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The Current Economic State : The Brief

The Current Economic State : The Brief. Mary Fiske Matt Sincora Lindsay Smith October, 14 2008 LIR 554 Comparative Employment Relations Systems. Agenda . History Current State Future State and implications on foreign relation Questions and Answers. Background .

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The Current Economic State : The Brief

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  1. The Current Economic State : The Brief Mary Fiske Matt Sincora Lindsay Smith October, 14 2008 LIR 554 Comparative Employment Relations Systems

  2. Agenda • History • Current State • Future State and implications on foreign relation • Questions and Answers

  3. Background • Buyer wants to buy house for $175. Puts a down payment of $35K and takes out a mortgage of $140K • Buyer goes to local bank and gets approved for the mortgage. Pays the loan back with interest. • Banks go to Fannie May and Freddie Mac which buy mortgages from lending intuitions and then hold them in investment portfolios or resell them as mortgage-backed securities to investors.

  4. Implications • Banks were loaning money to people who should have never been able to get a loan. • Currently 12% of mortgages are in default. The historic average is 3%.

  5. Fannie Mae • Nation’s largest mortgage buyer • Taken over by the federal government on Sept. 8, 2008 • Created during the Depression to make sure that sufficient funds were available to mortgage lenders. • Recaptured by Congress in 1968 as a publicly traded company • After significant accounting problems, since 2004 were required to hold 30 percent more capital than the minimum previously required, in effect capping their ability to purchase mortgages.

  6. Freddie Mac • A publicly traded company that operates under a federal charter, is the nation’s second-largest mortgage buyer. • Buys mortgages from lending institutions and then either holds them in investment portfolios or resells them as mortgage-backed securities to investors. Plays a vital role in providing financing for the housing markets • But the mortgage meltdown also made the companies more important. When the credit markets seized up, Freddie regained their central role in mortgage finance after losing significant market share to investment banks during the housing boom.

  7. American International Group (AIG) • Insurance company started in China in 1919 • Expanded into Latin America, Europe, and the Middle East. • In 1962- company’s US focus from personal insurance to high margin corporate coverage • In the mid 2000’s AIG became embroiled in a series of fraud investigations conducted by the SEC and the US Justice Department. • September 2008 – Federal Bailout of $85 billion

  8. Lehman Brothers • 4 Star 100 year old investment banking firm in New York • Average salary: $600,000 • Firm did business in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking • Sept 15, 2008- firm filed Chapter 11 bankruptcy protection • The largest bankruptcy in US History: $613 billion in bank debt, $155 billion in bond debt, and assets worth $639 billion

  9. The First Plan • $700 Billion to purchased distressed mortgages • What does this $700 billion include? • $85 Billion agreement to bailout American International Group (AIG) • $29 Billion to support the government pledged in the marriage of Bear Sterns and JPMorgan Chase • $25 Billion to bailout Fannie Mae and Freddie Mac • After mortgages are purchased, the government will try to sell these to investors • The government is not cutting a check for $700 billion, but rather, this is the amount they are ready to go up to. • The money to fund this legislation will come from tax payers money

  10. THE FIRST DECISION: • The House of Representatives did not pass the bill with a 2/3 vote. • Some speculated reasons are: worried to lose their political position or they took a “you not me” attitude towards voting.

  11. The Second Plan Same details as the first, plus:The Senate added an additional $110 billion in tax breaks, incentives and other measures, as well as an expansion of of the coverage of individual bank deposits.Only needed 12 votes, but ended with 58 votes that switched

  12. Immediate Repercussions STOCK MARKET • Sept 29 - Stock Market Dropped 9%, which is the third-biggest decline since WWII • Dow plunged 500 points when the market realized the first bill was not going to be passed and then another 200 points before the close of the market for the day • October 7 - DOW Loses another 500 points. This brings the 2008 loss to almost • 29% - now only second to the 1937 decline of 32.8% ECONOMY • Consumers are spending less, adding more to the economic problem – causing the first quarterly spending decline in decades

  13. How does this directly affect us? • As college students • Paying for college • Options • Leave your current investments ALONE! • Schools offer emergency loans • Perkins or Stafford Loans still available • Work study jobs • The Good News! • A recession is the best time to be in school. For those first and second semesters this means when we graduate the economy will be rebuilding and job opportunities will be more plentiful.

  14. The Political Debate • DID YOU KNOW….. • Obama and McCain both supported the passing of the bailout legislation?

  15. US/International Implications

  16. US Implications… • Inflation is inevitable • Analysts are trying to remain optimistic that it will recover in ’09 (although unlikely) • Interest Rates are rising • Large deficits make bankers and holders of gov’t debts worried • The best way for them to deal with it is to raise lending rates • People with variable interest mortgage rates should probably lock in their rates now • Don’t Panic! • Financial institutions make money by lending money out • Eventually, they will pump money back into the system

  17. Implications in Asia • October 8th - South Korean currency dropped 4.8% • 10-year low mark • Has dropped 16.8% since Lehman Brothers filed for bankruptcy in mid-September • Japanese Yen dropped to below 100 to the dollar for first time in 6 months • Due to concerns of unstable financial sectors in the US and Europe • Japanese central bank pumped $20.9 billion into their financial system • Help stop surge in borrowing costs

  18. Implications in Europe • Britain – Announced an effort to inject £50 billion of taxpayer money into country’s largest banks • Barclays, Lloyds TSB, Royal Bank of Scotland • Spain – Prime Minister announced he would create 30 billion euro fund • Buy assets from nation’s banks • Europe’s credit crisis deepening • Finance ministers met in Luxembourg • Agreed to temporarily relax accounting rules to help banks avoid fire sales

  19. Work Cited Aljazeera.Net. 4 October 2008. Us Adopts a $700 Billion Bailout Plan http://english.aljazeera.net/news/americas/2008/10/20081046306214567.html Labaton, Stephen. “Treasury Acts to Shore Up Fannie Mae and Freddie Mac.” The New York Times. 14 July 2008 Stout, David. “The Wall Street Bailout Plan Explained”. The New York Times 28 September 2008.

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