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Troubled Asset Relief Program

Troubled Asset Relief Program. Jesse Krieger May 4 th , 2011. Presentation Content. Subprime Mortgage Crisis TARP Purpose and Background TARP and AIG TARP and GM. Subprime Mortgage Crisis. Causes of the Crisis: Housing Prices Peak in 2006 High Default Rates

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Troubled Asset Relief Program

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  1. Troubled Asset Relief Program Jesse Krieger May 4th, 2011

  2. Presentation Content • Subprime Mortgage Crisis • TARP Purpose and Background • TARP and AIG • TARP and GM

  3. Subprime Mortgage Crisis • Causes of the Crisis: • Housing Prices Peak in 2006 • High Default Rates • Conception of Housing Prices Always Increasing • Housing Loans Approved for Normally Under Qualified Applications • Housing Prices Drop Late 2006-2007 • Led to Increase in Mortgage Defaults and Forclosures

  4. Subprime Mortgage Crisis (Cont.)

  5. Subprime Mortgage Crisis (Cont.)

  6. Companies Failed During Crisis • New Century Financial Corporation • American Freedom Mortgage • American Home Mortgage • Bernard L. Madoff Investment Securities LLC • Charter Communications • Lehman Brothers • Linens 'n Things • Mervyns • NetBank • Terra Securities • Sentinel Management Group • Washington Mutual • Icesave • Kaupthing Singer & Friedlander • Yamato Life • Circuit City • BancoPrivadoPortuguês • Allco Finance Group • Waterford Wedgwood • Saab Automobile • BearingPoint • Tweeter • Chrysler • General Motors

  7. Economic Crisis • In Economic Uncertainty, Banks Don’t Loan • Want to Maintain Liquidity • Need Either More Capital or Greater Certainty • Natural Business Tendency to NOT Spend During These Times • TARP Created to Encourage Spending

  8. TARP Background • Fundamental Part of the Emergency Economic Stabilization Act of 2008 • Gives Secretary of the Treasury Authority to Purchase Troubled Assets • Restore Liquidity • Improve Financial Stability • Other Economic Assistance • Automotive Industry • Private Companies (Toxic Assets) • Fannie and Freddie • AIG

  9. TARP Continued • Report Submitted to Congress Reporting the TARP’s Progress • http://www.sigtarp.gov/reports/congress/2011/January2011_Quarterly_Report_to_Congress.pdf • If Short, Legislative Proposal to Recuperate • Ensure that National Debt Does Not Increase

  10. AIG In Trouble • American International Group • International Insurance Agency in Over 130 Countries • Reported Losses of $99B in 2008 • Reported Losses of $11B in 2009 • Invested in High-Grade Residential Mortgage Backed Securities • Sold Credit Default Swaps to Financial Institutions for Loans Rated AAA • Suffered Great Losses and Liquidity Issues due to Mortgage Crisis

  11. TARP and AIG • November 25th, 2008 • TARP Purchased $40B in Preferred Stock • %10/yr Dividends • March 2nd, 2009 • TARP Purchased $30B More in Preferred Stock • Used Capital to Relieve Liquidity Issues

  12. AIG Moving Forward • Repaid $9B • Plans to Repay • Treasury to Sell Stock Gradually Over Time • Sold Several Subsidiaries • ALICO to MetLife for $16B • Net Income of $8B in 2010 • Operational Goals • Reduce Risk in Investments and Credit Default Swaps • Reduce Operational Costs • Strengthen Financial Position to Repay Taxpayers

  13. GM In Trouble • General Motors • Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden, Isuzu, Jiefang, Opel, Vauxhall, Wuling… • Locations in 31 Countries • Downturn in Economy • Reported Losses of $39B in 2007 • Reported Losses of $31B in 2008

  14. TARP and GM • US Treasury Purchased $51B in Common Stock • 61% Stake in the Company • Returned $23B • US Received Revenue of $700M to Date

  15. GM Moving Forward • Reorganized Under Chapter 11 Bankruptcy • Primarily Used by Corporate Entities • Ch. 13 Pertains to the Reorganization of Private Individuals • Ch. 7 Pertains to Liquidation Bankruptcies • Listed on the NYSE on November 18th, 2010 • World’s Largest IPO of $23B • “Repaid” Debt Early • Claimed Ability due to Increase in Malibu and LaCrosse Sales • Used Federal Funds to Repay TARP Debt • Net Income of $5B in 2010

  16. Conclusion • Activity to Date • 928 Recipients • $619B Committed • 27.3% Banks/Financial Institutions, Cap at $475B • 14.1% Fannie and Freddie, No Cap • 12% Auto Companies, Included in $475B Cap • Toxic Asset Purchases, Cap at $22.4B • $564B Dispersed • $259B Returned • $57B Total Revenue • Notice – Did Not Cost $700B

  17. Conclusion (Cont.) • Was this program effective? Is this even measureable or quantifiable? • Will the TARP encourage institutions to take more risks, knowing that the government will bail them out? • Pros? • Cons?

  18. Works Cited • http://troubled-asset-relief-program.net/ • http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#cite_note-0 • http://www.brookings.edu/~/media/Files/rc/papers/2009/0123_tarp_elliott/0123_tarp_elliott.pdf • http://en.wikipedia.org/wiki/Subprime_mortgage_crisis • http://en.wikipedia.org/wiki/United_States_housing_bubble • http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization • http://www.nytimes.com/2010/05/02/business/02gret.html?_r=1&ref=business • http://articles.boston.com/2010-05-14/business/29290548_1_ed-whitacre-gm-general-motors • http://en.wikipedia.org/wiki/General_Motors • http://en.wikipedia.org/wiki/American_International_Group • http://projects.propublica.org/bailout/list/index • http://www.creditcards.com/credit-card-news/federal-reserve-g19-consumer-credit-march-10-1276.php • http://www.thompsonhine.com/publications/pdf/2008/10/summaryofthe1543.pdf • http://www.britannica.com/EBchecked/topic/1505432/Troubled-Asset-Relief-Program • http://www.aigcorporate.com/index.html • http://en.wikipedia.org/wiki/Credit_default_swap • http://www.aigcorporate.com/investors/AIG_2010_Annual_Report.pdf • http://www.sigtarp.gov/reports/congress/2011/January2011_Quarterly_Report_to_Congress.pdf • http://www.gm.com/corporate/ • http://investor.gm.com/pdfs/Annual%20Report.pdf

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