Order Code RS22956
Updated September 23, 2008
The Cost of Government Financial
Interventions, Past and Present
Baird Webel, N. Eric Weiss, and Marc Labonte
Government and Finance Division
Summary
In response to ongoing financial turmoil that began in the subprime mortgage-
backed securities market, the federal government has intervened with private
corporations on a large scale and in an ad hoc manner three times from the beginning
of 2008 through September 19, 2008. The firms affected were Bear Stearns, Fannie Mae
and Freddie Mac, and AIG. Another large investment bank, Lehman Brothers, sought
government intervention, but none was forthcoming; subsequently, the firm sought
bankruptcy protection.
These interventions have prompted questions regarding the taxpayer costs and the
sources of funding. The sources of funding are relatively straightforward, the Federal
Reserve (Fed) and the U.S. Treasury. The costs, however, are difficult to quantify at this
stage. In the most recent interventions (Fannie Mae and Freddie Mac, and AIG), all the
lending that is possible under the interventions has yet to occur. Also, in all the current
cases, the government has received significant debt and equity considerations from the
private firms. At this point, Fannie Mae, Freddie Mac, and AIG are essentially owned
by the federal government. Depending on the proceeds from the debt and equity
considerations, the federal government may very well end up seeing a positive fiscal
contribution from the recent interventions, as was the case in some of the past
interventions summarized in the tables at the end of this report. The government may
also suffer significant losses, as has also occurred in the past.
This report will be updated as warranted by legislative and market events.
Where Has the Money Come From?
In the recent interventions, there have been two primary sources of funding: the
Federal Reserve (Fed) and the U.S. Treasury. The Fed has the general authority under its
founding statute to loan money “in usual and exigent circumstances” to “any individual,
partnership, or corporation” provided five members of the Board of Governors of the

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Federal Reserve system agree.1 This authority has been cited in two of the three
interventions this year, Bear Stearns and AIG. The source of money loaned under this
section derives from the Fed’s general control of the money supply, which is essentially
unlimited subject to the statutory mandates of controlling inflation and promoting
economic growth.2 Since the profits of the Fed are ultimately remitted to the Treasury,
the indirect source of the funds is the Treasury. In the case of Fannie Mae and Freddie
Mac, the direct source of funding is the Treasury, pursuant to the statutory authority
granted in the Housing and Economic Recovery Act of 2008.3
The Cost of Financial Interventions
Determining the cost of government interventions, particularly those currently in
progress, is not straightforward. Assistance often comes in forms other than direct monies
from the Treasury, including loan guarantees, lines of credit, or preferred stock purchases,
which may have little or no initial cost to the government. A loan guarantee, which can
be thought of as a sort of insurance, has value even if it is never used. Many insurance
policies are never used, but individuals and companies purchase them to reduce risk of
loss. In many past cases, the value to various companies of federal guarantees was to
allow them to access the private credit markets, issuing bonds or obtaining bank loans that
they would not otherwise have been able to obtain. In other past cases, the federal
guarantee resulted in a lower interest rate on the bonds or loans.
Depending on the conditions attached to each specific intervention and how events
proceed thereafter, the government may even see a net inflow of funds from the actions
taken, rather than a net outflow. The summaries below address the maximal amounts
promised in federal assistance and attempt to quantify the amounts that have actually been
disbursed, although particularly in the most recent cases (Fannie Mae and Freddie Mac,
and AIG), there is little information as to the exact amounts disbursed. There are also
other, more diffuse costs that could be weighed. For example, many would argue that the
cost to the taxpayers of any intervention should be weighed against the potential costs of
financial system instability resulting from inaction, or that one intervention may lead to
more private sector risk-taking, and thus necessitate additional future interventions (moral
hazard). Such costs, however, are even harder to quantify than the realized cost of the
interventions. This report does not attempt to address them.
1 12 U.S.C. Sec. 343.
2 For more information on the Federal Reserve’s actions, please see CRS Report RL34437,
Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte.
3 P.L. 110-289, Title I.

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Recent Financial Interventions
AIG
On September 16, 2008, the Fed announced that it was taking action to support AIG,
a federally chartered thrift holding company with a broad range of businesses, primarily
insurance subsidiaries, which are state-chartered. This support took the form of a secured
two-year line of credit with a value of up to $85 billion. The interest rate on the loan is
relatively high, approximately 11.5% on the date it was announced. In addition, the
government received warrants to purchase up to 79.9% of the equity in AIG. According
to the Fed, $28 billion has been lent to AIG as of September 18, 2008.4
Fannie Mae and Freddie Mac5
On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie
Mae and Freddie Mac into conservatorship. As part of this conservatorship, Fannie Mae
and Freddie Mac have signed contracts to issue new senior preferred stock to the
Treasury, which has agreed to purchase up to $100 billion of this stock from each of them.
If necessary, the Treasury agreed to contribute cash in the amount equal to the difference
between each company’s liabilities and assets. Each company issued the Treasury $1
billion of senior preferred stock and warrants (options) to purchase common stock for
which the Treasury did not compensate the company. If the warrants are exercised,
Treasury would own 79.9% of each company. Treasury agreed to make open market
purchases of Fannie Mae and Freddie Mac mortgage-backed securities (MBS). Treasury
has said that it expects to profit from the spread between the interest rate that it pays to
borrow money through bonds and the mortgage payments on the MBS. Fannie Mae and
Freddie Mac will guarantee payment of the MBS. Treasury agreed that if the companies
have difficulty borrowing money, which has apparently not been the case to date, Treasury
will create a Government Sponsored Enterprise Credit Facility to provide liquidity to
them, secured by MBS pledged as collateral. There are no specific limits to these
purchases or loans, but they are subject to the statutory limit on the federal government’s
debt. The authority for both preferred stock purchase and the credit facility will terminate
December 31, 2009. At this point, there has been no announcement that the credit facility
has been accessed, nor that any purchase of preferred stock has occurred.
Bear Stearns
On March 16, JPMorgan Chase agreed to acquire the investment bank Bear Stearns.
As part of the agreement, the Fed lent $28.82 billion to a Delaware limited liability
corporation (LLC) that it created to purchase financial securities from Bear Stearns.
These securities are largely mortgage-related assets. The interest and principal will be
repaid to the Fed by the LLC using the funds raised by the sale of the assets. The Fed’s
4 See Federal Reserve Statistical Release, H.4.1, dated September 18, 2008, available at
[http://www.federalreserve.gov/releases/h41/Current].
5 For more information see the September 7, 2008 statement by Treasury Secretary Henry
Paulson at [http://ustreas.gov/press/releases/hp1129.htm] and CRS Report RL34661, Fannie
Mae’s and Freddie Mac’s Financial Problems: Frequently Asked Questions, by N. Eric Weiss.

