eventually closed, and the Federal Deposit Insurance Corporation (FDIC), appointed as a receiver, sold parts of its business to JP Morgan Chase & Co. while equity holders and debtors of the institution were left to take a major haircut. On the other hand, Wachovia was able to avoid the same fate as WaMu through a systemic risk exception under the FDIC Improvement Act of 1991. This provision allowed the FDIC to stand behind Wachovia with Citigroup. This case provides details on the background and government response for each troubled financial institution during the financial crisis, and the rationale behind the design of each response

Restructuring and Forgiveness in Financial Crises B: The Asian Crisis of 1997

Asia’s economy, Thailand in particular, was booming when the financial crises hit in the 1990s. However, troubles were brewing underneath the seemingly buoyant economy. With a fragile financial system and ineffective domestic government responses to these troubles, an exchange rate crisis took over Thailand, and this crisis started a financial contagion in the neighboring countries. This case reviews the background and domestic government responses to contain the crisis, and the international intervention provided by the International Monetary Fund including the assistance and the required reforms accompanying the support

Guarantees and Capital Infusions in Response to Financial Crises B: U.S. Guarantees During the Global Financial Crisis

During 2008-09, the federal government extended multiple guarantee programs in an effort to restore the financial market and contain the panic and crisis in the market. For example, the Treasury provided a temporary guarantee program for the money market funds, the FDIC decided to stand behind certain debts and non-interest-bearing transaction accounts, and the Treasury, the FDIC, and the Federal Reserve agreed to share losses in certain assets belonging to Citigroup. This case reviews these guarantee programs implemented during the global financial crisis by the government and explores the different rationale that shaped certain design features of each program

Guarantees and Capital Infusions in Response to Financial Crises C: U.S. 2009 Stress Test

When President Obama took office in 2009, the Treasury focused on restarting bank lending and repairing the ability of the banking system as a whole to perform the role of credit intermediation. In order to do so, the Treasury needed to raise public confidence that banks had sufficient buffers to withstand even a very adverse economic scenario, especially given heightened uncertainty surrounding the outlook of the U.S. economy and potential losses in the banking system. The Supervisory Capital Assessment Program (SCAP)—the so-called “stress tests”—sought to rigorously measure the resilience of the largest bank holding companies. Those found to have insufficient buffers were able to raise funds from the private sector, and if unable to do so, the Capital Assistance Program (CAP) would capitalize the firm with public capital. surroundin

Restructuring and Forgiveness in Financial Crises A: The Mexican Peso Crisis of 1994-95

Following a year in which repeated political turmoil sapped investor confidence in Mexico, putting pressure on the peso and draining the country’s foreign exchange reserves, on December 22, 1994, the Mexican government sparked a financial crisis by unexpectedly abandoning its policy of anchoring the peso to the US dollar and instead allowing it to float freely. The resulting collapse of the peso left Mexico with $40 billion to$50 billion in external debt (much of it dollar-indexed) coming due in the near term and almost no foreign exchange reserves. Faced with the prospect that Mexico would either default on its obligations or impose exchange controls (with either scenario being seen by many as likely to result in contagion), officials from both the US and abroad scrambled to craft a response to what had been dubbed “the first financial crisis of the twenty-first century” because of its origins in an emerging market economy within globalized financial markets. On January 31, 1995, an assistance package comprised primarily of funds from the US and the IMF was announced. Backed by $20 billion from the US Treasury’s Exchange Stabilization Fund (ESF) and a$17.8 billion stand-by arrangement from the IMF, Mexico met its immediate obligations, restructured short-term debt into longer-term debt, and implemented a strict economic reform plan. While the country experienced significant economic hardship in the immediate aftermath of the crisis, by 1996-97 the economy had rebounded, and by 2000 Mexico had paid back all outstanding obligations under the assistance package

Towards the Declassification of S&P 500 Boards

This report provides an overview and analysis of the work that the Shareholder Rights Project (SRP) undertook on behalf of a number of institutional investors during 2012 and 2013, the SRP’s first two years of operations. During 2012 and 2013, the SRP worked on behalf of eight SRP-represented investors on board declassification proposals submitted for a vote at the 2012 and/or 2013 annual meetings of 122 S&P 500 and Fortune 500 companies, and this work has produced substantial results:100 Negotiated Outcomes: Negotiated outcomes involving a commitment to board declassification were reached with 100 S&P 500 and Fortune 500 companies, about three-quarters of the companies receiving proposals in 2012 and/or 2013.58 Successful Precatory Proposals: During 2012 and 2013, declassification proposals brought by SRP-represented investors received majority support at 58 annual meetings of 53 S&P 500 and Fortune 500 companies (all but three of the annual meetings in which such proposals went to a vote), with average support of about 80% of votes cast.81 Board declassifications: A total of 81 S&P 500 and Fortune 500 companies already declassified their boards during 2012 and 2013 as a result of the work of the SRP and SRP-represented investors. These 81 companies, which have an aggregate market capitalization exceeding one trillion dollars (as of Dec, 31, 2013), represent about 65% of the companies with which engagements took place and about 60% of the S&P 500 companies that had classified boards as of the beginning of 2012.Expected Impact by End of 2014: The work of the SRP and SRP-represented investors is expected to produce a significant number of additional board declassifications during 2014 as a result of (i) management declassification proposals that will go to a vote pursuant to 2012 and 2013 agreements, (ii) companies agreeing to follow the preferences of shareholders expressed in 58 successful precatory declassification proposals, and (iii) ongoing engagement by the SRP and SRP-represented investors. We estimate that, by the end of 2014, this work will have contributed to movements towards board declassification by about 100 S&P 500 and Fortune 500 companies; this large-scale change can be expected to increase board accountability and thereby to enhance shareholder value and company performance in the affected companies.Beyond Board Declassification: The SRP’s 2012 and 2013 work also facilitated a substantial increase in successful engagement by public pension funds, and in their ability to obtain governance changes favored by shareholders. The proposals that the SRP worked in 2012 and 2013 on represented over 50% of the shareholder proposals by public pension funds that received majority support in 2012 and 2013, and over 20% of all precatory shareholder proposals (by all proponents) that received majority support in 2012 and 2013.The Shareholder Rights Project (SRP) is a clinical program operating at Harvard Law School and directed by Professor Lucian Bebchuk. The SRP works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University