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Congressional Oversight Panel Report August 2009

Congressional Oversight Panel Report August 2009

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Published by Kim Hedum
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Filled with a plethora of information for everyone to read.

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Published by: Kim Hedum on Oct 21, 2010
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11/04/2011

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The precipitous decline in the value of securities backed by pools of residential
mortgages and whole mortgage loans, held by banks and other financial institutions,1

ignited

the financial crisis. The decline was compounded by the complexity of many of the
securities, the lack of accurate information about the underlying mortgages, and the chain-
reactions generated by interlocking liabilities among financial institutions.

The drop in real estate values that began in 2006 undermined the economic
assumptions on which millions of loans had been made and revealed that many should not
have been made under any circumstances. The same conditions gave a first view of the size
and scope of the potential losses to which the nation‟s banks and other financial institutions
could become subject if the asset values did not stabilize, and the degree to which the capital

foundation of even the nation‟s largest financial institutions could be impaired if the trend

continued.

A substantial portion of real estate-backed securities and whole loans remain on
bank balance sheets. The success of the financial stabilization effort continues to depend on
how the potential impact of these assets is managed by Treasury, the Federal Reserve Board
and other financial supervisors, and by the institutions themselves.

In this report, the Panel examines the risks these troubled, or “toxic,” assets continue
to pose for the financial system and the economy, ten months into the financial stabilization
effort. Further, the report discusses the need for, and challenges associated with, accurate
valuation and transparent presentation of troubled asset holdings, attempts to estimate the
size and distribution of the holdings of troubled assets that remain in the U.S. financial
system, discusses Treasury‟s strategies, including the design and progress of the PPIP, and
suggests factors that may influence the ability of the financial system to reduce or magnify
the risks troubled assets continue to pose.

1

The Panel‟s past reports ordinarily refer to bank holding companies, or BHCs. BHCs are

corporations that own one or more banks, but do not themselves carry out the functions of a bank; they usually
also own other non-bank financial institutions. Most large banks are owned by BHCs; the 19 stress-tested
institutions were all BHCs, for example. This report, however, deals with both large and small banks; many of
the latter are not BHCs, so the term “bank” is used in this report to include both kinds of institutions. In some
cases, where discussions refer only to BHCs, that term continues to be used.

It should be noted that troubled assets are also owned by non-depository institutions and their holding
companies and affiliates, for example by insurance companies, pension funds, trading houses, hedge funds,
governments, etc., and the financial crisis has also affected these institutions, often seriously. The Panel
focuses on banks in this report, however, because the TARP focuses on banks.

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