CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 959
“stress tests” on the nineteen largest BHCs—each with more than
$100 billion of assets—and injected more than $220 billion of capital
into eighteen of those companies. 16 Before regulators performed the
stress tests, they announced that the federal government would
provide any additional capital that the nineteen banking firms needed
but could not raise on their own. By giving that public assurance,
regulators indicated that all nineteen firms were presumptively TBTF,
at least for the duration of the financial crisis. 17
Similarly, the United Kingdom and other European nations
implemented more than eighty rescue programs to support their
financial systems. Those programs included costly bailouts of several
major EU banks, including ABN Amro, Commerzbank, Fortis, ING,
Lloyds HBOS, Royal Bank of Scotland (RBS), and UBS. 18
Notwithstanding these extraordinary measures of governmental
support, financial institutions and investors suffered huge losses in the
United States and in other developed nations. Between the outbreak
of the crisis in mid-2007 and the spring of 2010, LCFIs around the
world recorded $1.5 trillion of losses on risky loans and investments
made during the preceding credit boom. 19 During 2008 alone, the
value of global financial assets declined by an estimated $50 trillion,
Pub. Law & Legal Theory, Working Paper No. 479, 2009), available at http://ssrn.com
/abstract=1499216.
16 Wilmarth, supra note 6, at 713, 713 n.11.
17 In announcing the “stress test” for the nineteen largest banking firms in early 2009,
federal regulators “emphasized that none of the banks would be allowed to fail the test,
because the government would provide any capital that was needed to ensure the survival
of all nineteen banks.” Wilmarth, supra note 4, at 1050 n.449 (citing speech by Federal
Reserve Bank of New York President William C. Dudley and congressional testimony by
FRB Chairman Ben Bernanke); Joe Adler, In Focus: Stress Tests Complicate ‘Too Big to
Fail’ Debate, AM. BANKER, May 19, 2009, at 1 (stating that “[b]y drawing a line at $100
billion of assets, and promising to give the 19 institutions over that mark enough capital to
weather an economic downturn, the government appears to have defined which banks are
indeed ‘too big to fail’”). Based on the stress tests, regulators determined that ten of the
nineteen firms required additional capital. Wilmarth, supra note 6, at 713, 713 n.12. Nine
of those firms were successful in raising the needed funds, but the federal government
provided $11.3 billion of additional capital to GMAC when that company could not raise
the required capital on its own. Id.
18 For descriptions of governmental support measures for financial institutions in the
United Kingdom and other European nations, see authorities cited in Wilmarth, supra note
6, at 714, 714 n.13.
19 Rodney Yap & Dave Pierson, Subprime Mortgage-Related Losses Exceed $1.77
Trillion: Table, BLOOMBERG NEWS, May 11, 2010 (showing that global banks, securities
firms, and insurers incurred $1.51 trillion of write-downs and credit losses due to the
financial crisis, while Fannie Mae and Freddie Mac suffered an additional $270 billion of
losses).