mini_case_Financial_Crisis_2011

mini_case_Financial_Crisis_2011 - Mini Case Study Financial...

Info iconThis preview shows pages 1–16. Sign up to view the full content.

View Full Document Right Arrow Icon
1 “Mini” Case Study Financial Mess! http://video.pbs.org/video/1082087546/
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2
Background image of page 2
3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4
Background image of page 4
5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Shocking headlines, but … Cool cartoons! 6
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Where to begin! Several corporate-finance issues in play with the government response to the financial crisis (i.e., gov’t bailouts) Risk of leverage Implicit “too big to fail” put option Agency/“moral hazard” issues Seniority of financial claims Consolidation in industries Appropriate payout policy for firms
Background image of page 8
9 Background (entering fall 2008) Total mortgage debt in U.S. $10-12T Fannie Mae and Freddie Mac are publicly- owned government sponsored enterprises (GSE) They make home loan guarantees and “bundle” mortgages to provide liquidity to the mortgage market Allows securitization of mortgages (a secondary market) Allows more mortgages to be undertaken at lower interest rate Fannie and Freddie own or guarantee about one half of the mortgage market!
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 Background (continued) Implicit government bailout guarantee – what if Fannie and Freddie fail? Will housing market be allowed to collapse? How will this affect the rate at which these companies can borrow? How will this affect capital structure choice of these companies?
Background image of page 10
11 Background (continued) In 2007, subprime-mortgage crisis begins More and more borrowers defaulting on their mortgages (too lenient standards for the original loan and home equity evaporating with decline in housing prices) Losses for Fannie and Freddie – have guaranteed these mortgages would be paid (further losses from mortgage-backed securities they own)
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12 Problem! Fannie and Freddie have extremely high leverage (debt ratio of roughly 95% at end of 2007) Little room for error, easy to get into a liquidity crisis, easy to have actually negative value of book equity as write-down value of assets In August of 2008, rating agencies downgrade rating of the preferred stock of both companies
Background image of page 12
Solution for Fannie and Freddie … 13
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 14
15 First Big Government Bailout
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 16
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 39

mini_case_Financial_Crisis_2011 - Mini Case Study Financial...

This preview shows document pages 1 - 16. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online