Finance Commons^™

The Public-Private Investment Program: The Legacy Securities Program (U.S. Gfc), Ben Henken

Journal of Financial Crises

On March 23, 2009, the U.S. Treasury, in conjunction with the Federal Reserve (Fed) and the Federal Deposit Insurance Corporation (FDIC), announced the Public-Private Investment Program (PPIP). PPIP consisted of two complementary programs designed to foster liquidity in the market for certain mortgage-related assets: The Legacy Loans Program and the Legacy Securities Program. This case study discusses the design and implementation of the Legacy Securities Program. Under this program, the Treasury formed an investment partnership with nine private sector firms it selected at the conclusion of a months-long application process. Using a combination of private equity and debt and equity …

The Public-Private Investment Program: The Legacy Loans Program (U.S. Gfc), Ben Henken

Journal of Financial Crises

On March 23, 2009, the U.S. Treasury, in conjunction with the Federal Reserve (Fed) and the Federal Deposit Insurance Corporation (FDIC), announced the Public-Private Investment Program (PPIP). PPIP consisted of two complementary programs designed to foster liquidity in the market for certain mortgage-related assets: The Legacy Loans Program and the Legacy Securities Program. This case study discusses the design and implementation of the Legacy Loans Program. Under this program, the FDIC and Treasury attempted to create public-private investment partnerships that—using a combination of private equity, Treasury equity, and FDIC-guaranteed debt—would purchase legacy mortgage loans from U.S. banks by way of …

The Term Asset-Backed Securities Loan Facility (Talf) (U.S. Gfc), June Rhee

Journal of Financial Crises

In the fall of 2008, the securitization market, which was the major provider of credit for consumers and small businesses, came to a near halt. Investors in this market abandoned not only the residential mortgage-backed securities that triggered the financial crisis but also consumer and business asset-backed securities (ABS), which had a long track record of strong performance, and commercial mortgage-backed securities (CMBS). Also, the unprecedented widening of spreads for these securities rendered new issuance uneconomical, and the shutdown of the securitization market threatened to exacerbate the downturn in the economy.

On November 25, 2008, the Federal Reserve (the Fed) …

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (Amlf) (U.S. Gfc), Rosalind Z. Wiggins

Journal of Financial Crises

In mid-September 2008, following the bankruptcy of Lehman Brothers, money market mutual funds (MMMFs) began to experience run-like redemption requests after a large fund “broke the buck,” owing to a large position in Lehman commercial paper (CP). Funds, which as a group were the largest investors in CP, retreated from CP, including asset-backed commercial paper (ABCP). Funds also sought to raise cash to meet redemptions by selling assets but were reluctant to sell ABCP into a depressed market. As the CP and ABCP markets seized up, it became difficult for issuers to place new paper, and concern grew about possible …

The Money Market Investor Funding Facility (U.S. Gfc), Rosalind Z. Wiggins

Journal of Financial Crises

In mid-September 2008, money market mutual funds (MMMFs) began to experience run-like redemption requests after the Reserve Primary Fund “broke the buck.” As a result, MMMFs became reluctant to roll over or invest in commercial paper (CP) and faced the prospect of selling asset-backed commercial paper (ABCP) they held into a declining market to raise cash. The money markets quickly became negatively impacted, and on October 21, 2008, the Fed announced the Money Market Investor Funding Facility (MMIFF), which would loan funds to a series of special purpose vehicles (SPVs) established by the private sector. The SPVs would use the …

Term Securities Lending Facility (Tslf) (U.S. Gfc), Manuel Leon Hoyos

Journal of Financial Crises

The 2007–09 financial crisis reached a critical stage in March 2008. Amid falling house prices and downgrades of mortgage-related securities, financial markets became severely disrupted. The Federal Reserve—the US central bank—became increasingly concerned about the inability of the 20 primary dealers, including the five largest US investment banks, to fund themselves in short-term funding markets, such as the repurchase agreement market, then estimated at $10 trillion. In response, the Fed created several emergency lending facilities to restore market liquidity that required the Fed to invoke Section 13(3) of the Federal Reserve Act. The Term Securities Lending Facility authorized the Federal …

The Primary Dealer Credit Facility (Pdcf) (U.S. Gfc), Karen Yang

Journal of Financial Crises

On March 16, 2008, the Federal Reserve created the Primary Dealer Credit Facility, or PDCF, to provide overnight funding to primary dealers in the tri-party repurchase agreement (repo) market, where lenders had become increasingly risk averse. Loans were fully secured by (initially) investment-grade securities and offered at the primary credit rate by the Federal Reserve Bank of New York. The eligible collateral was significantly expanded in September 2008, after rumors of Lehman Brothers potentially filing for bankruptcy, to include all of the types of instruments that could be pledged at the two major tri-party repo clearing banks. The PDCF was …

