________________________________________________________________________

The Bailout Review November 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 to improve market conditions via press releases and several public presentations. Financial Rescue Package and Economic Update On November 12, Treasury Secretary Henry M. Paulson, Jr. provided an update on financial markets, the Financial Rescue Package, and future strategies to address the economic crisis. The Government will move its efforts away from purchasing troubled assets, which was the original intention of the program but has not received much traction since the approval of the EESA. He stated:
Over these past weeks we have continued to examine the relative benefits of purchasing illiquid 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 forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending.

In the days following Mr. Paulsons remarks, many news organizations and government officials criticized the strategy to move away the programs original intentions. For example, The Wall Street Journal published the article Bailing on the Bailout: Treasury Shifts Focus, which stated:
Demand for the rescue funds is clearly outstripping supply, and yesterday's shift in emphasis didn't dispel an impression that more than a year-and-a-half since the problems emerged, 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 TARP were 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 stabilize the financial markets and how the actions by the Government have clearly helped stabilize it. While he admitted that there is a lot of progress needed, he also said that U.S. financial system is no longer at the tipping point it was before the recent actions taken by the Federal Reserve, FDIC and Treasury, such as the Capital Purchase Program.

________________________________________________________________________ Paulson said market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair. He mentioned the following actions taken to avoid preventable foreclosures and keep mortgage financing 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 to refinance 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 monitors the performance of both Fannie Mae and Freddie Mac, and both are performing within the range of their expectations. He reiterated that the new President and Congress, who will now be deciding role government should play in the housing market, should make the governments support either explicit or non-existent. In addition, their involvement must be structured to resolve the conflict between public and private purposes. Policymakers must address the issue of systemic risk. Secretary Paulson also mentioned that 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 troubled assets, Paulson highlighted Treasurys three strategies moving forward: Further Strategies for Building Capital in Financial Institutions: The Treasury is currently evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. Treasury will also consider capital needs of non-bank financial institutions not eligible for the current capital program, which will provide both benefits and challenges. For example, many of those institutions are not directly regulated, which makes protecting the taxpayer more difficult. Regardless of the structure, the new program must not begin until the first program is complete and the results have been examined. Strategies to Support Consumer Access to Credit outside the Banking System: The illiquidity in the non-bank consumer finance sector, specifically the asset-backed securitization market, is raising the cost and reducing the availability of car loans, student loans and credit cards. Treasury hopes to increase investment using TARP to offer private investors access to federal financing while protecting taxpayers' investment. Though the program Treasury is evaluating is focused on consumer financing, it might support new commercial and residential mortgagebacked securities lending as well.

________________________________________________________________________ Strategies to Mitigate Mortgage Foreclosures: According to Paulson, now that we are not planning to purchase illiquid mortgage assets, we must find another way to meet that commitment. He identified the mortgage modification protocol FDIC Chairman Bair developed with IndyMac Bank as the model to follow, as well as the Streamlined Industry-Wide Modification program announced on November 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 a number 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 future actions with respect to Treasurys three strategies. Paulson also mentioned steps taken at a global level to address the economic instability and the role the U.S. plays. For additional information on Secretary Paulsons speech, please see the official transcript (Found Here). Is Treasury Using Bailout Funds to Increase Foreclosure Prevention, as Congress Intended? On November 14, Interim Assistant Secretary Neel Kashkari spoke before the House Subcommittee on Domestic Policy, which is part of the Committee on Oversight and Government Reform. Chairman Dennis Kucinich (D-OH) began the discussion by addressing 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 called for 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 which will have the opportunity to reconsider Secretary Paulsons decision, it would be helpful to 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 them the remainder of the bailout funds and continue their policies.

Rep. Kucinich highlighted several areas of concern in the movement away from purchasing troubled assets, and states why an explanation is necessary. Rep. Kucinich commented that there is a general consensus that resolving the financial crisis relies on addressing the mortgage crisis. In his opinion, the Treasury has passed the responsibility back to the private sector and inadequate government efforts. Foreclosures continue to grow as do re-defaults, which occur when the loan modification

________________________________________________________________________ received by the borrower does not address both problems of affordability and negative equity, according him. Foreclosure is delayed but not prevented. Kashkaris statement to the subcommittee reiterated much of what Secretary Paulson addressed on November 12. He provided an update on Treasurys actions to stabilize the financial markets reiterating the three objectives: stabilize the housing market, prevent avoidable foreclosures, and protect taxpayers. He then commented on the effectiveness of the governments actions and the Treasurys commitment to transparency. Kashkari provided an update on the Capital Purchase Program and the reasons for implementing the program, and then addressed the housing/mortgage crisis. He said we have worked aggressively to avoid preventable foreclosures, keep mortgage financing available and develop new tools to help homeowners. He provided the following three accomplishments as examples: 1. Establishment of HOPE NOW Alliance in October 2007: An estimated 2.5 million homeowners have been helped since July 2007. Now, industry is helping 200,000 homeowners a month avoid foreclosure 2. Prevented the failure of Fannie Mae and Freddie Mac: We have stabilized the GSEs and limited systemic risk. 3. Streamlined Loan Modification Program: Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes. Regarding TARPs priorities, Kashkari reiterated the three mentioned by Secretary Paulson on November 12. He concludes his remarks by saying that the Treasury will work towards the goals Secretary Paulson outlined, but the foremost objective is to ensure sufficient capital to thaw credit to consumers and businesses. For his full testimony, 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 forces bearing down on an already troubled housing market are simply too strong for private sector loan modification initiatives alone to counteract the nationwide increase in mortgage defaults and foreclosures.

