TheGreatRecession

TheGreatRecession - REPAIRING THE FINANCIAL SYSTEM BAILOUT...

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REPAIRING THE FINANCIAL SYSTEM BAILOUT AND REFORM
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WHAT EXACTLY HAPPENED? U.S. housing bubble. Large scale diversification and securitization of mortgages. MBC’s emerge as a popular financial asset. FED raises interest rates. As a result, a large number of sub-prime mortgagees went under. Housing prices fell nationwide. It became apparent that securitization did not insulate investors from aggregate risk. Uncertainty regarding individual risk exposure rises. It becomes very difficult to assess how much risk exposure an individual bank has. (This is a direct result of over- sophisticated financial instrument design.)
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WHAT EXACTLY HAPPENED? -PART 2- Commercial banks respond to uncertainty by sharply increasing the overnight interbank rates. “Flight to safety”: Lenders decide to place their funds in U.S. treasury bills. The spread between T-bill yields and interbank lending rises dramatically. The amount of lending dropped. Volume of transactions in financial markets falls sharply. Asset valuation becomes difficult. For all intents and purposes, a liquidity crisis emerges. Panic sets in.
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LIBOR SPREAD
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WHAT EXACTLY HAPPENED? -PART 3- September 2008: The government takes over Fannie Mae and Freddie Mac. Lehman Brothers collapses into bankruptcy. Wounded brokerage giant Merrill Lynch is sold to Bank of America. American International Group (AIG) is bailed out by the FED. Washington Mutual collapses and is seized by federal regulators. October 2008: The Emergency Economic Stabilization Act of 2008 is introduced. Its enacted rescue program, the Troubled Assets Relief Program (TARP) is utilized to bailout troubled financial institutions. Stock markets decline sharply, vaporizing more than $30 trillion. While
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This document was uploaded on 11/01/2011 for the course ECO 301 at Miami University.

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TheGreatRecession - REPAIRING THE FINANCIAL SYSTEM BAILOUT...

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