November 7, 2011 / 1:40 AM / 9 years ago

Analysis: U.S. bailout manuals handy if Europe crisis widens

WASHINGTON (Reuters) - As the European debt crisis edges closer to a break up of the euro zone, financial regulators may be reaching for emergency manuals that have gathered little dust since the last crisis.

In doing so, they will be mindful of how bitter the American public remains about the bailouts of Wall Street in 2008-09.

The Federal Reserve and the Obama administration would likely be able to draw on many of the same tools used at the height of the U.S. crisis, should Europe’s sovereign debt woes spiral into a severe credit freeze or worse.

They will have the benefit of the lessons of their recent experience and improved coordination among regulators.

But it is highly unlikely Washington would resort to a new bailout fund like the $700 billion Troubled Asset Relief Program (TARP) that was used to shore up U.S. banks, insurers and automakers three years ago.

Many Americans across the political spectrum remain angry at what they perceive as protection given to Wall Street executives while ordinary people lost their jobs, homes and savings. The popular backlash helped create the Tea Party political movement and is now fueling the “Occupy Wall Street” protests across the country.

“We are more restricted now. The public concluded that the TARP was a terrible program, even though it was a good program,” said Douglas Elliott, a former investment banker who researches financial policy at the Brookings Institution, a Washington think-tank.

“Because the public hated TARP so much, it would be very difficult to put capital into banks again, even if that were the smart thing to do,” he added.

The likelihood of a new full-blown banking crisis in the United States seems less likely given recent actions to strengthen the sector and tougher regulations, but U.S. officials pressed European leaders to erect a strong quarantine around euro zone banks.

U.S. regulators have said American banks have minimal direct exposure to European sovereign debt, although the collapse of Wall Street brokerage MF Global serves as a reminder that crises always expose hidden problems.

Direct exposure is not the main concern. U.S. financial institutions have significant financial ties to European banks, particularly those in France, Germany and Italy.

If the euro zone’s debt woes spur a banking crisis and a deep recession in Europe, the United States would feel some of the pain.


While a new U.S. bank bailout fund may be too hard to swallow politically, the Federal Reserve could almost certainly widen its safety net.

The Fed would fall back on its role as lender of last resort, offering liquidity against good-quality collateral to ease bank funding pressures. It has already opened swap lines with foreign central banks, providing U.S. dollar liquidity internationally to prevent a dollar funding squeeze.

During the financial crisis of 2007-2009, the Fed invoked emergency powers to take an array of unorthodox steps. They included standing behind the fire sale of Bear Stearns to JPMorgan Chase, and other programs ensured financial firms were always be able to obtain short-term funding.

The Dodd-Frank regulatory overhaul enacted last year with a goal of making a future crisis less likely has restricted the Fed’s emergency powers.

It must now obtain U.S. Treasury approval before putting special measures into motion, and it can no longer assist an individual company. However, there is little doubt the Treasury would sign off on Fed actions if Europe’s crisis washed up on U.S. shores in a menacing fashion.

The Federal Deposit Insurance Corp’s temporary loan guarantee program, which put the government behind bank-to-bank lending and calmed fears of counterparty risk, could also be useful, analysts said.


One edge authorities would have is institutional. Congress created a super-regulatory agency, the Financial Stability Oversight Council (FSOC), to sniff out potential risks to the broader financial system.

Treasury Secretary Timothy Geithner chairs the council, which has authority to brand large firms as systemically important, requiring them to increase capital holdings.

The FSOC could carefully parse individual firms’ bets on European banks and euro area sovereign debt to identify any concentrations that could cause dominoes to start toppling.

“If I’m Geithner, when I get back from (the Group of 20 summit in) Cannes, I’m calling the regulators, and I’m telling them, ‘Let’s get a serious handle on what the exposure is,’” said Terry Haines, an analyst for the Potomac Research Group.

While memories of the recent bank bailouts are still fresh, and with a U.S. general election looming a year from now, any rescue measures are sure to draw criticism. However, if the financial system begins to exhibit the same strains as at the height of the previous crisis, the public could become more accepting of attempts to keep the financial storm at bay.

“It’s true that the public has little appetite for more intervention, but if financial markets are melting down, the authorities will have little other choice but to act,” said New York University economics professor Mark Gertler.

Reporting by Mark Felsenthal, Glenn Somerville and David Lawder; Editing by Dan Grebler

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