In his statement, Mr. Deutsch addressed the following topics: Current economic and housing market conditions, and the challenges those conditions impose on efforts to prevent foreclosures via loan modifications

________________________________________________________________________ The goals, progress and limitations of industry loan modification initiatives targeting securitized residential mortgage loans to date Additional efforts underway within the securitization industry to further facilitate and streamline the loan modification process Perspectives on additional steps that we believe the federal government should consider to expand opportunities to modify and refinance troubled mortgage loans through the Troubled Asset Relief Program (TARP), to avoid foreclosures and to help stabilize the broader housing market For details on the first three topics, please see the transcript of his testimony (Found Here). Regarding the recommended expansion of opportunities under TARP, Mr. Deutsch provided 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 to resolve the mortgage crisis. According to Professor Barr, these steps are currently under the existing authorities, so the government should not wait any longer to help homeowners. 1. 2. 3. 4. 5. Guarantee home mortgages in exchange for real restructuring Pay servicers to restructure loans. Let the FDIC act now Enlist Fannie Mae and Freddie Mac 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 Program On November 11, Kashkari (full transcript Found Here) joined the following officials to announce a new streamlined modification program. : 5

________________________________________________________________________ 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 to address the housing downturn. The Government must look at all the tools that will help homeowners and increase the availability of mortgage finance. According to Kashkari, since last year, Treasury has worked with leading housing counselors, mortgage servicers and investors through the HOPE NOW Alliance to reach and help homeowners who 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 200,000 homeowners a month avoid foreclosure with a loan workout. The FHFA, GSEs and HOPE NOW relied heavily on the IndyMac model, for which Kashkari commends FDIC Chairman Sheila Bair for her leadership in developing, to create the new streamlined loan modification program. The framework not only helps homeowners, but also providers, because it frees up resources so they can address all borrowers. Kashkari commends FHFA Director James Lockhart, the FHFA, and the GSEs Fannie Mae and Freddie Mac for taking the lead in developing and adopting the streamlined loan modifications program and helping establish the new industry standards. Director Lockhart provided additional information on the program, including the following figures: Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages, about 58% of all single family mortgages, which represent 20% of serious delinquencies Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies.

He asked that private label MBS servicers and investors rapidly adopt the program as the industry standard. Director Lockhart provided the following details of the program: Target the highest risk borrower who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed for bankruptcy. Fast-track method of getting troubled borrowers to an affordable monthly payment.

________________________________________________________________________ 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, the servicer will further evaluate the borrowers situation through a customized process. According to Lockhart:
Fannie Mae and Freddie Mac will soon issue specific guidance to their servicers implementing 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 Windfall On September 30, Treasury issued a five-sentence notice that significantly changed federal tax policy on banks, but received remarkably little attention in the press and Congress. The release came just one day after the House of Representatives defeated Bushs initial bailout bill, and also one day after Wachovia agreed to be acquired by Citigroup. While the public paid almost no attention to the notice, corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion, according to the Washington Post. The Post calls the notice a sweeping change to two decades of tax policy. Under the notice, the IRS changed Section 382 of the tax code, a provision that limited the kind of tax shelter banks received under corporate mergers. Section 382 was passed by Congress in 1986 to end perceived abuse of the tax system. The Post reports that this abuse came at the hands of companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would avoid 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 $700 billion bailout request. When lawmakers began discovering the change, the Post reports, some legislators were furious. And many immediately began to question the legality of

________________________________________________________________________ the move. According to the Post, some congressional staff members have privately concluded the notice was illegal, but have worried that saying so publicly could unravel several recent bank mergers made possible by the change. George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes told the Post:
Did the Treasury Department have the authority to do this? I think almost every tax expert 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 the legal 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 one day after the announcement of Wachovias acquisition by Citigroup. The change to Section 382 gave financial institutions much more incentive to acquire distressed banks. Wells Fargo, which had previously expressed interest in Wachovia, renewed talks with the troubled bank after the change. Despite Citigroups previous agreement to take over Wachovia, Wells Fargo went on to acquire the bank instead. Analysts then dubbed the tax change the Wells Fargo Ruling, and law firm Jones Day said it could be worth as much as $25 billion for Wells Fargo. Over the next month, two more bank mergers took place and reaped the benefits of the new law. PNC took over National City, reportedly saving about $5.1 billion, or about the total amount that it spent to acquire the bank, according Robert L. Willens, a prominent corporate tax expert quoted in the Post. Willens also estimated that Banco Santander made about $2 billion in of its take over of Sovereign Bancorp. Corporate tax experts have estimated that the change to Section 382 could cost taxpayers between $105 and $140 billion. Many ultimately believe that the Treasury Department overstepped its bounds in changing Section 382. Senator Charles Grassley (R-IA), ranking member on the Senate Finance 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 call the notice illegal. The Post reports that many aides remain torn about speaking out, as no one wants to be blamed for ruining these mergers and creating a new Great Depression.

________________________________________________________________________ Federal Housing Finance Agency On November 17, the Federal Housing Finance Agency (FHFA) released a report that said federal housing finance agencies hold or guarantee more than half of the government's total debt. Fannie Mae, Freddie Mac and the 12-member Federal Home Loan 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 government seizure of Fannie Mae and Freddie Mac. It now oversees the two companies through a government conservatorship, and as well as the 12 home loan banks. According to the FHFA report, these 14 government-sponsored enterprises purchased or guaranteed nearly 87% of new mortgages made during the second quarter of 2008. Freddie Mac and Fannie Mae own or guarantee nearly half of all U.S. mortgages. Fannie Mae On November 17, Fannie Mae (Fannie) returned to the long-term debt market after taking a 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 terms of existing debt sold last summer. The mortgage finance company had to pay a higher risk premium than it had when it sold similar securities this summer, indicating that buyers 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 and its 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 $29 billion loss in the third quarter of 2008, compared with $2.3 billion in the second quarter of 2008. The loss was attributed to a $21.4 billion non-cash charge to establish a valuation allowance against deferred tax assets, as well as a $9.2 billion in credit-related expenses arising from the ongoing deterioration in mortgage credit conditions and declining 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 by Fannie and Freddie. This lack of buyers, Fannie said in its filing, made it difficult "to issue debt securities with maturities greater than one year." Freddie Mac On November 14, Freddie Mac reported a $25.3 billion quarterly loss as the housing slump worsened, forcing the second-largest provider of U.S. home loan funding to draw on a $100 billion Treasury Department lifeline. The company attributed much of the 9

________________________________________________________________________ record loss to a write down of tax-related assets, essentially conceding it will not return to profitability soon. After tentative signs that the housing market was stabilizing in the second quarter, conditions worsened "dramatically" during July through September. "The percentage decline 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 worsening housing market. A $14.3 billion charge for deferred tax assets pushed the company's net worth to a negative $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 $13.8 billion to erase this shareholder equity deficit last week, and expects to receive the money by November 29. This is the first request to tap the $100 billion each promised by the Treasury Department to Fannie and Freddie. Paul Miller, and analyst at Friedman Billings Ramsey, recently estimated that Freddie could post losses totaling $20 billion to $40 billion next year, forcing Treasury to infuse between $30 billion to $50 billion in 2009. This would also prevent Freddie from being publicly 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 on November 12 that the government will move its efforts away from purchasing troubled assets, which was the original intention of the program but it has not received much traction 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
Designated Financial Agents Custodian Securities Asset Mgmt Services Whole Loan Asset Mgmt Svcs Investment Management Consultant Legal Advisor Internal Controls Auditing Human Resources

Incumbent
Bank of NY Mellon Not yet awarded. Not yet awarded. Ennis Knupp Simpson, Thacher and Bartlett PriceWaterhouseCo opers Ernst & Young Lindholm & Assoc.

