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Are the Bailouts of Wall Street Complements or Substitutes?

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Abstract

The Term Securities Lending Facility (TSLF) lent $2.3 trillion worth of general collateral to 18 investment houses in exchange for riskier securities. Treasury collateral was in high demand in 2008 and 2009 as repo markets shunned lower quality collateral. This paper finds a negative and significant relationship between participating in the TSLF and having funds from the Troubled Asset Relief Program (TARP) and other Federal Reserve lending programs. Thus, it appears that the TSLF was a substitute for other bailouts. In addition, dealers with higher paid CEOs were more likely to borrow in the next TSLF auction cycle.

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Notes

  1. Because no dollars changed hands in the TSLF program, it had no effect on the money supply and was unrelated to open market operations, which involve the buying and selling of Treasuries with currency. The TSLF program only exchanged securities, and thus, it did not impact bank reserves as Flemming et al. (2009) explain.

  2. Board of Governors of the Federal Reserve, March 11, 2009, “Press Release, Federal Reserve Announces Expansion of Its Securities Lending Program,” accessed online on March 19, 2012, http://federalreserve.gov/newsevents/press/monetary/20080311a.htm.

  3. Board of Governors of the Federal Reserve, June 25, 2009, “Press Release, Federal Reserve Announces Extensions of and Modifications to A Number of Its Liquidity Programs,” accessed online on March 19, 2012, at http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm.

  4. Board of Governors of the Federal Reserve, January 27, 2010, “Press Release, January 26–27 Federal Open Market Committee meeting statement,” accessed online on March 19, 2012, http://www.federalreserve.gov/newsevents/press/monetary/20100127a.htm.

  5. Federal Reserve Bank of New York, March 20, 2008, “Press Release, New York Fed Announces Modifications to Terms and Conditions of Term Securities Lending Facility,” accessed online on March 19, 2012, at http://www.newyorkfed.org/newsevents/news/markets/2008/rp080320.html.

  6. Federal Reserve Bank of New York, June 25, 2009, “Term Securities Lending Facility: Program Terms and Conditions,” accessed online on March 19, 2012, at http://www.newyorkfed.org/markets/tslf_terms.html.

  7. Federal Reserve Bank of New York, March 20, 2008, “Press Release, New York Fed Announces Modifications to Terms and Conditions of Term Securities Lending Facility,” accessed online on March 19, 2012, at http://www.newyorkfed.org/newsevents/news/markets/2008/rp080320.html.

  8. Board of Governors of the Federal Reserve, September 14, 2008, “Press Release: Board Announces Several Initiatives to Provide Additional Support to Financial Markets,” accessed online on March 19, 2012, at http://www.federalreserve.gov/newsevents/press/monetary/20080914a.htm.

  9. This was prior to the passage of Housing and Economic Recovery Act (HERA) in July 2008. This act gave the U.S. Treasury secretary authority to inject funds into the government sponsored agencies (GSEs) Fannie Mae and Freddie Mac, signalling explicit federal support for their debt. Paulson (2010, pp. 155, 169–170) writes that he got to use the “bazooka” in the HERA legislation on the Sunday of Labor Day weekend, September 8, 2008, when the government began funding the restructured agencies with taxpayer dollars. At this point, schedule 1 collateral, agency debt, became much safer.

  10. Jeannine Aversa, December 1, 2010, “Fed Names Recipients Of Aid — Startling Report Documents Trillions Of Dollars Used To Prop Up Global Financial System,” Associated Press.

  11. See Bob Ivry, Bradley Keoun and Phil Kuntz, Nov 27, 2011, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” Bloomberg Markets Magazine, accessed online on March 19, 2012, at http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html.

  12. Wilson and Wu (2012) also found that the predictive power of total assets went away when controlling for CEO pay. That study also found that CEO pay was significant when total assets were not.

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Authors and Affiliations

  1. Department of Economics & Finance, B. I. Moody III College of Business, University of Louisiana at Lafayette, 214 Hebrard Boulevard, Moody Hall 253, P. O. Box 44570, Lafayette, LA, 70504-4570, USA

    Linus Wilson

  2. Department of Economics, School of Business and Economics, Wilfrid Laurier University, 75 University Avenue West, Waterloo, ON, Canada, N2L 3C5

    Yan Wendy Wu

  3. Department of Economics & Finance, B. I. Moody III College of Business, University of Louisiana at Lafayette, 214 Hebrard Boulevard, Moody Hall 326, P. O. Box 44570, Lafayette, LA, 70504-4570, USA

    Stephanie Prejean

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  1. Linus Wilson
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  2. Yan Wendy Wu
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Correspondence to Linus Wilson.

Appendixes

Appendixes

Appendix A: List of Primary Dealers Eligible for the TSLF

Table 5 Eligible primary dealers for the Term Securities Lending Fund (TSLF)
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Appendix B: Marginal Effects of the Logistic Regressions

The logistic model generates probabilities that an investment bank participates in the TSLF. Let x be a column vector of independent variables X 1,…,X N , where N is an integer greater than 1, and b is a row vector of coefficients b 1 ,…,b N for the independent variables. Let us assume that the estimated intercept coefficient is α. If the independent variable is denoted by the variable Y, then the probability of receiving TARP funds is p(Y = 1|x) below:

$$ p\left(\left.Y=1\right|x\right)=\frac{1}{1+ \exp \left(-\alpha - bx\right)} $$
(1)

To find the marginal effects of a change in the independent variable Xj, where N ≥ j ≥ 1 we need to differentiate Eq. (1) with respect to Xj. That simplifies to the following expression:

$$ \begin{array}{c}\hfill \frac{ dp\left(\left.Y=1\right|x\right)}{d{X}_j}\kern0.5em ={b}_jp\left(\left.Y=1\right|x\right)\left[1-p\left(\left.Y=1\right|x\right)\right]\hfill \\ {}\hfill ={b}_j\frac{ \exp \left(-\alpha - bx\right)}{{\left(1+ \exp \left(-\alpha - bx\right)\right)}^2}\hfill \end{array} $$
(2)

In Tables 6 and 7, we have reported the marginal effects for Tables 3 and 4. Since the marginal effects in the logistic model are dependent on the values of all the independent variables, we have chosen the mean values of the independent variables from the summary statistics in Table 1.

Table 6 Marginal effect of Term Securities Lending Fund (TSLF) participation
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Table 7 Marginal effect of Term Securities Lending Fund (TSLF) participation controlling for CEO pay
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Wilson, L., Wu, Y.W. & Prejean, S. Are the Bailouts of Wall Street Complements or Substitutes?. Atl Econ J 42, 21–38 (2014). https://doi.org/10.1007/s11293-013-9395-x

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