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Final Exam

Final Exam. Three groups: 3 p.m. Garrett and Verena (graded) 6 p.m. Edel , Gloria, Kevin (pass/fail) 6:45 p.m. Saurabh , Ozge , Elisa (graded)

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Final Exam

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  1. Final Exam • Three groups: 3 p.m. Garrett and Verena (graded) 6 p.m. Edel, Gloria, Kevin (pass/fail) 6:45 p.m. Saurabh, Ozge, Elisa (graded) Format: I will go through my list of questions, asking each student to respond. The first student will answer Question #1, the second #2, etc. and then I will return to the first student. Location: varies

  2. Finish the discussion about what various countries are doing to address the crisis • Heard from Verena (Portugal), Gloria (Portugal), Kevin (Iceland), Edel (Greece),Saurabh (tariffs) and Elisa (Italy). • Ozge and Garrett?

  3. Articles on Portugal (Thanks, Gloria) • http://www.bloomberg.com/news/2013-05-14/portugal-reforms-urged-by-oecd-to-fix-economy-s-achilles-heel-.html • http://www.guardian.co.uk/business/2013/jul/03/eurozone-crisis-portugal-resignations-greece-troika • http://www.bbc.co.uk/news/world-europe-23261035

  4. Political Quagmire • Dilemma for leaders of these countries • Troika – “three of a kind” • European Commission (EC) • International Monetary Fund (IMF) • European Central Bank (ECB) • Austerity measures

  5. Problems within Troika? • http://www.nytimes.com/2013/06/08/world/europe/policy-troika-for-europe-financial-crisis-has-splits.html?pagewanted=all&_r=0 • http://www.nytimes.com/2013/06/11/business/global/troika-has-a-patchy-record-on-bailouts.html

  6. Come up with 2 unintended consequences of reform measures • Health care – Greece • Lose job/lose healthcare • Nationwide unemployment increase of 20% since last year (215,735 people) • Free clinics • Corruption: public trust in govt – eroded • Greece – 90% say political parties affected by corruption.

  7. http://www.nytimes.com/2013/07/16/world/europe/spain-rajoy.html?ref=todayspaperhttp://www.nytimes.com/2013/07/16/world/europe/spain-rajoy.html?ref=todayspaper • http://www.nytimes.com/2013/07/16/world/europe/parliament-votes-to-indict-ex-official-in-greece.html?ref=todayspaper

  8. U.S. Reactions/Solutions to the Financial Crisis • 1999: repeal of 1933 Glass-Steagall Act (background) • US: Troubled Asset Relief Program [TARP] • Dodd-Frank Wall Street Reform and Consumer Protection Act and more….

  9. 1933 Glass-Steagall Act • Enacted as reaction to ? • Regulatory firewall between commercial and investment bank activities • Severely limited right of commercial bank to issue securities • Parts -repealed in 1999 - no longer illegal for investment commercial bank to also engage in business/commercial and retail banking.

  10. Troubled Asset Relief ProgramTARP – mentioned yesterday • U.S. Treasury - purchasing power of $475 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. • “Bailout” • “Toxic assets”

  11. Facts: TARP – cont. • October 2012 Congressional Budget Ofc. report: govt. disbursed $313 billion to financial institutions, almost all of which was paid back. The CBO estimates that taxpayers will realize a net gain of about $25 billion. • The government purchased $205 billion worth of preferred stock from 707 financial institutions. Of that investment, those institutions paid back $192 billion, or 94%. The CBO believes that taxpayers will see a net gain of $18 billion from that program. INFLATION?

  12. TARP - continued • TARP provided an infusion of capital to banks (some would say they were "bailed out"), most of the banks have paid back the funds with interest. • As of December 31, 2012, the Treasury had received over $405 billion in total cash back on TARP investments, equaling nearly a non-inflation-adjusted 97 percent of the $418 billion disbursed under the program.

  13. Wikipedia article on TARP • During 2008, companies -$ 295 billion in bailout money -had spent $114 million on lobbying and campaign contributions. • Banks that received bailout money had compensated their top executives nearly $1.6 billion in 2007, including salaries, cash bonuses, stock options, and benefits including personal use of company jets and chauffeurs, home security, country club memberships, and professional money management.

  14. CONTINUED…. • The Obama administration has promised to set a $500,000 cap on executive pay at companies that receive bailout money… • Graef Crystal, a former compensation consultant and author of "The Crystal Report on Executive Compensation," claimed that the limits on executive pay were "a joke" and that "they're just allowing companies to defer compensation."

  15. Federal Housing Administration (FHA) • FHA loans: insured by this govt. agency. • FHA: part of HUD • Following crisis: home purchases financed with FHA mortgages rose from 2% to over 1/3rd. • 3.5% down payment • FHA – substantial losses in future?

  16. Home Loan Modification Program"Home Affordable Modification Program" • Banks – voluntarily change loan terms so more affordable • Banks with bailout money – little interest • Mortgage servicers – received $1,000 for each modification approved + $1,000/yr. for 3 yrs. while borrower in the program.

  17. Home Affordable Refinance Program (HARP)http://www.freddiemac.com/avoidforeclosure/harp.html • Freddie Mac loans • Not in default • Little or no equity in home • Refi to lower interest rate or better mortgage • 1- to 4-unit home as primary residence, a 1-unit second home, or a 1- to 4-unit investment property.

  18. Primary Mortgage Market Survey® July 11, 2013 Definition of 'Freddie Mac - Federal Home Loan Mortgage Corp – FHLMC: A stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.

  19. Dodd-Frank Wall Street Reform and Consumer Protection Act • 2010 • Several year implementation period • Reduce risks in financial markets • Created several new agencies • Financial Stability Oversight Council (monitors financial stability of firms; liquidation/restructuring if nec. • Federal Insurance Office (monitors ins. cos.)

  20. Dodd-Frank - continued • Consumer Financial Protection Bureau (prevent predatory lending and easier for consumers to understand mtgs.) • SEC Office of Credit Ratings (ensure that agencies provide meaningful and reliable credit ratings of the entities they evaluate) • Years before full implications known

  21. EUROPE http://www.youtube.com/watch?v=wY6G6U4gU40 • Banks – shedding assets around the world • Euro zone – banks in healthy economies pulling out of weaker southern locales • Significant retrenchment in global banking

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