Award Date
10/14/2008

Award (000)
N/A

Amount

10/11/2008 10/12/2008 10/16/2008 10/18/2008 N/A

$2,495 $300 $191 $492 N/A

More details on the Bailout contractors can be found in Bailout Procurements. Bailout: Lack of Oversight and the Treasurys Response In addition to the recent criticism regarding Secretary Paulsons announcement to change direction under the EESA and move away from purchasing toxic assets under TARP, the level of transparency has come into question. On November 13, The Washington Post published the article Bailout Lacks Oversight Despite Billions Pledged, criticizing the governments efforts in the area of independent oversight. The article claims that on all level of oversight, the government has not fulfilled the requirements written into the EESA. These levels include the following: 1. Special Investigator General 2. Five-Member Congressional Oversight Panel 3. Financial Stability Oversight Board Currently, the Special Inspector General position is vacant, and Eric M. Thorson, the Treasury 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 currently being performed by a few dozen people out of Thorsons office who are splitting their time with their current positions. The Special Inspector General has a budget of $50 million to perform the audits and investigations necessary to ensure the money under the EESA is spent properly. $290 billion of the total $700 billion has already been committed while this oversight position remains vacant. The Post article also points out that Congress has failed to nominate candidates for the five-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 program on the financial markets and mortgage crisis. Finally, the Post criticizes the Financial Stability Oversight Board because two of its five members are Secretary Paulson and the Federal Reserve Chairman Ben Bernanke. The article questions whether policymakers can conduct oversight of themselves. The same day, November 13, Treasury issued a press release in response to the Washington Post article. Treasury defended its attempts to provide oversight and transparency. 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 transparency provisions in the bill and every reporting requirement in the statute has been fully met 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 the EESA. Within days of the bill being signed, the Acting Comptroller General spoke with Secretary Paulson and with Interim Assistant Secretary Kashkari. GAO staff typically meets with Treasury staff several times a week. They have access to contract files as soon as each contract is completed, and they often begin their review of those files within 24 hours of a contract signing. The Financial Stability Oversight Board was organized and met within days of the bill's enactment, well before the statutory deadline. The board met within 4 days of 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 well as to consider establishment of the Capital Purchase Program and TARP's investment in American International Group. Treasury has provided regular briefings to staff from the Congressional oversight committees and leadership offices on its implementation of the legislation.

The Post article mentions that Neil M. Barofsky is the leading candidate for the Special Inspector General position as reported in last weeks edition of FedSources Federal Weekly Bailout Review. On November 17 he appeared before the Senate Finance Committee as the Presidents nominee for the Special Inspector General for the Troubled Asset Relief Program (TARP). During the hearing (testimony Found Here), Mr. Barofsky spoke to his experience as an Assistant United States Attorney in the Southern District of New York and various aspects 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 supervisor of 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. in the amount of $2.4 billion. Mr. Barofsky states he would be committed as the Special Inspector General for TARP to ensuring 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 as an 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 to confront the harsh reality that almost half the $700 billion is already out the doorFor a while, 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 Special Inspector General, he will be expected to report to the committee every 120 days and inform Congress if he is denied requested information. Chairman Baucus provides an update on the actions taken by the Treasury since the TARP program was established, including the recent events of Secretary Paulson changing the direction of the program. During his statement, he outlines several questions the committee intends to get answered 1. We are going to find out why the first plan was rejected and a new plan was developed. 2. What is the theory behind the new plan for providing equity to these financial establishments? 3. What exactly are the agreements with the financial institutions who have received TARP 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 money is 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 Urban Affairs on November 19 at 9:30 a.m. According to the Associated Press, it is this committee, 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, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to buy equity stakes in the U.S. banking system. Banks of all size are covered under the $250 billion plan. Half of the allotment was used to buy $125 billion in preferred stock in the nine largest banks in the U.S.

Nine Largest Banks

J. P. Morgan Chase Citigroup Wells Fargo Bank of America Goldman Sachs Morgan Stanley Merrill Lynch Bank of New York Mellon State Street

Bailout ($B)
$25 $25 $25 $15 $10 $10 $10 $3 $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 has received interest from a broad group of banks of all sizes, and sufficient capital has been allocated so that all qualifying banks can participate. Approximately $51.08B has been allocated to 45 regional banks (if all maximum funds indicated are approved). 18 banks are either under application or are developing plans to participate but have not yet applied.

Regional Banks
PNC U.S. Bancorp (USB) CapitalOne SunTrust Regions Financial

Bailout ($B)
7.7 (Preliminary approval) 6.6 3.55 3.5 3.5

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________________________________________________________________________ Fifth Third Bancorp 3.45 BB&T 3.1 KeyCorp 2.5 Comerica 2.25 Marshall & Ilsley Corp. (MI) (Preliminary approval) 1.7 Northern Trust 1.5 Huntington Bancshares 1.4 Zions Bancorp 1.4 Popular Inc. (Preliminary approval) 0.95 First Horizon National 0.866 E*Trade Financial Corp. (ETFC) (Under application) 0.8 Associated Banc-Corp 0.530 Webster Financial Corp 0.4 City National 0.395 Fulton Financial Corp. (FULT) (Under application) 0.375 TCF Financial Corp. 0.361 Valley National Bancorp 0.33 East West Bancorp, Inc. (Preliminary approval) 0.316 UCBH 0.298 Whitney Holding Corp. (WTNY) (Plans to apply) 0.282 FirstMerit (Under application) 0.08 - 0.250 Trustmark Corp. (TRMK) (Preliminary approval) 0.215 Umpqua Holdings 0.214 Washington Federal 0.2 International Bancshares Corp. (Eligible after amendments (IBOC) secured) 0.2 First Midwest Bancorp Inc. (FMBI) (Preliminary approval) 0.193 Pacific Capital Bancorp (PCBC) (Preliminary approval) 0.188 First Niagara Financial Group 0.186 Old National Corp. 0.16 The Bank Holdings Inc. (TBHS) (Under application) 0.005-0.015 Western Alliance Bancorporation 0.14 Banner Corp. (BANR) (Preliminary approval) 0.124 Signature Bank (SBNY) (Under application) 0.120

