Ferguson & Johnson Too Big to Bail: The “Paulson Put,” Presidential Politics and the Global Financial Meltdown The “Paulson Put” I: put off high-profile bailouts until after election The “Paulson Put” II: avoid diluting financial firm shareholders The Great Recession – The Long Slump Villain: Market Fundamentalism Deregulation – Self-regulation – Non-regulation Glass – SteagleSquashing Born The Greenspan “Put” » Fuel a bubble – Clean up later Securitization and its discontents Efficient market dogma  rocket science  complex over-the-counter derivatives Bank’s Shadow Banks: Conduits – SIVs A shadow bailout: Paulson enlists FHLB, the Fed’s “facilities”

Easy Money Policy Capital Inflows Eager Home Buyers Innovative Banks Rating Agencies Ambitious Mortgage Brokers Financial Engineers Securitization  MBSs Escalating House Prices Gov’t Sponsored Enterprises Developer Clout Bank Regulators The best of times A “Global Saving Glut”

Easy Money Policy Capital Inflows Eager Home Buyers Innovative Banks Rating Agencies Ambitious Mortgage Brokers NINJA/Alt-A… Securitization  MBSs Escalating House Prices Gov’t Sponsored Enterprises Developer Clout Bank Regulators The best of times

House Price – Foreclosure Spiral Demand – Jobs – Wages – Income – Spiral Deleveraging – Debt Deflation Spiral Government Revenue – Cutback Spiral Global Repercussion Spiral Macroeconomic Linkages and Feedbacks Vicious Spirals Unleashed

Financial Crisis of (cont’d) Banks’ balance sheets deteriorate – Write downs – Sale of assets and credit restriction High-profile firms fail – Bear Stearns (March 2008) – Fannie Mae and Freddie Mac (July 2008) – Lehman Brothers, Merrill Lynch, AIG, Reserve Primary Fund (MMMF) and Washington Mutual (September 2008). Fed pumps up bank reserves: TARP/TALF,etc. – Lend and lend freely Bailout package enacted – House votes down the $700 billion bailout package (9/29/08)  Stock market slumps  Bailout passes on October 3. – Congress approves a $787 billion economic stimulus plan on February 13, Recession deepens

Responses Lender of Last Resort / Spender of Last Resort Tax Rebate $124 bil. Fed Fund Rate Cuts Fannie/Freddie $200 bil. Bear-Stearns $29 bil. AIG $174 bil. Fed “Facilities” Primary Dealer Credit Facility (PDCF) $58 bil. Treasury Security Loan Facility (TSLF) $133 bil. Term Auction Facility (TAF) $416 bil. Asset- Backed Commercial Paper Funding Facility (CPFF) $1,777 bil. Money Market Investor Funding Facility (MMIFF) $540 bil. More Fed Fund Rate Cuts … Hold At ~0% Fed Purchases of Long-Term Securities: GSEs & MBSs $600 bil. Term Asset-Backed Securities Loan Facility (TALF) $200 bil. Emergency Economic Stabilization Act/TARP $700 bil. Government Loans Government Equity Stimulus Package $787 bil. aka The American Recovery and Reinvestment Act TARP II Stress Tests