Crisis on Wall Street

Panel Discussion sponsored by Department of Economics

Alan BlinderMarkus Brunnermeier

Harrison HongPaul KrugmanHyun Song Shin

Total Assets [1952 =1]

0

100

200

300

400

500

600

700

800

900

1952

1961

1970

1979

1988

1997

2006

Non-FinancialCorporate

Household

CommercialBanks

Broker Dealer

Total Assets [1952 =1]

1

10

100

1000

1952

1961

1970

1979

1988

1997

2006Non-FinancialCorporate

Household

CommercialBanks

Broker Dealer

US Home Mortgage Holdings

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1980

Q1

1981Q1

1982Q1

1983

Q1

1984Q1

1985

Q1

1986

Q1

1987Q1

1988

Q1

1989Q1

1990Q1

1991

Q1

1992Q1

1993

Q1

1994Q1

1995Q1

1996

Q1

1997Q1

1998

Q1

1999

Q1

2000Q1

2001

Q1

2002Q1

2003Q1

2004

Q1

2005Q1

2006

Q1

2007

Q1

Trillion Dollars Agency and GSE mortgage pools

Commercial banks

ABS issuers

Savings institutions

GSEs

Credit unions

US Home Mortgage Holdings

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1980Q1

1981Q1

1982Q1

1983Q1

1984Q1

1985Q1

1986Q1

1987Q1

1988Q1

1989Q1

1990Q1

1991Q1

1992Q1

1993Q1

1994Q1

1995Q1

1996Q1

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

Trillion Dollars

Market‐based

Bank‐based

Lehman Balance Sheet (2007)

Cash1%

Long position45%

Collateralized lending44%

Receivables6%

Other4%

Short term debt8%

Short position22%

Collateralized borrowing

37%

Payables12%

Long-term debt18%

Equity3%

Assets Liabilities

Bear Stearns Balance Sheet

Assets Liabilities

Cash5%

Long position43%

Collateralized lending

32%

Receivables14%

Other6%

Short term debt11%

Short position11%

Collateralized borrowing

34%

Payables22%

Long-term debt17%

Other2%

Equity3%

1998-3

1998-4

2007-32007-4

-.2-.1

0.1

.2To

tal A

sset

Gro

wth

-.2 -.1 0 .1 .2Leverage Growth

Lehman Brothers

1998-3

1998-4

2007-3

2007-4

-.2-.1

0.1

.2To

tal A

sset

Gro

wth

-.2 -.1 0 .1 .2Leverage Growth

Merrill Lynch

1998-3

1998-4

2007-3

2007-4

-.2-.1

0.1

.2To

tal A

sset

Gro

wth

-.2 -.1 0 .1 .2Leverage Growth

Morgan Stanley

1998-3

1998-42007-3

2007-4

-.10

.1.2

Tota

l Ass

et G

row

th

-.2 -.1 0 .1 .2Leverage Growth

Bear Sterns2007-3

2007-4

-.05

0.0

5.1

Tota

l Ass

et G

row

th

-.15 -.1 -.05 0 .05 .1Leverage Growth

Goldman Sachs

1998-3

1998-4

-.3-.2

-.10

.1To

tal A

sset

Gro

wth

-.2 -.1 0 .1 .2Leverage Growth

Citigroup Markets 98-04

Total Assets and Leverage

1998-4

2007-3

2007-4

2008-1

-.2-.1

0.1

.2To

tal A

sset

s (lo

g ch

ange

)

-.2 -.1 0 .1 .2Leverage (log change)

Asset weighted, 1992Q3-2008Q1, Source: SECLeverage and Total Assets Growth

Bear Stearns Liquidity Pool (US$ billions)(Source: SEC)

0.00

5.00

10.00

15.00

20.00

25.00

22-Feb

23-Feb

24-Feb

25-Feb

26-Feb

27-Feb

28-Feb

29-Feb

1-Mar

2-Mar

3-Mar

4-Mar

5-Mar

6-Mar

7-Mar

8-Mar

9-Mar

10-Mar

11-Mar

12-Mar

13-Mar

GENERALINSURANCE

DOMESTICBROKERAGE

GROUP

DOMESTICPERSONAL

LINES

UNITEDGUARANTY

CORPORATION

FOREIGNGENERAL

INSURANCEGROUP

FOREIGN LIFE INSURANCE

& RETIREMENTSERVICES

DOMESTIC LIFEINSURANCE &RETIREMENT

SERVICES

HSB Group(Parent company

of The BoilerInspection &Insurance)

FINANCIALSERVICES

Operating lossQ2 2008

LIFEINSURANCE

& RETIREMENTSERVICES

AIG FinancialProducts

(Capital MarketsOperation)

AmericanGeneralFinance

ConsumerFinanceGroup

InternationalLease FinanceCorporation

PuertoRico

LatinAmerica

MiddleEast

Europe

Africa

Australia

Brunei

China

Japan

Japan

Europe

MiddleEast

LatinAmerica

SouthAsia

Caribbean

Guam

Taiwan

HongKong

India

Indonesia

Philippines

Macau

Malaysia NewZealand

Singapore

SouthKorea Thailand

Vietnam

USVirginIslands

Including45 states

in US

-$5.9bn

ASSETMANAGEMENT

Operating lossQ2 2008

-$314m

Operating lossQ2 2008

-$2.4bn

Operating lossQ2 2008

-$827mAIU Accident

& HealthDivision

Nan ShanLife Insurance

Company

AIG AnnuityInsuranceCompany

AIGAmericanGeneral

AIGRetirement

AIGSunAmericaRetirement

Markets

AIGInvestments

AIGPrivateBank

AIGSunAmerican

AssetManagementCorporation

AIGStar LifeInsurance

The PhilippineAmerican

Life & GeneralInsuranceCompany

AmericanInternationalUnderwriters

Asiaand thePacific

Canada

Imperial A.I.Credit

Companies

AIGEnvironmental

AmericanInternationalAssurance

AmericanLife Insurance

Company

AIGAdvisorGroup

AIGExecutiveLiability

LexingtonInsuranceCompany

Spiralling subsidiaries

FT Graphic

AIG is a huge multinational insurer, but it is much more than that. A glance at the group’s structure shows why. Should it follow Lehman into administration, it would create shockaves across global financial markets

Note: Not all subsidiaries are represented

Markus BrunnermeierWhat happened last week?

Harrison HongHow did we get here?

Paul KrugmanWhat should be done?

Alan BlinderWhere do we go from here?