The Subprime Mortgage Crisis Revisited | Wall Street’s Most Horrifying 640 Days


On August 9, 2007, the US subprime mortgage crisis came to Wall Street and finally turned into a global financial crisis on September 15, 2008. Like the financial crisis that also broke out in the United States in the 1920s and 1930s, the 2007 -2008 global financial tsunami can be classified as extraordinary turbulence in the history of financial crises. It is worth including financial experts, policy researchers, financial Practitioners who have repeatedly reviewed and researched.

 Although the subprime mortgage crisis and the global financial tsunami a decade ago may have surpassed the financial crisis in the 1920s and 1930s, they did not evolve into more than a decade of development. the Great Depression.

 In fact, the response to the financial crisis a decade ago greatly benefited from the tireless study of the Great Depression by financial experts for more than 70 years. Coincidentally, Bernanke, the chairman of the Federal Reserve at the time of the crisis, was one of the authority figures in the study of the Great Depression, and Paulson, then the US Treasury secretary, was the CEO of Goldman Sachs, the most powerful investment bank on Wall Street, just two years ago. official. Together with the 46-year -old New York Fed President Geithner, the three took the lead to form the firefighting team in the United States to deal with the financial tsunami.

 Looking back at the response to the financial crisis ten years ago, it was effective from the perspective of cutting off the financial crisis’s contagion to the real economy. After all, it did not evolve into the Great Depression that Americans are still fascinated by decades later. But on the other hand, new problems have arisen, such as the relative survival of the American workforce that may be worse than it was a decade ago as Wall Street recovers. Populism is looming in many parts of the world, and globalization has a tendency to ebb.

 The financial crisis ten years ago also had a profound impact on China’s economy and finance. Although for China, the crisis was caused by external shocks, it was embedded in the imbalance of China’s economic structure. Losing the most powerful demand in the US market, China’s economy, which was too dependent on external demand at that time, was inevitably implicated and impacted.

 Just as the US’s response to the crisis was not perfect, China’s decisive four trillion stimulus policy, on the one hand, quickly stimulated the rebound of China’s economy but also caused some adverse consequences, such as breeding real estate bubbles, shadow banking, local governments Soaring debt and other issues.

 Ten years have passed, and it is time to re-examine and reflect on the reasons for the financial crisis and the response policies after the financial crisis.

 The Paper has specially planned a series of reports on “Recovering the Subprime Mortgage Crisis“. The report interviewed Chinese and foreign scholars, including Nobel laureates in economics, and different policymakers and witnesses during the financial crisis, as well as on-the-spot inspections of China’s rural economy, which showed grass-roots vitality under the background of the ten-year crisis, to restore and reflect on the ten-year crisis. the previous crisis.

 “It’s like a war right now, an economic war,” Paulson said. “The market could crash at any time.”

 When the then US Treasury Secretary Paulson said this, it was the fourth day after Lehman Brothers went bankrupt. At this time, only Goldman Sachs and Morgan Stanley were left in Wall Street investment banks, but they were also in danger.

 Bernanke, then the chairman of the Federal Reserve and an expert on the Great Depression, told then-President Bush that this was the biggest financial crisis since the Great Depression.

 Wall Street adventurers once thought that as long as the music was playing, the banks would dance to the rhythm of it as much as possible. Yet the titans of Wall Street, amid the greedy clamor, failed to notice that the music had stopped, and when they did, it all seemed to be over.

 The crisis is not without signs. The source is the excessive prosperity of the US housing loan market. At the same time, due to the lack of supervision, financial innovation for subprime mortgages has inflated the bubble.

 According to a report released by the Bank of England in November 2007, the global subprime mortgage bond scale is 700 billion US dollars, but the global financial derivatives market is as high as 415 trillion US dollars, and the derivatives market is already 8% of the global GDP. to 10 times.

 When subprime assets started to become toxic assets, hundreds of trillions of dollars in derivatives were like an atomic bomb about to explode.

 From August 9, 2007, BNP Paribas announced to freeze its three subprime mortgage investment funds, announcing the advent of the subprime mortgage crisis, to September 15, 2008, the bankruptcy of Lehman Brothers detonated the global financial tsunami, and then to May 7, 2009. , the Federal Reserve completed the stress test of 19 financial institutions and declared that the most difficult time for the US banking industry has passed. During these 640 days, the financial institutions on Wall Street were on the verge of life and death, and for the “rescue trio” Paulson, Bernanke, Geithner, the 640 days of all kinds of running around is the most unforgettable memory in his life.

 Paulson, Bernanke, and Geithner, members of the “rescue trio”, during these 640 days, Geithner first served as the chairman of the New York Fed, and later served as the Treasury secretary in the Obama administration. Geithner recalled: “I don’t know how to describe those horrific days, the feeling of facing a crisis, the combination of too much responsibility and numbness to a financial catastrophe; the frustration of not being able to control the situation, the uncertainty about the way to rescue; fears that strategies might go the other way; ignoring family pain and guilt; loneliness and numbness. When the protagonist of the movie “The Hurt Locker” was asked about the best way to defuse a bomb, I liked his deadpan answer, alive.

