Gurjeit Singh

Introduction Government Sponsored Enterprise MBS, CDS & ARM Housing Bubble Subprime Crises Bail Out Plan Gurjeit Singh

Introduction

Government Sponsored Enterprise

MBS, CDS & ARM

Housing Bubble

Subprime Crises

Bail Out Plan

Economic Meltdown Recession & Depression Earlier Economic Crisis Gurjeit Singh

Economic Meltdown

Recession & Depression

Earlier Economic Crisis

Decline in demand Rise in unemployment Fall in business confidence & profits Reduction in investment spending Reduced inventory levels & heavy discounts Fall in demand for imports Increased government borrowing Lower interest rates by Central Bank Gurjeit Singh

Decline in demand

Rise in unemployment

Fall in business confidence & profits

Reduction in investment spending

Reduced inventory levels & heavy discounts

Fall in demand for imports

Increased government borrowing

Lower interest rates by Central Bank

Recession Slow down in economic activity Sustained period of time Business cycle contraction Depression Slow down in economic activity Prolonged period of time Extended recession Gurjeit Singh

Recession

Slow down in economic activity

Sustained period of time

Business cycle contraction

Depression

Slow down in economic activity

Prolonged period of time

Extended recession

Panic of 1907 Wall Street Crash of 1929 Great Depression 1929-1939 OPEC Oil Crisis Black Monday of 1987 Asian Financial Crisis of 1997 Financial Crisis 2007-2009 Gurjeit Singh

Panic of 1907

Wall Street Crash of 1929

Great Depression 1929-1939

OPEC Oil Crisis

Black Monday of 1987

Asian Financial Crisis of 1997

Financial Crisis 2007-2009

Fannie Mae Freddie Mac Gurjeit Singh

Fannie Mae

Freddie Mac

Group of financial services corporation Enhance credit flow in desired sectors Improve efficiency of capital market Financial intermediate, assist lender & borrower Created Secondary market in loans guarantees... I st is Farm Credit System in 1916 Gurjeit Singh

Group of financial services corporation

Enhance credit flow in desired sectors

Improve efficiency of capital market

Financial intermediate, assist lender & borrower

Created Secondary market in loans guarantees...

I st is Farm Credit System in 1916

Housing The twelve Federal Home Loan Banks (1932) Federal National Mortgage Association (Fannie Mae) (1938–2008) Federal Home Loan Mortgage Corporation (Freddie Mac) (1970–2008) Government National Mortgage Association (Ginnie Mae) (1968) Farming Federal Farm Credit Banks (1916) Federal Agricultural Mortgage Corporation (Farmer Mac) (1987) Gurjeit Singh

Housing

The twelve Federal Home Loan Banks (1932)

Federal National Mortgage Association (Fannie Mae) (1938–2008)

Federal Home Loan Mortgage Corporation (Freddie Mac) (1970–2008)

Government National Mortgage Association (Ginnie Mae) (1968)

Farming

Federal Farm Credit Banks (1916)

Federal Agricultural Mortgage Corporation (Farmer Mac) (1987)

Federal National Mortgage Association (FNMA) Founded/established in 1938 Privately (Stockholder) owned but publicly chartered Purchase and securitize mortgages Sells purchased mortgages to investors Guarantee scheduled principal, interest if borrower default Gurjeit Singh

Federal National Mortgage Association (FNMA)

Founded/established in 1938

Privately (Stockholder) owned but publicly chartered

Purchase and securitize mortgages

Sells purchased mortgages to investors

Guarantee scheduled principal, interest if borrower default

Federal Home Loan Mortgage Corporation (FHLMC) Private corporation through Emergency Home Finance Act of 1970 Expansion of secondary market for mortgages Buys mortgages, pools, sells as MBS to investors Charge guarantee fee on loans purchased, securitized into MBS Guarantee principal, interest if borrower defaults Gurjeit Singh

Federal Home Loan Mortgage Corporation (FHLMC)

Private corporation through Emergency Home Finance Act of 1970

Expansion of secondary market for mortgages

Buys mortgages, pools, sells as MBS to investors

Charge guarantee fee on loans purchased, securitized into MBS

Guarantee principal, interest if borrower defaults

Gurjeit Singh

Asset Backed Securities, issued by GSE’s Transform illiquid assets to liquid, tradable instruments Allow mortgage originator to replenish their funds Allow issuers to diversify financing sources Efficient lower cost sources of financing Varieties: Prime, Alternate A paper, Subprime Banks monetize credit spread between private, public market transaction Gurjeit Singh

Asset Backed Securities, issued by GSE’s

Transform illiquid assets to liquid, tradable instruments

Allow mortgage originator to replenish their funds

Allow issuers to diversify financing sources

Efficient lower cost sources of financing

Varieties: Prime, Alternate A paper, Subprime

Banks monetize credit spread between private, public market transaction

Gurjeit Singh

Structured asset backed security [value, payments derived from – fixed income assets] Assigned risk classes [senior classes safest securities] Interest, principal payments in the order of seniority Issuer of CDO - earns commission & management fees Gurjeit Singh

Structured asset backed security [value, payments derived from – fixed income assets]

Assigned risk classes [senior classes safest securities]

Interest, principal payments in the order of seniority

Issuer of CDO - earns commission & management fees

CDS buyer receives payoff if credit instrument (i.e. bond/loan) defaults CDS maturity doesn’t have to match reference asset maturity i.e. [10year bond may be protected by 1year CDS] CDS can be traded easily as it’s different from insurance Buyer never had asset at risk to purchase swap No actual loss from credit event to collect payment Gurjeit Singh

CDS buyer receives payoff if credit instrument (i.e. bond/loan) defaults

CDS maturity doesn’t have to match reference asset maturity i.e. [10year bond may be protected by 1year CDS]

CDS can be traded easily as it’s different from insurance

Buyer never had asset at risk to purchase swap

No actual loss from credit event to collect payment

Causes Bubble Burst’s Gurjeit Singh

Causes

Bubble Burst’s

Mania for home ownership Belief that housing is a good investment Government policies Crash in dot-com bubble Low interest rates Gurjeit Singh

Mania for home ownership

Belief that housing is a good investment

Government policies

Crash in dot-com bubble

Low interest rates

Gurjeit Singh

Gurjeit Singh

Vicious Cycle Causes Effects Gurjeit Singh

Vicious Cycle

Causes

Effects

Gurjeit Singh

Growth of housing bubble Easy credit conditions Subprime lending Securitization practices Inaccurate credit ratings Government policies Policies of central banks Credit default swap Investment by foreigners Shadow banking system Gurjeit Singh

Growth of housing bubble

Easy credit conditions

Subprime lending

Securitization practices

Inaccurate credit ratings

Government policies

Policies of central banks

Credit default swap

Investment by foreigners

Shadow banking system

Need of Bailout Plan Conclusion Gurjeit Singh

Need of Bailout Plan

Conclusion

Stabilize Economy Improve Liquidity Comprehensive Strategy Immediate and Significant Broad Effect Investor Confidence Impact on Economy, GDP Gurjeit Singh

Stabilize Economy

Improve Liquidity

Comprehensive Strategy

Immediate and Significant

Broad Effect

Investor Confidence

Impact on Economy, GDP

Today’s economic disaster is due to over consumption and artificial credit creation “ You cannot build a strong economy on borrowed funds” - Abraham Lincoln He was absolutely right! Gurjeit Singh

Today’s economic disaster is due to over consumption and artificial credit creation

“ You cannot build a strong economy on borrowed funds” - Abraham Lincoln

He was absolutely right!

Gurjeit Singh