The Current Economic State : The Brief

The Current Economic State : The Brief

Mary FiskeMatt Sincora

Lindsay Smith

October, 14 2008

LIR 554 Comparative Employment Relations

Systems

1. History2. Current State3. Future State and implications on

foreign relation4. Questions and Answers

1. History2. Current State3. Future State and implications on

foreign relation4. Questions and Answers

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.

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.

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%.

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%.

Fannie MaeFannie 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.

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.

Freddie MacFreddie 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.

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.

American International Group (AIG)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

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

Lehman BrothersLehman 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

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

The First PlanThe 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

$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

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.

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.

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

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

The Second Plan

Immediate RepercussionsImmediate RepercussionsSTOCK 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

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

How does this directly affect us?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.

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.

The Political DebateThe Political Debate

DID YOU KNOW…..

Obama and McCain both supported the passing of the bailout legislation?

DID YOU KNOW…..

Obama and McCain both supported the passing of the bailout legislation?

US/International Implications

US/International Implications

US Implications…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

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

Implications in AsiaImplications 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

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

Implications in EuropeImplications 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

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

Work CitedWork 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.

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.