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36 Iowa J. Corp. L. 869, Summer 2011
Author: Brent J. Horton
In 2008 the housing bubble burst, and those financial companies that invested
in mortgage-backed securities (MBS) faced insolvency as their MBS became
worthless. Secretary of the Treasury Henry Paulson recalls:
Credit markets froze, and banks substantially reduced interbank lending.
Confidence was seriously compromised throughout our financial system. Our
system was on the verge of collapse, a collapse that would have significantly
worsened and prolonged the economic downturn that was already underway. That
was the background against which Chairman Ben Bernanke and I met with the
congressional bipartisan leadership to request emergency legislation. We needed
the financial rescue package so we could intervene, stabilize our financial
system, and minimize further damage to our economy.
As reflected in his remarks, 2008 marked a decision point for Paulson. Should
he bail out America's financial institutions, or allow them to go bankrupt? He
decided to bail them out, and Congress acquiesced, passing the Emergency
Economic Stabilization Act (EESA) and the component Troubled Asset Relief
Program (TARP). Pursuant to TARP, some financial companies received a direct
federal cash infusion from the Treasury to increase liquidity, including
Goldman Sachs, Morgan Stanley, and Wells Fargo. Others received an indirect
bailout, such as when the Treasury arranged for the purchase of Merrill Lynch
by Bank of America. [footnotes omitted]
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