Connectedness and Contagion Protecting the Financial System from Panics Hal S Scott The MIT Press Cambridge, Massachusetts London, England © 2016 Hal S Scott All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher This book was set in Palatino LT Std by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data Names: Scott, Hal S., author Title: Connectedness and contagion : protecting the financial system from panics / Hal S Scott Description: Cambridge, MA : The MIT Press, 2016 | Includes bibliographical references and index Identifiers: LCCN 2015039900 | ISBN 9780262034371 (hardcover : alk paper) eISBN 9780262332149 Subjects: LCSH: Financial crises—History—21st century | Global Financial Crisis, 2008–2009—Government policy | Global Financial Crisis, 2008–2009 Classification: LCC HB3722 S385 2016 | DDC 339.5/3—dc23 LC record available at http://lccn.loc.gov/2015039900 10 9 8 7 6 5 4 3 2 1 To all of those who so successfully fought the panic created by the financial crisis of 2008 Table of Contents Title page Copyright page Dedication Acknowledgments Introduction I Connectedness, Contagion, and Correlation: Definitions and a Review of the Economic Literature 1 The Concept of Connectedness 2 The Concept and History of Contagion 3 The Concept of Correlation II Connectedness in the Crisis 4 Asset Connectedness: Lehman and AIG 5 Liability Connectedness: Money Market Funds and Tri-Party Repo Market 6 Dodd–Frank Act Policies to Address Connectedness III Contagion 7 Contagion in the 2008 Crisis: The Run on the Nonbank Sector, “Shadow Banks” 8 History of Lender of Last Resort in the United States 9 Dodd–Frank Restrictions on the Lender-of-Last-Resort Power 10 Comparison of LLR Powers of Fed with Bank of England, European Central Bank, and Bank of Japan 11 Strengthening the LLR Powers of the Fed 12 Liability Insurance and Guarantees 13 Insuring Money Market Funds IV Ex ante Policies to Avoid Contagion: Capital, Liquidity, Resolution, Money Market Mutual Fund Reform, and Limits on Short-Term Funding 14 Capital Requirements: Basel III Framework 15 Liquidity Requirements 16 Bank Resolution Procedures, Contingent Capital (CoCos), and Bail-Ins 17 Dodd–Frank Orderly Liquidation for Nonbank SIFIs (Including Bank Holding Companies) 18 Living Wills 19 Money Market Mutual Fund Reform 20 Dependence of the Financial System on Short-Term Funding 21 Government Crowding Out of Private Issuance of Short-Term Debt V Public Capital Injections into Insolvent Financial Institutions 22 Capital Purchase Program and Other TARP Support Programs 23 Criticisms of Bailouts Generally 24 Specific Criticisms of TARP 25 Standing Bailout Programs 26 Conclusion Appendix Index List of Tables Table 4.1 Projected recoveries of key creditors under modified third amended plan (USD in billions) Table 4.2 Claims filed against LBHI and affiliated Chapter 11 debtors (USD in billions) Table 4.3 AIG’s CDS portfolio (USD billions) Table 4.4 Maximum losses on multi-sector CDS relative to equity (USD billions) Table 4.5 Regulatory capital relief recipients (USD billions) Table 5.1 Select US financial institutions’ reliance on US prime money market mutual funds in June 2007 Table 6.1 Federal Reserve: Banking organization systemic risk report Table 7.1 Assets and liabilities of major US commercial and investment banks, 2008 (USD millions) Table 7.2 Government responses to contagion Table 8.1 First Bank holdings, 1801 Table 10.1 Table 12.1 Deposit and nondeposit US financial system liabilities, 1950 to 2014 Table 12.2 DIF assessment rates Table 12.3 Eligibility of branches and subsidiaries of foreign banks in selected US stabilization programs Table 14.1 Basel III capital requirements provisional phase-in schedule Table 14.2 Estimated scores and surcharges Table 14.3 Large US bank capital ratios in 2007 Table 16.1 Illustrative bail-in of Citigroup balance sheet as of December 31, 2008 (USD millions) Table 16.2 Illustrative bail-in of Citigroup under IIF proposal with subordinated