Finance and Financial Management Commons^™

Mongolian Asset Recovery Agency, Sean Fulmer

Journal of Financial Crises

Mongolia’s transition away from the monobank system in the 1990s did not occur smoothly, with inherited, non-performing loans from the monobank period causing significant instability and insolvency in the banking sector. These inherited portfolios, in conjunction with risky lending by the newly formed banking sector, led to the insolvency of People’s Bank (also known as Ardyn Bank), and Insurance Bank, which together held approximately 35% of total assets in the banking system. From 1996 to 1997, the Mongolian government, with the technical and financial support of the World Bank and the Asian Development Bank, formed the Mongolian Asset Recovery Agency …

Mexico: Fobaproa Capitalization And Loan Purchase Of Bank Portfolio Program (Clpp), Manuel León Hoyos, Alexander Nye

Journal of Financial Crises

In December 1994, Mexico entered a financial crisis after a year of political turmoil, assassinations of high-level politicians, and a substantial depreciation of the peso. In 1995, following the economic contraction, the recently privatized banking sector experienced difficulties in meeting regulatory minimum capital requirements. The Mexican government received a $52 billion international financial package and enacted multiple programs to support the banking system. In the spring of 1995, through the Bank Fund for Savings Protection (FOBAPROA), the Capitalization and Loan Purchase of Bank Portfolio Program (CLPP) was introduced to provide new, permanent capital to Mexican banks. For banks that were …

Kazakhstan’S Rehabilitation Bank, Sharon M. Nunn

Journal of Financial Crises

After the dissolution of the Soviet Union in 1991, Kazakhstan officials made market-oriented stabilization reforms to its previously Soviet-planned economy, including removing most price constraints, privatizing various state-owned enterprises (SOEs), and taking steps to prevent the collapse of its banking system. As part of its efforts, Kazakhstan created the Rehabilitation Bank (RB) in 1995 to absorb the large number of non-performing assets from state-owned banks while also assuming a corresponding amount of the institutions’ liabilities, essentially “shrinking their portfolios” (Implementation Completion Report 1998). The RB, established with a four-year mandate, either liquidated the debtors or required the firms to restructure. …

Finland: Arsenal, Kaleb B. Nygaard

Journal of Financial Crises

Following a large-scale deregulation of the financial sector during the 1980s and the subsequent massive credit expansion, a banking crisis in Finland caused a sharp contraction in the economy in the early 1990s. One of the key policy responses to the crisis was the creation of an asset management company called Arsenal in 1992. The original purpose of Arsenal was to absorb, manage, and liquidate the bad assets of the Savings Bank of Finland (an entity created by the government-forced merger of 41 of the country’s 81 savings banks). During the following years, Arsenal expanded to become a group of …

Swedish Amcs: Securum And Retriva, Mallory Dreyer

Journal of Financial Crises

With the liberalization of the Swedish banking system in the 1980s, there was a rapid credit expansion, and real estate prices soared. When the Swedish economy began to weaken, real estate prices began to decline, and finance companies faced difficulties. Swedish banks were not insulated from financial pressures, and Nordbanken, a majority state-owned bank, declared large credit losses in 1990. The Swedish government’s response was initially ad hoc and targeted to specific banks, but in 1992, the government announced an open-ended guarantee of all bank liabilities. The crisis response also included a bank restructuring program and the establishment of targeted …

The Hungarian Loan Consolidation Program, Mallory Dreyer

Journal of Financial Crises

After spinning off the commercial banking functions that the central bank had performed for many years into three new banks, post-Communist Hungary faced a severe recession in 1992. The recession led to a high level of nonperforming loans (NPLs) in the banking system. In 1992, the Hungarian government announced a Loan Consolidation Program (LCP) to remove bad debt from the balance sheets of banks on a voluntary basis. Depending on the date when a loan was classified as “bad,” the government paid 50%, 80%, or 100% of book value. In 1992, banks transferred bad debt with a book value of …

