Notes on Economic Crisis

I need to look at the history of Fannie Mae and Freddie Mac because people (often, Republicans) are talking about it as the core of the problem.



AIG got an 85 billion dollar loan



There's something called a 'credit default swap market' that Elizabeth Dole spoke about. I don't know what that is but it might have something to do with insurance.



One Senator said the root cause of the problem started with foreclosures.

We can enhance ability to modify loans so they don't get foreclosed on.



One Senator asked what we're doing about lowering home values (which he assumes is the bottom line problem).

Me: if its just that the home values have gone down, isn't that part of the market? We shouldn't do anything about that it seems.



Me: I'm not entirely clear why we have to act now or act at all. I'm not suggesting we don't, only that it hasn't been explained to me in a way I understand.



*****

I'm taking these notes as I watch the Senate Banking Committee have a hearing with Bernanke, Paulson, Cox, and someone else.



Here are two suggestions for a more efficient hearing meeting:

1. Don't have introductory statements. What's the point? They can have statements at the end.

2. If they absolutely must have introductory statements, can't we just assume that, as a whole, the Senators thank the hearing participants. Each one of them doesn't have to say it.



*****



Paulson speaks...

quickly enacting a program to stabilize our financial systems

to avoid frozen credit markets, and further failures.

Started with bad lending practices on the part of banks and borrowers.

We've now had higher foreclosure rates and now the impact on financial institituions.

Finally, last week our crdit markets froze.

Even regular companies had trouble with their normal operations.

Eveyr business requires money flowing through every day - to maintain normal business operations, sustain jobs, and to grow.

Previously we've worked on a case by case basis - AIG, Freddie Mae, Fannie Mae, Lehman Brothers.

Exectuvie compensation - F/F, AIG, CEO's were replaced, government got warrants for 79.9 percetn of equity, compensation



Congressional Charters started many years ago - root of problem with FF



Confidence steps:

more is needed



Fundamentally and comprehensively get at the root cause

Root caus e is the downturn in the housing market.



...then the financial companies can raise more capital.



Asset relief program...



Include provisions that provide transparency



Paulson presented a simple three page legislative outline...but congress will work on the oversight with Treasury together.



Bernanke -

Why proposal would make a positive difference...

why aren't they working? mortgage related securities rae held by insti.

there are two prices...fire sale price - hold to maturity price

becuase the securities rae complexities there is no active market for these securities so the fire sale price is much less than the maturity price.

institutions must value closer to fire sale price for accounting purposes.

leads to big writedowns and reduction in capital

without a market to determine hold to maturity price -

Under th treasury program, auctions can give the market good infromation about market price.

If the

Banks will have a basis to value the asset and they do

liquidity will come back to markets

removal from balance sheets and will .....???

credit markets will start to unfreeze

taxpayers should own assets at close to maturity prices



Cannot impose punitive measures would reduce participation in the program.





Establish reasonable hold to maturity prices.





Cox - SEC

Emergency to ban shortselling

make it eaasier for issuers to buy their own shares on the market

.????...daily short positions.



Okay - I'm getting lost...now...



I'm going to have to get the transcripts...Bernanke's information was interesting and Cox was talking about specifics that I couldnt' keep up with.