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________________________________________________________________________ Taylor Capital Group Inc. (TAYC) (Under application) 0.105 Midwest Banc Holdings, Inc. 0.086 First Financial Bancorp (FFBC) (Preliminary approval) 0.08 Columbia Banking Systems Inc. (Preliminary approval) 0.077 (COLB) Nara Bancorp, Inc. (Preliminary approval) 0.067 American West Bancorp (AWBC) (Plans to apply) 0.057 NewBridge Bancorp (NBBC) (Under application) 0.052 First Community Bancshares Inc. 0.043 (FCBC) Heritage Commerce Corp. (HTBK) (Preliminary approval) 0.04 Simmons First National Corp. (Preliminary approval) 0.04 (SFNC) Cascade Financial Corporation 0.039 West Bancorp (seeking shareholder approval for) 0.012 - 0.036 HF Financial 0.025 Heritage Financial Corp. (HFWA) (Preliminary approval) 0.024 Bank of Commerce 0.017 Provident Bancshares 0.016 Pamrapo Bancorp Inc. (PBCI) (Plans to apply) 0.011 Broadway Financial Corp. 0.009 Capital Pacific Bancorp (CPBO) (Preliminary approval) 0.004 Sterling Bancshares Under application Frontier Financial Corp. Under application South Financial Group Inc. (TSFG) Under application CoBiz Financial Inc. (COBZ) Plans to apply Bridge 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 CPP was November 14. The program will not be implemented on a first-come-first-served basis. All transactions implemented by the Treasury under CPP must be publicly announced 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 caseby-case basis. The plan is still under development, but will include executive compensation guidelines similar to those under the Capital Purchase Program. This program will provide more detail about what constitutes a golden parachute clause in order 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 and Chrysler) are seeking funds to save the industry from collapse. Democratic leaders are working to quickly pass new legislation during the lame-duck Congressional session, but the idea of offering a bailout to the auto industry has met with objections from both sides of the aisle. On November 17, House and Senate Democrats unveiled competing versions of a plan to start funneling $25 billion to U.S. automakers before the end of the year. Both proposals would draw money from the $700 billion bailout, and mirror many of its rules such as limits on executive pay. In the Senate, Carl Levin (D-MI) introduced a bill that would allow the government to offer bridge loans to automakers and parts suppliers amid "extraordinary and exigent circumstances" that have prevented the industry from receiving credit. The Wall Street Journal reports that according to the draft, those circumstances threaten "a systemic adverse effect on the economy." Sen. Levins proposal would require automakers to submit a detailed plan for revamping their businesses and building more fuel-efficient models. Senate Banking Committee Chairman Christopher Dodd (D-CT) called a hearing on November 18. Executives of the Big Three and the head of the United Auto Workers Union were called to testify before the Committee, the first of several hearings on the industry. The hearing included testimony from Ford CEO Alan Mulally, Chrysler CEO Robert Nardelli, GM CEO Richard Wagoner, and United Auto Workers (UAW) President Ron Gettelfinger. Sen. Debbie Stabenow, D-MI also appeared before the committee. During his testimony, GM CEO Wagoner told the committee that a bailout is needed 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. Barney Frank (D-MA), chairman of the House Financial Services Committee and a key architect 17

________________________________________________________________________ of the Treasury rescue program. Pelosis plan is far more demanding on the industry, giving the government veto power over major business decisions. Automakers would only receive part of the $25 billion upfront. To receive the remaining funding, each company would have to submit a "plan for long-term viability and international competitiveness" by March 31, or face having the first loan called back. Those plans would have to include how the automakers will restructure debt, cut costs and meet fuel economy standards. Rep. Frank has summoned the chief executives of GM, Ford and Daimler-Chrysler, and the head of UAW, to testify at a House Financial Services Committee hearing on November 19. Republicans remain skeptical. "I don't know where you stop once you get started down that 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 $25 billion they're talking about will make them survive," said Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee. "It's just postponing the inevitable." Democrats are clearly more supportive of aiding the industry, but there are still concerns about 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 Minutes in support of aid to the industry, but emphasized that he did not support providing unlimited 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 the stakeholders coming together with a plan what does a sustainable U.S. auto industry look like?"

The Washington Post also reports that the UAW plans to seek an additional $25 billion in public 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's legislative 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," he said. The Bush administration does not support using bailout funds to aid automakers. On November 12, White House spokesman Tony Fratto said the Treasury program is working 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 the White House does not want U.S. automakers to fail." Perino said the administration believe[s] this assistance should come from the program created by Congress that was specifically 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 12 that the bailout program should only be used "to deal with the financial industry." While Paulson believes the industry is "critical to the country," federal aid must take into consideration the "long-term viability" of the Big Three. Federal Reserve Interagency Statement on Meeting the Needs of Creditworthy Borrowers On November 12, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) issued a joint press release urging banks to continue lending responsibly to creditworthy borrowers. There are four key 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 is to serve as intermediaries of credit to businesses, consumers, and creditworthy borrowers. 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 to help restore a sound economy, but also to promote the financial success of the institutions. The second principle is strengthening capital. A strong capital position affects the capacity and willingness of banks to lend during fluctuating market conditions. Banks must reassess the priority given to distributing dividends. The press release stipulated that 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 focus on avoiding preventable foreclosures through systemic, proactive, and streamlined mortgage loan modification protocols. Banking organizations must also be willing to implement effective and sound loan modification programs. The last principle involves the structuring of compensation policies. Banks must regularly review their management compensation policies to ensure they remain consistent with the long-run objectives of the organization as well as sound lending and risk management practices. 19