1. The subprime mortgage crisis came, and Bernanke misjudged

August 9, 2007

 “The broader economic and financial market implications of what’s happening in the subprime mortgage market appear likely to be contained.”

 After 7:00 on August 9, 2007, the then US Treasury Secretary Hank Paulson couldn’t wait to drive to the Federal Reserve. Paulson was upset that he missed his weekly breakfast meeting with Fed Chairman Ben Bernanke on a business trip to China last week.

 On this day, BNP Paribas suddenly disclosed that it had suffered huge losses in US subprime mortgage securities, and announced that it would freeze three of its subordinate investment funds in the US subprime mortgage market. The LIBOR rate soared and the European interbank market collapsed.

 Before Paulson arrived, Bernanke received an e-mail from Fed staffers, giving him a first glimpse of the latest market developments. With the European day coming to an end and the US market not getting started, Bernanke knew it was going to be a bad day because of the time difference.

 Worse than BNP Paribas’ statement, the once-conservative European Central Bank announced it would lend unlimited amounts at a discount to any bank in need, an unprecedented move to inject liquidity into the banking system. This bold move is not a good thing.

 When he got the news, New York Fed President Geithner knew the crisis was coming, and he was vacationing in Cape Cod, Massachusetts, where he stayed when Thailand’s financial crisis erupted 10 years ago.

 The news caused panic in the market as investors began to realize that subprime and structured credit products, despite their high credit ratings, could still experience significant losses.

 On August 10, the Federal Open Market Committee (FOMC) held an emergency video conference, and the Fed announced an injection of $24 billion into the financial market.

 In October 2007, the market returned to calm, housing prices also rebounded slightly, and the financial crisis seemed to be over. In the second and third quarters of 2007, US economic output grew by nearly 4 percent, and unemployment remained low. Bernanke, therefore, concluded that “the effects of the problems in the subprime mortgage market on the broader economy and financial markets appear likely to be contained.”

 In fact, Bernanke’s judgment was wrong, and it was only a brief quiet before the storm.

 Events in 2007

2. For $2 per share, JPMorgan Chase bought Bear Stearns

March 14-16, 2008

 Bush promptly deleted the words “who will not help” in the speech.

 After the Federal Reserve cut interest rates frequently in the winter, housing prices fell unexpectedly, triggering more losses in mortgage securities and financial stocks slumping.

 The most stressed company is Bear Stearns, the fifth-largest investment bank on Wall Street. Shares of Bear Stearns fell from $77.32 to $62.3 in the week from Monday, March 3 to March 10.

 On March 7, Paulson stood on the podium of the National Press Club, in front of a room of tireless reporters, explaining the cause of the crisis: The immediate trigger was low-quality subprime loans… market participants and regulation All of them turn a blind eye to all kinds of risks.

 After finishing his speech, Paulson hurried back to the Treasury’s office, and the usually calm Deputy Secretary Robert Steel rushed in, “Bear Stearns has a liquidity problem.” Before he could finish, Paulson said Sen knew that Bear Stearns was doomed. Once the liquidity problem got out, there was a massive divestment of Bear Stearns, a brutal Wall Street rule: When a financial institution is dying, they die quickly.

 Bear Stearns reluctantly stated that if there was no solution, he could only file for bankruptcy the next morning. Bear Stearns had about $18 billion in cash on Monday, and only about $200 million left. When the market opened in the morning, no trading partner was willing to lend Bear Stearns any more money, and everyone was fleeing.

 US President Bush soon called to ask if a buyer could be found. Paulson could only say that he didn’t know yet. “We may see a company fail.”

 At 5:00 am on March 14, Paulson, Geithner, Bernanke, Cox of the SEC, and others held a conference call, and connected with JPMorgan Chase CEO Jamie Dimon, Dimon stressed that Bear Stearns’ failure would be a disaster for the market and that the key was to keep Bear Stearns through the weekend.

 Bailout Bear Stearns first required the president’s opinion, and Bush expressed his support. Bush was going to give a speech at the Athletic Club in New York on this day, and Bush promptly deleted the wording of “no one to help” in the speech.

 Paulson and Bush On the morning of Saturday, March 15, New York Fed President Geithner was on his way to his office and stopped by to visit former Fed Chairman Paul Volcker. Geithner told Volcker that the Fed could not keep Bear Stearns and could only seek a strong buyer. Volcker agrees, realizing that the current situation is dire and could very well get worse.

 Bear Stearns’ options were to accept a takeover by JPMorgan or go bankrupt.

 Throughout the day, JPMorgan’s team was combing through Bear Stearns’ books, and as night fell, it said it would buy Bear Stearns for $8-$12 per share, well below the stock price of $30 at the time.

 However, things didn’t go so smoothly.

 Jamie Dimon changed his mind the next morning. Nearly three-quarters of Bear Stearns’ assets belonged to subprime loans. No matter the price, he could not take this part of the assets and had to cancel the transaction. He also warned that if Bear Stearns went bankrupt, four other investment banks were likely to be implicated.