Czech And Slovak Federative Republic: Consolidation Bank (Kob), Lily S. Engbith

Journal of Financial Crises

Following the disintegration of the Soviet Union and subsequent Velvet Revolution in 1989, the former Czech and Slovak Federative Republic (CSFR) began the complex transition from a centrally controlled command economy to a market-based economy. The transition necessitated the removal of non-performing loans from state-owned banks’ balance sheets, a task assigned by the Ministry of Finance to the newly formed Consolidation Bank (Konsolidační Banka, hereafter “KOB”). Established on February 25, 1991, the KOB was specifically mandated to acquire and restructure what were known as “TOZ” loans, unsecured debt with no amortization schedules and unsustainably high interest rates. The …

Bureau De Recouvrement Des Crédits Du Burkina (Brcb), Mallory Dreyer

Journal of Financial Crises

In Burkina Faso, the pre-1990s banking system was characterized by a high level of government involvement and ownership, which led to government-induced lending rather than lending based on creditworthiness. Nonperforming loans in the Burkinabe banking system grew to 10 percent of total loans in 1991. In order to address the banking crisis in 1991, the Burkinabe government entered into a Structural Adjustment Facility with the IMF and other multilateral organizations which prioritized the privatization of government-owned enterprises and included rehabilitation of the financial system. As part of this restructuring, the government established the Bureau de Recouvrement des Crédits du Burkina …

Us Resolution Trust Corporation, Aidan Lawson, Lily S. Engbith

Journal of Financial Crises

The savings and loan (S&L) industry experienced a period of turbulence at the end of the 1970s as sharply increasing interest rates caused much of the value of the industry’s net worth to evaporate due to its focus on long-term, fixed-rate mortgages. As a result, a period of rapid deregulation followed, and S&Ls, also called thrifts, engaged in increasingly risky behavior despite many being clearly insolvent. This trend of yield-seeking growth on the part of zombie thrifts forced the government’s hand as huge losses rendered the insurance fund backing the industry, called the Federal Savings and Loan Insurance Corporation (FSLIC), …

Senegal Société Nationale De Recouvrement (Snr), Corey N. Runkel

Journal of Financial Crises

In the late 1980s, Senegal embarked on a comprehensive set of reforms to its banking sector. The reforms comprised changes to management, supervision, and lending standards after loose central bank refinancing standards had let the nonperforming loans (NPLs) caused by drought and public enterprise mismanagement linger on bank balance sheets. In the process, the country attempted to recover NPLs worth hundreds of billions of francs. Senegal closed several state-controlled banks, transferring bad assets and certain liabilities to a new asset management company, the Société Nationale de Recouvrement (SNR). The SNR’s debt recoveries would reimburse depositors in the liquidated banks and …

Uruguayan Non-Performing Portfolio Purchase Scheme, Sean Fulmer

Journal of Financial Crises

As the Latin American sovereign debt crisis spread through the continent during the early 1980s, foreign investors began to abandon Uruguay out of fear that it would devalue its currency like Argentina did in March 1981. Five small- to medium-sized commercial banks in Uruguay faced solvency crises as a result. Although the Central Bank of Uruguay (CBU) decided that a full, direct intervention into the failed banks was not necessary due to their size, the CBU arranged for the sale of the banks to foreign financial institutions, while assuming the non-performing portfolios of the failed banks to facilitate the transaction. …

Spain: Deposit Guarantee Fund Asset Management, Manuel León Hoyos

Journal of Financial Crises

The global oil shock in 1973-74 occurred at a time when Spain was embarking on a liberalization of its financial system that resulted in many new entrants, particularly small- and medium-sized institutions. The banking crisis that followed from 1977-85 affected 52 of the country’s 110 banks, most of them of small- and medium-sized, that comprised over 20% of bank deposits. Spain established the Deposit Guarantee Fund in November 1977 to provide limited deposit insurance, and, in March 1978, established a Banking Corporation to take control of and reorganize troubled banks. However, because the Banking Corporation lacked the legal authority to …