debt only (USD millions) Table 17.1 Top 10 US bank holding company subsidiary data on loans to subs (USD millions)a Table 20.1 Level of runnable short-term debt Table 22.1 Standardized investment terms under the Capital Purchase Program Table 22.2 Remaining financial-crisis TARP commitments as of Jan 2015, reproduced per GAO update (apart from housing programs) Table 24.1 International CPP comparison List of Illustrations Figure 4.1 Representative LBHI senior unsecured bond trading prices Sourced from Bloomberg Figure 4.2 LBHI senior unsecured bond trading prices before and after the filing Sourced from Bloomberg Figure 7.1 Seasonally adjusted commercial paper outstanding (in USD billions) and [Functions: FCPONCS, FCPOFCS, FCPOAB] Source: Bloomberg Terminal, Bloomberg LP Figure 17.1 Recapitalization example Figure 17.2 Capital downstream example Figure 20.1 Intermediation chain in repo transaction Acknowledgments This book has been made possible through the efforts of many individuals C Wallace DeWitt, Eric M Fraser, John Gulliver, Brian A Johnson, Jacqueline C McCabe, each a former Research Director of the Committee on Capital Markets Regulation, and Jacob Weinstein, Senior Advisor to the Committee, worked on early drafts of a paper from which this book evolved Matthew Judell and Megan Vasios, each a Research Fellow at the Committee on Capital Markets Regulation, also contributed to this book I particularly appreciate the significant support and outstanding work provided by the following research assistants, each of whom assisted in drafting significant portions of earlier versions of this book: Ledina Gocaj, Adam Jenkins, Conor Tochilin, Yuli Wang, and Peter Zuckerman In addition, research assistants Pam Chan, Weiwei Chen, Elaine Choi, Joseph Costa, Michael DiRoma, Katrina Flanagan, Brent Herlihy, Carys Johnson, Paul Jun, Tsz hin Kwok, Hye Kyoung Lee, Steven Li, Brice Lipman, Sai Rao, Jeffrey Scharfstein, and David Willard provided general assistance Also thanks to Roel Theissen for his work on the European Union This study arose from a broader review of issues in financial regulatory reform conducted by the Committee on Capital Markets Regulation in the wake of the 2008 financial crisis, the first stage of which resulted in a report (The Global Financial Crisis: A Plan for Regulatory Reform) released in May 2009 The views expressed in this book are my own and not necessarily represent the views of the Committee on Capital Markets Regulation or any of its individual members Any errors are, of course, mine Introduction This book is concerned with the fundamental stability of our financial system upon which the viability of our economy, and ultimately our polity, rests In the 2008 financial crisis we witnessed a severe plunge in real estate prices—the Case Shiller National Home Price Index stood at 184.62 in July 2006, but by September 2008 it had fallen to 161.95 It eventually fell as low as 134.03 in 2012.1 This decline in housing prices was unprecedented; before 2006, the index had never declined by more than five points over a three-year period.2 The Moody’s/RCA Commercial Property Price Index for US commercial real estate experienced a similar fall, peaking at 173 in the fourth quarter of 2007 and declining to 104 in the fourth quarter of 2009.3 These declines led to significant losses for financial institutions exposed to residential mortgages and commercial real estate Five of the twenty largest US financial institutions either became insolvent— Washington Mutual, Lehman Brothers, and AIG (at least the holding company)—or were acquired with government assistance—Bear Stearns and Wachovia.4 The IMF estimated total losses to be $4.1 trillion.5 GDP growth fell from positive 5.12 percent in 2006 to negative 0.92 percent in 2008 and negative 0.11 percent in 2009, putting the US economy into recession.6 This book demonstrates that “contagion,” not “connectedness,” was the most potentially destructive feature of the 