Washington backed assets worth $4.3tr and still faces huge risk

Washington: The US government guaranteed as much as $4.3 trillion (Dh15.78 trillion) in financial assets last year, making such backstops the biggest and riskiest part of Washington's response to the financial crisis, a bailout watchdog panel said yesterday.

The Congressional Oversight Panel said in its latest monthly report that the asset guarantees from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corp helped calm panic in fin-ancial markets at minimal cost to taxpayers so far.

To date, the programmes have generated fees of about $17.4 billion, while only up to $2 million is expected to be paid out for a default under the FDIC's bank debt guarantee programme.

The report said for the programme that once guaranteed a pool of $301 billion in Citigroup assets, initial actuarial estimates point toward a possible loss of $34.6 billion under a "moderate" stress scenario.

But since Citigroup must absorb the first $39.5 billion in losses from these assets, taxpayers would not be liable for any of this. A "severe" stress test scenario would result in losses of $43.9 billion, of which taxpayers would have to absorb nearly $4 billion.

Decreasing scope

The panel, charged with overseeing the US Treasury's $700 billion Troubled Asset Relief Programme, said that as financial markets stabilise and the scope of the guarantee programmes decreases, the likelihood of major expenditures also diminishes.

"This apparently positive outcome, however, was achieved at the price of a significant amount of risk," the panel said in the report. "A significant element of moral hazard has been injected into the financial system and a very large amount of money remains at risk."

Elizabeth Warren, the Harvard Law School professor who heads the Congressional Oversight panel, said the guarantees also produced significant distortions in private markets, drawing funds to assets that had backstops. "The fact that there is no upfront cost is both the beauty and danger of guarantees," she told a conference call on the report. "They are perhaps too tempting."

The majority of the $4.3 trillion that the government guaranteed came from a money market mutual fund guarantee programme aimed at preventing massive withdrawals of such funds in the fall of 2008.