 The problem has been clear, JPMorgan Chase would not have bought Bear Stearns without government help to address the mortgage equity.

 After discussing with Paulson, Geithner decided that the New York Fed would loan JPMorgan Chase $30 billion, using Bear Stearns’ investment-grade assets of the same value as collateral, and the Treasury Department would compensate for some of the losses. What they didn’t realize, however, was that the Treasury couldn’t compensate the Fed without congressional approval. In hindsight, both of them felt incredible and lost their temper, but anger was useless.

 The atmosphere became tenser and tenser, and everyone was walking on thin ice. Dimon wanted to eliminate as much risk as possible, forcing his team to use a ruthless attitude to pressure regulators.

 Ultimately, JPMorgan’s board approved the deal. At 6 pm, Bear Stearns’ board also approved the deal.

 The acquisition exhausted Geithner, and he finally had the strength to take care of himself when he faced the JPMorgan Chase team. “As the chairman of the New York Fed, I think this is solved. Let’s talk about it.”

 Details of the deal were revealed by The Wall Street Journal in the evening on Sunday, March 16. JPMorgan Chase bought Bear Stearns for $2 per share, with a total investment of $236 million (in January 2007, Bear Stearns’ market value reached $20 billion at one point). As part of the deal, the Fed will lend $30 billion to a separate entity called Maiden Lane LLC, which will buy and manage Bear Stearns’ mortgage-like assets.

3. Using $200 billion, the US government took over the “two houses”

Summer 2008

 On private occasions and at banquets, Paulson repeatedly communicated with Wang Qishan, the then Vice Premier in charge of China’s financial and economic affairs, and Zhou Xiaochuan, governor of the People’s Bank of China, to ensure the “safety” of the two rooms.

 Within a year, US housing prices have spread from a partial decline to a nationwide decline, and the losses of Freddie Mac and Fannie Mae are well known.

 Two Houses is an agency chartered by the US Congress to stabilize the US housing loan market and promote affordable housing. They do not provide loans directly to homebuyers but package home loans into securitized products to ensure that homebuyers can repay their home loans on time, and then go through banks. sold to investors. The two houses can apply for a Treasury loan in an emergency, which makes investors around the world believe that the securities they issue have an unconditional full guarantee from the US government.

 Foreign investors hold more than $1 trillion in bonds issued or guaranteed by the “two houses”, mainly Japan, China, and Russia. If the two houses are allowed to fail, their investment will be in vain.

 As the largest overseas credit bankruptcy of Langfang, the Chinese government is particularly worried about the bankruptcy of Langfang. Despite being overseas, the Chinese government has been paying close attention to the analysis reports of investment banks and the ratings given by rating agencies.

 Paulson communicated with Wang Qishan, the then Vice Premier of the State Council in charge of China’s financial and economic affairs, and Zhou Xiaochuan, governor of the People’s Bank of China, to ensure the “safety” of the two rooms in private occasions and at banquets. “It is very important to inform China of the situation in the United States promptly because China holds a huge amount of American debt, including hundreds of billions of dollars in bonds issued by the two houses.”

 Paulson has a close relationship with Wang Qishan. Time magazine of the United States has put China on the list of accountability for the financial crisis. The reason for the account is that China has purchased a large number of US bonds, which has led to the United States borrowing a lot of money and using it after the debt crisis. Taxpayer money bails out businesses that shouldn’t.

 The House and Senate passed a bipartisan relief package, the Housing and Economic Recovery Act, on July 23 and 26, respectively, which gave the Treasury Department broad discretion. It went into effect after Bush signed in the Oval Office on the morning of July 30.

 In early August, the Paulsons flew to China to attend the Olympics. Paulson, who had no intention of taking a vacation, was constantly worried about the situation of the two rooms and arranged meetings with Chinese officials. Paulson learned that Russian officials had held top-level meetings with China and advised the two countries to sell a lot of their two-bedroom bonds, forcing the US government to use emergency powers to support the two companies. Although China unilaterally refused, this news is enough to make Paulson sleepless.

 On August 11, Standard & Poor’s downgraded the two rooms to junk level. After returning to the United States, Paulson, who was in a hurry, went to the Fed to see Bernanke and stated that the two rooms should be placed directly in the receiving process. Bernanke said on the spot, “We support you 100%.”

 Paulson wanted Geithner to go to Washington with him to help him plan the plan. Instead, Geithner decided to go fishing in the valley that weekend to find “a moment of peace” for himself. He also felt guilty for rejecting Paulson, but in fact, he was somewhat disgusted with the plan. In his opinion, the brazen two rooms should not be given “special care”, even if those foreign governments hysterically seek the protection of the US government. “But it’s a Treasury business, so I don’t think Hank’s war room needs me.”

 On September 8, the Federal Housing Finance Agency forced Fannie Mae and Freddie Mac to escrow and replaced the CEO. The Treasury Department pledged to use $200 billion in government funds to support the businesses, easing fears of a two-room collapse.