Broad-Based Asset Management Programs, Christian M. Mcnamara, Greg Feldberg, Mallory Dreyer, Andrew Metrick

Journal of Financial Crises

Dealing with high levels of nonperforming assets (NPAs) on bank balance sheets is one of the most challenging aspects of financial crisis management. High levels of NPAs can interfere with both bank profitability and general economic growth by increasing uncertainty about bank solvency and therefore funding costs, tying up resources and attention, and inhibiting new lending. One potential solution to the NPA problem is a centralized, government-driven effort to remove these assets from troubled institutions and then manage and sell them. Though such broad-based asset management (BBAM) programs existed even earlier in history, they appear to have become more common …

Lessons Learned: Zachary Taylor, Maryann Haggerty

Journal of Financial Crises

Zachary Taylor joined the Federal Reserve Bank of New York (FRBNY) in January 2009 to lead the team responsible for managing and unwinding the central bank’s Maiden Lane II and III portfolios, which were acquired in connection with the intervention to assist American International Group (AIG). Taylor later took over responsibility for the Maiden Lane portfolio consisting of former Bear Stearns assets as well as the unwinding of the Term Asset-Backed Securities Loan Facility (TALF), another crisis-era program. All told, those portfolios amounted to more than $140 billion in residential mortgage-backed securities (RMBS), collateralized debt obligations (CDO), credit default …

Lessons Learned: Robert Hoyt, Esq., Yasemin Esmen

Journal of Financial Crises

Robert Hoyt was General Counsel at the U.S. Department of Treasury between 2006 and 2009. He oversaw legal aspects of policies implemented to manage the crisis, including the rescues of Bear Stearns, AIG, and the U.S. Auto industry, the conservatorship of Fannie Mae and Freddie Mac, and the failure of Lehman Brothers, as well as the creation and implementation of the Troubled Asset Relief Program (TARP.) This Lessons Learned is based on a phone interview with Mr. Hoyt.

Lessons Learned: Alejandro Latorre, Maryann Haggerty

Journal of Financial Crises

At the time of the 2007-09 global financial crisis, Alejandro Latorre was an assistant vice president at the Federal Reserve Bank of New York (FRBNY). He was active in the bailout of American International Group (AIG) from its inception to the end, when AIG repaid its outstanding obligations to both the Federal Reserve and the U.S. Treasury. This Lessons Learned summary is based on a Feb. 26, 2020, interview. He emphasized that the views discussed here are his own, not the views of anyone else currently or previously within the Federal Reserve System or the views of his current employer.

Lessons Learned: Sarah Dahlgren, Alec Buchholtz, Rosalind Z. Wiggins

Journal of Financial Crises

Sarah Dahlgren was the Executive Vice President and head of the Financial Institution Supervision Group at the Federal Reserve Bank of New York (FRBNY) during the crisis and instrumental in the rescue of American International Group (AIG). This Lessons Learned summary is drawn from a March 22, 2018, interview in which she gave her take on how central bankers can prepare for future crises.

Lessons Learned: Chester B. Feldberg, Maryann Haggerty

Journal of Financial Crises

Chester B. Feldberg worked for the Federal Reserve Bank of New York (FRBNY) for 36 years in a variety of roles. In the aftermath of the Global Financial Crisis, he served as a trustee for the AIG Credit Trust Facility (2009-2011). The trust was established in early 2009 to hold the equity stock of American International Group Inc. (AIG) that the U.S. government had received as a result of the 2008 AIG bailout. The three trustees were responsible for voting the stock, ensuring satisfactory corporate governance at AIG, and eventually disposing of the stock.

