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The “Paulson Put” I: put off high-profile bailouts until after election

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

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The “Paulson Put” I: put off high-profile bailouts until after election

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  1. Ferguson & JohnsonToo 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”

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

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

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

  5. Financial Crisis of 2007 - 2009 (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, 2009. Recession deepens

  6. ResponsesLender 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

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