Financial Update (First Quarter 2009)

Fed, Treasury Issue Joint Statement on Financial, Monetary Stability

Seals of the Federal Reserve Board and U.S. Treasury

The Federal Reserve and the U.S. Treasury recently addressed their joint role in preserving financial and monetary stability in the United States. In a late March statement, the agencies stressed the importance of maintaining the Fed's independence and their intention to gradually remove the central bank from programs that could jeopardize taxpayer money.

The statement’s four key points emphasize:

  • the cooperation between the Fed and Treasury in improving the functioning of credit markets and fostering financial stability. The agencies cited the Fed's "expertise and powers" in preventing and managing financial crises. "As long as unusual and exigent circumstances persist, the Federal Reserve will continue to use all its tools working closely and cooperatively with the Treasury and other agencies as needed to improve the functioning of credit markets, help prevent the failure of institutions that could cause systemic damage, and to foster the stabilization and repair of the financial system," they said in the statement;
  • Related
    Press release off-site image
  • the Fed's avoidance of credit and risk allocation. The agencies stressed that the Fed's responsibilities as the lender of last resort involve lending against collateral that is secured to the Fed’s satisfaction and that government decisions aimed at influencing credit allocation belong to fiscal authorities. "Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly defined sectors or classes of borrowers," they said;
  • the need to preserve monetary stability. Actions taken by the Fed in pursuit of financial stability must not constrain the exercise of monetary policy as needed to foster maximum sustainable employment and price stability; and
  • Fed Announces Details on TALF, AIG Restructuring

    Recent Federal Reserve actions taken to improve the functioning of financial markets in March include adding categories of asset-backed securities that are eligible for loans extended by the Term Asset-Back Securities Loan Facility (TALF) and more information about the participation by the U.S. Treasury and the Federal Reserve Board in the restructuring of AIG.

    Eligible assets for TALF broadened
    On March 19, the Federal Reserve Board announced that collateral eligible for TALF funding includes asset-backed securities (ABS) backed by mortgage servicing advances, loans or leases relating to business equipment, leases of vehicle fleets, or floor plan loans.

    Information about changes to TALFoff-site image

    Press release about the AIG restructuringoff-site image

    Mortgage servicing advances are loans extended by residential mortgage servicers to cover payments missed by homeowners. Accepting ABS backed by mortgage servicing advances should improve the servicers' ability to work with homeowners to prevent avoidable foreclosures.

    Treasury Department, Federal Reserve coordinate AIG efforts
    In early March, the U.S. Treasury and the Federal Reserve issued a joint statement to clarify their participation in the plan to restructure AIG, the struggling insurance company. The statement specified that the government's restructuring of the company is intended to enhance the company's capital and liquidity to facilitate the orderly completion of the company's global divestiture program.

    Key steps of the plan include preferred shares in the firm for the U.S. Treasury, a $30 billion capital source that AIG can draw on in exchange for preferred stock to the Treasury, and the establishment by the New York Fed of a $60 billion revolving credit facility for AIG.

    Treasury and the Fed jointly emphasized that AIG will be required to comply with executive compensation and corporate governance requirements of the Emergency Economic Stabilization Act.

  • the need for a comprehensive resolution regime for systemically critical financial institutions. The Treasury and Federal Reserve stressed that they remain fully committed to preventing the disorderly failure of systemically critical financial institutions. "To reduce the risk of future crises, the Treasury and the Federal Reserve will work with the Congress to develop a regime that will allow the U.S. government to address effectively at an early stage the potential failure of any systemically critical financial institution," they said.

March 31, 2009