bail out final pro copy
DESCRIPTION
This presentation covers the first TARP package, now, go ahead and double it!!TRANSCRIPT
![Page 1: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/1.jpg)
Who’s Going to Bail Me Out?Navigating Today’s Market Conditions
![Page 2: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/2.jpg)
Headlines Continue…
• IndyMac Bank Fails
• Freddie Mac & Fannie Mae in Trouble
• Lehman Brothers Goes Bankrupt• Merrill Lynch Looking for Help
• Fed Loans AIG $85 Billion
What’s Next?
![Page 3: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/3.jpg)
$700 Billion Bail Out
![Page 4: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/4.jpg)
Let’s Back Up…
![Page 5: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/5.jpg)
How did we get into this mess?
1. They believed housing prices would continue to rise and they would be able to re-finance at a more favorable rate in the future
2. Banks realized they could charge much higher origination fees for sub-prime loans and so encouraged people without adequate education to apply for a sub-prime loan
3. Everyone got a little greedy.
![Page 6: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/6.jpg)
Let's break it up to explain…
• A Security– An instrument of financial value; stocks and bonds are
securities.• A Mortgage Backed Security
– Is where a bunch of mortgage loans are grouped together to create a large pool of debt. this debt is then sold to investors the same way a bond is; you buy it at a discount and rely on the mortgage payments for the payout. Because some of these mortgages were structured so that people ended up paying MORE than they were borrowing, it sounded like a great deal.
![Page 7: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/7.jpg)
Gems aren’t always what they seem to be!
Corporate and institutional investors and investment banks like Bear Stearns bought mortgage-backed securities in droves during the height of the real estate boom, often touting them as “undiscovered gems”.
- Schaeffers’s Investment Research
![Page 8: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/8.jpg)
What does this mean to me?
![Page 9: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/9.jpg)
How many more banks are at risk of failure?
The FDIC has identified over 100 banks as "problem institutions" that where at risk of failure for the first quarter of 2008. That number will go up but historically, only about 13 percent of banks on the list typically fail, says the FDIC. The FDIC doesn’t name the banks specifically for fear customers will rapidly pull their money out.
![Page 10: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/10.jpg)
A look at Insurance
Who is AIG?
• American International Group is the world’s largest insurer…at the moment
• Fortune 500 company
• It’s stock is tracked within the S&P 500
![Page 11: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/11.jpg)
…What Happened?
• As a company gets bigger, it gains tougher competition and lower margins. Making it harder to put up consistent profits.
• So in order to make more profits, they take on more risk and more ventures
• AIG was very heavily involved in the fast-growing market for a kind of derivative called a credit default swap.
![Page 12: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/12.jpg)
/Credit Default Swap?
• Much like an insurance contract.
• AIG Financial Products (AIG FP)
• In a market where companies don’t default, it was much like selling car insurance in a world that didn’t have car accidents.
• The opposite when there is a market that is crashing….
![Page 13: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/13.jpg)
and Rating Agencies
Why are Ratings so important?
• When an insurance company has great ratings, they don’t have to have as much collateral.
• Works much like your credit score.
![Page 14: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/14.jpg)
and the GovernmentWhy the Government won’t let AIG fail
• AIG was deemed too huge (its assets toped $1 trillion), too global, and too interconnected to fail.
• Could, and probably would, put the credit market on its tail, making it hard for the common consumer to get credit
• The particular risks that brought the company to the brink of bankruptcy seem to lie not with its core insurance businesses but with AIG FP.
• They believe that AIG’s insurance businesses make so much money that hey could conceivably pay off the cost of the bailout within a few years!
![Page 15: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/15.jpg)
Bailout?
What is the bailout?• The Fed authorized the Fed. Reserve Bank of New York
to Lend AIG up to $85 billion. In return, the federal government will receive a 79.9% stake in the company.
• The line of credit, which is available for two years, is designed to help AIG meet its obligations.
• Fed says that taxpayers will be protected because the loan is backed by the assets of AIG and its subsidiaries.
![Page 16: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/16.jpg)
What’s this Bailout all about?
![Page 17: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/17.jpg)
What $700,000,000,000.00 (seven hundred billion) looks like:
It's hard to imagine what the USA bailout would look like in hard cash.
![Page 18: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/18.jpg)
![Page 19: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/19.jpg)
![Page 20: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/20.jpg)
![Page 21: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/21.jpg)
![Page 22: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/22.jpg)
![Page 23: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/23.jpg)
![Page 24: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/24.jpg)
![Page 25: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/25.jpg)
![Page 26: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/26.jpg)
![Page 27: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/27.jpg)
![Page 28: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/28.jpg)
![Page 29: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/29.jpg)
![Page 30: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/30.jpg)
![Page 31: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/31.jpg)
Now double that.
And add $170 Billion.
That's the price tag of the bailout...
![Page 32: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/32.jpg)
What could $700 billion buy?
• If you stack up the dollar bills they will reach about 43,000 miles high
• You could pay for our nation’s education bill for a year and still have $2 billion to buy the children candy
• You could give every single American ‘private’ healthcare for nearly 5 years
• You could buy 40 million Ford Focus automobiles
• You could hire singer George Michael for a private concert every night for 956 years and see a matinee every Saturday for 956 years
– As reported on ABC’s ‘Nightline’ on 9-25-08
![Page 33: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/33.jpg)
What’s the Risk of Stepping in?
The Fed pays about 95% of its earnings to the Treasury. Booking a loss on an
investment reduces the central bank's profits - and that, in turn, reduces how much the Fed can pay the Treasury.
![Page 34: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/34.jpg)
What’s the Risk of Not Stepping In?
• The government stepped in to help Fannie, Freddie and AIG on the premise that their demise would cripple the economy.
• One concern was that if they fell, the noose on lending would tighten further. The last thing we want is to have the banks cut back on lending
• But the knock-on effects could be more widespread. If Fannie and Freddie went under, for instance, the housing industry could seize up, causing the loss of millions of jobs.
![Page 35: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/35.jpg)
Even if the bailout gets approved…Will it get worse before it gets better?
Who remembers the RTC or Resolution Trust Corporation in 1989?
![Page 36: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/36.jpg)
• Stock Market: Here's the S&P 500 from the late-80s to
the early-90s. That little red dot is the RTC bailout deal:
![Page 37: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/37.jpg)
Economy: Here's GDP. Again, that dot is the bailout.
![Page 38: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/38.jpg)
Unemployment: Did the bailout put people
right back to work? Not exactly.
![Page 39: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/39.jpg)
Housing: Given that the RTC cleaned up the S&L mess, you
might think housing bounced back right away. Nope.
![Page 40: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/40.jpg)
So Who Will Bail You Out?
Ultimately you…but you’ll need an advisor on your
team
![Page 41: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/41.jpg)
Don’t Panic!
Much of what’s happening is out of your control
![Page 42: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/42.jpg)
Focus on what you can control!
• Pay attention to your risk level
• Find out what exposure your insurance carriers have
• Audit your bank accounts for proper FDIC Coverage
• Be aware of bad advice or bad advisers
![Page 43: Bail Out Final Pro Copy](https://reader034.vdocuments.us/reader034/viewer/2022051400/559869381a28ab1f0b8b458f/html5/thumbnails/43.jpg)
Key areas to watch
• Income-producing investments– How safe are they?– What is Withdrawal Risk?
• Getting out at the wrong time– What are your time horizons?– How much risk should I take?– Is it too late to protect my investments?
• Timing of withdrawals– Structure a plan– Stick to the plan