A Fighting Chance

In her excellent book, Bull by the Horns, Sheila Bair, the chair of FDIC, notes that she wasn’t notified by Treasury and the Fed of the impending Citi bailout until Friday, November 21, the same day that we met with Kashkari. For more discussion, see Sheila Bair, Bull by the Horns (2012), 121–29.

According to a SIGTARP document entitled “Extraordinary Financial Assistance Provided to Citigroup,” Federal officials referred to November 21–23, 2008, as “Citi Weekend.” See Special Inspector General for the Troubled Asset Relief Program, “Extraordinary Financial Assistance Provided to Citigroup, Inc.,” January 13, 2011, http://www.sigtarp.gov/Audit%20Reports/Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20Inc.pdf. The New York Times reported that Citigroup executives and board members “held several calls with Henry M. Paulson” on Friday, November 21. Andrew Ross Sorkin and Louise Story, “Shares Falling, Citigroup Talks to Government,” New York Times, November 22, 2008.

scientific research for the next twenty years: I recognize that TARP was a loan that was designed to be repaid, but a loan from the government—particularly on terms that no private lender would take on—is fundamentally about investment. Thus the examples in the text include other investments that the United States could have made, such as education, infrastructure, and scientific research, that also would have paid out over time, albeit over a longer time horizon, with a more productive and inventive workforce, more efficiency in power, transportation, and other production necessities, and a boost to business innovations that come through support of scientific and medical research.

previously been closed off to them: The regulatory changes in the 1980s (see note, “the cap on interest rates…”) enabled banks to engage in increasingly risky, nontraditional practices. In the 1980s and 1990s, regulators reinterpreted—and Congress ultimately repealed—the Glass-Steagall Act, which had separated commercial and investment banking activities. These changes, in combination with other changes that encouraged greater consolidation of financial institutions, enabled banks to enter new and dangerous terrains. As basic banking—checking, savings, mortgages, loans—were folded into increasingly complex financial institutions, regulators were called on to oversee a wider variety of intricate investment and hedging activities. Everything became more complicated, from the balance sheets to the credit ratings. A few banks ballooned in size, posing more risks for the economy and more challenges for the regulators.

See Matthew Sherman, “A Short History of Financial Deregulation in the United States,” Center for Economic and Policy Research, July 2009.

During this time, the financial industry developed a number of new products, including a variety of derivatives (instruments used to hedge against risk without involving an actual transfer of underlying assets) and securitized assets (instruments used to pool assets and repackage them into securities). As discussed in the text, the risky proliferation of securitized mortgage loans contributed significantly to the 2008 financial crisis.