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
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?
Articles on Portugal (Thanks, Gloria)
• http://www.bloomberg.com/news/2013-0514/portugal-reforms-urged-by-oecd-to-fixeconomy-s-achilles-heel-.html
• http://www.guardian.co.uk/business/2013/jul
/03/eurozone-crisis-portugal-resignationsgreece-troika
• http://www.bbc.co.uk/news/world-europe23261035
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
Problems within Troika?
• http://www.nytimes.com/2013/06/08/world/
europe/policy-troika-for-europe-financialcrisis-has-splits.html?pagewanted=all&_r=0
• http://www.nytimes.com/2013/06/11/busine
ss/global/troika-has-a-patchy-record-onbailouts.html
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.
• http://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-officialin-greece.html?ref=todayspaper
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….
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• Parts -repealed in 1999 - no longer illegal for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.
Troubled Asset Relief Program
TARP – 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”
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?
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 noninflation-adjusted 97 percent of the $418
billion disbursed under the program.
Wikipedia article on TARP
• During 2008, companies -$ 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.
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."
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?
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.
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 1unit second home, or a 1- to 4-unit investment
property.
Primary Mortgage Market Survey®
July 11, 2013
30 Year
15 Year
Average Rate
4.51 %
3.53 %
Fees/Points
0.8
0.8
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.
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.)
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
EUROPE
http://www.youtube.com/watch?v=wY6G6U4gU
40
• Banks – shedding assets around the world
• Euro zone – banks in healthy economies
pulling out of weaker southern locales
• Significant retrenchment in global banking