 Paulson did it regardless of the political cost, and President Bush has always supported him. Markets in Asia and Europe soared across the board, with the Bank of Japan and the People’s Bank of China applauding.

 On September 14, through capital injection, the US government officially took over the two houses and provided guarantees for their debts, and the two home mortgage loan giants were completely nationalized.

 However, bigger crises are looming.

4. To save Lehman Brothers, seven Wall Street CEOs gathered at the New York Fed

September 12-14, 2008

 “Don’t count on government funding, you are the protagonists of solving the problem,” Paulson said. “We will remember those who didn’t try their best.”

 The bailout of the two houses didn’t buy Lehman Brothers time.

 The plight of Lehman Brothers is beyond imagination. On September 10, Lehman announced its third-quarter results, with a loss of $3.9 billion in the third quarter due to the impairment of $5.6 billion in residential and commercial real estate assets; it also announced that it would divest its $25 billion-$30 billion in commercial real estate assets. However, investors did not buy it.

 The total assets of Lehman Brothers are about 600 billion US dollars, neither the scale nor the complexity can be compared with Bear Stearns.

 Lehman was on the brink of bankruptcy, and American International Group (AIG) and Merrill Lynch were on the verge of death. There were three real crises this weekend in September, not just one.

 If Lehman went Bear Stearns’ way, Merrill would be considered the next weakest investment bank, a new round of runs on Merrill was inevitable, and AIG’s stock price fell 50% in a week.

 After the two-room incident, ordinary people, Congress, and both parties were tired of the rescue operation. “Protecting taxpayers from emergency aid” has also become a bipartisan consensus in Congress. With the unemployment rate at 6.1% and the economy clearly deteriorating, no politician wants to stand against the rising populists.

 The worst-case scenario looms: Lehman can’t find a buyer, the government has no power to inject capital, and there is no legal authority to liquidate a non-bank financial institution.

 On Friday, September 12, the meeting originally scheduled to start at 18:00 was delayed until nearly 19:00. Paulson and several aides set up camp at the New York Fed’s makeshift headquarters on the 13th floor. The building was now full of bankers, lawyers, accountants, and analysts.

 These bankers include some of Wall Street’s most prominent CEOs, such as JPMorgan’s Jamie Dimon, Morgan Stanley’s John Mack, Goldman Sachs’ Lloyd Blankfein, Citigroup’s Vikram Pandey Robert Kelley of Bank of New York Mellon, John Sean of Merrill Lynch, Brady Dugan of Credit Suisse.

 The bankers did not include Lehman Brothers CEO Fuld, who Paulson believes has been quarantined and has no right to intervene in his refusal to accept reality.

 Those bankers also don’t include people from Bank of America and Barclays, which have been selected by the US Treasury as two potential buyers for Lehman Brothers. Obviously, these two potential buyers would not have acquired Lehman Brothers at all without financial backing.

 “Don’t count on government funding, you are the protagonist of the problem,” Paulson told a group of Wall Street bankers.

 The bankers were divided into three groups, one to study ways to minimize the ramifications of a Lehman failure; one to study how the financial industry should buy out Lehman as a whole in the future Gradually wind it up; another group studies how to fund the part of the asset that the buyer doesn’t want.

 When these Wall Street CEOs were chatting, talking, and even bickering, Paulson raised his voice: “This event concerns our capital markets and the country as a whole, and we will remember those who didn’t try their best.”

 Desperately, towards the end of the day, neither Bank of America nor Barclays had shown any further interest in the deal, nor did the government have the power to inject capital. Lehman has only the last $2 billion in cash left, and if he can’t find a solution over the weekend, he will be left with a corpse next Monday.

 Paulson and Geithner had persuaded Buffett to invest in Lehman, but Fuld’s offer was much higher than Buffett’s offer.

 On Saturday, September 13, Merrill Lynch was negotiating a deal with Bank of America. This also explains why Bank of America is not interested in Lehman.

 On the morning of September 14, Geithner received a call from Callum McCarthy, chairman of the UK Financial Services Authority, the UK’s highest financial regulatory authority. McCarthy rejected the merger with a typical “British euphemism”. “We’re not sure that Barclays has enough capital to pay for the Lehman risk, nor is the law allowing Barclays to back the Lehman deal before the shareholders vote…good luck.”

 British Barclays Bank is Lehman’s only last straw. Geithner walked into Paulson’s makeshift office next door and said, “We’re screwed.”

 Around 3:30 pm, Paulson received a call from the White House.

 “Can we explain why Lehman’s situation is different from Bear Stearns?” Bush asked.

 “Yes, Mr. President,” Paulson replied. “There is really no way to save Lehman. Even with the help of other private companies, we still can’t find a buyer. We can only try to control the situation.” Paulson Elson also told Bush on the phone that more powers needed to be applied to Congress to deal with the crisis.

 The only good news on Sunday night was that Bank of America agreed to buy Merrill Lynch for $29 a share, which was really good news, but no one was in the mood to celebrate.

