Dallas Hall, Chuck Dobson, Guy Tahye & Tunde Olabiyi

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

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?

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

Increase Panic in the Market • Dow Jones lost 700 points the day after first bailout bill was rejected. Businesses not being able to get loans Could lead to massive lay offs. GDP could decrease Ultimately could cause a recession Worldwide Economic Crisis 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

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 profit

Asset managers determine how best to

buy the debt

Banks an other institutions submit bids to sell their securities

to the Treasury

Asset managers rank orders by price and

begin buying the cheapest first