Economic History Commons^™

A Special Project: Inside The Cdo Machine, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

In this issue of the Journal of Financial Crisis, we feature Inside the CDO Machine—a special undertaking recently completed under the auspices of the Yale Program on Financial Stability Lessons Learned Oral History Project by Steven H. Kasoff, a Yale School of Management Fellow and former equity partner and head of real estate and structured products investments at the Elliott Management Corp., a global hedge fund. For the project, Kasoff undertook a series of interviews with industry professionals to focus on one of the critical derivatives products of the Global Financial Crisis (GFC), collateralized debt obligations (CDOs), and how they …

Wall Street’S Subprime Debacle: Firsthand Accounts From Inside The Cdo Machine, Matthew A. Lieber, Steven H. Kasoff

Journal of Financial Crises

The observations, perceptions, and actions of participants in the subprime markets remain poorly documented and incompletely understood. Seeking to deepen our understanding, this study has produced seven interview summaries and one article telling the story of a hypothetical CDO deal. This article is organized in four parts. First, it presents our research questions and methods in relation to the existing knowledge on the topic. Second, it describes what we think are the study’s main contributions. Third, it previews the Lessons Learned summaries and interviews from each of the participants. And last, it identifies what we believe are some of the …

The Rescue Of The Us Auto Industry, Module Z:Overview, Rosalind Z. Wiggins, Greg Feldberg, Alexander Nye, Andrew Metrick

Journal of Financial Crises

In the fall of 2008, credit markets tightened amid a broader economic downturn that severely impacted the US auto industry, especially the three largest domestic manufacturers, General Motors (GM), Ford Motors, and Chrysler. The companies requested assistance from the government in a bid to stay afloat, but Congress declined to authorize funding. The Bush administration, however, provided bridge loans to GM and Chrysler under the Auto Industry Finance Program (AIFP), funded through the Troubled Assets Relief Program (TARP), to sustain them until the Obama administration was in place. Within months, the Obama administration decided that a speedy bankruptcy would be …

The Rescue Of The Us Auto Industry, Module G: The Auto Warranty Commitment Program, Benjamin Henken

Journal of Financial Crises

On March 30, 2009, President Barack Obama announced a plan for government-funded protection of warranties on new vehicles sold by General Motors (GM) and Chrysler while the companies underwent restructuring. The initiative, which would become known as the Auto Warranty Commitment Program (AWCP), was intended to bolster consumer confidence by alleviating a major risk—the loss of warranty benefits—to consumers associated with the companies’ potential bankruptcies. Under the AWCP, GM and Chrysler established independent special purpose vehicles (SPVs) to which they transferred a combination of their own money along with funding they received from Treasury in the form of a loan. …

The Rescue Of The Us Auto Industry, Module F: Auto Supplier Support Program, Riki Matsumoto

Journal of Financial Crises

The Global Financial Crisis that began in 2007 intensified the decade-long malaise of two of the largest auto manufacturers in the US, General Motors and Chrysler. Their possible collapse was deemed to pose a systemic risk by the United States government. In response, the Department of the Treasury made efforts to provide support to the automotive industry through the Automotive Industry Financing Program (AIFP). As US auto parts suppliers experienced deteriorated automotive markets, disrupted manufacturer operations, and stressed credit markets, the Treasury announced the Auto Supplier Support Program (ASSP) on March 19, 2009, as an auxiliary program to the overall …

The Rescue Of The Us Auto Industry, Module E: Emergency Assistance For Chrysler Financial, Alexander Nye

Journal of Financial Crises

In the fall of 2008, due to the confluence of the Global Financial Crisis and years of structural decline in the auto industry, Chrysler was nearing bankruptcy. Chrysler’s related finance company, Chrysler Financial, was also in dire straits. On December 19, 2008, President Bush announced the Automotive Industry Financing Program and that the US Treasury would extend Chrysler a $4 billion Bridge Loan to give the company time to prepare a viable restructuring plan. Two weeks later, the Treasury arranged $1.5 billion in low-interest financing for Chrysler Financial to fund the securitization of new consumer car loans and the facility …

