Order Code RS22956
Updated October 15, 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, the federal government intervened
financially with private corporations on a large scale that resulted in the government
receiving significant debt and equity considerations three times from the beginning of
2008 until the middle of September 2008. The firms affected were Bear Stearns, Fannie
Mae and Freddie Mac, and AIG. Dissatisfaction with the case-by-case approach that
had been pursued up to that point led to Treasury’s decision to propose a more
comprehensive solution to the turmoil on September 19, 2008. On October 3, 2008,
P.L. 110-343 was signed into law, authorizing the Troubled Assets Relief Program
(TARP). TARP gave Treasury the option of purchasing or insuring up to $700 billion
of assets from financial firms. On October 14, 2008, Treasury announced it was
purchasing up to $250 billion in financial firms’ preferred stock under the TARP
authority.
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 most of the interventions, all the financial outflows that are possible have yet
to occur, and the ultimate value of the debt and equity considerations received from the
private firms is uncertain. At this point, the federal government has the option to own
nearly 80% of Fannie Mae, Freddie Mac, and AIG. Depending on the final proceeds
from the various debt and equity considerations, the federal government may 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.

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Where Has the Money Come From?
In the recent interventions, there have been two primary sources of immediate
funding: the Federal Reserve (Fed) and the U.S. Treasury. The Fed has the authority
under its founding statute to loan money “in unusual and exigent circumstances” to “any
individual, partnership, or corporation” provided five members of the Board of Governors
of the Federal Reserve system agree.1 This authority has been cited in two of the
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 Because the profits of the Fed are overwhelmingly 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 In the case of the
Troubled Assets Relief Program, the direct source of funding is the Treasury, pursuant to
the statutory authority granted in the Emergency Economic Stabilization Act of 2008.4
Treasury finances these activities by issuing bonds and increasing the federal debt.
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.
Such assistance may have little or no up-front cost to the government, although loan
guarantees in legislation are scored by the Congressional Budget Office as an up front
budgetary cost. This score reflects that 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 the risk of loss. In many past
cases, the value to various companies of federal guarantees was to enable 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 maximum amounts
promised in federal assistance and attempt to quantify the amounts that have actually been
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
1 12 U.S.C. Sec. 343.
2 For more information on the Federal Reserve’s actions, please see CRS Report RL34427,
Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte.
3 P.L. 110-289, Title I.
4 P.L. 110-343, Division A, Title 1.

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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.
Recent Financial Interventions
Troubled Assets Relief Program (TARP)
As the government has intervened in 2008 to prevent the failure of troubled financial
firms, market conditions seemed to get worse instead of better. After the AIG
intervention, Treasury argued that a more comprehensive solution was needed to restore
financial calm. It proposed creating a TARP to purchase up to $700 billion of troubled
assets from financial firms as a way to restore investors’ confidence in the health of the
financial sector. It was argued that financial firms would be unable to replenish their
capital (by selling equity to private investors) unless certain assets were transferred to the
government. Once financial markets stabilized, Treasury would be able to sell these
assets, recouping some or perhaps all (if asset prices rose above their purchase price) of
the costs.
On October 3, 2008, P.L. 110-343 was signed into law, creating TARP. In addition
to an asset purchase program, P.L. 110-343 included an insurance program providing
federal guarantees for troubled assets in return for premiums paid by companies. It also
allowed the government to take an equity stake in companies participating in the asset
purchase program. P.L. 110-343 provided broad discretion to the Treasury to design the
parameters of the program, making it difficult to evaluate the ultimate costs of the
program at this time. On October 14, 2008, Treasury announced a TARP capital purchase
program. Under this program, rather than purchasing troubled assets, Treasury will inject
capital directly into financial institutions through the purchase of preferred stock.
American International Group (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. AIG must also pay
interest on the amount of the credit line that it does not access. In addition, the
government received warrants to purchase up to 79.9% of the equity in AIG. On October
8, the Fed announced that it would lend up to a further $37.8 billion AIG against
investment-grade securities held by its insurance subsidiaries. These securities had been
previously lent out and were not available as collateral at the time of the original
intervention. The Fed reported that $70.3 billion had been lent to AIG as of October 8,
2008.5
5 See Federal Reserve Statistical Release, H.4.1, dated October 9, 2008, Table 1, “Other credit
(continued...)

