Academic journal article Atlantic Economic Journal

Are the Bailouts of Wall Street Complements or Substitutes?

Academic journal article Atlantic Economic Journal

Are the Bailouts of Wall Street Complements or Substitutes?

Article excerpt

Introduction

This is the first study to find evidence that the various bailouts of Wall Street were substitutes for one another. We find that assistance from the Federal Reserve's emergency lending programs and discount loans or the Troubled Asset Relief Program (TARP) bailouts were associated with a significantly lower chance that a major investment bank would borrow U.S. Treasuries from the Federal Reserve through its Term Securities Lending Fund (TSLF). This contradicts the previous findings of Wilson and Wu (2011a, b) which found that TARP recipients were significantly more likely to sell commercial paper to the Federal Reserve and accept FDIC debt guarantees during the crisis years of 2008 and 2009.

We think that, in part, the difference in our results stems from the way our paper measures TARP participation. Prior studies looked at whether or not a bailout participant ever participated in an emergency program or TARP. Instead, our measure of participation is whether or not TARP money was received prior to receiving a TSLF loan. The way the present study is conducted is more conducive to showing how the sources of funding can be substitutes. TARP recipients may be more likely to receive other forms of government assistance at some point, as prior studies have argued, but TARP recipients may slack off on other emergency forms of assistance while they have TARP capital injections. Prior work showed that firms receiving bailouts were more likely to get multiple bailouts. In contrast, this study shows that when such firms have access to multiple bailouts, they may cut back on one source of bailout financing if they tap more of another bailout fund.

In addition, this is the first study to test how CEO pay was associated with the propensity for firms to obtain the Federal Reserve's emergency assistance. We find that higher stock and total compensation is significantly positively correlated with obtaining TSLF emergency loans.

This is the first paper to examine which factors are associated with the likelihood of participating in the Federal Reserve's TSLF program. This program lent out securities worth in excess of $2.3 trillion dollars. (1) Thus, this paper adds to a growing literature analyzing the propensity for firms to take emergency loans from the Fed during the financial crisis. Wilson and Wu (2011a) and Duygan-Bump et al. (2013) are other examples of papers that have looked at the likelihood of potential Federal Reserve bailout recipients' accepting of Fed assistance. Those papers studied the Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), respectively.

The TSLF and the CPFF dwarfed the much-studied bank investment program, the Capital Purchase Program (CPP), of the TARP in terms of the value of loans extended. The TSLF and CPFF extended loans of $2,319 billion and $738 billion, respectively. The TARP CPP bank investment program only passed out $205 billion. Even the relatively "small" AMLF extended loans in excess of the funds committed from the CPP. It passed out $217 billion; yet, numerous studies have analyzed the propensity of banks to participate in the smaller TARP CPP. Examples of these studies are Bayazitova and Shivdasani (2012), Cadman et al. (2012), Cornett et al. (2013), Duchin and Sosyura (2012), Li (2011), Ng et al. (2010), and Taliaferro (2009).

The Fed's TSLF program auctioned loans of up to $200 billion of U.S. Treasury securities per month to primary dealers since its inception in March 2009 through August 2009. (2) At any given time, there are about 20 primary dealers who trade with the New York Federal Reserve as part of the Federal Reserve's open market operations. Primary dealers generally are the largest securities dealers and investment banks. The TSLF loans were collateralized loans in which dealers exchanged less liquid and potentially riskier collateral for U. …

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