Subprime Mortgage Crisis TARP Purpose and Background TARP and AIG TARP and GM
Causes of the Crisis: o Housing Prices Peak in 2006 o High Default Rates o Conception of Housing Prices Always Increasing o Housing Loans Approved for Normally Under Qualified Applications o Housing Prices Drop Late 2006-2007 o Led to Increase in Mortgage Defaults and Forclosures
New Century Financial Corporation New Century Financial Corporation American Freedom Mortgage American Freedom Mortgage American Home Mortgage American Home Mortgage Bernard L. Madoff Investment Securities LLC Bernard L. Madoff Investment Securities LLC Charter Communications Charter Communications Lehman Brothers Lehman Brothers Linens 'n Things Linens 'n Things Mervyns Mervyns NetBank NetBank Terra Securities Terra Securities Sentinel Management Group Sentinel Management Group Washington Mutual Washington Mutual Icesave Icesave Kaupthing Singer & Friedlander Kaupthing Singer & Friedlander Yamato Life Yamato Life Circuit City Circuit City Banco Privado Português Banco Privado Português Allco Finance Group Allco Finance Group Waterford Wedgwood Waterford Wedgwood Saab Automobile Saab Automobile BearingPoint BearingPoint Tweeter Tweeter Chrysler Chrysler General Motors General Motors
In Economic Uncertainty, Banks Don’t Loan o Want to Maintain Liquidity o Need Either More Capital or Greater Certainty Natural Business Tendency to NOT Spend During These Times TARP Created to Encourage Spending
Fundamental Part of the Emergency Economic Stabilization Act of 2008 Gives Secretary of the Treasury Authority to Purchase Troubled Assets o Restore Liquidity o Improve Financial Stability Other Economic Assistance o Automotive Industry o Private Companies (Toxic Assets) o Fannie and Freddie o AIG
Report Submitted to Congress Reporting the TARP’s Progress o http://www.sigtarp.gov/reports/congress/2011/January2011_Quar terly_Report_to_Congress.pdf http://www.sigtarp.gov/reports/congress/2011/January2011_Quar terly_Report_to_Congress.pdf If Short, Legislative Proposal to Recuperate o Ensure that National Debt Does Not Increase
American International Group o International Insurance Agency in Over 130 Countries o Reported Losses of $99B in 2008 o Reported Losses of $11B in 2009 Invested in High-Grade Residential Mortgage Backed Securities Sold Credit Default Swaps to Financial Institutions for Loans Rated AAA Suffered Great Losses and Liquidity Issues due to Mortgage Crisis
November 25 th, 2008 o TARP Purchased $40B in Preferred Stock o %10/yr Dividends March 2 nd, 2009 o TARP Purchased $30B More in Preferred Stock Used Capital to Relieve Liquidity Issues
Repaid $9B Plans to Repay o Treasury to Sell Stock Gradually Over Time o Sold Several Subsidiaries ALICO to MetLife for $16B Net Income of $8B in 2010 Operational Goals o Reduce Risk in Investments and Credit Default Swaps o Reduce Operational Costs o Strengthen Financial Position to Repay Taxpayers
General Motors o Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden, Isuzu, Jiefang, Opel, Vauxhall, Wuling… o Locations in 31 Countries Downturn in Economy o Reported Losses of $39B in 2007 o Reported Losses of $31B in 2008
US Treasury Purchased $51B in Common Stock o 61% Stake in the Company Returned $23B US Received Revenue of $700M to Date
Reorganized Under Chapter 11 Bankruptcy o Primarily Used by Corporate Entities o Ch. 13 Pertains to the Reorganization of Private Individuals o Ch. 7 Pertains to Liquidation Bankruptcies Listed on the NYSE on November 18 th, 2010 World’s Largest IPO of $23B “Repaid” Debt Early Claimed Ability due to Increase in Malibu and LaCrosse Sales Used Federal Funds to Repay TARP Debt Net Income of $5B in 2010
Activity to Date o 928 Recipients o $619B Committed 27.3% Banks/Financial Institutions, Cap at $475B 14.1% Fannie and Freddie, No Cap 12% Auto Companies, Included in $475B Cap Toxic Asset Purchases, Cap at $22.4B o $564B Dispersed o $259B Returned o $57B Total Revenue Notice – Did Not Cost $700B
Was this program effective? Is this even measureable or quantifiable? Will the TARP encourage institutions to take more risks, knowing that the government will bail them out? o Pros? o Cons?
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