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Paulson's gift

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  • Veronesi, Pietro
  • Zingales, Luigi

Abstract

We calculate the costs and benefits of the largest ever US government intervention in the financial sector announced during the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks' financial claims by $130 billion (bn) at a taxpayers' cost of $21-$44 billion with a net benefit between $86 and $109Â bn. By looking at the limited cross section, we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the bondholders of the three former investment banks and Citigroup, while the losers were JP Morgan shareholders and the US taxpayers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 97 (2010)
Issue (Month): 3 (September)
Pages: 339-368

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Handle: RePEc:eee:jfinec:v:97:y:2010:i:3:p:339-368

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Banking crisis Bailout TARP;

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  1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Thomas Philippon & Philipp Schnabl, 2009. "Efficient Recapitalization," NBER Working Papers 14929, National Bureau of Economic Research, Inc.
  3. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October.
  4. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," NBER Working Papers 16151, National Bureau of Economic Research, Inc.
  5. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  6. Swagel, Phillip, 2009. "The financial crisis: an inside view," MPRA Paper 21104, University Library of Munich, Germany.
  7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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