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Lecture 2,3-The Great Recession.docx

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History 1803E
Jeffery Vacante

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Mike G. September 13, 2012 The Great Recession During the George W. Bush era Henry Paulson, Secretary of the Treasury, former CEO of Goldman Sachs -Bear Stearns collapses in March, 2008 and is bought by JP Morgan at fire- sale price (orchestrated by Paulson) -September, 2008, Merrill Lynch is forced to sell its self to Bank of America -Lehman Brothers files for bankruptcy September 15, 2008. ($600 Billion) -September, 2008 AIG is given a $182 billion bailout by government (State Intervention) Bush is losing interest with presidency and hands off all responsibilities for recession to Paulson. He seems to be making it up as he goes along. He creates a deal for Bear Stearns but not Lehman. Paulson creates a comprehensive bailout package for Wall Street. -October, 2008 Emergency Economic Stabilization Act (The Bailout) -Troubled Asset Relief Program (TARP)-government program to buy toxic/bad assets (bonds, securities) that Wall Street has on its books. -frees up capital, takes weight of toxic assets of their shoulders -Bailout is met with negativity by public. Publics tax dollars spent on risky Wall Street banks who messed up no the public. -House of representatives say no and banks start to plummet. -Paulson rewrites and brings it back and it is passed Roots in American obsession with home ownership Mortgaging the American Dream -Beginning in 1930’s, post war era, obsession with home ownership. Shows success. National housing Act (1934) -Creates Federal Housing Administration, to insure mortgages -The federal national mortgage association (fannie mae) -A government sponsored enterprise (gse) created in 1938 to buy mortgages insured by the government from banks. Would alleviate debt and free up capital so that banks can issue more mortgages. -This encourages the suburban, home ownership boom in the post war years -Late 1960’s Fannie Mae would be privatized and be permitted to buy private mortgages (not backed by National Housing Act). -Government creates new entity, the government national mortgage association (Ginnie Mae) to focus on government-backed mortgages while Fannie Mae focuses on riskier, private mortgages. -At the same time the Federal home loan mortgage corporation (Freddie Mae) is created to compete with Fannie. Market competition. Stimulate economy Mike G. September 13, 2012 -Fannie issues first mortgage backed security in 1970s Incorrect Assumptions The more debt a bank has the more reserve capital it must keep. Essentially tie down capital and not allow the movement of capital, which is how a bank works. Banks have no incentive of checking someone’s credit because it doesn’t matter because Freddie and Fannie will buy it. Freddie and Fannie in turn are under the assumption that the government will back them up. But they had been privatized and government doesn’t have their
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