THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 243

CHAPTER 9

GLOBAL

Financial Crises and the Subprime Meltdown 211

The U.S. Treasury Asset Relief Plan and Government
Bailouts Throughout the World

The Economic Recovery Act of 2008 in the
United States had several provisions to promote recovery from the subprime financial
crisis. The most important was the Treasury
Asset Relief Plan (TARP), which authorized
the U.S. Treasury to spend US$700 billion
purchasing subprime mortgage assets from
troubled financial institutions or to inject capital into banking institutions. The hope was
that by buying subprime assets, their price
would rise above fire-sale prices, thus creating a market for them, while at the same time
increasing capital in financial institutions.
Along with injections of capital, this would
enable these institutions to start lending
again. In addition, the Act raised the federal
deposit insurance limit temporarily from
US$100 000 to US$250 000 in order to limit
withdrawals from banks and required the
U.S. Treasury, as the owner of these assets, to
encourage the servicers of the underlying
mortgages to restructure them to minimize
foreclosures. Shortly thereafter, the Federal
Deposit Insurance Corporation (FDIC) put in
place a guarantee for certain debt newly

issued by banks, and the Treasury guaranteed money market mutual fund shares at par
value for one year.
The spreading bank failures in Europe in
the fall of 2008 led to bailouts of financial
institutions: the Netherlands, Belgium, and

Luxembourg injected US$16 billion to prop
up Fortis, a major European bank; the
Netherlands injected US$13 billion into ING,
a banking and insurance giant; Germany
provided a US$50 billion rescue package for
Hypo Real Estate Holdings; and Iceland took
over its three largest banks after the banking
system collapsed. Ireland s government guaranteed all the deposits of its commercial
banks as well as interbank lending, as did
Greece. Spain implemented a bailout package similar to the United States to buy up to
50 billion euros of assets in their banks in
order to encourage them to lend. The U.K.
Treasury set up a bailout plan with a similar
price tag to that of the U.S. Treasury s plan of
400 billion pounds. It guaranteed 250 billion
pounds of bank liabilities, added 100 billion
pounds to a facility that swaps these assets
for government bonds, and allowed the U.K.
government to buy up to 50 billion pounds
of equity stakes in British banks. Bailout
plans to the tune of over US$100 billion in
South Korea, US$200 billion in Sweden,
US$400 billion in France, and US$500 billion
in Germany, all of which guaranteed debt of

their banks as well as injecting capital into
them, then followed. Both the scale of these
bailout packages and the degree of international coordination was unprecedented.

In response to the subprime meltdown in the United States, the Canadian government banned subprime mortgages in Canada in the summer of 2008. Although
there are currently no publicly available figures, it is estimated that more than half
of the total new mortgages approved by Canadian financial institutions during this
period (worth over $50 billion) were risky, 40-year mortgages, and that 10% of
these mortgages (worth over $10 billion) were taken out with zero money down.
At the time of writing, it is not clear how this brief experiment with U.S.-style
subprime lending will affect the Canadian economy and the country s otherwise
prudent mortgage landscape.