MIM 574 – Current Financial Condition of The United States

1. MIM 574 – Current Financial Condition of The United States • Financial Crises Of 2007-2010 • The Great Recession

2. Causes • Housing Bubble – subprime mortgages a. Reckless and unsustainable lending practices b. Deregulation and securitization of mortgages c. Global speculative bubble in real estate d. Increase in oil and food prices 2. Greed – Wall Street and Investment Banking

3. Housing Bubble • Subprime Lending • High-risk borrowers with imperfect credit • Increased demand in The Housing Market • ARM – 43% of foreclosures in 2007 • Risk – higher interest and fees

4. Securitization • Securitization - originate to distribute model, in which banks essentially sell the mortgages and distribute credit risk to investors through mortgage-backed securities, instead of holding the mortgage to maturity. • Homeowners, bondholders, corporations and consumers were $25 trillion, $10 trillion from securitized markets, frozen in 2009. • Investment banks issued debt at a low interest rate and invested the proceeds at a higher interest rate is a form of financial leverage in MBS (2.5% - 7%, unsecured to 12%). This is analogous to an individual taking out a second mortgage on his residence to invest in the stock market or investment property. • MBS were fixed income securities for pension and mutual funds, insurance companies, investment banks and other fixed income investors. • Service providers like investment banks generate fees at every level. • Speculation bubble, investment properties, flipping after built.

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11. Toxic Assets • ABS • Housing Market • Mortgage Backed-Securities

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15. Market and Foreclosure • Residential Mortgage Market – 2008 - $10.6 trillion, (about $2.0 trillion subprime) • 14.4% by September 2009, were in foreclosure • California and Florida hardest hit

18. The risks to the broader economy • $ 8 trillion in losses, U.S. Stocks – 2008 • Losses in the stock markets and housing value declines place downward pressure on consumer spending • Negative equity • Unemployment • Add: Detroit, outsourcing, foreign debt and, budget and trade deficit

19. Major Players • Lehman Brothers Holdings Inc. - BNC Mortgage – subprime lender • Merrill Lynch - First Franklin (from National City Bank) • Bear Stearns - Hedge Funds • Citibank • Countrywide • UBS • Washington Mutual

20. Results to Major Players • Lehman Brothers - bankruptcy • Bear Stearns - fire sale to J.P. Morgan • Merrill Lynch - sold under distress to Bank of America • Morgan Stanley - converted from an investment bank to a bank holding company • Goldman Sachs (since 1869) - converted from an investment bank to a bank holding company • Wachovia -sold to Wells Fargo Bank • Washington Mutual - sold to J.P. Morgan; - $224 bil. Toxic, $85 FDIC remaining • Countrywide Financial Corporation - Indy Mac seized by regulators and remaining sold to BofA

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22. Government Sponsored Entities • In 1995, Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market ($10.6 trillion). • In 2008, The Federal government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers' expense. • The Glass-Steagall Act was enacted after the GreatDepression. It separated commercial banks and investment banks

23. TARP • The Troubled Asset Relief Program • A program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector; mostly, to address the subprime mortgage crises. • TARP allows the United States Department of the Treasury to purchase or insure up to $700 billion of troubled (Toxic) assets. • Senior preferred stock in the nine largest American banks • Equity and debt • The Treasury will receive warrants for non-voting shares, or will agree not to vote the stock

24. Beneficiaries of TARP • Citigroup $45 billion • AIG (American International Group) $40 billion • JPMorgan Chase $25 billion • Wells Fargo $25 billion • General Motors $13.4 billion • Goldman Sachs $10 billion • Morgan Stanley $10 billion • Chrysler $4 billion

25. Bonuses and Other Compensation • AIG is notable for bonuses for the entire company reaching $1.2 billion, after receiving bailout funding. These bonuses were paid during a loss of $61.7 billion in 2008, the greatest ever for any corporation. • Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals. • Purchase of shares in the stock market on the way back up. • Retreat for $425 million – AIG. • Purchase of other troubled companies. • Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management.

26. Take Away’s • Reckless and unsustainable lending practices • Greed – fees and speculation • Redistribution vs. creation of wealth - Speculation vs. real GDP growth - Michael Milken, Boesky, Madoff, Tyco, Enron - Finance for business strategy and wealth creation - Maximize wealth from assets under management’s control