________________________________________________________________________ Borrowing from the Fed On November 13, CNN Money reported that according to reports from the Federal Reserve, financial institutions have borrowed less from the Fed. The Fed reported that commercial banks borrowed $95.4 billion dollars a day on average. This is 13.3% less than the $110 billion a day borrowed last week during the emergency lending window. A record high of $111.9 billion a day was reached the previous week. Under the emergency discount window, the Fed offers overnight funding for commercial banks at a rate slightly higher than its 1.0% targeted funds rate. The discount rate is currently 1.25%. The Fed opened the discount window after the collapse of Bear Stearns in March to help prevent other financial institutions from failing. Investment banks 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 the government purchased $14 billion in short term corporate debt over the past week, down from $100 billion bought last week. The critical short-term business lending market has only increased by $288 million in the past week, despite the $14 billion the Fed has pumped into the credit system. AIG According to American International Group (AIG), the firm currently owes the government $83.6 billion. The numbers in Table 1.1 do not reflect the terms of AIGs new bailout, which will not go into effect for more than a week. AIG Debt to Government as of November 13, 2008

Amount ($B)
$63 $20.20 $0.40 $83.60

Source
From the $85 (B) Bridge Loan From the Fed's $37.8 (B) Lending Facility Other

Total:

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

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________________________________________________________________________ AIGs Projected Restructured Bailout

Amount ($B)
$40.0 $60.0 $23.5 $30.0 $153.50

Source
Treasury Loan Fed Loan Other New Funding Facility Other New Funding Facility

Total:

On November 14, the Washington Post reported that AIG plans on paying $503 million in deferred compensation to its top employees. Deferred compensation is a common tool used by organizations to retain top employees, and allows the employee to wait until retirement, when he or she is presumably in a lower tax bracket, to collect his or her full salary while simultaneously avoiding being taxed yearly. AIG spokesman Nicholas Ashooh said that in an effort to keep top talent from abandoning AIG, more than 6,000 employees are covered by AIG deferred compensation plans. Ashooh stressed that the funds are not from the government. Bernankes Remarks at Fifth European Central Banking Conference On November 14, Chairman Bernanke spoke at the Fifth European Central Banking Conference The Euro at Ten: Lessons and Challenges in Frankfurt, Germany. Bernankes encouraged central banks to continue increasing the availability of liquidity while maintaining close relationships with each other. Bernanke attributed the worldwide economic deceleration to the constriction of available credit to households and businesses, and the inadequacy to meet the strong demand for dollar funding, both domestic and abroad. The increase of foreign dollar investments in latter years and the significant role the dollar plays in international trade, foreign direct investment, and financial transactions are key reasons why Bernanke urged the banks to coordinate a response to the dollar shortage. As a result of deteriorating conditions in funding markets, many foreign financial institutions are without sufficient access to short-term dollar financing because they rely on interbank and other wholesale markets to obtain 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 balances denominated in its foreign partners currency. Eliminating limits on the sizes of its swap lines with specific central banks has helped improve the distribution of liquidity around the globe.

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________________________________________________________________________ Bernanke stressed that central banks around the world can address the disruptions in credit markets and promote a vibrant global economy through a collaborative effort. Term Auction Facility On November 18, the Federal Reserve posted the results of the auction of $150 billion in 28-day credit through its Term Auction Facility held on November 17:

Results from Term Auction Facility

Stop-out rate: Total propositions submitted: Total propositions accepted: Bid/cover ratio: Number of bidders: 0.510 percent $104.478 billion $104.478 billion 0.7 80

The stop-out rate shown above applies to all awarded loans, which will settle on November 20, 2008 and will mature on December 18, 2008. Institutions that submitted winning bids were contacted by their respective Reserve Banks by 11:30 a.m. EST on November 18 and had until 12:30 p.m. EST on the same day to inform their local Reserve Bank of any error. FDIC Temporary Liquidity Guarantee Program FDIC 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 several businesses ranging from providing loans to midsized companies to investing in commercial real estate. GE has since taken several steps to improve its liquidity and has in fact moved to scale back its exposure to financial services. GE spokesman Russel Wilkerson said that the eligibility of GE Capital for the FDICs temporary liquidity guarantee program will enable the company to source its debt competitively 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 debtinsurance program. The FDIC is considering charging different fees depending on the maturity of the debt rather than the previously proposed standard fee to insure all eligible senior unsecured debt.

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________________________________________________________________________ Several small banks are angered by the FDICs initiative. Former FDIC Chairman William Isaac calls the idea complicated and convoluted. Banks are automatically enrolled in the program unless they opt out. They have until December 5 to notify the FDIC. The FDIC is scheduled to have a board meeting on November 21 at 2 p.m. to discuss and vote on the final rule. Failed Banks The 19 failed banks as reported by the FDIC in 2008 are listed below:

Banks
Security Pacific Bank, Los Angeles, CA Franklin Bank, SSB, Houston, TX Freedom Bank, Bradenton, FL Alpha Bank & Trust, Alpharetta, GA Meridian Bank, Eldred, IL Main Street Bank, Northville, MI Washington Mutual Bank, Henderson, NV and Washington Mutual Bank FSB, Park City, UT Ameribank, Northfork, WV Silver State Bank, Henderson, NV En Espaol Integrity Bank, Alpharetta, GA The Columbian Bank and Trust, Topeka, KS First Priority Bank, Bradenton, FL First Heritage Bank, NA, Newport Beach, CA First National Bank of Nevada, Reno, NV IndyMac Bank, Pasadena, CA First Integrity Bank, NA, Staples, MN ANB Financial, NA, Bentonville, AR Hume Bank, Hume, MO

Closing Date
November 7, 2008 November 7, 2008 October 31, 2008 October 24, 2008 October 10, 2008 October 10, 2008 September 25, 2008

September 19, 2008 September 5, 2008 August 29, 2008 August 22, 2008 August 1, 2008 July 25, 2008 July 25, 2008 July 11, 2008 May 30, 2008 May 9, 2008 March 7, 2008

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________________________________________________________________________ Douglass National Bank, Kansas January 25, 2008 City, MO Regular deposit accounts are now insured up to $250,000 as part of the new financial rescue package enacted in early October. The limit on individual retirement accounts held in banks remains at $250,000. SEC There has been much discussion regarding the regulatory authority for credit default swaps (Please see: Credit Default Swaps: Increasing Transparency). The Securities and Exchange Commission (SEC), in conjunction with the Commodity Futures Trading Commission (CFTC) and the Federal Reserve are currently in discussions concerning regulation of these volatile financial instruments. SEC Chairman Christopher Cox has called on Congress to appoint a committee to modify the current dysfunctional patchwork of our regulatory system. Reuters also reports that Cox supports similar consolidation in the banking industry where a half-dozen federal regulators overlap not only 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 rating firms on November 19. The rules would bar rating companies from having the same officials 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 is being rated. The SEC has requested public comment regarding stricter rules for credit rating agencies, which have drawn blame for exacerbating the credit crunch by giving high ratings to risky mortgage-related products. The Wall Street Journal reports that Chairman Cox, who plans to step down once the new administration is in office, has highlighted several more items for review. As of now, it is 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 has suggested that the new administration consider a sweeping overhaul of regulatory practices for the financial industry, according to The Wall Street Journal. He is calling for the creation of three regulators to replace the CFTC and the SEC.