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loan will be made at an interest rate set equal to the discount rate (2.5% when the terms
were announced, but fluctuating over time) for a term of 10 years, renewable by the Fed.6
In addition, JPMorgan Chase extended a $1.15 billion loan to the LLC that will have an
interest rate 4.5 percentage points above the discount rate. Thus, in order for the principal
and interest to be paid off, the assets will need to appreciate enough or generate enough
income so that the rate of return on the assets exceeds the weighted interest rate on the
loans (plus the operating costs of the LLC). The interest on the loan will be repaid out
of the asset sales, not by JPMorgan Chase.
Any difference between the proceeds and the amount of the loans is profit or loss for
the Fed, not JPMorgan Chase. Because JPMorgan Chase’s $1.15 billion loan was
subordinate to the Fed’s $28.8 billion loan, if there are losses on the $29.95 billion assets,
the first $1.15 billion of losses will be borne, in effect, by JPMorgan Chase, however.
Thus, if the assets appreciate in value by more than operating expenses, the Fed will make
a profit on the loan. If the assets decline in value by less than $1.15 billion, the Fed will
not suffer any loss on the loan.7 Any losses beyond $1.15 billion will be borne by the Fed.
It will likely be many years until all the assets are liquidated, and a final tally of the Fed’s
profit or loss can be calculated.
6 Federal Reserve Bank of New York, “Summary of Terms and Conditions Regarding the JP
Morgan Chase Facility,” press release, March 24, 2008.
7 It will only have forgone interest it could have earned on other investments, namely U.S.
Treasury securities.

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Table 1. Summary of Current and Historical Financial Interventions
by the Federal Government
Beneficiary
Action
Financial Commitment
Final Cost to Treasury
AIG
Two-Year Secured Loan from the
Up to $85 billion
Unknown (Government receives
(September 16, 2008)
Federal Reserve
interest on loan plus stock warrants on
up to 79.9% of AIG’s equity.)
Senior Preferred Stock Purchase
Initial commitment, $100 billion each;
Unknown (Treasury receives $1
ultimately, no set limit
billion (each) of preferred stock and
10% accrual on the stock.)
Fannie Mae and Freddie Mac
Purchase of Mortgage-Backed Securities
No set limit
Unknown (Treasury receives interest
(September 7, 2008)
issued by the companies
on any MBS purchased and may sell
the securities in the future.)
Credit Facility
No set limit; collateralized
Unknown (Treasury receives interest
on any loans taken.)
Bear Stearns
Asset Purchase through LLC controlled
$28.8 billion
Unknown (The Federal Reserve LLC
(March 14, 2008)
by the Federal Reserve
received $29.95 billion in relatively
illiquid assets.)
U.S. Airlines
Loan Guarantees
Up to $10 billion
None except implicit value of loan
P.L. 107-42
guarantees; under $2 billion in loans
(September 22, 2001)
made.
Savings and Loan Failures
Savings and Loan Failures and
Full faith and credit backing of Federal
$150 billion.
P.L. 101-73
Insolvency of Federal Savings and Loan
Savings and Loan Insurance Corporation
(August 9, 1989)
Insurance Corporation
Chrysler Loan Guarantee
Loan Guarantees
$1.5 billion
$311 million profit from sale of
P.L. 96-185
warrants.
(January 7, 1980)

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Beneficiary
Action
Financial Commitment
Final Cost to Treasury
New York City
Loan Guarantees
$1.65 billion in guaranteed bonds
None, except the implicit value of loan
P.L. 95-339
guarantee.
(August 9, 1978)
New York City
Short-Term Loans
$2.3 billion
None, except the implicit cost of the
P.L. 94-143
risk of loan.
(December 9, 1975)
Penn Central
Loan Guarantees in the wake of
$125 million loan guarantees;
$3 billion net loss after sale of
P.L. 93-236
Railroad Bankruptcy
$7 billion in federal operating subsidies
ownership stake and the implicit value
(January 2, 1974)
of loan guarantee.
Lockheed
Loan Guarantees
$250 million of loans guaranteed for five
$31 million profit from sale of
P.L. 92-70
years with three year renewal; guarantee
warrants less the lost value of loan
(August 9, 1971)
and commitment fees charged
guarantee.

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