2008 financial crisis Connectedness occurs when financial institutions are directly overexposed to one another and the failure of one institution would therefore directly bankrupt other institutions, resulting in a chain reaction of failures Contagion is a different phenomenon It is an indiscriminate run by short-term creditors of financial institutions that can render otherwise solvent institutions insolvent due to the fire sale of assets that are necessary to fund withdrawals and the resulting decline in asset prices triggered by such sales Contagion indeed remains the most virulent and important part of systemic risk still facing the financial system today This is because, as set forth throughout this book, our financial system still depends on approximately $7.4 to $8.2 trillion of runnable and uninsured short-term liabilities—defined as liabilities with a maturity of less than one month, with about 60 percent of these liabilities held by nonbanks The losses and the impact on our economy and country in September 2008 would have been much worse but for the response of our government to halting the contagion that broke loose following the bankruptcy of Lehman Brothers However, since then the Congress has dramatically weakened the Federal Reserve, FDIC, and Treasury’s ability to respond to contagion, leaving our financial system sharply exposed to another contagion The Federal Reserve was created in 1913 to stem such panics, which were rife in the nineteenth century and culminated in the panic of 1907, by acting as a lender of last resort After the bank runs experienced in the Depression of 1933, Congress created the Federal Deposit Insurance Corporation (FDIC) to guarantee deposits These two powers were used extensively during the 2008 crisis The Fed supplied liquidity to the banking and nonbanking financial sector, the latter through its authority under Section 13(3) of the Federal Reserve Act The FDIC expanded the scope and amount of deposit insurance In addition, the US Treasury offered temporary guarantees to money market funds And finally, TARP was enacted to infuse public capital into the banking system, beginning with the nine largest banks In the aftermath of the crisis, the use of these powers has been called into question as contributing to moral hazard—giving institutions the incentive to take on risk—and as constituting undesirable public bailouts of insolvent institutions In fact some members of Congress believe that public funds in any form should not be used to support the private sector, including financial institutions As a result of these concerns, the Fed’s and FDIC’s powers were pared back by the Dodd–Frank Act of 2010, and in the case of the Treasury’s temporary guarantee to money market funds, by TARP The Fed’s powers to loan to nonbanks under 13(3) can now only be used with the approval of the Secretary of Treasury, the Fed can only loan to nonbanks under a broad program (not to one institution as it did in the case of AIG), and nonbanks must meet heightened collateral requirements The Fed now ranks fourth to its central bank peers—the Bank of England, the European Central Bank, and the Bank of Japan—in its powers to act as lender of last resort The FDIC and the Treasury cannot on their own, without prior congressional approval or new authority, expand guarantees The authority to make public capital injections, even to address widespread insolvency that could seize up the banking system and real economy, has expired with the expiration of TARP The contraction of powers, which former Secretary Timothy Geithner calls barely adequate in his book Stress Test, puts us at severe risk in dealing with the next financial crisis Secretary Geithner states: “We went into our crisis with a toolbox that wasn’t exactly empty, but also wasn’t remotely adequate for our complicated and sprawling modern financial system … What should be in the toolbox? The vital tools are: an ability to extend the lender-of-last-resort