1 / 20

Inside the Meltdown

Inside the Meltdown. Why did the Fall of 2008 occur?. Glass- Steagall Act passed during Great Depression in 1933.

eman
Download Presentation

Inside the Meltdown

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Inside the Meltdown Why did the Fall of 2008 occur?

  2. Glass-Steagall Act passed during Great Depression in 1933 • In 1929, stocks on the New York Stock Exchange crashed in value in a few days. One reason this happened is that banks, securities firms and insurance companies were owned by the same people. • In 1933, Congress wanted to prevent “systemic risk” causing such a crash again by passing the Glass-SteagallAct. A bank, securities firm or insurance company were not permitted to be owned in the same business. • A securities firm buys and sells investments like stocks and bonds.

  3. Congress repeals Glass-Steagall • In 1999, Congress repealed the Glass-Steagall Act to allow American businesses to compete world wide. • Senator Bob Kerrey (D-NE) predicted that, “The concerns that we will have a meltdown like 1929 are dramatically overblown.” Senator Bob Kerry

  4. After 9/11, Fannie Mae sought to increase home ownership in US. • The Federal National Mortgage Association (Fannie Mae) is a federal government corporation created in 1938. Its purpose is to increase home ownership in the US. • Fannie Mae borrowed money from investors and then loaned that money to banks who, in turn, made home loans to citizens. • Fannie Mae was protected by the Federal Government, so the banks would not lose money on the home loan.

  5. Post 9/11Housing boom • After 9/11 Fannie Mae encourage banks to lend money to people with bad credit and high risk of repayment. These borrowers received “subprime” interest rates. These rates were not fixed and could increase over the time of the loan. • Record numbers of homes were sold and a real estate boom took off. • Home values continued to increase. Banks and securities firms bought many home loans grouped together called “bundles” as investments. Some of loans were still being paid off, others were worthless.

  6. Housing Bubble Bursts in 2007! • Interest rates on the subprime loans began to rise. Home owners couldn’t pay the banks and began to default on their home loans nationwide. • The bundles of home loans owned by banks and securities firms began to become worthless. • Bear Sterns was 4th largest investment bank in US in 2007. It owned more home loans than any other bank in the US. • Many of the largest securities firms in the US have their headquarters on Wall Street in New York City.

  7. Bailout Nation page 180 quote • “It started out as a real estate boom and bust, driven by ultralow interest rates and a bubble in credit and lending…. It then slowly morphed into a full-blown credit crunch, where commercial lending ceased. Then it changed into a Wall Street crash as stocks crumbled globally and yields (profits) dramatically fell. Ultimately, it became a US, then global, economic recession….”

  8. What actions did the federal govt. take in 2008?

  9. Bear Stearns Investment Bank • March, 2008 • On March 10, 2008 Bear had $18 billion in cash; on March 13th there was $2 billion left. Depositors feared the bank would fail. • First the Federal Reserve gave a loan to JPMorgan for Bear. This caused Bear’s stock to continue to fall. • Next the Federal Reserve and US Treasury took over the bank and forced its shareholders to sell to JPMorgan Chase bank for $2 per share on March 16. • Bear Stearns owed several other banks and securities firms billions of dollars. If they failed, the Federal Reserve and US Treasury feared they would force many other companies to fail. They could pull down the entire financial system.

  10. Bear Stearns Investment Bank • “Buying a house is not the same as buying a house on fire.” Jamie Dimon, CEO of JPMorgan Chase, on his offer to buy Bear Stearns stock.

  11. Treasury Department “nationalizes” Fannie Mae • It and its sister government corporation, Freddie Mac, together own 45% more properties than Citicorp, the US’ largest bank. • It owed billions of dollars to the banks that had lent out its money. It had to stand behind its loans. • It’s stock value dropped throughout the summer of 2008. • Treasury Secretary Paulson decided to take over Fannie Mae in September, 2008.

  12. Lehman Brothers • Lehman Brothers was the 4th largest bank in US. CEO Richard Fuld wanted to bury his competitors. • Lehman was unable to pay off their debt and depositors began to remove their deposits. • The Federal Reserve and Treasury tried to force the other large banks to acquire Lehman’s assets on September 12 & 13. • None of the other banks would buy Lehman. • Lehmans filed for bankruptcy protection on September 14, 2008, the largest business bankruptcy in US history.

  13. American International Group • World’s largest insurance company had “made consistent if unspectacular profits.” • Then it’s investment division assumed $2.7 trillion of potential debt in “credit default swaps” (cds). A cds is a contract betting corporations would not default on their bonds. Many of these were based upon Lehman Brothers’ bonds. • AIG executives thought the risk on cds “ was so remote that the fees were almost free money. Just put on your books and enjoy.”

  14. AIG “bailed out” • AIG lost $13 billion January to June, 2008 • September 17, 2008 the Federal Reserve took over 79% of AIG assets. Taxpayers are responsible for these debts of AIG.

  15. Book and HBO MOVIE! • Too Big to Fail

  16. General Motors (GM) • In November, 2008 GM officials warned the Treasury Department that it needed $4 billion by December and another $6 billion in the first two months of 2009. • Congress was unable to agree on giving GM the needed money. • The Bush White House stated in December that “Given the current weakened state of the US economy, we will consider other options…to prevent a collapse of troubled automakers.

  17. President Obama and GM • In late May, 2009, GM filed for bankruptcy. It had assets of $89 billion but $172 billion of debt. • President Obama directed $50 billion be given to GM in return for 61% of its outstanding shares of stock. • Congress, now a part owner, pressured GM to build new models in US. • GM is now profitable again. US may make money on sale of US owned stock.

  18. Troubled Asset Relief Program • Treasury Secretary Paulson told Congress more money was needed to buy the toxic or worthless securities from banks, securities firms and insurance companies. • In so many words, he said “Trust me. Vote for this or suffer horrific consequences to the entire financial system.” • Congress approved the $750 billion TARP program which still operates today.

  19. What Happened as a Result? • By 2009, US government spent or assumed risk of nonpayment of $9.5 trillion corporate bonds and assets. • Federal bonds $5.5 trillion Total payments or mortgages assumed toward rescuing damaged businesses= $15 trillion

  20. Looking back…Was Bailout policy effective? • Some of the moneys have been repaid to the US Government by AIG and banks. • Should US Government give money to companies in danger of bankruptcy? • Why are some companies considered “too big to fail” while others are left to market competition? • What lessons should we take from the financial crisis of 2008? • Is it still being felt today?

More Related