Rebirth of England.

Chapter 606: Big but Unbreakable

At 7 p.m. on July 14, Bush Jr. convened Treasury Secretary Paulson, Federal Reserve Chairman Ben Bernanke, advisory members and representatives of other financial regulatory agencies for a high-level meeting in the Roosevelt Room of the White House.

In this meeting, the president changed his usual relaxed and humorous style, looked gloomy, and asked bluntly:
“How did we get to this point?”

Bernanke, who was sitting across from the president at the time, later recalled:

“This question is really telling.”

Lehman's bankruptcy ultimately put Paulson, Bernanke and Bush Jr. in a dilemma, and they were neither popular nor welcome.

After Paulson and Bernanke reported on Lehman's bankruptcy, they immediately proposed to the President a plan for emergency assistance to American International Group.

Bernanke's reasoning was that the motivation for saving the company was definitely not to help its shareholders or employees, but that the entire American economic system could not afford the company's bankruptcy.

AIG's assets exceed $1 trillion, more than 50% more than Lehman Brothers, and it has more than 7400 million corporate and individual clients worldwide.

More importantly, the company's main business itself does not have major problems and can be said to be of high quality, but its main problem is that its subsidiaries involve a large number of CDS.

Now that Lehman has collapsed and the wave of defaults has resulted in massive compensation, American International Group may go bankrupt immediately.

Bernanke said to Bush in a very serious tone:
“Due to the deep international business connections, once the American International Group goes bankrupt, it is likely to lead to the collapse of more financial giants in the United States and other countries.”

Paulson also reminded the president that rescuing AIG was necessary and that there were not many options.

No institution in the market was willing to acquire it or provide it with a loan, and the government did not have enough funds to take it over.

If American International Group still has enough collateral assets, the Federal Reserve can only step in and provide it with a loan to save it from bankruptcy.

……

"There has always been a saying on Wall Street, 'too big to fail'..."

The maid poured the red wine into the decanter with gentle movements.

Barron said to Ivanta in front of him:

"It means that when a company is large enough, once it encounters a crisis, it will bring fatal damage to the entire market, so the government will try its best to avoid this situation and find ways to rescue it."

"So the bigger the scale, the less likely it is to fall, right?"

"Yes, that explains the urge of Wall Street investment banks to expand their scale, especially those institutions that have lasted for hundreds of years. They try to extend their tentacles to all aspects of the economy and become one with it..."

“But Lehman Brothers went bankrupt anyway…”

When Barron heard what Ivanta said, he raised his glass and clinked it with hers, then said with a smile:

"Then it's still not big enough."

The collapse of Lehman Brothers seemed to establish the government's punitive attitude toward the market.

But when a systemic crisis occurs, the logic of "too big to fail" seems to hold true again.

Regarding whether to rescue AIG, Bush Jr. chose to trust the judgment and approach of Paulson and Bernanke.

After reporting to Bush Jr., Paulson and Bernanke rushed to Capitol Hill without stopping.

There, they had to explain to difficult lawmakers why they had to rescue AIG.

Various difficult questions came up, including one member of Congress asking whether the Federal Reserve had the authority to lend money to an insurance company.

Generally speaking, the Federal Reserve can lend money to banks and savings institutions, but what about insurance companies like American International Group? In this regard, Bernanke explained that according to Section 13, Section 3 of the Federal Reserve Act, in "unusual and emergency" circumstances, the Federal Reserve can lend to any individual, partnership or institution if five or more members of the Federal Reserve Board vote in favor.

The meeting lasted for several hours, and the congressmen were already showing signs of fatigue. They were more aware of the approaching crisis and did not raise much objection to the actions of Bernanke and Paulson.

After the meeting, an exhausted Bernanke returned to the Fed office.

Just then, Geithner of the New York Federal Reserve called him and said that the board of directors of American International Group had agreed to the conditions they proposed.

To get assistance from the Federal Reserve, certain conditions must be met.

Out of caution, Bernanke set very harsh conditions for AIG.

"Because we don't want to reward a failed company, nor do we want to encourage other companies to follow American International Group and take risks that could lead to bankruptcy."

The interest rate of the loan that the Federal Reserve gave to American International Group was very high, and after the capital injection, its shareholding ratio would be close to 80%.

The real advantage of American International Group is that its main business assets are relatively healthy and high-quality.

However, Bernanke still felt extremely uneasy about this.

If this rescue operation fails, the market's confidence in the Fed's ability to control the crisis will suffer a devastating blow.

The Federal Reserve was established after the financial crisis of 1907 with the original intention of preventing a wave of bank failures.

However, during the Great Depression, the Federal Reserve's functions failed to stand the test and even became the culprit of the Great Depression.

This rescue of American International Group can be called the most in-depth and largest government intervention in the market in American history.

If it fails, can the Fed afford the responsibility?

Bernanke finally mustered up the "courage to act" and "do what others cannot and are unwilling to do, but must do."

The day after Lehman Brothers filed for bankruptcy, the Federal Reserve announced that it had authorized the New York Fed to provide American International Group with an $850 billion loan.

So far, among the five major investment banks on Wall Street, Bear Stearns was acquired by JPMorgan Chase, Merrill Lynch was acquired by Standard Chartered Bank, and Lehman Brothers was placed under bankruptcy protection...

After that, the only two remaining independent investment banks, Goldman Sachs and Morgan Stanley, had no choice but to ask the Federal Reserve to transform into bank holding companies.

The Federal Reserve approved the two investment banks' requests on July 7.

As mentioned before, under normal circumstances, the Federal Reserve can only lend money to commercial banks and savings institutions. Only after the "transformation" of Goldman Sachs and Morgan Stanley can they, like other commercial banks, permanently obtain the right to obtain emergency loans from the Federal Reserve to overcome difficulties.

Ultimately, Lehman Brothers became the only large financial institution to go bankrupt without government rescue.

7月20日，小布什提交了总额为7000亿美元的金融救援法案，并在8月3日获国会通过。

The core content of the bill is the Troubled Asset Relief Program (TARP), which authorizes the Treasury Department to purchase and guarantee troubled assets of financial institutions to stabilize the financial system and provide credit support for economic recovery.

At the same time, a meeting was taking place at the Goldman Sachs headquarters at 200 West Street in Manhattan.

Participants in the meeting included Wall Street giants such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo, as well as institutions such as Standard Chartered Bank, Barclays, IC Capital, Vanguard Group, and DS Group.

"DS Group's funds are willing to invest to help everyone through this difficult time. We need to act together to maintain the stability of the global financial industry, and the stability of Wall Street is particularly important."

Amber Sheehan, as a representative of DS Group, said this at the meeting.

(End of this chapter)