Role of US Governments in Protecting Financial Markets;
M4 Public Discussion
Each week you should find an article or news report of interest directly relating to the current module you are working on within this Money and Banking Course. Post the item, and then comment on at least two other student’s postings.
M4 Dynamic Discussion
CASE STUDY
As you develop your analysis of the scenario which follows, please keep in mind that there is no right or wrong answer. The purpose of this exercise is to stimulate creative thinking. That is, you can speculate as wildly as you like each time as to the missing factors in the case. Also keep in mind that the case will evolve over the course of the terms with no foreseeable pattern or end to it. Subsequent additions do not necessarily have to follow any logic. In fact, they may represent “real world” shocks. In your analysis, try to anticipate what were the causal factors and what the implications are for individuals, firms, the domestic economy, and the global economy.
Please try to contribute two times a week to this discussion, make your own statements and comment on other peoples contributions.
Part 3
Demand for these Mortgage Backed Securities/Collateral Debt Obligations (CDO) were continuing to grow dramatically by the mid decade of 2000. So much in fact that the major commercial paper market (short term financing for large corporation banks & investment banks) became dependent upon them. Nearly 1/2 of commercial paper growth during this time came in the form of Mortgage Related Asset Backed Commercial Paper (ABCP). To make both the CDO and ABCP markets more attractive these investment were secured by a specialized insurance product called a Credit Default Swap (CDS).
These CDO and ABCP investments were extraordinarily attractive based upon higher returns than safer traditional U.S. Treasury Obligations yet thought safe because they were backed by mortgages. The underlying issue: the growth of this market was being fueled by Sub-Prime mortgages and Sub-Prime borrowers. What happens when you lend money to individual who can’t afford to repay? And what happens to the institutions and investors who own these CDO and ABCP investments when mortgage defaults start to dramatically increase? Let us also not forget the insurance companies (AIG) who provided most of the CDS insurance to support the above mentioned investments.
Please discuss the following:
Please discuss what effects the increase in mortgage delinquency default and foreclosure had on the following: U.S. Housing Prices Value of the CDO & ABCP investments & the liquidity of the short term commercial paper markets.
Each week you should find an article or news report of interest directly relating to the current module you are working on within this Money and Banking Course. Post the item, and then comment on at least two other student’s postings.
Case Study
As you develop your analysis of the scenario which follows, please keep in mind that there is no right or wrong answer. The purpose of this exercise is to stimulate creative thinking. That is, you can speculate as wildly as you like each time as to the missing factors in the case. Also keep in mind that the case will evolve over the course of the terms with no foreseeable pattern or end to it. Subsequent additions do not necessarily have to follow any logic. In fact they may represent “real world” shocks. In your analysis, try to anticipate what were the causal factors and what the implications are for individuals, firms, the domestic economy, and the global economy.
Part 4
By mid 2007 the pressure caused by increased mortgage delinquency foreclosure rates and a free falling U.S. Housing Market caused great concern in Wall Street. The commercial paper market previously funded in majority by Mortgage Related Asset Backed Commercial Paper (ABCP) investments was literally drying up. No investor was willing to purchase the ABCPs based upon the fear of mortgage default, and non payment. Compounding this crisis was the knowledge that the U.S. Major Banks and Brokerage Houses had literally Billions of Dollars invested in the Mortgage Backed CDOs and ABCPs. Billions of dollars invested, and a great reliance on the ability to borrow in the commercial paper market for the basic funding of their day to day operations.
With the commercial paper market coming to a stop; a literal freeze, and the balance sheets of our nations major financial institutions populated with now devalued or even worthless mortgage backed investments, something had to give.
Please review the following timeline:
2/7/07 HSBC Announces it will post larger than anticipated losses from rising defaults on subprime mortgages in the U.S.
4/2/07 New Century Financial one of the nations largest Sub-Prime mortgage lenders files for bankruptcy and cuts 3,200 jobs from its workforce.
June 2007 Two large hedge funds owned by Bear Stearn, which had significant holdings in Sub-Prime CDOs runs into trouble, and has to liquidate assets. This caused major trouble with our nations largest financial firms such as JP Morgan Cash, Citigroup and Goldman Sachs, which had lent the hedge funds money.
9/18/07 The Federal Reserve starts to cut interest rates, citing the “Credit Freeze” on Wall Street. This will lead to seven consecutive meetings when interest rates are lowered to fight the crisis. The Fed also agrees to start loaning money (providing liquidity) directly to Wall Street Firms (in addition to Commercial Banks) and accepting the CDOs and ABCPs as collateral.
3/16/08 JP Morgan Chase takes over troubled investment firm Bear Stearns, saving it from financial collapse. The price was pennies on the dollar. The deal came to fruition only with $29 Billion in financing & funding from the Fed.
7/11/08 The Fed takes over IndyMac a California bank which was one of the leaders in Sub-Prime lending.
9/06/08 Treasury Secretary Henry Paulson announced the takeover of the nations two largest Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac, who either owned or guaranteed over $5 Trillion in mortgages.
9/15/08 Leman Brothers one of Wall Streets largest firms files for bankruptcy based upon mounting losses on CDOs.
Please discuss the following:
Please discuss your thoughts on the U.S. Governments role in protecting our financial markets. Do you think that the Federal Reserve and the Treasury Department should have saved the Wall Street Giants? What is your position on the “Too Big To Fail” doctrine? Should have the markets been able to take their own course and let the giants fail? Role of US Governments in Protecting Financial Markets
Please read the discussion evaluation document.