The panel's report, The Global Context and International Effects of the TARP, explains how the financial crisis that peaked in 2008 exposed the interconnectedness of the global financial system. Although the crisis began with subprime mortgage defaults in the U.S., its damage spread rapidly overseas and the "result was a truly global financial crisis."
The U.S. responded by setting up the $700 billion Troubled Asset Relief Program (TARP) in 2008 as a rescue fund for banks. Other countries followed suit with similar efforts, however, the overseas funds were not distributed in the same way. America simply flooded the financial markets with money to stabilize the system, aiming to help as many banks as possible, including those with significant overseas operations. But most foreign nations targeted their funds to save individual institutions, often those with no major U.S. operations.
"In the end, the U.S. pumped capital into more than 700 banks," Elizabeth Warren (pictured), head of the panel, said, "while all other G8 nations combined reached fewer than 50 banks." Warren adds, "The result appears to be that America's rescue had much greater impact internationally than their rescue programs had on the U.S."
U.S Could Have Asked Foreign Beneficiaries to "Share the Pain of Rescue"
The committee found that this outcome was likely inevitable given the structure of the TARP. But it pointed out that "if the U.S. government had gathered more information about which countries' institutions would most benefit from some of its actions, it might have been able to ask those countries to share the pain of rescue." The report noted the ripple effect of the AIG (AIG) bailout:
For example, banks in France and Germany were among the greatest beneficiaries of AIG's rescue, yet the U.S. government bore the entire $70 billion risk of the AIG capital injection program. The U.S. share of this single rescue exceeded the size of France's entire $35 billion capital injection program and was nearly half the size of Germany's $133 billion program.Panel Calls for Increased Stress Tests and "War Games"
The panel found that policymakers were ill-prepared for such a worldwide crisis and that "the internationalization of the financial system has outpaced the ability of national regulators to respond." The group pressed for continued oversight:
The report includes an appendix with two tables that show direct and indirect foreign beneficiaries from the payments made to just one of AIG's domestic counterparties -- Goldman Sachs (GS).The report recommends that Treasury collect data on cross-border flows of funds, increase the scope and frequency of stress testing on financial institutions, and collaborate with foreign policymakers on a cross-border resolution regime and for regular crisis planning and financial 'war games.'