FIN 4303 – RVE Financial Markets and Institutions Spring 2019 Group Project – Research Paper Your team is an independent panel hired by the Chairman of the Finance Committee of the House and Senate to investigate the Subprime Mortgage Crisis and its aftermath. In 10 weeks, you will report your findings to the Committee. The written report to the Committee is to include: Part I (50%) 1. Summarize the subprime mortgage crisis and its aftermath in a chronological format, highlighting only significant events that occurred. Be sure to include the starting point, as you see it. 2. Outline the role that each party played in the subprime mortgage crisis. Identify the names of the companies that played a major role and briefly provide an update of their present status: a. Mortgage companies/ brokers b. Subprime borrowers c. “Money center” banks d. Investment bankers e. Mortgage credit insurers (Freddie Mac, Fannie Mae, Ginnie Mae) f. Credit rating agencies (the big 3) g. Investors (Pension funds, hedge funds, global investors) 3. Identify the winners and losers from this financial event. Clearly state your reasons. 4. Describe the magnitude of the effects to the national and international economy, through data and statistics, and present your opinions about whether AIG should have been allowed to fail. Part II (50%) 1. Summarize the actions already taken until now by the Federal Reserve and Federal Government to ease the credit crisis. 2. Based on your research and your knowledge of the current economic environment, forecast economic growth and the direction of interest rates in the following one year and outline a series of recommendations for the Finance Committee to consider to control the effects of the financial crisis and avoid an occurrence in the future. Specify which ones you believe would be the most effective. Consider practicality, timeless, cost, timeframe and effect of implementation. Recommendations could cover governmental policy or action, monetary policy, regulatory, and private industry. 3. The Ethics Committee also wants the panel to identify which parties should be investigated for potential ethics violations and the potential role they played that would be considered unethical behavior during the credit crisis. Begin with a definition of ethical standards in business. 4. This crisis is the most serious economic crisis in the world history. European countries also suffer another wave of financial crisis. Summarize what the European debt crisis is and how would the European debt crisis play out? What really caused the Eurozone crisis? Are Americans responsible for European woes? The written report is due on April 24 at 2:00 PM. Groups are required to electronically submit a copy of your report using Canvas Course Mail. The report must be presented in professional manner and must be submitted before deadline. Late project will be assessed a penalty of 10% points per day. Each group will be responsible for subm.

1. FIN 4303 – RVE
Financial Markets and Institutions
Spring 2019
Group Project – Research Paper
Your team is an independent panel hired by the Chairman of the
Finance Committee of the House and Senate to investigate the
Subprime Mortgage Crisis and its aftermath. In 10 weeks, you
will report your findings to the Committee.
The written report to the Committee is to include:
Part I (50%)
1. Summarize the subprime mortgage crisis and its aftermath in
a chronological format, highlighting only significant events that
occurred. Be sure to include the starting point, as you see it.
2. Outline the role that each party played in the subprime
mortgage crisis. Identify the names of the companies that
played a major role and briefly provide an update of their
present status:
a. Mortgage companies/ brokers
b. Subprime borrowers
c. “Money center” banks
d. Investment bankers
e. Mortgage credit insurers (Freddie Mac, Fannie Mae, Ginnie

2. Mae)
f. Credit rating agencies (the big 3)
g. Investors (Pension funds, hedge funds, global investors)
3.
Identify the winners and losers from this financial event.
Clearly state your reasons.
4.
Describe the magnitude of the effects to the national and
international economy, through data and statistics, and present
your opinions about whether AIG should have been allowed to
fail.
Part II (50%)
1. Summarize the actions already taken until now by the Federal
Reserve and Federal Government to ease the credit crisis.
2. Based on your research and your knowledge of the current
economic environment, forecast economic growth and the
direction of interest rates in the following one year and outline
a series of recommendations for the Finance Committee to
consider to control the effects of the financial crisis and avoid
an occurrence in the future. Specify which ones you believe
would be the most effective. Consider practicality, timeless,
cost, timeframe and effect of implementation.
Recommendations could cover governmental policy or action,
monetary policy, regulatory, and private industry.
3. The Ethics Committee also wants the panel to identify which
parties should be investigated for potential ethics violations and
the potential role they played that would be considered