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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 reverberate among companies and lead to serious economic repercussions. The market-integrity regulator would oversee the safety and soundness of exchanges and key financial institutions. The investor-protection regulator would protect investors and business conduct across all firms. Chairman Lukken said, Regulation by objective rather than function will ensure that all products and institutions are properly overseen based on identified public risks rather than futile difficult determinations of whether an instrument is a security, a future, or a swap 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 regulatory approach led, in part, to the economic crisis. SEC Chairman Cox disagrees with Chairman Lukkens suggestions, having called for the unification of the CFTC and SEC in late October. CFTC Commissioner Bart Chilton claims there is logical strength to Chairman Coxs idea, but thinks that a merger of the two 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 the economy 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 was expected 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 in recession. Half of them estimated the downturn started in the fourth quarter of 2007 or in the first quarter of 2008. The financial sector has announced more jobs cuts. Citigroup plans to eliminate 53,000 more 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 offs of 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 revised its fourth quarter earnings forecast by 20%.

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________________________________________________________________________ Recent bankruptcy filings and job cuts demonstrate how this economic crisis is different from others in recent years. The retail sector is no longer the employer of last resort for the newly unemployed, according to The Wall Street Journal. Last week Circuit City filed for bankruptcy, a few weeks after announcing that it would close 600 stores and eliminate 6,800 jobs. Circuit City is the latest of 14 retail chains to file for bankruptcy protection in the past year. Many were forced into bankruptcy when they could not find financing. Other retail companies that filed for Chapter 11 are:

Liquidation
Mervyns Linens n Things Friedmans, Inc. Whitehall Jewelers Sharper Image Wicker Furniture Shoe Pavilion

Number of Employees at Time of Filing

18,000 17,500 3,500 2,900 2,200 1,500 1,400

Reorganization
Fortunoff Goodys Family Clothing Steve & Barrys

Number of Employees at Time of Filing

2,400 9,900 9,700

To Be Determined
Circuit City Boscovs

Number of Employees at Time of Filing

43,000 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 in the retail sector. But since November 2002, about a fourth of all jobs that have been lost about 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 to part-time status.

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________________________________________________________________________

Global Aspects
Recession The Euro zone has fallen into its first recession. Eurostat, the European Unions statistical office, reported that gross domestic product in the region fell in the quarter ending in September. Only France escaped recession with a 0.1 % GDP increase in the third 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 or even contract next year, governments should consider discretionary fiscal packages on top of automatic higher budgetary social spending, called automatic stabilisers. The Wall Street Journal reported on November 18 that European auto makers are seeking aid as sales decline. European car sales dropped 15% in October, the sixth consecutive month of decline since October 2007. The European Union is currently drafting an investment 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 is based on consumer spending. French auto maker Renault will reduce global production by 25% in the fourth quarter 2008 and temporarily close plants in Romania, Spain and France, 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 gross domestic 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 not much better. This comment was met with demands for the government to increase a stimulus package it expects to generate investments and contracts of up to 50 billion euros ($63.12 billion). After meeting with executives of General Motors and its German unit, Opel, German Chancellor Angela Merkel agreed to consider the automakers request. Opel, with 26,000 employees in Germany, wants refinancing guarantees of 1 billion in bank loans as a contingency plan in case GM is forced to withdraw financial support because of their own 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 AG and 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 dollars passed by the Chinese government. The $586 billion program represents 16% of Chinas economic output in 2007. The Financial Times called the program a reflection of mounting anxiety in Beijing that Chinas economy is cooling much more quickly than was initially expected given a shrinking international market and its own real estate market problems. The Wall Street Journal reported that Chinas growth has dropped to its lowest in five years. Bankruptcies and unemployment are increasing throughout southern China, one of the countrys major manufacturing zones. The infrastructure package seems like a last resort after the government has already cut interest rates three times, eliminated quotas for bank lending and introduced ways to help new homeowners and some exporters. The package will include some projects already budgeted, such as plans to rebuild the areas damaged by Mays earthquake. Other targeted areas include low income housing, upgrading companies to more advanced technology, improving irrigation in rural areas, raising pensions and social programs, and improving water and waste treatment in urban areas.

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

Country
Australia

Bailout Package (B)

$24.42

Bailout Allocations
The government introduced a $10.4b package, along with the $8b committed to buy residential mortgage-backed securities on behalf of small banks and non-bank lenders scalded by the meltdown of the global financial system. A $6b package is being devoted to bailing out the auto industry. On Nov 7, the government announced a $22m bailout to keep ABC Learning solvent and prevent childcare centers from closing before Dec 31. 320b to guarantee bank lending and 40b to provide capital to banks in need. 10.5b ($13.9b) has been devoted to Credit Agricole, Societe Generale and BNP Paribas. 400m has been planned to aid Frances carmakers. The package consists of a 400b financial market stabilization fund to guarantee loans and 80b to recapitalize the banking sector through the government taking stakes in banks. Additionally, 20b is being set aside to cover losses. ING is to receive a $13.4b (approx. 10b) government cash injection. 200b in loan guarantees are being offered to Dutch banks.

France

380

Germany

500

Netherlands

210

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________________________________________________________________________ Russia $200 Russia's bailout package for its economy is worth $200b. The money is channeled through the state development bank, VEB. Thus far, $50bn has been spent. VEB awarded about $10b of the $50b by Oct 23. Rusal, the aluminum and mining branch of Oleg Deripaska's holding company, Basic Element, was awarded $4.5b. Alfa Group, an investment 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 also putting 15bn crowns ($1.9b) into a fund that will be used in case a bank needs emergency capital. Switzerland $65 Regulators set up a $60b fund to absorb troubled assets lingering on UBS books. UBS has also been provided with 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) for controlling 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 financial institutions. So far the government has planned to purchase up to $250b of senior preferred shares under the Capital Purchase Plan (CPP). The rest is TBD.

