The Financial Crisis of 2007–2009 I just need a 250 word summary of the followin

Question

The Financial Crisis of 2007–2009

I just need a 250 word summary of the following 950-word excerpt from the article "The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort": (also with the summary I would appreciate if you could also provide bullet points of the main points in the summary)

ARTICLE BEGINS BELOW:

When the financial crisis began in 2007, the Federal Reserve faced two major challenges in its function as lender of last resort. First, the stigma of the discount window, originally created by the policies of the 1920s, was still causing a reluctance to borrow by member banks. Second, the sharp growth of a financial sector outside of member banks—in the so-called “shadow banking” sector where institutions like money market mutual funds take deposits and funds are invested in bonds and other financial assets—left a large portion of the financial system without access to the discount window. Most of the Fed’s actions during the crisis can be viewed as attempts to deal with these challenges.

Policies both formal (raising the discount rate) and informal (implicit threats to conduct more extensive and frequent bank examinations) continued to discourage borrowing from the discount window from the 1920s through the rest of the twentieth century. Despite an additional change in August 2007 that decreased the discount-window premium by 50 basis points and increased the eligible term for discount window loans, banks were still reluctant to borrow throughout 2007. In an interesting parallel to the role of the Reconstruction Finance Corporation during the Great Depression, many banks found an alternative source of backup liquidity to escape the stigma of the discount window—in this case, the Federal Home Loan Banks. Ashcraft, Beck, and Frame (2010) describe how the FHLB system became a “lender of next-to-last resort” with over $1 trillion in loans at the peak of the crisis.

In December 2007, the Fed created the Term Auction Facility in a major attempt to overcome the reluctance of banks to borrow at the discount window. In the Term Auction Facility (TAF), the Fed created regular auctions of pre-set total quantities of loans for set terms (either 28 or 84 days), and the same institutions eligible to use the discount window were able to submit bids for what they would pay to borrow these funds. The rules for these loans were similar (although not identical) to those for the discount window. The institutions that received the loans were not publicly revealed, and the market apparently believed that some combination of the stigma and risk of possible disclosure of these loans was significantly lower than those from the discount window. According to Almantier, Ghysels, Sarkar, and Shrader (2011), TAF credit outstanding peaked at over $300 billion, nearly three times the peak for discount window credit. This occurred although interest rates for borrowing through the Term Auction Facility were higher on average than rates at the discount window, by an average of 37 basis points overall and more than 150 basis points after the Lehman bankruptcy in September 2008. Banks were apparently willing to pay a premium to avoid the stigma of borrowing at the discount window.

Continued pressure in short-term funding markets led to the near-bankruptcy and resale of Bear Stearns to JPMorgan in March 2008. As Bear Stearns was not a depository institution and thus did not have access to the discount window, the eventual Fed guarantee that enabled the JPMorgan sale required the use of the 13(3) authority granted in the 1930s, its first invocation during the crisis. The

Fed also responded by expanding the discount window—historically reserved for depository institutions—to include a broader group of primary dealers including Lehman Brothers, Merrill Lynch, and Goldman Sachs. A further expansion of the lender-of-last-resort function, which also required the use of Section 13(3), authority came through the Term-Securities Lending Facility (TSLF), which allowed primary dealers to effectively exchange illiquid securities for government bonds. The Term Securities Lending Facility was successful in reducing stress in the sale and repurchase or “repo” markets (Fleming et al. 2010; Hrung and Seligman 2011), in which one rm sells securities to another rm and then agrees to repurchase them at a slightly higher price in the near future—thus in effect receiving a short-term loan (Gorton and Metrick 2012).

However, the Federal Reserve was only getting started in expanding its role as lender of last resort for other parts of the shadow banking system. In fall 2008, 13(3) authority was used to create an alphabet soup of facilities, each targeted to extend the lender-of-last-resort function to another part of the shadow banking system. The Term Asset-Backed Securities Loan Facility (TALF) allowed borrowers to post various asset-backed securities as collateral for term loans; the Commercial Paper Funding Facility (CPFF) created facilities to buy commercial paper directly from issuers; the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) purchased asset-backed commercial paper from money-market mutual funds; and the Money-Market Investor Funding Facility (MMIFF) lent to money-market mutual funds on a broad range of collateral, effectively acting as a discount window for these funds. The Fed also used its 13(3) authority to create special-purpose vehicles to support lending programs to the insurance company AIG in September 2008.

Overall, the Fed made significant use of its 13(3) powers during the crisis, expanding its role as a lender of last resort well beyond the depository institutions typically served by the discount window. To go with the lender-of-last-resort function, the Fed marked the end of the panic phase of the financial crisis with the Supervisory Capital Assessment Program (SCAP), also known as the “stress tests,” carried out in spring 2009. The stress tests expanded the standard supervisory reviews to include considering the stresses that might arise in speci c look-ahead scenarios, an element of what is now called “macroprudential” regulation (that is, policies aimed at protection of the entire nancial system) in which potential reac- tions across nancial rms and markets are considered, not just whether individual companies seem to be holding suf cient capital.

Explanation / Answer

The financial crisis of the year 2007 -09 was one of the biggest challenges against the world economy. The federal bank of USA has two major challenges at that time to mitigate with discount window and shadow banking on the other horizon. Both formal and informal policies have created borrowing a tough task for the customers. The role of the Reconstruction Finance Corporation during the Great Depression was crucial. Many banks found an alternative source of backup liquidity to escape with the discount window. In this case the FHLB system became a “lender of next-to-last resort” with over $1 trillion in loans at the peak of the financial crisis.

Term auction facility ( TAF) was also used as a tool to fulfil the secret system of financial up gradation. The rate of interest in TAF lending was much higher than discount window. There was a further expansion of the lender-of-last-resort function, which also required the use of Section 13(3), authority came through the Term-Securities Lending Facility (TSLF), which allowed primary dealers to effectively exchange illiquid securities for government bonds. It was successful in reducing stress in the sale and repurchase or “repo” markets. Federal Reserve was only getting started in expanding its role as lender of last resort to the shadow banking system.

After this crisis, many steps were taken to regulate the financial lending. Some key highlights of the whole crisis can be pointed as,

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