3. unethical behavior during the credit crisis. Begin with a
definition of ethical standards in business.
4. This crisis is the most serious economic crisis in the world
history. European countries also suffer another wave of
financial crisis. Summarize what the European debt crisis is and
how would the European debt crisis play out? What really
caused the Eurozone crisis? Are Americans responsible for
European woes?
The written report is due on April 24 at 2:00 PM. Groups are
required to electronically submit a copy of your report using
Canvas Course Mail. The report must be presented in
professional manner and must be submitted before deadline.
Late project will be assessed a penalty of 10% points per day.
Each group will be responsible for submitting only ONE
document, rather than submitting individually.
When you prepare your report, you should follow these rules
and guidelines:
1. The report must be prepared with a word processor and
consist of summaries and recommendations for Part I and Part II
listed above. 15 to 20 double-spaced pages would be sufficient
to meet my expectation. The maximum allowed length is 20
pages (not counting the title page and bibliography). The
margins of your report should be 1" on all sides. Use 12-point
font. Each page of the body of your report must have a footer
that indicates your group number and page number. You should
understand that your grade is a function of the quality of your
work and not the number of pages you write.
THE MAXIMUM PAGE LIMIT WILL BE RIGOUROUSLY
ENFORCED.
2. Your recommendations for Part II (solutions to the financial
crisis) and analyses for other questions should be informative
which gives someone insight. Both parts (Part I and II) count
equally toward the research paper grade. If you want to use
tables and figures to support your arguments, make sure that

4. these tables and figures have a title. Readers of your report
should be able to understand what is presented in the tables or
figures without referring to the text. You can include footnotes
in your tables and figures to indicate data sources or to explain
the definition of variables. Your graphs must be of high-quality.
· Jack Levy
· Raymond
· Laila Khalil
· Khloe
· Nick
· Henry
· Cristian B
Question 1
The financial crisis has come in the year 2007-2008 with the
effect of the housing bubble which means frequent changes in
the prices of assets class such as houses, stock or other
commodities, etc. that exceeds its intrinsic value. Let us discuss
the causes which would have had the biggest impact in the
United States economy.
The first cause was Federal Reserve (Fed) the central bank of
the United States was started in 2001 that reduced the interest

5. rate from 6.50 % in May 2000 to 1.75 % in December 2001
(Duignan, 2019). By decreasing the interest rate it allows the
bank to extend consumer credit at the lowest rate. As a result,
customers take advantage of cheap credit to buy durable goods –
electronic appliances, houses, cars, etc. which would result in a
housing bubble.
The second cause was changing in the banking laws. At the
beginning of 1980s banks offer subprime mortgage loans with
balloon payments that means large payments due at the end of
the period or the interest rate is usually low in the starting
period (Chomsisengphet & Pennington-Cross, 2006). A
subprime mortgage is a type of loan which is issued to
borrowers with low credit ratings having a high rate of interest
for compensating their additional risk and involves high credit
risk.
When the home price tends to increase it would result in the
subprime borrowers protecting themselves against high
mortgage payments or by selling their homes at a high profit so
that they will pay their mortgage amount. In case of default,
banks have the right to sell the property of the borrower at
higher prices above the original amount which was shown in the
sanction letter. Due to this, many banks intentionally offer
subprime loans to customers with poor credit facilities as they
already know that they could not repay the loan amount. Due to
this, the share increased from 2.5% in 1990 to 15% in 2007
(Duignan, 2019).
The third cause was related to securitization. As banks
combined hundreds or even thousands of subprime mortgages
and sold them in capital markets – bonds, hedge funds, pension
funds, etc. where Bonds mean Mortgage-backed securities.
Selling subprime mortgage as Mortgage-backed securities was a
good way to increase their liquidity, stability in the market, and
reduce their risky loans. While purchasing MBS, it is a good
source for the banks to earn money by diversifying their
portfolios (Chomsisengphet & Pennington-Cross, 2006).
The fourth cause came with a concept too big to fail as its