The European Commission proposed plans for tighter regulation of credit rating agencies through a legally binding central register and surveillance system in Europe. According to Reuters, European Union Internal Market Commissioner Charlie McCreevy criticized credit rating agencies such as Moodys, Standard & Poors and Fitch for playing a role in the global financial crisis. Agencies have been criticized for assigning inflated 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 already standard practice. International Monetary Fund The International Monetary Fund (IMF) has announced that, in addition to relaxing lending requirements, it is ready to lend up to $100 billion in new aid to developing countries. Over the next three years, loans will be available through its International Bank for Reconstruction and Development. Loans to developing countries will increase to more than $35 billion this year. Last year this type of aid totaled $13.5 billion. This years ceiling for such aid was budgeted at $16 billion before the global economic crisis endangered poorer and middle-income states. The IMF is seeking a rapidly increasing amount of extra funding to help resolve the world financial crisis, commented Managing Director Dominique Strauss-Kahn at a news conference on a visit to Libya. Reuters reported that Strauss-Kahn told the BBC this week his organization was likely to need at least $100 billion in extra funding over the next 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 as investors withdraw funds. Serbia, Belarus and Turkey are reported to be talking to the IMF 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 $7.6 billion 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 increase financial support for developing countries, including the launch or expansion of four facilities for the crisis-hit private sector that is critical to employment, recovery and growth. The International Bank for Reconstruction and Development plans to make new 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 longterm, 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 to the 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 sources including governments and other International Financial Institutions, these new IFC facilities are expected to total around $30 billion over the next three years and address problems experienced by the private sector due to the global financial crisis. They include: Expanded trade finance program: IFC plans to double its Global Trade Finance Program from US$1.5 billion to US$3.0 billion. The trade guarantees issued under the program will have an average tenor of six months, thereby supporting up to US$18 billion for short-term trade finance over the next three years. The expanded facility would benefit participating banks based in 66 countries, including some of the worlds 78 poorest countries. The program offers banks partial or full guarantees covering the payment risk in trade related transactions. Bank Recapitalization Fund: IFC plans to launch a global equity fund to recapitalize distressed banks, as more bank failures would further damage economic activity, thus worsening poverty in developing countries. IFC expects to invest US$1 billion over three years with at least US$2 billion provided by other investors. Infrastructure Crisis Facility: This new IFC facility would provide roll-over financing and help recapitalize existing, viable, privately-funded infrastructure projects facing financial distress. IFC expects over three years to invest a minimum of US$300 million and mobilize between US$1.5 billion and US$10 billion from other sources. IFC Advisory Services: To address the mounting needs of clients, IFC is refocusing existing advisory services programsbanking for small and medium enterprises, leasing, microfinance, housing, investment policy and promotion, and business operation and regulation--to make them better geared to helping clients in the current crisis. IFC estimates a financing need of at least US$40 million over three years.

G20 Summit Leaders of the G20 nations met in Washington, D.C. this past weekend to develop an action plan for an economic recovery. Each country has an agenda for stimulus programs, reforms including restrictions on executive pay and global regulation standards. The Financial Times reported that a globally coordinated fiscal stimulus is emerging as a 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 participant in the November 13 edition. The transition in the American presidency has dampened hopes for progress. The lame duck Bush administration has opposed the strict regulation promoted by European leaders. Bush also disagreed with the root causes of the crisis, something, greed and something else expressed by the members. President-elect Barack Obama did not attend the conference because he felt that his presence would be inappropriate. He did, however send two representatives, former Secretary 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 stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

While rejecting protectionism, the group acknowledged that more needs to be done to stabilize financial markets and support economic growth and stressed the impact on emerging nations. Many emerging market economies, which helped sustain the world economy this decade, are still experiencing good growth but increasingly are being adversely impacted by the worldwide slowdown. Recognizing that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries, the following action list was released: Continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system. Recognize the importance of monetary policy support, as deemed appropriate to domestic 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 current difficult financial conditions, including through liquidity facilities and program support. We stress the International Monetary Fund's (IMF) important role in crisis response, welcome its new short-term liquidity facility, and urge the ongoing review of its instruments and facilities to ensure flexibility. Encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda, and we welcome the 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 to continue playing their role in overcoming the crisis.

White House Fact Sheet summarizing the G20 agreements: Common Principles to Guide Financial Market Reform Strengthening transparency and accountability by enhancing required disclosure on complex financial products; ensuring complete and accurate disclosure by firms of their financial condition; and aligning incentives to avoid excessive risktaking. Enhancing sound regulation by ensuring strong oversight of credit rating agencies; prudent risk management; and oversight or regulation of all financial markets, products, and participants as appropriate to their circumstances. Promoting integrity in financial markets by preventing market manipulation and fraud, helping avoid conflicts of interest, and protecting against use of the financial system to support terrorism, drug trafficking, or other illegal activities. Reinforcing international cooperation by making national laws and regulations more consistent and encouraging regulators to enhance their coordination and cooperation across all segments of financial markets. Reforming international financial institutions (IFIs) by modernizing their governance and membership so that emerging market economies and developing countries have greater voice and representation, by working together to better identify vulnerabilities and anticipate stresses, and by acting swiftly to play a key role in crisis response.

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________________________________________________________________________ G20 Action Plan The leaders approved an Action Plan that sets forth a comprehensive work plan to implement these principles, and asked finance ministers to work to ensure that the Action Plan is fully and vigorously implemented.