When he was named as a …

Lessons Learned: Eric Dinallo, Maryann Haggerty

Journal of Financial Crises

Eric Dinallo was New York State Superintendent of Insurance from January 2007 through July 2009. In New York, as throughout the United States, insurance companies are regulated at the state level. In his position as Superintendent, Dinallo oversaw the insurance operating companies of American International Group (AIG) within New York. AIG’s holding company, however, was supervised at the federal level. Much of AIG’s problems came from its non-insurance subsidiary AIG Financial Products (AIGFP), which was a major presence in the market for credit default swaps (CDS), a type of derivative that was a factor behind the 2007-09 financial crisis. This …

The Rescue Of American International Group Module Z: Overview, Rosalind Z. Wiggins, Aidan Lawson, Steven Kelly, Lily S. Engbith, Andrew Metrick

Journal of Financial Crises

In September 2008, in the midst of the broader financial crisis, the Federal Reserve Board of Governors used its emergency authority under Section 13(3) of the Federal Reserve Act to authorize the largest loan in its history, a $85 billion collateralized credit line to American International Group (AIG), a $1 trillion insurance and financial company that was experiencing severe liquidity strains. In connection with the loan, the government received an equity interest representing 79.9% of the company’s ownership. AIG continued to experience a depressed stock price, asset devaluations, and the risk of ratings downgrades leading to questions about its solvency. …

The Rescue Of American International Group Module F: The Aig Credit Facility Trust, Alec Buchholtz, Aidan Lawson

Journal of Financial Crises

In September 2008, American International Group, Inc. (AIG) experienced a liquidity crisis. To avoid the insurance giant’s bankruptcy, the Federal Reserve Bank of New York (FRBNY) extended an $85 billion emergency secured credit facility to AIG. In connection with the credit facility, AIG issued 100,000 shares of preferred stock, with voting rights equal to and convertible into 79.9% of the outstanding shares of AIG common stock, to an independent trust (the Trust) set up by the FRBNY. Three trustees held the stock for the sole benefit of the US Treasury, exercised the rights, powers, authorities, discretions, and duties of the …

The Rescue Of American International Group Module E: Maiden Lane Iii, Lily S. Engbith, Devyn Jeffereis

Journal of Financial Crises

Starting in mid-2007, American International Group (AIG) faced increasing collateral calls from counterparties looking to protect their positions in credit default swap (CDS) contracts that AIG had written on residential and commercial collateralized debt obligations (CDOs) (US COP 2010, 28-30). Per these agreements, the AIG parent company was responsible for insuring the value of the CDOs against the risk of a negative credit event, such as default (GAO 2011, 5; US COP 2010, 29-30). AIG’s immediate need for liquidity on September 16, largely driven by a securities lending program and those collateral calls, prompted the Federal Reserve to lend the …

The Rescue Of American International Group Module D: Maiden Lane Ii, Lily S. Engbith, Devyn Jeffereis

Journal of Financial Crises

In September 2008, American International Group (AIG) faced increasing difficulty in returning cash collateral to counterparties looking to terminate, rather than roll over, their securities lending agreements, in part because the company had invested the collateral in residential mortgage-backed securities (RMBS), which were becoming illiquid. The Federal Reserve Bank of New York (FRBNY) provided liquidity to the company, including through the Securities Borrowing Facility (SBF), which allowed for the repayment of cash collateral but did not address the falling values of the RMBS. In November 2008, the Federal Reserve Board authorized the creation of Maiden Lane II (ML II), a …

The Rescue Of American International Group Module C: Aig Investment Program, Alec Buchholtz, Aidan Lawson

Journal of Financial Crises

In September 2008, the Federal Reserve Bank of New York (FRBNY) extended an $85 billion credit line to AIG to address its liquidity stresses, but AIG’s balance sheet remained under pressure. The insurance giant was projected to report large third-quarter losses and was at risk of being downgraded by major credit rating agencies. For these reasons, in early November 2008, the US Treasury invested $40 billion of Troubled Assets Relief Program (TARP) funds into AIG in exchange for 4 million shares of AIG Series D preferred stock and a warrant to purchase AIG common stock. The investment helped repay a …