5. Lehman bankruptcy, the New York Fed to inject $85 billion into AIG

September 15, 2008

 “If we do face another Great Depression, you see, I’ll be Roosevelt, not Hoover,” Bush said.

 Asian markets have opened, and Lehman Brothers have not yet announced its bankruptcy filing. The 158-year-old company still hopes to struggle to the end.

 Having lost patience, Paulson yelled at SEC Chairman Cox, urging him to pick up the phone and let Lehman Brothers go through bankruptcy proceedings. In the end, Cox and Geithner’s lawyers called the Lehman Brothers board, and together they declared Lehman Brothers bankruptcy. At 1:45 am, Lehman Brothers finally filed for bankruptcy protection.

 With $613 billion in debt, the bankruptcy of Lehman Brothers became the largest bankruptcy in US history. On Sept. 15, the Dow dropped 504 points or nearly 5%, and S&P financial stocks also had their worst day ever, closing down more than 10%. The commercial paper market and the interbank overnight market were immediately paralyzed.

 Subsequently, the British authorities froze the accounts of some Lehman clients, and foreign hedge funds withdrew funds from Goldman Sachs and Morgan Stanley.

 Lehman Brothers bankruptcy AIG is still in dire straits. This veteran insurance company is involved in life insurance, life insurance, property insurance, and auto insurance. It holds the retirement accounts of millions of American families and provides insurance to 180,000 companies. Two-thirds of the US workforce is insured and also holds $2.7 trillion in derivatives contracts.

 After the collapse of Lehman Brothers, Moody’s and Standard & Poor’s downgraded AIG’s credit rating. AIG’s shortfall so far has ballooned to $85 billion in loan commitments by the end of the day, up from $50 billion two days ago. In this case, it is no longer possible to solve the problem by the private sector. Just a few days ago, the Fed and Treasury thought they would not bail out AIG, but now they are changing their minds.

 Three (from left) blamed for bailouts of financial institutions: Paulson, Bernanke, Geithner. Paulson has been in touch with Geithner about saving AIG. Realizing the magnitude of the AIG problem, Paulson called Bush, told him that he might have to get the Fed to rescue AIG, and hoped for his support. Bush immediately said, do what to do.

 Paulson and Geithner quickly developed an action plan, Geithner was responsible for the specific affairs of the bridge loan, and Paulson was responsible for finding a new CEO for AIG. Paulson identified Ed Liddy, the retired CEO of Allstate Insurance, as the new CEO of AIG within three hours.

 At 4 pm on September 16, Geithner proposed some terms to the AIG board of directors to rescue it. The Federal Reserve Bank of New York provided AIG with a capital injection of $85 billion to obtain 79.9% of AIG’s equity, which was taken away by the government’s capital injection. Three-quarters of AIG shareholders.

 At 3:30 pm on September 18, Paulson and Bernanke went to the White House to participate in a meeting of the President’s Working Group on Financial Markets. For the second time in three days (the last was the day after Lehman Brothers went bankrupt, at 3:30 pm on September 16), they met with the president and asked for his support for radical and unprecedented intervention in the US financial system. measure.

 “Mr. President, we’re going through a financial crisis,” Bernanke, a placid personality, told Bush.

 “Is this the worst crisis since the Great Depression?” Bush asked.

 “Yes, as far as the financial system is concerned, we didn’t see that in the 1930s either, and it could get worse,” Bernanke replied.

 Paulson and Bernanke’s main plan is to apply to Congress for funding to buy distressed assets or recapitalize banks.

 As a Republican strongly inclined to let the market solve the problem, Bush has an intuitive resistance to Paulson and Bernanke’s plans, and he knows that Republicans in Congress will be equally resistant. But he expressed support for Paulson and Bernanke’s plan on the spot.

 After the meeting, Bush told his staff, “If we do face another Great Depression, look, I’ll be Roosevelt, not Hoover.”

 On September 19, George W. Bush made a public speech in the Rose Garden of the White House, defending the rescue of Fannie Mae, Freddie Mac, and AIG, with Bernanke and Paulson standing by. 6. Goldman Sachs and Morgan Stanley are at stake, China refuses to increase capital in Morgan Stanley

September 19-21, 2008

 After finishing the call with Wang Qishan, Paulson called the White House staff, China will not continue to invest in Morgan Stanley, there is no need for President Bush to call President Hu Jintao.

 On the evening of September 19, Bernanke heard from the Fed supervisor that Goldman Sachs wanted to change its legal status from an investment bank to a bank holding company. The effect of this was that Goldman Sachs’ supervisory authority changed from the Securities and Exchange Commission to the Federal Reserve. . Goldman executives believe that as long as the Fed announces that it will regulate their activities, the risk of a run on short-term funds can be reduced.