authority to provide liquidity where it’s needed in the financial system; resolution authority … and, along with deposit insurance … broader emergency authority to guarantee other financial liabilities.”7 Or consider this quote from former Secretary of the Treasury Paulson: Dodd–Frank falls short in other areas … Congress has also removed some of the most creative and effective tools used to stave off collapse In order to provide greater Congressional control, Dodd–Frank limits regulator discretion in times of crisis In one respect, of course, that’s all to the good Congress is responsible to our citizens, so it’s encouraging to see the focus on taxpayer protection The bank rescues were a source of public outrage, so it is understandable that Congress would take steps to ensure that failing institutions not be propped up in their present form But some of the powers that Congress limited or constrained, such as some Federal Reserve lending authorities or the FDIC guarantee authority, were rarely used, if ever Emergency measures such as we used to stem the crisis should be employed only when we are facing the economic equivalent of war, and the president and two-thirds financial institutions (SIFIs) capital requirements surcharges for, 172–73 total loss absorption capacity (TLAC), 208–209 GMAC, 270 Goldman Sachs, 9, 31, 48, 74–75, 238, 252 AIG and, 45 loans to nonbank affiliates, 104 Moody’s downgrade of, 270 repo market and, 57 S&P downgrade of, 269 Golub, Benjamin, 295–96 Goodhart, Charles, 119, 270 Gorton, Gary, 12, 13 Government responses to 2008 contagion, 75–78 Great Depression, 7, 106, 146–47, 229, 253 Greece, 119, 174 Greenwood, Robin, 239, 250 Haldane, Andrew G., 175, 295, 298 Hamilton, Alexander, 80 Hanson, Samuel G., 164, 239, 250 Hardest Hit Fund, 261–62 Hensarling, Jeb, 95, 102 Herding behavior, 15 Hoenig, Thomas, 221 Hoover, Herbert, 91 Hortacsu, Ali, 12 Housing programs, TARP, 261–62 HSBC, 38 ICI, 162–63 IMF Global Financial Stability Report, 178, 235 Indiscriminate runs, 67–68 Informational cascades, 10 Information economics, 12–13 Institute of International Finance (IIF), 180, 198 Insurance See Liability insurance and guarantees Interbank lending and repos during the 2008 crisis, 73–74 Interconnectedness, measure of, 14 Interest on excess reserves (IOER), 242–44 impact on private short-term debt issuance, 243–44 International Organization of Securities Commissions, 150 International Swaps and Derivatives Association (ISDA), 36–37 Investment banks during the 2008 crisis, 74–75 Investment Company Act of 1940, 142 Investment Company Institute, 55, 228 IOER See Interest on excess reserves (IOER) Jackson, Andrew, 80, 87–88 Jackson, Matthew, 295–96 Japan See also Bank of Japan (BOJ) bailout programs, 281–84 lost decade, 267–68 Jefferson, Thomas, 83–84 Jones, William, 85 JPMorgan, 8–9, 21, 74, 200, 214, 215 Bear Stearns and, 147 complexity of subsidiaries of, 219 derivatives claims against Lehman, 39–40 Moody’s downgrade of, 270 repo market and, 57 share of bank-held derivatives in 2008, 38 S&P downgrade of, 269 Kapadia, Sujit, 298 Kaufman, George, 219 Kaupthing Bank, 33 Kodres, Laura, 300 Korea Development Bank, 21 Kuritzkes, Andrew, 220 Lacker, Jeff, 135 Laevan, Luc, 88–89 Landsbanki Bank, 33 LaSalle Re Holdings Ltd., 190 Lastra, Rosa, 119 LCH.Clearnet, 40 Lehar, Alfred, 302 Lehman Brothers, 3, 17, 53–54, 103, 147, 202, 215, 251, xv, xvi See also 2008 crisis “Big Bank” derivatives claims and recoveries, 36–47 bonds, 28, 32, 33–35 collapse and bankruptcy, 19–24 comparison to AIG, 41–47 complexity of subsidiaries of, 219 contagion after bankruptcy of, 71–75 credit default swaps (CDS), 30–31, 32–35 debt to the Federal Reserve, 90–91 derivatives counterparties, 28–29 double filing of claims against, 27 examining effects of collapse on different counterparties, 24–25 exchange-traded derivatives portfolio, 28, 31–32 firms affected by collapse of, First Amended Plan, 27 International (Europe), 22, 47–48 minibonds, 