6. failure threatened the entire financial system. In 2004 the SEC
(Securities and Exchange Commission) decrease the net capital
which totally impacts the total assets and total liabilities. It is
treated as a safeguard for banks which encouraged them to
invest more money into MBS.
The fifth and the last one started in the 1980s, which is known
as Great Moderation, which satisfied many financial institution
and the U.S government.
The federal fund rate was increased from 1.25% in June’2004 to
5.25% in June’2006 (Duignan, 2019) which resulted in more
default in the loan amount. Due to many subprime mortgage
loans, customers protect themselves by selling, refinancing or
borrowing their homes because many mortgage holders owed
more on their loan amount than their home value. Due to so
many defaults, it damaged the image of financial institutions,
banks, etc. and caused huge losses.
It was difficult to predict the strength of bank MBS as assets
and the securities were downgraded by credit rating agencies
which were treated as worthless assets.
It is the worst economic recession as it destroyed the overall
international financial systems like insurance companies, banks,
financial institutions, etc.
To solve this serious problem the US Congress took a big step
by making a secondary market for promoting home ownership
so that it would become easier to borrow money for buying of
houses. For this, it took the help of two government sponsor
enterprise namely Freddie Mac & Fannie Mae as they provided
liquidity, stability, and affordability to the mortgage market
In April 2007, one of the biggest subprime lenders filed for
bankruptcy due to which many other subprime lenders ceased
their operations.
The Federal Reserve helps to purchase federal funds at the
lowest rate with more liquidity. In January 2008, Bank of
America purchased Country Wide Financial for $4 billion in
stock (Duignan, 2019). In March 2008, Bear Stearns finished its
liquid assets and was purchased by JP Morgan Chase.

7. In 2008, Fannie Mae (the Federal National Mortgage
Association) and Freddie Mac (the Federal Home loan Mortgage
Corporation) influenced the secondary mortgage market which
involved buying and selling of mortgage loans. The main reason
behind their establishment is to provide liquidity either by
selling or buying them with a guarantee of principal and interest
payment. At the beginning of 2000, the share of a subprime
mortgage increased due to policy changes. This will impact
awareness of homeownership among low income and minority
groups. It became riskier because their liabilities were huge and
the chances of default in loans were high. To recover from this
crisis, the United States Treasury Department freed both
corporations by replacing their directors and by giving the
security to cover their debts which amounted to approx. $1.6
trillion (Duignan, 2019). After one month Lehman Brothers
which was a 168-years-old investment bank filed the largest
bankruptcy amounting $639 billion assets (Duignan, 2019).
The Federal Reserve gave a loan amounting $85 billion
(Duignan, 2019) to American International Group (AIG) to
cover losses in the sale of credit default swaps (CDS) which is a
contract which protects debt holders including MBS.
For protecting the financial system of the United States
economy Emergency Economic Stabilization Act (ESSA) was
established under which Troubled Asset Relief Program
(TARP). It was introduced with the help of Treasury Secretary
Henry Paulson, who gave permission from United States Banks
to invest $700 billion (Duignan, 2019) in MBS.
As government purchased, MBS did not provide sufficient
liquidity, so Paulson authorized to use $250 billion (Duignan,
2019) in TARP funds to purchase preferred stock. After taking
Quantitative Easing (QT) measures it improved the liquidity and
stimulated economic growth.
In February 2009, after the adverse effect of the Great
Recession, $787 billion (Duignan, 2019) program was
introduced by Barack Obama. This resulted in tremendous
growth in the economy after two years of the deep recession.

8. The net worth of American Household has declined by approx.
$17 trillion (Duignan, 2019) in the year 2012 estimated by St.
Louis Federal Reserve Bank. According to the Federal Reserve
Bank of San Francisco, the country gross domestic product was
approximately 7% (Duignan, 2019) lower than the rate before
the crisis. The unemployment rate was 10% (Duignan, 2019)
between 2007 and 2009 as 7.5 million jobs were lost. In 2018,
the unemployment rate reduced to (Duignan, 2019) 3.9% which
constitutes remarkable growth. This financial crisis affected the
overall economy as millions of families lost their homes and
millions of workers lost their jobs and eventually faced long
term unemployment and as a result, a great number of people
fell below the poverty line.
Question 2
Question 3
Winners and Losers in the 2008 Financial Crisis

