Too Big to Bail: The "Paulson Put," Presidential Politics, and the Global Financial Meltdown

This paper is the second part of our study of the world financial crisis. Part I, "From Shadow Banking System to Shadow Bailout," appeared in the previous issue of this journal (Ferguson and Johnson 2009). The discussion centers on the "Paulson Put" that defined the "Shadow Bailout"âthe effort by the Treasury and the Federal Reserve to put off high-profile financial bailouts until after the 2008 presidential election. The role Fannie Mae and Freddie Mac played in the collapse of the Paulson Put is traced at length, along with the failure of Bear Stearns and the eventual nationalization of the GSEs (government-sponsored enterprises). The Lehman bankruptcy receives detailed attention in the context of the U.S. presidential election. John Taylor's recent arguments about the relative (un)importance of the Lehman episode are examined and rejected. The establishment of the Troubled Asset Relief Program (TARP) and its aftermath are also examined in some detail.