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Transcript
Dallas Hall, Chuck Dobson, Guy
Tahye & Tunde Olabiyi
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In the late 90’s and early 2000’s interest rates were low and banks had large
amounts of cash on hand
At the same time the housing market was doing very well
Due to this home ownership became very attractive, increasing the demand for
mortgages and increasing competition among mortgage lenders
To capitalize on the increased demand and avoid competition mortgage lenders
began to lend to people with less than perfect credit, a practice know as subprime
lending
Due to the higher probability of foreclosures with subprime borrowers, lenders had
to charge higher interest rates. One way they did this was to use adjustable rate
mortgages (ARM) which have low interest rates in the first couple of years and
higher ones in later years.
Beginning in 2006 home values began to decline. At the same time many lenders
sold subprime loans to mutual funds and hedge funds as investments, meaning a
large percentage of the investing public in America now owned these mortgages as
investments
As foreclosures increased these investments declined in value. The financial firms
made enormous investments in these mortgage backed securities and lost billions.
Large names such as Merrill Lynch and Bear Sterns either merged with other
companies or closed their door completely
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The remaining financial firms, fearing the same fate, tightened their lending
practices, tightening credit markets
The scarcity of credit has crippled the US economy. Business rely on short and long
term credit to operate
Over the past couple moths US financial markets have been in a full blown crisis,
shut down by the lack of credit and panic of investors
The US government has decided to intervene with a $700 billion dollar bailout plan
to save US financial markets
Public sentiment has been mixed on the issue with some thinking the bailout
saving those on Wall Street who made bad investment decisions while others think
it is necessary to save these financial firms in order to save the economy
The question remains, is government intervention justified to save US financial
markets?
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Bill Passed by the House of Representatives on Friday,
October 3, 2008, and signed into effect by President
Bush
• Establishes Troubled Asset Relief Program
 $700 billion to buy toxic mortgages, securities and related assets.
• Roughly two dozen employees hired: accountants, lawyers, and asset
managers.
 Assets will be purchased in a reverse auction
• Federal Government will pay interest on the reserves that
banks leave on deposit with the central bank.
 1933
Home Owners Loan Corporation
 Program that purchased delinquent mortgages at a
discount and worked with homeowners to restructure their
mortgages into more manageable terms
• Disbanded in Early 1950’s and turned a small profit
 1980’s
Savings and Loan Crisis
• Federal Savings and Loan Insurance Corporation approaching
insolvency due to failure of member savings and loan
institutions
• President George H. W. Bush established Resolution Trust
Corporation; made profit of roughly $394 million
 1971
President Nixon’s Price and Salary
Controls
• Largest Government Intervention in the private sector in
the history of the US.
• Put pricing limits on goods and salaries to combat
inflation
• Current bailout would socialize unprecedented
amounts of private debt, but price and salary
controls effect whole economy.
 Create
a market for illiquid mortgage-backed
securities can be valued and traded
 Setup regulatory oversight on how these toxic
assets are valued and disposed of
 By taking mortgage backed securities off of
companies and banks books, credit and capital
will begin to flow again.
 Possible Profits
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Increase Panic in the Market
• Dow Jones lost 700 points the day after first bailout bill was rejected.
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Businesses not being able to get loans
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Could lead to massive lay offs.
GDP could decrease
Ultimately could cause a recession
Worldwide Economic Crisis
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Other countries are experiencing credit crunches and declines in equity as
well.
If US companies have less accesse to funding they will not be able to conduct
business or invest in other parts of the world to the same extent, which will hurt
foreign markets.
Because of US businesses slowing production, the importation of raw materials
will decrease, which will cause a decline in foreign profits.
It’s Not a Bailout, It’s An Investment
Treasury hires asset
managers with expertise
in debt instruments
Asset managers
determine how best to
buy the debt
Treasury will publish a list of
assets it is looking to buy,
simpler debt like mortgage
backed securities likely will
be bought first
Asset managers manage
portfolio of distressed assets
with the hopes of selling them
back into the open market at a
Asset managers rank
orders by price and
begin buying the
cheapest first
Banks an other institutions
submit bids to sell their
securities to the Treasury