The Rescue Of The Us Auto Industry, Module C: Restructuring Chrysler Through Bankruptcy, Alexander Nye

Journal of Financial Crises

In late 2008, due to the confluence of the financial crisis and years of structural decline in the auto industry, Chrysler was nearing bankruptcy. The US Treasury provided Chrysler’s owner, Chrysler Holding, with a $4 billion bridge loan and Chrysler’s related finance company, Chrysler Financial, with a $1.5 billion financing program under the Troubled Assets Relief Program (TARP). The government-led restructuring through bankruptcy involved the commitment of roughly $5 billion in debtor-in-possession (DIP) loans from the US Treasury and the Canadian government, under which the US Treasury ultimately lent $1.89 billion, using TARP funds, and Canada lent about $1 billion, …

The Rescue Of The Us Auto Industry, Module D: Emergency Assistance To Ally Financial (Formerly Gmac), Riki Matsumoto, Kaleb B. Nygaard

Journal of Financial Crises

In 2008, GMAC was a $200 billion company providing financing to General Motors customers. As the Global Financial Crisis entered a critical stage in early 2008, GMAC’s funding strategy and liquidity position were adversely affected by the significant disruption in credit markets and the broader economic downturn. This reduced access to financing, which impacted GMAC’s ability to provide automotive wholesale inventory and retail financing to General Motors and Chrysler. In late 2008 and early 2009 GM and Chrysler underwent a complex restructuring process. To restore liquidity to GMAC’s auto finance business, the Federal Reserve agreed to expedite GMAC’s conversion to …

The Rescue Of The Us Auto Industry, Module B: Restructuring General Motors Through Bankruptcy, Kaleb B. Nygaard

Journal of Financial Crises

As the Global Financial Crisis worsened in 2008, credit markets tightened and a broader economic downturn developed, hitting the auto industry particularly hard. The crisis intensified a decade-long decline of the largest US auto manufacturers. Because of its size and importance to the economy, the US government decided to provide assistance to General Motors (GM) to sustain it while it developed plans for its long-term viability. Congress declined to authorize funding for the auto manufacturers, but in December 2008, Treasury provided a bridge loan to GM under the Troubled Assets Relief Program (TARP) to sustain the company until the Obama …

The Rescue Of The Us Auto Industry, Module A: Automotive Bridge Loans, Alexander Nye

Journal of Financial Crises

In 2008, in the midst of the Global Financial Crisis, America’s Big Three automakers neared their breaking point. Two of them, General Motors (GM) and Chrysler, asked Congress for funding to prevent uncontrolled bankruptcies. Policymakers realized these uncontrolled bankruptcies would damage the manufacturing sector. Congress considered but failed to pass a framework conditioning short-term financing on the companies’ producing acceptable restructuring plans. With the companies warning that they could not survive the coming presidential transition, on December 19, 2008, President George W. Bush announced the Automotive Industry Financing Program (AIFP) under the authority of the Emergency Economic Stability Act (EESA) …

Broad-Based Capital Injection Programs, June Rhee, Junko Oguri, Greg Feldberg, Andrew Metrick

Journal of Financial Crises

This paper surveys 36 broad-based capital injection (BBCI) programs and attempts to identify some best (and worst) practices. We argue that it is crucial to distinguish between programs implemented during acute (“panic”) and chronic (“debt overhang”) phases of a crisis, where the goals of program design should be different. In an acute phase, programs should be designed to influence the behavior of bank counterparties, while in chronic phases, the focus should be on bank behavior itself. With this framing, we identify seven themes to guide program design, and provide many illustrative examples for the policymaker’s tool kit.

