Chapter 606: Big but Unbreakable

At 4 p.m. on July 14, Bush convened Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, advisory members and other financial regulatory representatives 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 melancholy, and asked bluntly:

"How did we get to this point today?"

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

"This question is deafening."

The bankruptcy of Lehman Brothers eventually put Paulson, Bernanke and Bush in a dilemma and neither side was in the right place.

After Paulson and Bernanke reported on the bankruptcy of Lehman Brothers, they immediately proposed to the president a plan to urgently assist American International Group.

Bernanke's reason 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 withstand the bankruptcy of the company.

American International Group's assets exceeded $1 trillion, more than 50% more than Lehman Brothers, and it had more than 74 million corporate and individual customers worldwide.

More importantly, the company's main business itself is not a big problem, it can be said to be very high-quality, but its main problem is that its subsidiaries are involved in a large number of CDS.

Now that Lehman has collapsed, the large-scale compensation brought by the wave of defaults may cause AIG to go bankrupt immediately.

Bernanke said to Bush very seriously:

"Due to the deep connection between international business, once AIG 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 it is necessary to rescue AIG, and there is not much room for choice.

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

If AIG 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, that is, 'too big to fail'..."

The maid poured 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 larger the scale, the less likely it is to fall, right?"

"Yes, this can explain the impulse of those Wall Street investment banks to expand their own scale, especially those institutions that have lasted for hundreds of years. They try to extend their tentacles to all aspects of the entire economy and integrate with it..."

"But Lehman Brothers still went bankrupt..."

Barron heard Ivanta's words, raised his glass and clinked it with her, and said with a smile:

"Then it means it is not big enough."

The collapse of Lehman Brothers seems to have established the government's punitive attitude towards the market.

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

As for whether to rescue American International Group, Bush Jr. chose to trust Paulson and Bernanke's judgment and approach.

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

There, they had to explain to the difficult congressmen why they had to rescue American International Group.

Various difficult questions came, including one congressman asking whether the Federal Reserve had the right to lend money to an insurance company.

Generally, the Federal Reserve can lend money to banks and savings institutions, but 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, if five or more members of the Federal Reserve Board vote in favor, the Federal Reserve can lend to any individual, partnership or institution.

The meeting lasted for several hours, and the congressmen were already tired. They were more aware of the approaching crisis and did not raise too many objections to Bernanke and Paulson's approach.

After the meeting, Bernanke, exhausted, returned to the Federal Reserve office.

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 the Fed's rescue, certain conditions must be met.

Out of caution, Bernanke put forward very harsh conditions for American International Group.

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

The interest rate of the loan given by the Federal Reserve to American International Group is very high, and the proportion of shares after the capital injection will 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 feels extremely uneasy about this.

If this rescue operation fails, the market's trust in the Federal Reserve's ability to control crises will be devastating.

The Federal Reserve was born after the financial crisis in 1907, and its original intention was to avoid a wave of bank failures.

However, during the Great Depression, the function of the Federal Reserve 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 the history of the United States.

If it fails, can the Fed bear the responsibility?

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

The day after Lehman Brothers filed for bankruptcy, the Federal Reserve announced that it authorized the New York Fed to provide a loan of $85 billion to American International Group.

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 protected by bankruptcy...

The only two independent investment banks left, Goldman Sachs and Morgan Stanley, could only reluctantly ask the Federal Reserve to transform into a bank holding company.

The Federal Reserve approved the requests of the two investment banks on July 20.

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

In the end, Lehman Brothers became the only large financial institution that has not been rescued by the government and went bankrupt so far.

On July 20, Bush submitted a $700 billion financial rescue bill, which was passed by Congress on August 3.

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

At the same time, a meeting was held at the headquarters of Goldman Sachs Group at 200 West Street in Manhattan.

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

"The funds under the DS Group are willing to invest to help everyone through the difficulties. We need to act together to maintain the stability of the global financial industry. In this regard, the stability of Wall Street is particularly important."

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