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Stock Market Recap► The Year In Review
► A FREE Presentation► Brought to you by The Net Fool dot com► Come by and subscribe for more!
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Where We Are Now?► Major Indices:
► Dow Jones Industrial Average: Down 33.8%► S&P 500: Down 38.5%► NASDAQ: Down 40.5%
► Federal Funds Interest Rate Target:► 2007: 4.25% 2008: 0.00-0.25%
► Crude Oil Futures (per barrel):► 2007: $95.98 2008: $44.60
► Unemployment Rate:► 2007: 4.7% 2008: 6.7%
► U.S. Treasury Yield (Six Month Note)► 2007: 3.49% 2008: 0.27%
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What Happened!?
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The Origin► Following the Dot Com bubble and
the 9/11 stock market crash…► Alan Greenspan cuts Fed Funds rate
to 1%
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The Credit Bubble Begins► From 2003 to 2007:
► Credit growth exceeded economic growth► So-called “sub-prime” mortgages became
readily available… and encouraged!► Real Estate = The Ever-Appreciating
Asset?
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Borrowing in Excess► Poor Mortgage Practices:
► “Alt-A” loans available without paperwork► People selling mortgages got commissions
from sales volume… not the actual value of the mortgage
► “Securitization” (Think Bundling & Selling)► Bad mortgages were put into basket securities
such as CDOs and Mortgage Backed Securities► What was sold actually got a HIGH credit
rating!
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Buyers Vanish from Market► Eventually, people stop buying homes… and
with no buyers, housing prices start to correct!
► Once home values are collapsed,the collateral holding up loansvanishes, and people suddenlycannot afford their own homes!
► What’s more, the value of all of the securities that were sold is gone…. So HUGE firms are forced to post losses!
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The MightyHave Fallen
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Bear Stearns► “Off Balance Sheet” items, like CDOs and
Mortgage-Backed Securities, cause write-downs of $500+ Billion from major banks
► Run on the Bank► Bear Stearns collapses as buyers vanished,
leaving liquidity issues in the company► Capital fell from $12 billion to $2 billion in less
than a day… causing a complete collapse► Bought out by JP Morgan for $10 a share,
with a $30 billion loan from the Federal Reserve
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Fannie Mae & Freddie Mac► Fannie Mae and Freddie Mac were set
up in the 1930s as Government Sponsored Entities (GSEs) in order to promote home ownership
► Liquidity was completely erased once credit dried up in the housing market
► BAILED OUT► Too big to fail? ► Responsible for nearly half of the $11 trillion
dollars of mortgages on the market
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Shorters Take Control…► By now, we are waking up every
morning to 10%+ declines in the financial stocks
► No Uptick Rule In Place by the SEC► Shorters are destroying every stock
on the market, causing the rest of the market to fall alongside it
► NO confidence in the system at all
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Merrill Lynch► Agrees over the weekend to be sold to
Bank of America for $50 billion► Bank of America went for safety in the
face of investment banks that were succeeding off of extreme amounts of leverage► Criticized over purchase, as the market
tanked Monday and BOA could have bought MER much cheaper!
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Lehman Brothers► Lehman Brothers had similar liquidity
problems to Bear Stearns… and the stock was being shorted to smithereens!
► The Question was:Will The Government Bail Them Out?
► Government DOESN’T step in, LEH declares Chapter 11 Bankruptcy on September 15th
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AIG Bailout► AIG received $85 billion from the
government back in September… effectively letting the government seize control of the company
► The problem? Credit Default Swaps► CDSs are insurance against defaults on assets
tied to corporate debt and mortgage securities► Weakness in AIG would have a MAJOR impact
on financial institutions that bought swaps to protect themselves against loss and take writedowns
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Enough is Enough► Morgan Stanley and Goldman Sachs step
in to put an end to the constant shorting► The SEC agrees, and bans shorting on a
select list of stocks for a while to ease the market pain► This also happened in the U.K., Australia, the
Netherlands and Taiwan
► MS and GS are converted from investment banks to “bank-holding companies.”
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Main StreetJumps In
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Capital Injections!► Warren Buffet invests $5 billion in
Goldman Sachs, and $3 billion in General Electric
► The Netherlands buys Fortis for $23 billion
► Citigroup agrees to acquire Wachovia for $2 billion, but Wells Fargo outbids with an $11.8 billion offer that doesn’t need federal support!
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Bailout Madness► President Bush signs on a $700 billion
bailout plan to rescue the U.S. financial system► One of the largest government
interventions in history► The world’s Central Bank’s launch a
coordinated effort by lowering short-term borrowing rates in unison by a half-percentage point
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Barack Obama Wins► Senator Barack Obama wins election
into the U.S. Presidency over John McCain
► Stocks endure worst post-election sell-off in history, and the market tumbles 5.1%
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AIG Bailout Revisited► Government scraps the existing
bailout package… and increases the giveaway to $150 billion!!!
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China Announces Stimulus Plan► China announces that they are
progressing with a bailout of their own, a sizable $586 billion to restore domestic demand and maintain double-digit GDP growth
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Who’s To Blame!?
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…Just Kidding
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Detroit In Trouble► The CEOs of Detroit auto-makers fly
into Washington to appeal for taxpayer money
► First obvious sign of trouble outside of the financial sector
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More Bailouts!► The government agrees to step in to
stabilize conditions at Citigroup► Guarantee more than $300 billion in
troubled assets, and injecting $20 billion of additional capital
► The central U.S. bank plans to buy up to $600 billion of debt issued or backed by mortgage-finance firms
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Recession► The National Bureau of Economic
Research stated on December 2nd that the recession officially began in December of 2007
► Bernard Madoff is arrested from multibillion-dollar fraud… the effects of which we still cannot fully know for sure
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The End of 2008► The Federal Reserve cuts its target on the
Federal Funds Rate to 0%-0.25%► Goldman Sachs posts its first quarterly loss
since going public► The White House agrees to lend GM and
Chrysler $17.4 billion to avoid bankruptcy► The government commits $6 billion to stabilize
GMAC… a financing company vital to the future of GM
… and we rally into 2009!
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Stock Market Recap► The Year In Review
► A FREE Presentation► Brought to you by The Net Fool dot com► Come by and subscribe for more!