The Cost-Effectiveness And Feminization Of The Human Papillomavirus Vaccine, Audrey Jammes

Scripps Senior Theses

Approved in 2006, the Human Papillomavirus (HPV) vaccine provided a medical breakthrough in combating cancer by inoculating first female and then male adolescents in 2010. In 2016, a new HPV vaccine was approved for all adolescents. However, it is the most expensive vaccine created in the United States and its female centered prescription led to debates regarding the vaccine’s necessity and risks. For the STS portion of this paper, analysis of the language in the vaccine’s prescriptions from 2006, 2010, and 2016 demonstrates two implicit assumptions regarding female health built into the vaccine’s rollout. Comparison of the two assumptions to …

Lessons Learned: Andreas Lehnert, Mercedes Cardona

Journal of Financial Crises

Andreas Lehnert was chief of the Federal Reserve’s Household and Real Estate Finance Section at the onset of the Global Financial Crisis of 2007–09 (GFC) and played a key role in implementing the Fed’s research and policy agenda on financial stability. He developed and helped run the Fed’s first regulatory bank stress tests in 2009, and in 2010 played a role in launching the Office of Financial Stability Policy and Research, which became the Division of Financial Stability. This “Lessons Learned” is based on an interview with Mr. Lehnert.

Us Community Development Capital Initiative (Cdci), Adam Kulam

Journal of Financial Crises

The United States Department of the Treasury responded to the Global Financial Crisis with an economy-wide stimulus package called the Troubled Assets Relief Program (TARP). Within the portion of TARP’s budget dedicated to bank investments, about $570.1 million was disbursed to community development financial institutions (CDFIs)—specifically, banks and credit unions (depositories)—in a program called the Community Development Capital Initiative (CDCI). Through the CDCI, Treasury provided capital to CDFI depositories, encouraged them to lend to small businesses, and promoted other community-oriented goals. The CDFI depositories issued either preferred shares or unsecured subordinated debentures to Treasury at low (2%) interest rates for …

Turkey Saving Deposit Insurance Fund Bank Recapitalization (2000–2001), Natalie Leonard

Journal of Financial Crises

Throughout the 1990s, Turkey’s macroeconomy featured high and fluctuating inflation and oscillating GDP growth rates. After Turkey’s April 1999 elections, Turkey adopted a new economic program in coordination with the International Monetary Fund (IMF) with three goals: fiscal adjustment, structural reform, and an exchange rate commitment. By the end of the third quarter of 2000, concerns over the pace of structural reform mounted and short-term interest rates remained high. The new Banking Regulation and Supervision Agency (BRSA) revealed significant corruption within several small banks taken over by the Saving Deposit Insurance Fund (SDIF). In November 2000, Demirbank, a private bank …

Lessons Learned: James Wigand, Sandra Ward

Journal of Financial Crises

A finance specialist and longtime Federal Deposit Insurance Corporation (FDIC) executive, James Wigand served as Deputy Director, Franchise and Asset Marketing, at the FDIC from 1997 to 2010, a period encompassing the global financial crisis of 2007-09. Wigand oversaw the resolution of all insured-depository institutions during the crisis, arranging acquisitions of troubled banks or liquidating them. He also acted as liaison between the chairman and board of directors of the FDIC. In 2010, in the aftermath of the crisis, Wigand was named director of the newly created Office of Complex Financial Institutions at the FDIC, an office formed under the …

Ghana Non-Performing Asset Recovery Trust (Npart), Riki Matsumoto

Journal of Financial Crises

The Ghanaian financial sector was in severe distress in 1985 after a decade of high and variable rates of inflation, low economic growth, and financial policies ill-suited to the country’s goals. Ghana, with World Bank support, implemented a Financial Sector Adjustment Program (FINSAP) between 1988-1997. To comply with the FINSAP, the Government established the Non-Performing Assets Recovery Trust (NPART) as a temporary public asset management company under Provisional National Defence Council Law 242 on February 28, 1990, with an initial 6-year statutory life, for the purpose of: 1) facilitating the restructuring and recapitalization of major state-owned banks; 2) expediting the …

Revisiting Subprime Pricing Irrationality During The Global Financial Crisis, Rasheed Saleuddin, Walter Jansson