 At around 6:30 that night, Paulson received a call from Morgan Stanley CEO John Mack. Morgan Stanley desperately needs to show the market that it can get the backing of strategic investors. However, its negotiations with China’s sovereign wealth fund, China Investment Corporation, made little progress. Mike thought that CIC would further increase its stake in Morgan Stanley. In fact, in December 2007, China Investment Corporation had just invested $5.6 billion in Morgan Stanley in the form of mandatory convertible bonds, and now it has suffered serious losses.

 Mike believes that the Chinese want to hear that the US government is willing to help solve Morgan Stanley’s problems. Paulson promised that he would call Wang Qishan, then Chinese Vice Premier, and he even planned to ask President Bush and Chinese President Hu Jintao to speak on the phone.

 Paulson believes that the problem with Goldman Sachs and Morgan Stanley is a lack of investor confidence, while Morgan Stanley also faces a short-term liquidity squeeze.

 On September 20, Paulson received multiple consecutive calls from Mike, and Morgan Stanley was on the verge of collapse. At 9 pm, Paulson returned home and waited to talk to Wang Qishan on the other side of the world.

 At 9:30, the call between the two began. First, Paulson asked his assistant to brief Wang Qishan on the latest situation of the crisis. After a brief exchange, Paulson spoke to Wang Qishan about the Troubled Asset Relief Program and expressed optimism that it would be authorized by Congress. Next, he raised the question of Morgan Stanley. Wang Qishan said he knew CIC was considering increasing its stake in Morgan Stanley by 9.9%. When Paulson said that he could not ask for it, Wang Qishan’s response was relatively indifferent, and he also expressed concern about the safety of Chinese investment.

 When Paulson pointed out to Wang Qishan that the US government believes that Morgan Stanley is about the safety of the financial crisis, Wang Qishan’s tone was flat and unenthusiastic.

 After finishing the call with Wang Qishan, Paulson called the White House staff, China will not continue to invest in Morgan Stanley, there is no need for President Bush to call President Hu Jintao. The next day, Paulson told the news to Morgan Stanley CEO Mike, who was not surprised.

 Bernanke, Geithner, and Paulson decided that actions that would minimize the risk of Goldman Sachs and Morgan Stanley failures were the second option, allowing the Fed to turn Morgan Stanley and Goldman Sachs into bank holding companies, expecting The two banks found strategic investors to ensure their survival.

 At 9:30 pm on September 21, the Federal Reserve announced that it approved the application of Goldman Sachs and Morgan Stanley to transform into a bank holding company. “Wall Street as I know it is coming to an end,” Paulson wrote.

 Both Goldman Sachs and Morgan Stanley gained strategic investors after they turned into bank holding companies. Among them, Goldman Sachs received a $5 billion investment from Warren Buffett a week later, while Morgan Stanley received a $9 billion investment from Japan’s Mitsubishi UFJ Financial Group in mid -October.

7. After twists and turns, the US$700 billion rescue plan was introduced

October 3, 2008

 500 billion will make Congress unhappy, 700 billion will make Congress even more unhappy, and close to 1 trillion may be problematic.

 On Monday, September 29, the US Dow fell 7%; the S&P 500 fell 8.8%, its biggest one-day drop since the October 1987 crash.

 The reason for the sharp drop in the US stock market was that the US House of Representatives rejected the $700 billion troubled asset rescue plan by a vote of 228 to 205 on the same day. Two-thirds of Republicans and two-fifths of Democrats voted no.

 The asset rescue plan is divided mainly on the fact that Democrats want to include a tax on the financial industry and limits on Wall Street executive compensation, but Paulson believes that the market has no way to accept such a plan, which is like trying to save someone at the same time. punish him again.

 Another thorny issue is the timing of the money, the Democrats are pretty sure that Obama won the election, so they don’t want to let the Bush administration’s Treasury use all the money, so they want to give $250 billion or $300 billion first and the rest The funding voice is left to the new government.

 “Without this, don’t we have nothing to do?” Vice President Cheney asked. “Does the Fed have no power? Do we have no power?”

 “Yes, we don’t,” Paulson replied.

 After the collapse of Lehman Brothers, Paulson realized that he needed more power to carry out the rescue operation, and this power required congressional authorization. Paulson needs to ask Congress for an appropriation to buy the failed home mortgages on the market. On September 18, he submitted a plan to buy the troubled assets to President Bush.

 In the $700 billion figure, Paulson took a lot of thought. From a political point of view, 500 billion yuan will make Congress unhappy, 700 billion yuan will make Congress even more unhappy, and close to 1 trillion yuan may be problematic. On the other hand, at that time, there were about 11 trillion US dollars of residential mortgage loans in the United States. With his professional judgment, 700 billion US dollars was enough to stimulate the vitality of the market.

 At a lunch between Paulson, Bernanke, and Bush on Oct. 1, Paulson suggested that the asset purchase plan may also require a plan to acquire direct stakes in financial institutions. This is also Bernanke’s long-standing view, that is, direct capital injection to financial institutions when necessary. But this kind of behavior similar to “nationalization” is difficult for Republicans to accept.

 On the same day, the Troubled Asset Relief Program, which complements the Tax Expansion, Energy Provisions, and Mental Health Equity Act, passed the Senate 74-25.

