DP7528 Paulson's Gift

Author(s): Pietro Veronesi , Luigi Zingales

Publication Date: November 2009

Keyword(s): government intervention , bankruptcy , credit crisis

JEL(s): G08 , G21 , G28

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP7528.asp

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.