The Rescue Of American International Group Module B: The Securities Borrowing Facility, Lily S. Engbith, Alec Buchholtz, Devyn Jeffereis

Journal of Financial Crises

In 2008, American International Group (AIG) was among the largest insurance corporations in the world and maintained a profitable securities lending program. However, AIG invested much of the cash collateral received from counterparties in residential mortgage-backed securities, whose value began to collapse rapidly and unexpectedly, creating liquidity strain for AIG when borrowers returned their securities. Because of these strains, credit downgrades, and losses, in September, the company sought assistance from the Federal Reserve which, on October 6, 2008, approved the establishment of the Securities Borrowing Facility by the Federal Reserve Bank of New York (FRBNY). The FRBNY agreed to loan …

The Rescue Of American International Group Module A: The Revolving Credit Facility, Alec Buchholtz, Aidan Lawson

Journal of Financial Crises

On September 15, 2008, the big three rating agencies downgraded AIG’s credit ratings multiple levels, exacerbating liquidity strains that the company was experiencing due to increasing cash demands by securities borrowers and collateral calls by credit default swap (CDS) customers. To prevent AIG from filing for bankruptcy, the Federal Reserve (the Fed) announced on the following day that, pursuant to its emergency powers, it would provide the company with an $85 billion Revolving Credit Facility (RCF). The RCF was secured by AIG assets and interests in its subsidiaries and required AIG to grant the US Department of the Treasury a …

Lessons Learned: Ron Borzekowski, Mercedes Cardona, Rosalind Z. Wiggins

Journal of Financial Crises

Ron Borzekowski was a senior economist at the Federal Reserve Board when he was detailed to join the Financial Crisis Inquiry Commission (FCIC) as a senior researcher and later became deputy to research director Greg Feldberg. The 10-member bipartisan commission, charged with investigating and determining the causes of the crisis, held more than 19 hearings, and interviewed more than 700 people from September 2009 to Jan. 2011. It issued a 662-page report explaining why the crisis came about and the roles of financial institutions, government, and the public. This Lessons Learned is based on an interview with Mr.Borzekowski.

Lessons Learned: Greg Feldberg, Sandra Ward, Rosalind Z. Wiggins

Journal of Financial Crises

Greg Feldberg was a senior supervisory financial analyst at the Board of Governors of the Federal Reserve experienced in regulating large banks when he was recruited to the Financial Crisis Inquiry Commission (FCIC) where he worked from 2010-11, becoming its Director of Research. The FCIC was a bipartisan commission charged with investigating the causes of the global financial crisis of 2007-09. Feldberg shared thoughts about some of the challenges faced by the commission and why its report is important. This "Lessons Learned" is based on an interview with Mr. Feldberg.

Lessons Learned: Gary Cohen, Sandra Ward

Journal of Financial Crises

Gary Cohen joined the Financial Crisis Inquiry Commission (FCIC) in December 2009 to serve as its general counsel at the request of commission chairman Phil Angelides. The FCIC was a 10-member bipartisan group convened by Congress to investigate the causes of the global financial crisis of 2007-09. Cohen had a wide-ranging and ad hoc position that included advising commissioners and staffers on administrative matters and protocols. In addition, he assisted in document requests and compelling witnesses to testify and, on occasion, in conducting interviews and public hearings. He played an instrumental role in editing the commission’s final report. This “Lessons …

Lessons Learned: Wendy Edelberg, Sandra Ward

Journal of Financial Crises

Wendy Edelberg served initially as Director of Research at the Financial Crisis Inquiry Commission (FCIC) before eventually being named Executive Director. Established in the wake of the global financial crisis of 2007-09, the FCIC was a bipartisan panel of six Democrats and four Republicans charged with determining the causes of the worst financial crisis since the Great Depression. Edelberg built the organization from the ground up, hiring staff, instituting operating procedures, establishing guidelines, managing communications, and reporting to the commissioners. This "Lesson Learned" is based on an interview with Ms. Edelberg.