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
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
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
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