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Fannie Mae and Freddie Mac
On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie
Mae and Freddie Mac into conservatorship.6 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.
The Treasury agreed to make open market purchases of Fannie Mae- and Freddie Mac-
issued 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. In return for the Treasury
support, each company issued the Treasury $1 billion of senior preferred stock without
additional compensation, as well as warrants (options) to purchase up to 79.9% of each
company’s common stock. Treasury’s authority to provide financial support will
terminate December 31, 2009.
Bear Stearns
On March 16, 2008, 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 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.7 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 will produce a
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,
5 (...continued)
extensions” available at [http://www.federalreserve.gov/releases/h41/Current/].
6 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, by N. Eric Weiss.
7 Federal Reserve Bank of New York, “Summary of Terms and Conditions Regarding the JP
Morgan Chase Facility,” press release, March 24, 2008.

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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 direct loss on the loan. Any losses beyond $1.15 billion will be
borne by the Fed.
Table 1. Summary of Current and Historical Financial Interventions
by the Federal Government
Beneficiary
Action
Financial
Final Cost to
Commitment
Treasury
Unknown (Assets
can be sold at future
Purchase of
date. Treasury has
troubled assets
the option to take an
from financial
equity stake in
firms
participating
companies.)
TARP
Unknown (By law,
Insurance of
Up to $700 billion
(October 3, 2008)
premiums paid for
troubled financial
the insurance are to
assets
cover losses.)
Unknown (Treasury
receives dividends
Purchase of
on stock, plus sale
preferred stock
value of stock at the
end of the program.)
Up to $75 billion
Unknown
against the general
(Government
Two-Year Secured
assets of AIG; up to
receives interest on
AIG
Loan from the
$37.8 billion against
loan plus stock
(September 16, 2008)
Federal Reserve
the securities held
warrants on up to
by AIG’s insurance
79.9% of AIG’s
subsidiaries
equity.)
Unknown (Treasury
Initial commitment,
receives $1 billion
Senior Preferred
$100 billion each;
(each) of preferred
Stock Purchase
ultimately, no set
stock and 10%
limit
accrual on the
stock.)
Fannie Mae and
Unknown (Treasury
Freddie Mac
Purchase of
receives interest on
(September 7, 2008)
Mortgage-Backed
any MBS purchased
No set limit
Securities issued
and may sell the
by the companies
securities in the
future.)
Unknown (Treasury
No set limit;
Credit Facility
receives interest on
collateralized
any loans taken.)

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Beneficiary
Action
Financial
Final Cost to
Commitment
Treasury
Unknown (The
Asset Purchase
Federal Reserve
Bear Stearns
through LLC
LLC received
$28.8 billion
(March 14, 2008)
controlled by the
$29.95 billion in
Federal Reserve
relatively illiquid
assets.)
None except implicit
U.S. Airlines
value of loan
P.L. 107-42
Loan Guarantees
Up to $10 billion
guarantees; under $2
(September 22, 2001)
billion in loans
made.
Savings and Loan
Full faith and credit
Savings and Loan
Failures and
backing of Federal
Failures
Insolvency of
Savings and Loan
$150 billion.
P.L. 101-73
Federal Savings
Insurance
(August 9, 1989)
and Loan Insurance
Corporation
Corporation
Chrysler
$311 million profit
P.L. 96-185
Loan Guarantees
$1.5 billion
from sale of
(January 7, 1980)
warrants.
New York City
None, except the
$1.65 billion in
P.L. 95-339
Loan Guarantees
implicit value of
guaranteed bonds
(August 9, 1978)
loan guarantee.
New York City
None, except the
P.L. 94-143
Short-Term Loans
$2.3 billion
implicit cost of the
(December 9, 1975)
risk of loan.
$3 billion net loss
Loan Guarantees in
$125 million loan
Penn Central
after sale of
the wake of
guarantees;
P.L. 93-236
ownership stake plus
Railroad
$7 billion in federal
(January 2, 1974)
the implicit value of
Bankruptcy
operating subsidies
loan guarantee.
$250 million of
loans guaranteed for
$31 million profit
Lockheed
five years with three
from sale of
P.L. 92-70
Loan Guarantees
year renewal;
warrants less the lost
(August 9, 1971)
guarantee and
value of loan
commitment fees
guarantee.
charged

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