Understanding the Credit Crisis Part 2: Getting Down the Mountain
Published by The Brattle Group, Inc.
Everyone in the securities business knows that it is easy to buy securities at rich prices but hard to sell them that way. The U.S. Treasury (Treasury) and the Federal Reserve (Fed) now have plenty of selling to do. Since the crest of the credit crisis in late 2008, the Treasury has taken equity positions in almost 700 government-sponsored enterprises (GSEs), banks, financial institutions, and automobile manufacturing companies.
In a parallel initiative that dwarfs the Treasury’s investments, the Fed has extended approximately $1.1 trillion in credit by making loans and buying financial instruments beyond its traditional investments in Treasury bills, notes, and bonds. This was the climb up the credit mountain.
This newsletter reviews the size and composition of both Treasury equity investments and Fed credit programs, outlines alternative mechanisms the Treasury and Fed can use to liquidate their positions, and speculates on the price impacts of the alternative liquidation methods. One conclusion is clear: no easy route down the credit mountain exists, and some routes are fraught with peril.