The Federal Reserve Single-Tranche Term Repurchase Agreements (U.S. Gfc), Aidan Lawson

Journal of Financial Crises

As mortgage defaults and foreclosures continued to climb, the severe strains that started to plague credit markets in the middle of 2007 worsened further. Losses on housing-related securities and derivative instruments continued to climb, causing substantial damage to the balance sheets of large financial institutions that had levered up on these same securities. As their positions worsened, banks found it increasingly difficult to attract funding that wasn’t priced at exorbitantly high rates or for very short terms. Term funding markets, specifically those that centered on agency mortgage-backed securities (MBS), quickly dried up as fears of illiquidity and even insolvency spread. …

The Federal Reserve’S Response To The 1987 Market Crash (U.S. Historical), Kaleb B. Nygaard

Journal of Financial Crises

The S&P 500 lost 10% the week ending Friday, October 16, 1987, and lost an additional 20% the following Monday, October 19, 1987. The date would be remembered as Black Monday. The Federal Reserve (the Fed) responded to the crash in four distinct ways: (1) issuing a public statement promising to provide liquidity, as needed, “to support the economic and financial system”; (2) providing support to the Treasury securities market by injecting in-high-demand maturities into the market via reverse repurchase agreements; (3) allowing the federal funds rate to fall from 7.5% to 7.0% and below; and (4) intervening directly to …

Market Liquidity Programs: Gfc And Before, June Rhee, Greg Feldberg, Ariel Smith, Andrew Metrick

Journal of Financial Crises

The virulence of the Global Financial Crisis of 2007–09 (GFC) was explained in large part by the increased reliance of the global financial system on market-based funding and the lack of preexisting tools to address a disruption in that type of system. This paper surveys market liquidity programs (MLPs), which we define as government interventions in which the key motivation is to stabilize liquidity in a specific wholesale funding market that is under stress. Most of the MLPs surveyed in this paper were launched during and after the GFC, but two pre-GFC MLPs are included. A subsequent survey on MLPs …

Designing The Main Street Lending Program: Challenges And Options, William B. English, J. Nellie Liang

Journal of Financial Crises

The Main Street Lending Program (MSLP) was established by the Federal Reserve to provide loans to small and mid-sized firms and large below-investment-grade firms that were financially sound before the onset of the COVID-19 pandemic. The program, which was established under the Fed’s Section 13(3) emergency authorities, is supported by capital from the U.S. Treasury and became operational in July 2020; however, utilization has been slight. We describe the economic challenges in designing a loan support program and evaluate the MSLP program in terms of how it manages significant asymmetric information, adverse selection, poor targeting, and moral hazard problems while …

Lessons Learned: A Conversation With Paul A. Volcker, Andrew Metrick, Rosalind Z. Wiggins, Kaleb B. Nygaard

Journal of Financial Crises

On March 26, 2019, Andrew Metrick, the Janet Yellen Professor of Finance at the Yale School of Management and Founder and Director of the Yale Program on Financial Stabilitysat down with Paul A. Volcker to discuss his perspectives on the Federal Reserve, central banking autonomy, “too big to fail,” and how his perspectives on these topics have changed over the decades.It turned out to be one of the last interviews given by the former Chairman of the Federal Reserve System who passed away on December 8, 2019, at the age of 92.

The Federal Reserve’S Financial Crisis Response E: The Term Asset-Backed Securities Loan Facility, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Securitization is a process that allows banks and other lenders to package loans and sell them as bonds called asset-backed securities (ABS), removing them from their balance sheets and immediately generating cash for new loans. ABS are an important component of the financing cycle for many types of loans to households and small businesses, including mortgages. In the fall of 2008, financial markets began experiencing disturbances as the effects of the U.S. subprime market meltdown spread. The ABS market froze decreasing the volume of new loans to households and small businesses. The Federal Reserve became very concerned about the potential …

The Federal Reserve’S Financial Crisis Response D: Commercial Paper Market Facilities, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

During the summer of 2007, the U.S. residential mortgage market began to decline sharply negatively impacting the asset-backed commercial paper (ABCP) market, which often relied on mortgages as underlying support. Money Market Mutual Funds (MMMFs), significant investors in commercial paper (CP), quickly retreated from the market, causing a substantial decline in outstanding ABCP. In September 2008, pressures on the markets severely escalated again, when the Reserve Primary Fund MMMF “broke the buck” and prompted run-like redemption requests by many MMMF investors. These disruptions resulted in higher rates and shorter maturities, practically freezing the market for term CP. Concerned about the …

The Federal Reserve’S Financial Crisis Response C: Providing U.S. Dollars To Foreign Central Banks, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