Journal of Financial Crises

During the depths of the global financial crisis of 2008-09, many holders of subprime mortgage securitizations and related derivatives were forced to mark their investments to fair values based on observable prices in mortgage index credit default swap markets. Research has generally claimed that crisis pricing of such indices cannot be explained by fundamental analysis of the underlying markets, while marking portfolios to such “irrational” benchmarks may have contributed to severe distress in the financial sector. This paper econometrically demonstrates significant fundamentally-driven components in subprime mortgage index returns throughout the crisis. Our findings suggest that such benchmarks must be considered …

Affordable Housing In San Francisco: A Historical Analysis Of Its Finances And Policies, Ricky H. Tran

Master's Projects and Capstones

The affordable housing crisis is not new to San Francisco. As it has been made clear several times, The Bay Area continues to face a crisis of a massive wealth disparity as housing prices continue to rise as incomes for the top earners have risen dramatically since 1999. In San Francisco, rents and housing prices are one of the highest in the nation, and people are facing rent burdens, in which a large portion of their income goes to rent, as for those with low and extremely low income are facing severe rent burdens, which take up more than 50% …

Lessons Learned: Zachary Taylor, Maryann Haggerty

Journal of Financial Crises

Zachary Taylor joined the Federal Reserve Bank of New York (FRBNY) in January 2009 to lead the team responsible for managing and unwinding the central bank’s Maiden Lane II and III portfolios, which were acquired in connection with the intervention to assist American International Group (AIG). Taylor later took over responsibility for the Maiden Lane portfolio consisting of former Bear Stearns assets as well as the unwinding of the Term Asset-Backed Securities Loan Facility (TALF), another crisis-era program. All told, those portfolios amounted to more than $140 billion in residential mortgage-backed securities (RMBS), collateralized debt obligations (CDO), credit default …

Lessons Learned: Alejandro Latorre, Maryann Haggerty

Journal of Financial Crises

At the time of the 2007-09 global financial crisis, Alejandro Latorre was an assistant vice president at the Federal Reserve Bank of New York (FRBNY). He was active in the bailout of American International Group (AIG) from its inception to the end, when AIG repaid its outstanding obligations to both the Federal Reserve and the U.S. Treasury. This Lessons Learned summary is based on a Feb. 26, 2020, interview. He emphasized that the views discussed here are his own, not the views of anyone else currently or previously within the Federal Reserve System or the views of his current employer.

Lessons Learned: Sarah Dahlgren, Alec Buchholtz, Rosalind Z. Wiggins

Journal of Financial Crises

Sarah Dahlgren was the Executive Vice President and head of the Financial Institution Supervision Group at the Federal Reserve Bank of New York (FRBNY) during the crisis and instrumental in the rescue of American International Group (AIG). This Lessons Learned summary is drawn from a March 22, 2018, interview in which she gave her take on how central bankers can prepare for future crises.

Lessons Learned: Chester B. Feldberg, Maryann Haggerty

Journal of Financial Crises

Chester B. Feldberg worked for the Federal Reserve Bank of New York (FRBNY) for 36 years in a variety of roles. In the aftermath of the Global Financial Crisis, he served as a trustee for the AIG Credit Trust Facility (2009-2011). The trust was established in early 2009 to hold the equity stock of American International Group Inc. (AIG) that the U.S. government had received as a result of the 2008 AIG bailout. The three trustees were responsible for voting the stock, ensuring satisfactory corporate governance at AIG, and eventually disposing of the stock.

When he was named as a …

The Rescue Of Fannie Mae And Freddie Mac–Module F: Federal Reserve’S Large-Scale Asset Purchase (Lsap) Program, Daniel Thompson, Adam Kulam

Journal of Financial Crises

By late 2008, the secondary mortgage markets were suffering high default rates, causing mortgage lending to slow and the value of mortgage securities to plummet. The Federal Reserve lowered the federal funds rate, and the government placed Fannie Mae and Freddie Mac into conservatorship, yet credit in housing and other financial markets remained tight. On November 25, the Fed announced its intent to purchase up to $500 billion in agency mortgage-backed securities (MBS) and $100 billion in agency debt to reduce the cost and increase the availability of mortgage credit, which would support housing markets and improve conditions in financial …