 On October 3, the $700 billion asset rescue plan returned to the House of Representatives to vote again and was finally approved by a vote of 263 to 171. Under the plan, the Treasury Department has immediate access to $250 billion and another $100 billion if the president of Congress proves necessary to Congress. To release the remaining $350 billion, the Treasury Department must submit a detailed report to Congress on its funding plan.

 At 2:30 pm that day, President Bush signed the bill into effect. However, for then-Fed Chairman Bernanke, it also meant that the Fed finally no longer had to take on the responsibility of restoring financial stability alone.

 But the crisis continues.

 Events in 2008

8. Nine major banks signed a $125 billion capital injection agreement, the Dow rose 11%

October 13, 2008

 Knowing that Paulson was working on a plan to recapitalize the bank, Buffett offered to call late at night to offer advice.

 When Paulson returned home on the evening of October 11, his wife told him that Buffett had called him. Although Paulson wanted to call Buffett back after dinner, he went to bed because he was too sleepy.

 Late at night, the phone rang and Paulson picked up the phone.

 “Hank, I’m Warren.” It turned out that the other end of the phone was Warren Buffett.

 Buffett knew that Paulson was working on a plan to recapitalize the bank, and called to offer advice.

 With the market deteriorating too quickly and the toxic asset purchases taking too long to work, and with Congress not giving out more than $700 billion, Paulson had to think about making the most of every penny he had. Obviously, it would be better to recapitalize banks directly than to buy toxic assets. Because capital injection can use leverage, assuming that the bank’s leverage ratio is 10 times, the effect of investing $70 billion in equity is equivalent to the release of $700 billion in assets.

 Buffett recommends that preferred stock dividends start at 5% to 6%, and then wait for an opportunity to raise them later.

 Buffett has invested in financial institutions including Wells Fargo and Goldman Sachs, an arrangement that does not preclude his consideration of vested interests. Still, that’s exactly what Paulson wants, albeit leaning toward a 7% to 8% dividend yield. By the time Paulson was back in bed, he had decided that Buffett’s approach was the best way to make capital buyouts attractive enough to banks and give them an incentive to repay government money.

 Bernanke and Paulson On October 12, Bernanke, Geithner, and others gathered in Paulson’s large conference room and spent 3 hours finalizing the capital injection plan. At this point, Paulson prefers to use preferred stock that pays 5% per annum, which will eventually increase to 9 % per annum. According to the bank capital injection plan, the equity investment funds injected into the planned banks are equivalent to 3% of their risk-weighted average assets, which also means that about 250 billion US dollars of equity will be invested in the entire banking system.

 The Federal Reserve Bank of New York completed the selection of the first banks with the assistance of the Office of the Comptroller of the Currency. The capital allocation plan is Citi, Wells Fargo, and JPMorgan Chase each $25 billion, Bank of America $15 billion, Merrill Lynch, Goldman Sachs, and Morgan Stanley each $10 billion, Bank of New York Mellon $3 billion, State Street USD 2 billion, the 9 companies add up to a total of 125 billion US dollars, which is equivalent to half of the total amount of the capital acquisition plan.

 On October 13, Paulson convened the CEO expiry conference room of the above 9 banks, and all 9 banks signed the capital injection agreement. On that day, the Dow rose 11%, its biggest one-day gain in 76 years.

9. Obama signs $787 billion stimulus package

February 17, 2009

 On his first day as Treasury secretary, Geithner presented President Obama with five big bombs: Freddie Mac, Fannie Mae, AIG, Citi, and Bank of America.

 On January 26, the US Senate approved the appointment of Geithner as Treasury Secretary. The next morning, the first day of his official tenure, Geithner went to the White House to present five big bombs to President Obama who had just taken office: Freddie Mac, Fannie Mae, AIG, Citi, and Bank of America.

 Obama told Geithner and White House National Economic Council Chairman Summers that, to rip off the Band-Aid, he needed a strategy that would end the crisis quickly and clearly.

 The first round of $600 billion of quantitative easing was launched in November 2008, and the Federal Reserve Funds rate was lowered to 0-0.25% at the Fed’s meeting in December 2008, or “zero interest rate”. Relative to the loose monetary policy, the United States has not yet formally introduced an expansionary fiscal policy.

 However, Obama’s fiscal stimulus package has been brewing in the campaign, when the size of 170 billion US dollars. After Obama won the election, by December 2008, the stimulus had grown to $500 billion. The Economic Recovery Act is primarily in charge of Summers.

 Christina Romer, then chair of the National Council of Economic Advisers, told Geithner and Summers in the transitional government office at the time that “this thing requires a much bigger plan — at least $800 billion.”

 Before Obama officially took office on January 20, 2009, the US House of Representatives and the Senate had already started brewing their own economic stimulus packages in early January.

 On February 13, the House of Representatives passed the stimulus package by a vote of 246 to 183. The Senate passed by a vote of 60 to 38.

