Working Paper: CEPR ID: DP7528
Authors: Pietro Veronesi; Luigi Zingales
Abstract: We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks? financial claims by $131 billion at a taxpayers?cost of $25 -$47 billions with a net benefit between $84bn and $107bn. 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 three former investment banks and Citigroup, while the loser was JP Morgan.
Keywords: bankruptcy; credit crisis; government intervention
JEL Codes: G08; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Paulson plan (H12) | increase in banks' financial claims (F65) |
| Paulson plan (H12) | reduction in probability of bankruptcy (G33) |
| reduction in probability of bankruptcy (G33) | increase in banks' financial claims (F65) |
| Paulson plan (H12) | reduction in perceived bankruptcy costs (G33) |
| bank run index (E44) | percentage increase in enterprise value (G32) |
| Paulson plan (H12) | increase in asset value (G19) |
| Paulson plan (H12) | increase in enterprise value (G32) |