50 Modified Third Amended Plan, 23, 25–29 money market funds, 50–52 OTC derivative portfolio, 28, 35–36 prime brokerage clients, 47–48 SpinCo spinoff, 20–21 structured securities, 48–50 third-party creditors affected by Lehman Brothers Treasury Co N V., 28–29 Lender(s) of last resort (LLR), 79–80 ability to lend to nonbanks and supervisory authority, 130 Bank of England as, 79–80, 109–16 Bank of Japan as, 122–26 collateral accepted by, 131 comparison of powers of four central banks as, 126–36 disclosure requirements, 134–35 European Central Bank as, 116–22 Federal Reserve as, 89–92, 288–89 First and Second National Banks as, 80–88 independence, 126–30 money market funds and, 142–43 need for “broad program regime structure, 130–31 solvency requirements, 131–33 strengthening powers of, 137–44 treasury approval or direction and, 133–34 using discount window proceeds to lend to affiliates, 135–36 Leverage ratio approach to capital requirements, 174–76 Lewis, Ken, 21 Liability connectedness, literature review, 297–300 money market funds and, 54–55 through reliance on common pool of liquidity, 299–300 tri-party repo market and, 55–58 Liability insurance and guarantees See also Federal Deposit Insurance Corporation (FDIC) during a crisis, 157 Dodd–Frank and, 145–48 international challenges, 157–58, 159 levels, 148–51 money market fund, 229–30 for money market funds, 161–65 pricing, 151–56 LIBOR rate during the 2008 crisis, 73–74 Liquidity fees, money market fund, 227–29 Liquidity requirements, 183–84, 290, xviii–xx Basel, 185–88 liquidity coverage ratio, 185–86 money market funds, 224–25 US implementation of Basel, 186–88 Literature reviews asset interconnectedness, 295–97 correlation, 301–302 liability connectedness, 297–300 Living wills, 219–22 LLR See Lender(s) of last resort (LLR) Lo, Andrew W., 14, 301 Lombard Street: A Description of the Money Market, 79 Long-Term Credit Bank of Japan, 267 Long-term refinancing operations (LTROs), 121–22 LTROs See Long-term refinancing operations (LTROs) Macey, Jonathan R., 146 Madison, James, 80, 83–84 Making Home Affordable (MHA), 261–62 Market signals and capital requirements, 180–81 Martin, Antoine, 233 Mason, Joseph, 7, 12 Matvos, Gregor, 12 McDonald, Robert, 42 Meltzer, Allan, 96 Merrill Lynch, 74, 238 Merton, Robert, 155 MetLife, 63 Metrick, Andrew, 12 Miller, Geoffrey P., 146 Miller, Harvey, 73 Minibonds, 50 MKM Longboat Capital Advisors, 47 MMFs See Money market funds (MMFs) Monetary Control Act of 1980, 90 Money market funds (MMFs) capital requirements, 229 end of public institutional prime, 230 enhanced liquidity requirements, 224–25 floating NAV reform, 225–27 insurance, 229–30 insuring, 161–65 Lehman Brothers and, 50–52, 53–54 liability connectedness and, 54–55 liability insurance and, 150 liquidity fees and redemption gates, 227–29 proposal to open lender-of-last resort facilities to, 142–43 reforms, 223–30 response to Lehman bankruptcy filing, 71–72 Money Market Investor Funding Facility (MMIFF), 223 Moody’s Investors Service, 201, 269–70 Moody’s/RCA Commercial Property Price Index, xv Moral hazard creation by bailouts Morgan, J P., 89 Morgan Stanley, 9, 24, 48, 74–75, 252 Moody’s downgrade of, 270 repo market and, 57 S&P downgrade of, 269 Mortgages, residential, 29 Multiple equilibria, 10–11 Multiple-point-of-entry (MPOE) approach, 217 National Bank Act of 1864, National Banking Era, National Central Banks (NCBs) disclosure requirements, 134–35 ECB and European Commission authority to restrict, 119–20 ECB monetary policy operations and, 120–21 ECB purchasing programs and, 122 emergency liquidity assistance to, 116–19 independence, 126–30 solvency requirements, 131–33 NAV government funds, 161–62 Net stable funding ratio (NSFR), 186 Network theory, 297–300 Nippon Credit Bank, 267 Nonbank financial institutions, See also Orderly Liquidation Authority (OLA) Bank of England ELA assistance to central banks abilities to lend to, 130 contagion effects on, 68 Federal Reserve