The financial crisis that began in late 2007 with the decline in the United States (U.S.) subprime mortgage markets quickly spread to other markets and eventually disrupted the interbank funding markets in the U.S. as well as overseas. To address the strain in the U.S. dollar (USD) funding markets, the Federal Reserve worked with foreign central banks around the world to provide USD liquidity to affected overseas markets by entering into currency swap agreements. Following the bankruptcy of Lehman Brothers in September 2008, and the resulting further destabilization of the world’s financial systems, the size and utilization of these swaps …

The Federal Reserve’S Financial Crisis Response B: Lending & Credit Programs For Primary Dealers, Rosalind Z. Wiggins, Patricia C. Mosser, Andrew Metrick

Journal of Financial Crises

Beginning in the summer 2007 the Federal Reserve (the Fed) deployed numerous conventional and innovative programs to address the credit crisis occurring in the wholesale lending markets that was beginning to affect the broader financial markets and threaten the economy at large. Two of those programs, the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) were aimed at providing liquidity to primary dealers and required the Fed to rely on its authority under Section 13(3) of the Federal Reserve Act. Section 13(3) is a Depression Era amendment that permits the Fed expanded powers in “unusual and …

The Federal Reserve’S Financial Crisis Response A: Lending & Credit Programs For Depository Institutions, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Beginning in summer 2007, the Federal Reserve (the Fed) was called upon to address a severe disruption in the interbank lending markets sparked by a downturn in the subprime mortgage market. As these developments began to impact the ability of banks to raise adequate funding, the Fed encouraged them to utilize the Discount Window (DW), its standing facility for lending to depository institutions, and repeatedly decreased the lending rate to make the facility more accessible. Despite the Fed’s efforts, for a number of reasons, including historical perceptions of stigma, banks were reluctant to utilize the DW. In December 2007, the …

Lessons Learned: David Wessel, Ben Henken, Rosalind Z. Wiggins

Journal of Financial Crises

Wessel, an award-winning journalist for The Wall Street Journal, talks about some of the issues faced by the media in covering the crisis, discusses the many challenges policymakers faced when trying to communicate the government’s crisis-fighting strategy, and shares suggestions for improvement.

Lessons Learned: James (Jim) Millstein, Alec Buchholtz, Rosalind Z. Wiggins

Journal of Financial Crises

Millstein, who was the Chief Restructuring Officer, U.S. Department of the Treasury, during the Global Financial Crisis and instrumental in the rescue of American International Group, gives us his take on how best to prepare for future crises

Restructuring And Forgiveness In Financial Crises D: The Japanese Financial Crisis Of The 1990s, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

In November 1997 the Japanese government confronted a problem of enormous proportions when the turmoil that had been roiling the financial markets since the collapse of a real estate and stock market asset bubble in 1990 reached a crescendo with the failure of four major financial institutions in quick succession in the space of a month. Prior to these failures, the damage done by the collapsing bubble had seemed to be limited to certain segments of the financial landscape, and the government’s response consisted largely of targeted intervention when necessary for clearly insolvent financial institutions, with a more comprehensive approach …

Restructuring And Forgiveness In Financial Crises C: The Swedish Banking Crisis Of 1990-94, Christian M. Mcnamara, Dr. Lars Thunell, Andrew Metrick

Journal of Financial Crises

In the Spring of 1992, the Swedish government faced a dilemma. The country was in the midst of an economic downturn stemming from the collapse of asset prices (especially in real estate) that had spiked as a result of a credit boom that followed the deregulation of the Swedish banking system in the mid-1980s. Initially the impact of the downturn on the country’s banks had seemed to be limited to a small number of specific firms that the government moved to assist on an ad hoc basis in 1991. However, evidence was mounting that the banking crisis was reaching a …

Restructuring And Forgiveness In Financial Crises B: The Asian Crisis Of 1997, June Rhee, Andrew Metrick

Journal of Financial Crises

Asia’s economy, Thailand in particular, was booming when the financial crises hit in the 1990s. However, troubles were brewing underneath the seemingly buoyant economy. With a fragile financial system and ineffective domestic government responses to these troubles, an exchange rate crisis took over Thailand, and this crisis started a financial contagion in the neighboring countries. This case reviews the background and domestic government responses to contain the crisis, and the international intervention provided by the International Monetary Fund including the assistance and the required reforms accompanying the support.

