Stock Market Recap► The Year In Review

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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%

What Happened!?

The Origin► Following the Dot Com bubble and

the 9/11 stock market crash…► Alan Greenspan cuts Fed Funds rate

to 1%

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?

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!

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 loansvanishes, and people suddenlycannot afford their own homes!

► What’s more, the value of all of the securities that were sold is gone…. So HUGE firms are forced to post losses!

The MightyHave Fallen

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

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

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

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 of investment 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!

Lehman Brothers► Lehman Brothers had similar liquidity

problems to Bear Stearns… and the stock was being shorted to smithereens!

► The Question was:Will The Government Bail Them Out?

► Government DOESN’T step in, LEH declares Chapter 11 Bankruptcy on September 15th

AIG Bailout► AIG received $85 billion from the

government back in September… effectively letting the government 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

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 list of 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.”

Main StreetJumps In

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 $11.8 billion offer that doesn’t need federal support!

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 world’s Central Bank’s launch a

coordinated effort by lowering short-term borrowing rates in unison by a half-percentage point

Barack Obama Wins► Senator Barack Obama wins election

into the U.S. Presidency over John McCain

► Stocks endure worst post-election sell-off in history, and the market tumbles 5.1%

AIG Bailout Revisited► Government scraps the existing

bailout package… and increases the giveaway to $150 billion!!!

China Announces Stimulus Plan► China announces that they are

progressing with a bailout of their own, a sizable $586 billion to restore domestic demand and maintain double-digit GDP growth

Who’s To Blame!?

…Just Kidding

Detroit In Trouble► The CEOs of Detroit auto-makers fly

into Washington to appeal for taxpayer money

► First obvious sign of trouble outside of the financial sector

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

Recession► The National Bureau of Economic

Research stated on December 2nd that the recession officially began in December of 2007

► Bernard Madoff is arrested from multibillion-dollar fraud… the effects of which we still cannot fully know for sure

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 $17.4 billion to avoid bankruptcy► The government commits $6 billion to stabilize

GMAC… a financing company vital to the future of GM

… and we rally into 2009!

Stock Market Recap► The Year In Review

► A FREE Presentation► Brought to you by The Net Fool dot com► Come by and subscribe for more!