assistance of, 92 limits on banks using proceeds of discount window loans to make loans to, 103–104 loan origination by, 68–69 vulnerability to runs, 69–71 Northern Rock, 120, 275 Obama, Barack, 98, 265–66 Office of Financial Research (OFR), 164–65 Office of the Comptroller of the Currency (OCC), 36 OFR See Office of Financial Research (OFR) OLA See Orderly Liquidation Authority (OLA) Olivant Ltd., 47 OMT See Outright Monetary Transactions (OMT) Option pricing, 154–55 Orderly Liquidation Authority (OLA), 100, 132, 195, 198, 203, 280, 290–91 derivatives contracts, 215–16 general design of, 205–208 international coordination problems, 216–17 recapitalization of operating subsidiaries, 210–14 total loss absorption capacity (TLAC), 208–209 Ordoñez, Guillermo, 13 OTC derivatives See Derivatives, Lehman Brothers Outright Monetary Transactions (OMT), 122, 139 Overman Act, 96 Ozdaglar, Asuman, 295 Palmer, Horsley, 86 Panicked runs, 9–12, 237 Paulson, Anna, 42 Paulson, Henry, 21, 99, 251, 252, 254, xvii PDCF See Primary Dealer Credit Facility (PDCF) Pedersen, Lasse H., 14, 299, 301, 302 Pelizzon, Loriana, 14, 301 Philippon, Thomas, 14, 301 Pop, Adrian, PPIP See Public-Private Investment Program (PPIP) Preferred stock, 253–54 President’s Working Group on Financial Markets (PWG), 161, 163, 164, 229–30 Pricing, liability insurance, 151 ex ante, 151–54 ex post, 155–56 option, 154–55 Primary Dealer Credit Facility (PDCF), 21, 75 Prime brokerage assets, LBIE, 47–48 Prudential, 63 Public-Private Investment Program (PPIP), 258–60 Public short-term debt crowding out by the Federal Reserve, 241–48 crowding out by the Treasury, 239–41 PWG See President’s Working Group on Financial Markets (PWG) Quantitative Impact Study (QIS), 209 Rajan, Raghuram, 250 RBS, 275 Recapitalization of operating subsidiaries, 210–14 Reconstruction Finance Corporation (RFC), 253 Red Book, Bank of England, 110–11, 112, 115 Redemption gates, money market fund, 227–29 Reinhart, Carmen, 302 Reserve Primary Fund (RPF), 9, 50–51, 72–73, 162 Residential mortgage loans, 29 Resolution procedures See also Bailouts contingent convertible capital instruments (CoCos), 190–94 creditor bail-in, 194–203 derivatives contracts, 215–16 international coordination problems, 216–17 living wills, 219–22 recapitalization of operating subsidiaries, 210–14 single-point-of-entry approach to, 206–208, 216 total loss absorption capacity (TLAC), 208–209 Reverse repo program (RRP), 242–44 adverse consequences of partial and full crowding out via, 247–48 impact on private short-term debt issuance, 243–44 potential conflicts between monetary policy and increasing size of, 245–46 size of, 244–45 Revolutionary War, 81 Richardson, Matthew, 14, 301 Risk-weighted assets (RWA), 170–72 Rogoff, Kenneth, 302 Rosengren, Eric, 138 Royal Bank of Scotland, 119 RPF See Reserve Primary Fund (RPF) RRP See Reverse repo program (RRP) Runs information economics and, 12–13 money market mutual fund, 223 panicked, 9–12 reducing incentives for, 40–41 of short-term creditors, 67–68 RWA See Risk-weighted assets (RWA) Schapiro, Mary, 229 Scharfstein, David S., 54, 164, 301–202 Schoenmaker, Dick, 119 Schultz, Frederick H., 97 Schwartz, Anna, 11 SEC See Securities and Exchange Commission (SEC) Second Bank of the United States, 80–82, 84–88 Secretary of the Treasury approval requirements under Dodd–Frank, 96–100 Securities and Exchange Commission (SEC), 132, 161, 178, 223, 224, 227, xix Securities Investor Protection Act of 1970, 23, 47 Securitized banking system, 68 Shadow banking sector, 68 Shafik, Minouche, 110 Shin, Chaehee, 12 Short-term funding caps on, 236–37 contagion vulnerability and, 67–68, 231 during the 2008 crisis, 74–75 gross funding, 232–34 importance of, 235–36 indirect limits on, 237–38 IOER and RRP impact on private, 243–44 net funding, 234 quantifying, 231–36 SIFIs See Systemically important financial institutions (SIFIs) Single-point-of-entry (SPOE) approach, 206–208, 216 Single Resolution Fund (SRF), 279–80 