Restructuring And Forgiveness In Financial Crises A: The Mexican Peso Crisis Of 1994-95, Christian M. Mcnamara, June Rhee, Andrew Metrick

Journal of Financial Crises

Following a year in which repeated political turmoil sapped investor confidence in Mexico, putting pressure on the peso and draining the country’s foreign exchange reserves, on December 22, 1994, the Mexican government sparked a financial crisis by unexpectedly abandoning its policy of anchoring the peso to the US dollar and instead allowing it to float freely. The resulting collapse of the peso left Mexico with $40 billion to $50 billion in external debt (much of it dollar-indexed) coming due in the near term and almost no foreign exchange reserves. Faced with the prospect that Mexico would either default on its …

Guarantees And Capital Infusions In Response To Financial Crises C: U.S. 2009 Stress Test, Chase P. Ross, June Rhee, Andrew Metrick

Journal of Financial Crises

When President Obama took office in 2009, the Treasury focused on restarting bank lending and repairing the ability of the banking system as a whole to perform the role of credit intermediation. In order to do so, the Treasury needed to raise public confidence that banks had sufficient buffers to withstand even a very adverse economic scenario, especially given heightened uncertainty surrounding the outlook of the U.S. economy and potential losses in the banking system. The Supervisory Capital Assessment Program (SCAP)—the so-called “stress tests”—sought to rigorously measure the resilience of the largest bank holding companies. Those found to have insufficient …

Guarantees And Capital Infusions In Response To Financial Crises B: U.S. Guarantees During The Global Financial Crisis, June Rhee, Andrew Metrick

Journal of Financial Crises

During 2008-09, the federal government extended multiple guarantee programs in an effort to restore the financial market and contain the panic and crisis in the market. For example, the Treasury provided a temporary guarantee program for the money market funds, the FDIC decided to stand behind certain debts and non-interest-bearing transaction accounts, and the Treasury, the FDIC, and the Federal Reserve agreed to share losses in certain assets belonging to Citigroup. This case reviews these guarantee programs implemented during the global financial crisis by the government and explores the different rationale that shaped certain design features of each program.

Lessons Learned: Ray Dalio, Andrew Metrick, Rosalind Z. Wiggins, Kaleb B. Nygaard

Journal of Financial Crises

Insights from a discussion with Ray Dalio, Founder, Chairman, and Co-Chief Investment Officer of Bridgewater Associates, one of the largest hedge funds in the world. Topics range from monetary policy to communications strategy when responding to a financial crisis.

Basel Iii G: Shadow Banking And Project Finance, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

The Net Stable Funding Ratio (NSFR), a liquidity standard introduced by Basel III, seeks to promote a better match between the liquidity of a bank’s assets and the manner in which the bank funds those assets. The NSFR requires banks to maintain a minimum amount of funding deemed “stable” by the Basel framework based on the liquidity of the banks’ assets and activities over a one-year timeframe. One of the areas seen as most affected by this development may be bank participation in project finance for infrastructure development. Since the global demand for infrastructure development remains robust, the shadow banking …

Basel Iii D: Swiss Finish To Basel Iii, Christian M. Mcnamara, Natalia Tente, Andrew Metrick

Journal of Financial Crises

After the Basel Committee on Banking Supervision (BCBS) introduced the Basel III framework in 2010, individual countries confronted the question of how best to implement the framework given their unique circumstances. Switzerland, with a banking industry that is both heavily concentrated and very large relative to the size of its overall economy, faced a special challenge. It ultimately adopted what is sometimes referred to as the “Swiss Finish” to Basel III—enhanced requirements applicable to Switzerland’s “too-big-to-fail” banks Credit Suisse and UBS that go beyond the base requirements established by the BCBS. Yet the prominent role played by relatively new contingent …

Basel Iii B: Basel Iii Overview, Christian M. Mcnamara, Michael Wedow, Andrew Metrick

Journal of Financial Crises

In the wake of the financial crisis of 2007-09, the Basel Committee on Banking Supervision (BCBS) faced the critical task of diagnosing what went wrong and then updating regulatory standards aimed at preventing it from occurring again. In seeking to strengthen the microprudential regulation associated with the earlier Basel Accords while also adding a macroprudential overlay, Basel III consists of proposals in three main areas intended to address 1) capital reform, 2) liquidity standards, and 3) systemic risk and interconnectedness. This case considers the causes of the 2007-09 financial crisis and what they suggest about weaknesses in the Basel regime …

Jpmorgan Chase London Whale Z: Background & Overview, Arwin G. Zeissler, Rosalind Bennett, Andrew Metrick

Journal of Financial Crises

In December 2011, the Chief Executive Officer and Chief Financial Officer of JPMorgan Chase (JPM) instructed the bank’s Chief Investment Office to reduce the size of its Synthetic Credit Portfolio (SCP) during 2012, so that JPM could decrease its Risk-Weighted Assets as the bank prepared to adopt the impending Basel III bank capital regulations. However, the SCP traders were also told to minimize the trading costs incurred to reduce Risk-Weighted Assets, while still maintaining the opportunity to profit from unexpected corporate bankruptcies. In an attempt to balance these competing objectives, head SCP derivatives trader Bruno Iksil suggested in January 2012 …