Address weaknesses in accounting and disclosure standards for off-balance sheet vehicles; Ensure that credit rating agencies meet the highest standards and avoid conflicts of interest, provide greater disclosure to investors, and differentiate ratings for complex products; Ensure that firms maintain adequate capital, and set out strengthened capital requirements for banks' structured credit and securitization activities; Develop enhanced guidance to strengthen banks' risk management practices, and ensure that firms develop processes that look at whether they are accumulating too much risk; Establish processes whereby national supervisors who oversee globally active financial 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 the following areas:

Avoiding regulatory policies that exacerbate the ups and downs of the business cycle; Reviewing and aligning global accounting standards, particularly for complex securities in times of stress; Strengthening transparency of credit derivatives markets and reducing their systemic risks; Reviewing incentives for risk-taking and innovation reflected in compensation practices; 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, including the 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 March 31, 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

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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 is currently no central authority for the credit-derivatives market, and The Wall Street Journal recently reported a brewing turf war developing among Federal regulators over the issue. The agreement does not alter agency oversight mandates, but seeks to ensure consistent 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 to repay 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 in exchange for the underlying securities or the cash equivalent. According to The Wall Street Journal, the buyer of a CDS contract essentially pays premiums and the seller agrees to pay back the principal if the issuer of the bonds doesnt. But CDS is not insurance, and an investor is not required to own the underlying bonds. So an investor can 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 protection without ever owning the underlying bonds. Due to the nature of credit derivatives, it is impossible to precisely measure the size of the market, but the Washington Post reports that estimates in the industry range from about $35 - $55 trillion. Lawmakers and some regulators have identified CDS as a potential source of systemic financial risk. SEC Chairman Christopher Cox said that the virtually unregulated overthe-counter market in credit default swaps has played a significant role in the credit crisis. Cox encouraged Congress to pass new legislation to further rein in the CDS market, which he said provided a significant opportunity for market manipulation. During the hearing on hedge-funds on November 14, House Oversight Chairman Henry Waxman (D-CA) pointed to CDS as a major cause of the credit crisis. But according to The Wall Street Journal, identifying major systemic risks in the CDS market has proven much harder than the pols expected. According to The Journal, Lehmans failure was caused by toxic mortgages, not CDS, and once Lehman went bust, CDS contracts added relatively little stress to other banks. The Journal also contends that AIGs problem was the fact that it was almost entirely a seller of CDS. The company used CDS to make a big bet on housing, and the housing market, not CDS, turned sour.

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Nonetheless, Capitol Hill seems intent on increased regulation of CDS. The Presidents Working Group on Financial Markets said on November 14 that a well-regulated intermediary would help absorb losses if another dealer failed, and could also be a catalyst for a more competitive trading environment. The Working Group also suggested increasing transparency for the purpose of "monitoring market trends, identifying potential issues, and preventing market manipulation and insider trading." Hedge Funds Hedge funds are blamed as a central contributing factor to the markets fall in recent days, and the funds have now come to the fore as a destabilizing threat to the global financial system. According to the Washington Post, hedge funds are said to be the cause of the turmoil because of their unregulated status, their unknown investments and shortselling that has accelerated the collapse of the mortgage market. According to data provider Eurekahedge, hedge fund assets plunged $100 billion in October, with investor redemptions accounting for $60 billion of the loss. As investors withdrew their money from these funds, the funds were forced to sell stock, which exacerbated severe global volatility. Last month the Dow Jones industrial average fell 14% and the Standard & Poors 500 index declined 17%. Donn Vickrey of independent research firm Gradient Analytics says that its pretty clear that hedge fund redemption has had an impact on the market. Financing requirements also forced hedge funds to sell, said Ted Berenblum, head of alternative investments at BNY Mellon Wealth Management. As the credit crisis worsened, banks tightened lending requirements for nearly all customers from retail borrowers to large corporations. That forced hedge funds to deleverage their balance sheets, which meant more selling, he said. On November 13, Representative Henry Waxman (D-CA), who heads the House Committee on Oversight and Government Reform, called a hearing in response to growing criticism of hedge funds. Top executives of several major U.S. funds were quizzed about use of borrowed money, the taxes they pay and the lack of disclosure within the $1.7 trillion hedge fund industry. The five executives in attendance were: George Soros, Chairman, Soros Fund Management, LLC James Simons, President, Renaissance Technologies Corporation John Paulson, President, Paulson & Co., Inc. Philip Falcone, Senior Managing Director, Harbinger Capital Partners Funds Kenneth Griffin, President and CEO, Citadel Investment Group

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________________________________________________________________________ Regulation Rep. Waxman pointed out that "currently, hedge funds are virtually unregulated. They are not required to report information on their holdings, their leverage, or their strategies. Regulators aren't even certain how many hedge funds exist or how much money they control." Waxman is concerned that the industry, which increased five-fold over the last decade, could blow up, like other sectors of the financial market. The nature of the funds was also at task. Waxman commented that we also know that some hedge funds are highly leveraged. They invest in assets that are illiquid and difficult to price and sell rapidly. Some of the executives acknowledged that hedge funds could pose systemic risks to the financial system. George Soros admitted that hedge funds were an integral part of the bubble. But the bubble has now burst and hedge funds will be decimated. Soros also warned against going overboard with regulation. He cautioned that there is a real danger that the pendulum will swing too far the other way. Executives were quick to point out other factors that contributed to the economic crisis besides hedge funds. According to Philip Falcone, companies were hurt by a number of problems, including over-leveraged balance sheets, poor management decisions and flawed business plans. He also defended short-selling as a valuable component of financial markets. James Simons said the SEC and Federal Reserve should share some of the blame for their hands-off approach to investment banks' leverage and the uncontrolled nature of the credit default swap market. Disclosure Rep. Tom Davis (R-VA), the ranking Republican on the committee, emphasized that public employees and middle-income senior citizens, not just Tom Wolfes masters of the universe, lose money when hedge funds decline or collapse. Soros and Falcone agreed when asked by lawmakers if U.S. regulators should be able to look more closely at their trading positions. James Simons concurred, but stipulated that the fund-specific information should not be released publicly, which could do more harm than good. Simons said rating agencies are the must culpable for bursting the economic bubble, because they allowed sows ears to be sold as silk purses. Kenneth Griffin remained entirely opposed new regulation, saying we do not need greater regulation of hedge funds. We've not seen hedge funds as a focal point of the carnage. Taxes According to Waxman, the five hedge fund managers in attendance at the hearing made, on average, between $1 and $2.5 billion each in 2007. However the long-term gains by 38

________________________________________________________________________ hedge fund managers are only taxed at the 15% capital gains rate. Rep. Elijah Cummings (D-MD) pointed out that "a schoolteacher or a plumber or a policeman makes on the average of $40,000 or $50,000 a year. Yet they had to pay 25 percent tax. My question is whether this is fair. Soros and Simons said they would support having their "carried interest" income taxed at regular rates. However, Falcone said hedge funds are not treated any differently than the rest of the investment community. Paulson agreed, saying our tax situation is fair.

Looking Ahead
Lame duck Congressional hearings on aid to auto makers SEC Second Roundtable on Mark-to-market Practices Confirmation hearing for Neil M. Barofsky, the leading candidate for the Special Inspector General position

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