“A Bazooka in My Pocket” Group A: Dan Azami, Veronica Abramson, Joe Ballai, Nate Bawduniak, Dan Bello, Lauren Brandenstein

Collapse of Housing Bubble Case–Shiller home price index data, 1890–2018. Prices peak in 2006 Declining home prices Increases foreclosures Huge impact on mortgage markets Group of indexes that track the change in home prices in the United States. Largest decrease in the index during 2008, recession from 2007-2009.

Henry Paulson 74th Secretary of Treasury nominated by George W. Bush Former Goldman Sachs Chief executive Bailout proposal for Fannie Mae and Freddie Mac Remove limits on Treasury lending Would give the broadest possible guarantees of access to government capital. If there was a “bazooka” in place, most likely the government would not have to go to the extreme of taking over the companies. After he said this, he ensured the bazooka would happen.

Fannie Mae & Freddie Mac Fannie Mae (Federal National Mortgage Association) Freddie Mac (Federal Home Loan Mortgage Corporation) Sell “mortgage-backed securities” to investors Key source of funding Paulson requests for “blank check” Goal: increase supply of money available for mortgage lending and increase the money available for home purchases Federal National Mortgage Association & Federal Home Loan Mortgage Corporation Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are Governement Sponsored Enterprises. They buy mortgages, poll them together, and sell them as “mortgage-backed securities” to investors. They are a key source of funding for banks and other home lenders, their funding is key to recoveries in housing and the economy as a whole. Henry Paulson requested that Congress removes limits on how much money Treasury can lend to the troubled finance firms and distribute them a “blank check”. The goal was to increase supply of money available for mortgage lending and increase the money available for home purchases

‘"If you've got a squirt gun in your pocket, you probably will have to take it out," Paulson said. "If you have a bazooka in your pocket and people know it, you probably won't have to take it out."’ This is the full quote. Showcases the idea that Paulson wanted to have access to liquidity and capital, but believed if the options were available they would never have to use it. Turns out her was wrong

Bailout July 2008 asked for bill to approve 25 Billion in subprime mortgages Bailout September 7, 2008 Freddie Mac Fannie Mae July 2008 Paulson asked for bill to approve 25 B in subprime mortgages - borrowers with low credit Causes stocks to plummet in fear the companies would be nationalized, would wipe out stockholder wealth Bailout September 7 2008, 100 B in preferred stock and mortgage backed securities, and conservatorship Supposed to be temporary, but conditions never improved to allow government to sell shares and return to private ownership It authorized the Federal Housing Administration to guarantee up to $300 billion Enactment of the Act led to the government conservatorship of Fannie Mae and Freddie Mac.

Bailout contd. Purchase 100 billion in preferred stock, warrant up to 80%, and mortgage backed securities Housing and Economic Recovery Act of 2008 Federal Finance Housing Agency Intended to be temporary Enactment of the Act led to the government conservatorship of Fannie Mae and Freddie Mac. restore confidence in Fannie Mae and Freddie Mac by strengthening regulations and injecting capital into the two large U.S. suppliers of mortgage funding. States are authorized to refinance subprime loans using mortgage revenue bonds. Enactment of the Act led to the government conservatorship of Fannie Mae and Freddie Mac. Conservatorship under the federal finance housing agency, no power to break them up or liquidate the companies, or change business modeal Belief that it shouldve been a receivorshup, where they could wipe out shares change the business model and over time either nationalize the companies, privatize them, or liquidate them. Generally investors would like the companies to return to private shareholders, stocks spiked when trump was elected because he promised to release them from government control. Efforts to end. Broad authority, reconstituted board of directors Focus on reducing losses and maintaining stability in the markets //

Conclusion Plan to prop up mortgage sector Never imagined using bazooka Resulted in bailout Government still holds shares of Fannie & Freddie