The Rescue Of Fannie Mae And Freddie Mac – Module E: The Housing And Economic Recovery Act Of 2008, Daniel Thompson

Journal of Financial Crises

As the U.S. housing crisis worsened in 2007, and through 2008, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) headed towards insolvency. At the same time, contractions in private securitization resulted in these two government-sponsored enterprises (GSEs) purchasing nearly half of all new mortgages. In July, the government passed the Housing and Economic Recovery Act of 2008 (HERA) to provide a more effective regulator and to address public uncertainty regarding whether the government would back the GSEs’ assets and liabilities. HERA provided Treasury and the newly formed Federal Housing Finance Agency (FHFA) …

The Rescue Of Fannie Mae And Freddie Mac – Module D: Treasury’S Gse Mbs Purchase Program, Michael Zanger-Tishler, Rosalind Z. Wiggins

Journal of Financial Crises

As the housing crisis escalated during the second half of 2007, two government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), occupied an increasingly central role in the secondary mortgage market, purchasing a greater percentage of new mortgages as private securitization rapidly contracted. As their importance in this market grew, the two GSEs also began to suffer billion-dollar losses, inciting concerns that they might not be able to stay solvent throughout the remainder of the crisis. On September 6, 2008, fearing the systemic consequences of the two firms’ failures, the …

The Rescue Of Fannie Mae And Freddie Mac – Module C: Gse Credit Facility, Emily Vergara

Journal of Financial Crises

In 2007 and 2008, the collapse of the subprime mortgage market and the deterioration of the housing market more generally precipitated a crisis at the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which together held or guaranteed $5.3 trillion in mortgage assets. Over the course of two years, both entities suffered high losses and saw their liquidity positions deteriorate as the market perceived their rapid decline. On September 6, 2008, the Federal Housing Finance Agency (FHFA), pursuant to the authority of the Housing and Economic Recovery Act (HERA) of 2008, took Fannie …

The Rescue Of American International Group Module Z: Overview, Rosalind Z. Wiggins, Aidan Lawson, Steven Kelly, Lily S. Engbith, Andrew Metrick

Journal of Financial Crises

In September 2008, in the midst of the broader financial crisis, the Federal Reserve Board of Governors used its emergency authority under Section 13(3) of the Federal Reserve Act to authorize the largest loan in its history, a $85 billion collateralized credit line to American International Group (AIG), a $1 trillion insurance and financial company that was experiencing severe liquidity strains. In connection with the loan, the government received an equity interest representing 79.9% of the company’s ownership. AIG continued to experience a depressed stock price, asset devaluations, and the risk of ratings downgrades leading to questions about its solvency. …

The Rescue Of American International Group Module D: Maiden Lane Ii, Lily S. Engbith, Devyn Jeffereis

Journal of Financial Crises

In September 2008, American International Group (AIG) faced increasing difficulty in returning cash collateral to counterparties looking to terminate, rather than roll over, their securities lending agreements, in part because the company had invested the collateral in residential mortgage-backed securities (RMBS), which were becoming illiquid. The Federal Reserve Bank of New York (FRBNY) provided liquidity to the company, including through the Securities Borrowing Facility (SBF), which allowed for the repayment of cash collateral but did not address the falling values of the RMBS. In November 2008, the Federal Reserve Board authorized the creation of Maiden Lane II (ML II), a …

The Rescue Of American International Group Module C: Aig Investment Program, Alec Buchholtz, Aidan Lawson

Journal of Financial Crises

In September 2008, the Federal Reserve Bank of New York (FRBNY) extended an $85 billion credit line to AIG to address its liquidity stresses, but AIG’s balance sheet remained under pressure. The insurance giant was projected to report large third-quarter losses and was at risk of being downgraded by major credit rating agencies. For these reasons, in early November 2008, the US Treasury invested $40 billion of Troubled Assets Relief Program (TARP) funds into AIG in exchange for 4 million shares of AIG Series D preferred stock and a warrant to purchase AIG common stock. The investment helped repay a …