9. The 2008 Financial crisis had a deep impact on all Americans.
Impact had been so huge that more than 8 million jobs were
lost, there were double-digit drop-in housing values, Dow Jones
industrial average plunged drastically. But there were select few
who were untouched. Those who were hardest hit were the
middle class, recent college graduates, pre-retirees and home
owners.
Winners and Losers of the Great Recession
The wealthy can be put in winners’ category – If true winners
can be found in any recession, the wealthy certainly qualify in
the Great Recession, this is because they had a diversified
portfolio of assets which the middle class didn’t. Alternative
investments apart from financial products were safe. The
middle-class assets were primarily concentrated in homes. The
wealthy did not experience any job loss, but the middleclass did
experience job losses which went as high as 15.3% from 7.7%
(Tasci, 2011).
The middle class can be put in the losers’ category – The
middle class continued to take a beating from the recession and
the share of working families who were low income had risen to
10.2 million. Home buyers also qualifies for the loser’s
category as the Housing bubble burst had provided homebuyers
opportunity to get deals of a lifetime. According to the NAR's
Housing Affordability Index, the median price of a single-
family home dropped from $196,600 in 2008 to $168,400 in
August 2011 (MacDonald, 2012). During that same period,
median mortgage rates declined from 6.15% to 4.69%, and the
money you would need to buy the average home dropped nearly
25% from $45,984 to $33,504.
Home sellers can be pit in loser’s category – According to NAR
figures, median home sale prices across the country fell from
$196,600 in 2008 to $173,100 in 2010. Homes put up for sale
were fetching even lesser prices thereby incurring losses to
sellers (Cerone, 2011).

10. Question 4
Part II

11. Question #1
The Federal Reserve has taken action aggressively towards the
financial crisis that emerged in 2010. The reserve implemented
designed programs in order to support the liquidity of financial
institutions and be able to improve the conditions in the
financial market So far its been successful and has improves
little by little the reserves balance sheets.
Even though the there has been programs that have expired or
have closed out the government still goes ahead and continues
to contribute new implementations of programs and take the
actions needed in order to setup a stable market after all. Some
of the actions that these programs involved over the few amount
yeas prior have been long-term securities putting downward
pressure on the long term interest rates that have been caused by
the crisis.
One of the tools they used was to provision liquidity directly to
borrowers investors in the key credit markets. Another tool
used has been provisioning short-term liquidity to banks and
other institutions. And lastly one of the many tools but one of
the top three tools they have used is expansion of the open
market in order to support the function of credit markets and out
downward pressure on the long-term interest rates and be able
to assist those with longer-term securities.
Currency swap agreements were also implemented to help those
institutions tied to central banks. This was going to provision
the dollar liquidity to banks in there jurisdictions. This was due
to the market being in a global level.
In 2011, the European central bank begun to purchase
government bonds to keep the yields from reaching level that
countries, such as Italy and Spain could not afford. This was
going to benefit those banks that were troubled initially and
would assist them directly with really low rates. This program
was called the Long Term Refinancing Operation (LTRO).
In 2012, the European central bank President has announced
that they would be doing whatever it took in order to keep the
crisis stable. This was something that repeatedly cut the

12. interest’s rates out and offset deflationary effects. This
continued to purchase government bonds at a rate of $100 bn
euros per month. This program is really similar to what was
used in the U.S Federal Reserve. The goal is to inject money
directly into the economy through large scales of purchase of
government bonds.
Today, these are the actions that have lead to slow economic
growth. However the crisis is over
Question #2

13. Question #3
Question #4

14. References
Cerone, M. (2011). Buying a First House in the Midst of a
Financial Crisis. Retrieved from
https://www.forbes.com/sites/moneybuilder/2011/01/28/buying-
a-first-house-in-the-midst-of-a-financial-crisis/#2eb5d96b684a
Chomsisengphet, S., & Pennington-Cross, A. (2006). The
Evolution of the Subprime Mortgage Market. Review, 88(1).
doi: 10.20955/r.88.31-56
Duignan, B. (2019). Financial crisis of 2007–08. Retrieved from
https://www.britannica.com/event/financial-crisis-of-2007-2008
MacDonald, J. (2012). Homebuyers Find A Windfall Of Lower
Prices | Bankrate.com. Retrieved from
https://www.bankrate.com/finance/real-estate/homebuyers-
windfall-lower-prices.aspx
Ramadhan, Mohammad & Naseeb, Adel. (2019). The Global
Financial Crisis: Causes and
Solution
s.
Tasci, M. (2011). Unemployment and the Great Recession.
Retrieved from https://www.clevelandfed.org/en/newsroom-and-
events/publications/forefront/ff-v2n03/ff-v2n0359-

15. unemployment-and-the-great-recession.aspx