 On February 17, less than a month after taking office, Obama signed a major fiscal stimulus package, the American Recovery and Reinvestment Act of 2009, which involved $787 billion, of which 2,880 $105 billion in tax cuts and $105 billion in infrastructure expansion.

10.19 companies stress test results announced, the most difficult time for the US banking industry has passed

May 7, 2009

 Geithner shouted to his subordinates, “You can’t call us doves and him (Summers) hawks. There are no doves here, you should present two plans as hawks, one or the other. The image of Hawks II.”

 Geithner’s ‘stress test’ puts the shackles on bankers. Although there has been a bailout, the five bombs of Freddie Mac, Fannie Mae, AIG, Citi, and Bank of America continue to deteriorate. For example, in the fourth quarter of 2008, AIG posted a loss of $61.7 billion, equivalent to a loss of $1 billion per working day.

 On November 4, Obama defeated McCain and won the 2008 US election. On November 21, President-elect Barack Obama nominated Geithner as Treasury secretary in the new administration. After the announcement, Geithner resigned as president of the Federal Reserve Bank of New York.

 During the transition period between the old and the new government, Geithner began to think about how to design a more comprehensive plan to stabilize the financial system.

 For Christmas 2008, Geithner fled to Mexico for vacation. One evening, Geithner called Summers on the beach to propose a new plan for the distressed asset rescue program. The program started out as a “valuation exercise” and was later called a “stress test. “

 The plan is divided into two parts. First, a unified test of large financial institutions is designed and executed by the Federal Reserve to analyze the scale of losses faced by each institution in the face of a recession like the Great Depression. Second, after the results of the stress test are in, the Fed will determine how much capital buffer each bank needs to weather a catastrophic recession and will allow each bank to raise funds from the private sector. The Treasury injected additional capital to fill the gap.

 The gist of the plan is that banks do not need to divest toxic assets, but instead use the long-term intrinsic value of the assets to estimate the bank’s potential losses and use that as a basis for supplementing potential capital needs. Summers worries that the market will see the stress test as a whitewash, a means of propping up zombie banks.

 On February 25, the Fed unveiled more details on the stress test, which will be used for the 19 largest banks. After the Fed determines the capital each bank needs to weather a stressful situation, the banks have six months to raise enough capital from private investors to cover their shortfalls.

 Bernanke was named Time Magazine’s Person of the Year in 2009 for the Fed’s response to the crisis. On March 15, at a meeting convened by Obama in response to the financial crisis, Summers emphasized that Geithner’s plan was too similar to Japan’s, which had been maintaining zombie banks and had to bear the burden of a recession due to cowardice. as a result of. Summers favors bold “quick exit solutions,” reorganizing or nationalizing banks, changing management, and divesting assets.

 Geithner argues that his plan is different from Japan’s, which is to make undercapitalized banks moribund until there is no money to lend to bring down the economy, while his plan is to ensure that banks will eventually have enough capital to survive the economy. During recessions, this capital can come from private investors or from government-forced capital injections.

 One of the two scenarios sounds “hawkish” and the other “dove”. Geithner was particularly concerned about this, and once shouted to his subordinates, “You can’t call us doves and him (Summers) hawks. There are no doves here, you should put two plans Appears as a hawk one or a hawk two.”

 An important reason for the disagreement between Summers and Geithner is that Geithner is optimistic about the results of the stress test, while Summers believes that the situation of the bank is worse than imagined. On May 7, the Federal Reserve released the results of stress tests for 19 banks. As of January 1, 2009, 9 of the 19 banks did not require any additional capital and 10 banks required an additional $185 billion in the capital. Since Citi has added $110 billion in common stock since Jan. 1, that means the real need to raise additional capital is $75 billion, which is covered by existing Troubled Asset Relief Program funds.

 “The stress test was a critical turning point. Since then, the US banking system has embarked on a path of steady strengthening and, finally, the US economy,” Bernanke wrote years later.


 Financial panics tended to subside in 2009, and while there is still little academic consensus on the interrelationship between financial and economic cycles, there is little doubt that the crisis triggered the worst recession since the Great Depression.

 The bursting of the bubble brought about a severe recession. Just as the “Great Depression” led to the collapse of the gold standard, the rollback of the first globalization and the rise of fascism, the subprime mortgage crisis has only just begun to have a major global impact.

 Iceland is bankrupt, the European debt crisis is like a dark cloud, and the risk of Greece leaving the eurozone has not dissipated. Refugee waves and terrorist attacks have repeatedly impacted Europa, which was rebuilt after World War II; Japan is carrying out an unprecedented expansionary policy, and Abe has already The pacifist constitution has been revised, and militarism is showing signs of revival; China has accumulated unprecedented real estate and local government debt problems, and doubts about the bust of the bubble and the impending crisis are endless.

 To stimulate economic growth, the major central banks have resorted to extraordinary measures and embarked on the long road of “quantitative easing”, and the orthodox theory has come to an end. Even 10 years later, with a strong recovery looming like a “mirage”, central bankers are still cautiously trying to clear the fog, fearful of falling back into the illusion of growth.


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