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Paulson's gift

  • Veronesi, Pietro
  • Zingales, Luigi

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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File URL: http://www.sciencedirect.com/science/article/B6VBX-4YR8RM3-1/2/0ff05fd78dcad980f791c0452baa1f50
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  5. 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.
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  7. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
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