8/8/2019 Stock Market 2008
1/31
Stock Market Recap
The Year In Review
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8/8/2019 Stock Market 2008
2/31
Where We Are Now? Major Indices:
Dow Jones Industrial Average: Down 33.8%
S&P 500: Down 38.5%
NASDAQ: Down 40.5%
Federal Funds Interest Rate Target:
2007: 4.25% 2008: 0.00-0.25%
Crude Oil Futures (per barrel):
2007: $95.98 2008: $44.60
Unemployment Rate: 2007: 4.7% 2008: 6.7%
U.S. Treasury Yield (Six Month Note)
2007: 3.49% 2008: 0.27%
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WhatHappened!?
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The Origin
Following the Dot Com bubble and the 9/11
stock market crash
Alan Greenspan cuts Fed Funds rate to 1%
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The Credit Bubble Begins
From 2003 to 2007:
Credit growth exceeded economic growth
So-called sub-prime mortgages became readily
available and encouraged!
Real Estate = The Ever-Appreciating Asset?
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Borrowing in Excess
Poor Mortgage Practices:
Alt-A loans available without paperwork
People selling mortgages got commissions from sales
volume not the actual value of the mortgage
Securitization (Think Bundling & Selling)
Bad mortgages were put into basket securities such as
CDOs and Mortgage Backed Securities
What was sold actually got a HIGH credit rating!
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Buyers Vanish from Market Eventually, people stop buying homes and with no buyers,
housing prices start to correct!
Once home values are collapsed,the collateral holding up loans
vanishes, and people suddenlycannot afford their own homes!
Whats more, the value of all of the securities that were soldis gone. So HUGE firms are forced to post losses!
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The MightyHave Fallen
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Bear Stearns
Off Balance Sheet items, like CDOs and
Mortgage-Backed Securities, cause write-downs of$500+ Billion from major banks
Run on the Bank
Bear Stearns collapses as buyers vanished, leaving
liquidity issues in the company
Capital fell from $12 billion to $2 billion in less than a
day causing a complete collapse
Bought out by JP Morgan for $10 a share, with a
$30 billion loan from the Federal Reserve
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Fannie Mae & Freddie Mac
Fannie Mae and Freddie Mac were set up in the
1930s as Government Sponsored Entities (GSEs)in order to promote home ownership
Liquidity was completely erased once credit dried
up in the housing market
BAILED OUT
Too big to fail? Responsible for nearly half of the $11 trillion dollars of
mortgages on the market
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Shorters Take Control
By now, we are waking up every morning to
10%+ declines in the financial stocks
No Uptick Rule In Place by the SEC
Shorters are destroying every stock on the market,
causing the rest of the market to fall alongside it
NO confidence in the system at all
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Merrill Lynch
Agrees over the weekend to be sold to Bank of
America for $50 billion
Bank of America went for safety in the face ofinvestment banks that were succeeding off of
extreme amounts of leverage
Criticized over purchase, as the market tanked Monday
and BOA could have bought MER much cheaper!
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Lehman Brothers
Lehman Brothers had similar liquidity problems to
Bear Stearns and the stock was being shorted tosmithereens!
The Question was:
Will The Government Bail Them Out?
Government DOESNT step in, LEH declaresChapter 11 Bankruptcy on September 15th
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AIG Bailout
AIG received $85 billion from the government
back in September effectively letting thegovernment seize control of the company
The problem? Credit Default Swaps
CDSs are insurance against defaults on assets tied to
corporate debt and mortgage securities
Weakness in AIG would have a MAJOR impact on
financial institutions that bought swaps to protect
themselves against loss and take writedowns
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Enough is Enough
Morgan Stanley and Goldman Sachs step in to put
an end to the constant shorting
The SEC agrees, and bans shorting on a select listof stocks for a while to ease the market pain
This also happened in the U.K., Australia, the
Netherlands and Taiwan
MS and GS are converted from investment banks
to bank-holding companies.
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Main StreetJumpsIn
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Capital Injections!
Warren Buffet invests $5 billion in Goldman
Sachs, and $3 billion in General Electric
The Netherlands buys Fortis for $23 billion
Citigroup agrees to acquire Wachovia for $2
billion, but Wells Fargo outbids with an $11.8billion offer that doesnt need federal support!
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Bailout Madness
President Bush signs on a $700 billion bailout plan
to rescue the U.S. financial system
One of the largest government interventions in history
The worlds Central Banks launch a coordinated
effort by lowering short-term borrowing rates in
unison by a half-percentage point
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Barack Obama Wins
Senator Barack Obama wins election into the U.S.
Presidency over John McCain
Stocks endure worst post-election sell-off inhistory, and the market tumbles 5.1%
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AIG Bailout Revisited
Government scraps the existing bailout package
and increases the giveaway to $150 billion!!!
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China Announces Stimulus Plan
China announces that they are progressing with a
bailout of their own, a sizable $586 billion torestore domestic demand and maintain double-
digit GDP growth
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WhosT
oBlame!?
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Just Kidding
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Detroit In Trouble
The CEOs of Detroit auto-makers fly into
Washington to appeal for taxpayer money
First obvious sign of trouble outside of thefinancial sector
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More Bailouts!
The government agrees to step in to stabilize
conditions at Citigroup
Guarantee more than $300 billion in troubled assets,
and injecting $20 billion of additional capital
The central U.S. bank plans to buy up to $600
billion of debt issued or backed by mortgage-
finance firms
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Recession
The National Bureau of Economic Research
stated on December 2nd that the recessionofficially began in December of 2007
Bernard Madoff is arrested from multibillion-dollar fraud the effects of which we still cannot
fully know for sure
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The End of 2008 The Federal Reserve cuts its target on the Federal Funds Rate
to 0%-0.25%
Goldman Sachs posts its first quarterly loss since going public
The White House agrees to lend GM and Chrysler $17.4billion to avoid bankruptcy
The government commits $6 billion to stabilize GMAC afinancing company vital to the future of GM
and we rally into 2009!
8/8/2019 Stock Market 2008
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Stock Market Recap
The Year In Review
A FREE Presentation
Brought to you byThe Net Fool dot com
Come by and subscribe for more!