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In addition to direct purchases of agencies and gse

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In addition to direct purchases of Agencies and GSE-backed MBS, the Fed supported mortgage markets by setting up various emergency liquidity facilities. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility, set up in March 2008, lent money to primary dealers, accepting Agencies and MBS as collateral. In September 2008, the Fed added the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility, which advanced short-term funding to banks -- again collateralized mostly by mortgage assets. At their peak, these three facilities provided $350 billion in advances. They were wound down in January 2009, whereas the direct purchases remain on the Fed balance sheet. 6.2. Why involve the Fed? It is true that the GSEs were simply too-big-to-fail (as we have explained in Chapter 4). In the midst of the financial crisis, they had to be bailed out, at least temporarily. The question is why didn’t the Treasury set up a special receivership, like the Resolution Trust Corporation set up after the Savings & Loan crisis in 1989, and instead why did the Fed balance sheet get involved so heavily? While the GSE situation was originally meant to be dealt with as a receivership (like a chapter 7 bankruptcy liquidation), the financial market conditions in the summer of 2008 made it clear that they would need – at least temporarily – conservatorships (more like a chapter 11 bankruptcy in which the bankrupt firm can continue in business). While no serious attempt was made to liquidate any of the GSEs’ holdings, to be fair, the Treasury was concerned this would just not work. It did attempt in the fall of 2008 to launch a Troubled Asset Relief Program to purchase the distressed real estate assets on the banks’ balance sheets. The plan to purchase – and eventually sell – the troubled assets lacked clarity and was later converted into a program that recapitalized bank holding companies against the purchase of senior preferred shares by the Treasury. A later attempt in March 2009 to launch a public-private investment program (PPIP) to purchase toxic assets from banks’ balance sheets also met with only mild success. But the six-
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80 month period after the collapse of Lehman Brothers was hardly the time to liquidate assets or hope to succeed in attracting huge pools of new capital for buying U.S. mortgage risk. A better plan would have been to combine the receivership and the temporary conservatorship ideas more directly, by employing a Resolution Trust Corporation (RTC)-style asset management company that would warehouse the troubled mortgage assets of the GSEs (and other failed or troubled private financial firms that had to be rescued). The company should have been pre-funded with a capital injection from the Treasury to weather the initial losses, but charged with the mandate of eventually – not immediately – liquidating these assets into markets through public-private partnerships of the type that was employed by the RTC. We provide more detail of such a GSE RTC in Chapter 8.
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