Page 400 - untitled

CRISIS AND PANIC 

Wachovia, but without success. The Wells Fargo deal would close at midnight on De-
cember , for  per share.
IRS Notice - was repealed in . The Treasury’s inspector general, who
later conducted an investigation of the circumstances of its issuance, reported that
the purpose of the notice was to encourage strong banks to acquire weak banks by re-
moving limitations on the use of tax losses. The inspector general concluded that
there was a legitimate argument that the notice may have been an improper change of
the tax code by Treasury; the Constitution allows Congress alone to change the tax
code. A congressional report estimated that repealing the notice saved about  bil-
lion of tax revenues over  years.  However, the Wells controller, Richard Levy, told
the FCIC that to date Wells has not recognized any benefits from the notice, because
it has not yet had taxable income to offset. 

TARP: “COMPREHENSIVE APPROACH”

Ten days after the Lehman bankruptcy, the Fed had provided nearly  billion to
investment banks and commercial banks through the PDCF and TSLF lending facili-
ties, in an attempt to quell the storms in the repo markets, and the Fed and Treasury
had announced unprecedented programs to support money market funds. By the
end of September, the Fed’s balance sheet had grown  to . trillion.
But the Fed was running out of options. In the end, it could only make collateral-
ized loans to provide liquidity support. It could not replenish financial institutions’
capital, which was quickly dissolving. Uncertainty about future losses on bad assets
made it difficult for investors to determine which institutions could survive, even
with all the Fed’s new backstops. In short, the financial system was slipping away
from its lender of last resort.
On Thursday, September , the Fed and Treasury proposed what Secretary Paul-
son called a “comprehensive approach” to stem the mounting crisis in the financial
system by purchasing the toxic mortgage-related assets that were weighing down
many banks’ balance sheets.  In the early hours of Saturday, September , as Gold-
man Sachs and Morgan Stanley were preparing to become bank holding companies,
Treasury sent Congress a draft proposal of the legislation for TARP. The modest
length of that document—just three pages—belied its historical significance. It would
give Treasury the authority to spend as much as  billion to purchase toxic assets
from financial institutions.
The initial reaction was not promising. For example, Senate Banking Committee
Chairman Christopher Dodd said on Tuesday, “This proposal is stunning and un-
precedented in its scope—and lack of detail, I might add.” “There are very few details
in this legislation,” Ranking Member Richard Shelby said. “Rather than establishing a
comprehensive, workable plan for resolving this crisis, I believe this legislation
merely codifies Treasury’s ad hoc approach.” 
Paulson told a Senate committee on Tuesday, “Of course, we all believe that the
very best thing we can do is make sure that the capital markets are open and that