Single Resolution Mechanism (SRM), 279–80 SMF See Sterling Monetary Framework (SMF) Solvency requirements, central banks and, 131–33 Special Inspector General for the Troubled Asset Relief Program (SIGTARP), 272 SpinCo, 20–21 SRF See Single Resolution Fund (SRF) SRM See Single Resolution Mechanism (SRM) Standard & Poor’s, 28, 269 Standby Financing Facility, 140 Standing bailout authority, 284–85 Steagall, Henry, 146 Stein, Jeremy C., 239, 250, 301–302 Stein, Kara, 228 Sterling, William, Sterling Monetary Framework (SMF), 110–11 acceptable collateral and, 111–12 Stress Test, 94, 98 Stress tests, 176–77 Summer, Martin, 302 Sunderam, Adi, 164 Sunspots, economic, 10 Swiss National Bank, 77 Systemically important financial institutions (SIFIs), 15, 62–64, 164, 220, xvii See also Dodd–Frank Act of 2010; Global systemically important US banks (G-SIBs) Systemic expected shortfall (SES), 14, 301 Systemic risk measures of, 14, 300–301 mitigating contagion problems by reducing, 40–41 Syverson, Chad, 12 Tahbaz-Salehi, Alireza, 295 TALF See Term Asset-Backed Securities Loan Facility (TALF) Talley, Eric, 249, 270 Taney, Roger, 88 Targeted Investment Program (TIP), 258 TARP See Troubled Assets Relief Program (TARP) Tarullo, Daniel, 236 Taxpayer losses due to bailouts, 265–67 T-bills, 239–41 Temporary Liquidity Guarantee Program (TLGP), 75 Term Asset-Backed Securities Loan Facility (TALF), 76, 260 Term Securities Lending Facility, 75–76 Terrorism Risk Insurance Act (TRIA) Third-party creditors of Lehman Brothers, 25–30 TIP See Targeted Investment Program (TIP) TLAC See Total loss absorption capacity (TLAC) Too-big-to-fail institutions competitive advantage, 268–70 designation, 179 Total loss absorption capacity (TLAC), 208–209 Transaction Account Guarantee Program (TAGP), 76, 145 Treasury, US, xvi–xvii See also Capital injections; Federal Reserve; Troubled Assets Relief Program (TARP) Treaty on the Functioning of the European Union (TFEU), 121 Tri-party repo market and liability connectedness, 55–58 Troubled Assets Relief Program (TARP), 76, 134, 251–52, 292–93, xvi–xvii comparisons with foreign bailout efforts in 2008 crisis, 275–76, 277–78 creation of moral hazard, 269 design of, 252–55 expiration and wind-down of, 255–60 failure to boost lending activities, 271–72 housing programs, 261–62 interference with firm operations, 274–75 lack of enforcement of CPP’s contractual terms, 275 politics and, 270–71 taxpayer cost for, 265–66 too favorable terms for CPP participants, 273–74 Treasury purchase of AIG shares under, 42 Tucker, Paul, 105 Tuckman, Bruce, 141 2008 crisis See also Lehman Brothers Federal Home Loan Bank system role, 77–78 government responses to, 75–78 interbank lending and repos, 73–74 investment banks and, 74–75 Lehman bankruptcy and, 71–75 money market funds and commercial paper markets in, 71–72 real estate prices and, 287–88 UBS, 47, 179 United Kingdom See Bank of England (BOE) Upper, 296 Valencia, Fabian, 88–89 Venkataraman, Sriram, 12 Vickers report, 135 Vitter, David, 132, 178–79 Volcker, Paul, 80 Wachovia, 9, 74, xv share of bank-held derivatives in 2008, 38 Walker, Michael, 233 War of 1812, 81, 84 Warren, Elizabeth, 95, 102, 132 Washington, George, 80 Washington Mutual, 9, 74, xv Welch, Ivo, 249, 270 WellPoint, 73 Wells Fargo, 9, 74 S&P downgrade of, 269 Wolf, Martin, Yang, Jian, Yellen, Janet, 95 Y2K computer glitches, 140–41 Zhou, Yinggang, .. .Connectedness and Contagion Protecting the Financial System from Panics Hal S Scott The MIT Press Cambridge, Massachusetts London, England © 2016 Hal S Scott All rights... author Title: Connectedness and contagion : protecting the financial system from panics / Hal S Scott Description: Cambridge, MA : The MIT Press, 2016 | Includes bibliographical references and index... Definitions and a Review of the Economic Literature 1 The Concept of Connectedness 2 The Concept and History of Contagion 3 The Concept of Correlation II Connectedness in the Crisis 4 Asset Connectedness: