Your Team Is An Independent Panel Hired By The Chairman ✓ Solved

Your team is an independent panel hired by the Chairman of t

Your team is an independent panel hired by the Chairman of the Finance Committee of the House and Senate to investigate the Subprime Mortgage Crisis and its aftermath. The written report to the Committee is to include:

Part I

1. Summarize the subprime mortgage crisis and its aftermath in a chronological format, highlighting only significant events that occurred. Be sure to include the starting point, as you see it.

2. Outline the role that each party played in the subprime mortgage crisis. Identify the names of the companies that played a major role and briefly provide an update of their present status:

• a. Mortgage companies/brokers
• b. Subprime borrowers
• c. "Money center" banks
• d. Investment bankers
• e. Mortgage credit insurers (Freddie Mac, Fannie Mae, Ginnie Mae)
• f. Credit rating agencies (the big 3)
• g. Investors (pension funds, hedge funds, global investors)

3. Identify the winners and losers from this financial event. Clearly state your reasons.

4. Describe the magnitude of the effects to the national and international economy, through data and statistics, and present your opinions about whether AIG should have been allowed to fail.

Part II

1. Summarize the actions already taken by the Federal Reserve and Federal Government to ease the credit crisis.

2. Based on your research and knowledge of the current economic environment, forecast economic growth and the direction of interest rates in the following one year and outline a series of recommendations for the Finance Committee to consider to control the effects of the financial crisis and avoid an occurrence in the future. Specify which ones you believe would be the most effective. Consider practicality, timeliness, cost, timeframe and effect of implementation. Recommendations could cover governmental policy or action, monetary policy, regulatory, and private industry.

3. Identify which parties should be investigated for potential ethics violations and the potential role they played that would be considered unethical behavior during the credit crisis. Begin with a definition of ethical standards in business.

4. Summarize what the European debt crisis is and how it would play out; explain what caused the Eurozone crisis and whether Americans are responsible for European woes.

Paper For Above Instructions

Executive summary

This panel summarizes the U.S. subprime mortgage crisis (2004–2009), assesses parties involved and consequences, evaluates policy responses, recommends reforms to reduce recurrence risk, and summarizes the European sovereign-debt episode and causal links to U.S. actors. Recommendations emphasize stronger regulation, market transparency, and targeted moral‑hazard‑reducing backstops.

Part I — Chronology and aftermath

Starting point (early 2000s): low interest rates and expanded mortgage credit (2001–2003) fueled mortgage originations, including subprime adjustable-rate mortgages (ARMs) (Brunnermeier, 2009). 2004–2006: housing prices peaked; lending standards weakened; securitization volumes surged. 2006–2007: rising delinquencies in subprime cohorts; securities tied to subprime began to lose value (Gorton, 2008). 2007: early failures of subprime lenders and liquidity stress (e.g., New Century Financial). 2008: Bear Stearns sold (March), Fannie/Freddie placed into conservatorship (September), Lehman Brothers bankruptcy (Sept 15), AIG rescue and broadening counterparty failures. 2008–2009: TARP capital injections, Fed liquidity facilities and quantitative easing (QE1) stabilized funding markets. Through 2010–2012, regulatory reforms (Dodd-Frank Act) and bank recapitalization supported recovery; unemployment and GDP recovered slowly over several years (FCIC, 2011; Bernanke, 2009).

Roles and major firms (current status)

• Mortgage originators/brokers: Countrywide, New Century, IndyMac (originators aggressively extended credit). Countrywide was acquired by Bank of America (2008); New Century failed (2007); IndyMac failed and was resolved.
• Subprime borrowers: many had limited documentation and adjustable rates; large foreclosure waves harmed household wealth and consumption.
• Money-center banks: Citigroup, Bank of America, JPMorgan, and others held/traded securitized products; many required capital infusions or asset purchases (Citigroup recapitalized; Bear Stearns sold; Lehman failed).
• Investment banks: Lehman (bankrupt), Bear Stearns (acquired), Merrill Lynch (acquired by Bank of America), Goldman Sachs and Morgan Stanley converted to bank holding companies and survived but were heavily restructured.
• Mortgage-related government-sponsored entities: Fannie Mae and Freddie Mac entered conservatorship (2008) and remain under Treasury oversight.
• Credit rating agencies: S&P, Moody's, Fitch gave high grades to many structured products later downgraded; they faced litigation and regulatory reforms (increased oversight).
• Investors: pension funds, hedge funds, and global banks suffered losses from MBS and CDO exposure; some hedge funds failed, others profited via short positions.

Winners and losers

Losers: subprime borrowers (foreclosures, wealth loss), middle-income homeowners (wealth concentrated in housing), workers (millions of jobs lost; unemployment peaked ~10% in 2009), and many financial firms and investors who held mispriced credit-linked securities (St. Louis Fed data; Reinhart & Rogoff, 2009).

Winners: well‑capitalized investors and institutions that hedged housing exposures, certain distressed buyers who purchased assets at discounts, and some international creditors that benefited from flight-to-quality into U.S. Treasuries.

Magnitude and AIG question

Magnitude: U.S. household net worth fell by trillions (St. Louis Fed estimates), unemployment rose from ~5% (2007) to ~10% (2009), global GDP growth slumped and world trade contracted (IMF, 2009). The financial system’s freezing had systemic implications: interbank markets seized and short-term funding imploded (Brunnermeier, 2009).

On AIG: allowing AIG to fail would likely have caused cascading failures because AIG was a major counterparty in credit default swaps; the 2008 Treasury/Fed support (≈$85bn initially, then larger interventions and asset protection) prevented immediate systemic collapse (Treasury report, 2009). Given the lack of credible limited-resolution mechanisms for large insurers and derivatives counterparties at the time, the government intervention, though morally fraught, was defensible to prevent a larger economic collapse (FCIC, 2011).

Part II — Policy actions taken

Federal Reserve: rapid rate cuts to near zero, large-scale asset purchases (QE1), emergency liquidity facilities (discount window expansions, TSLF, PDCF), and dollar swap lines with other central banks (Bernanke, 2009). Treasury/Federal Government: TARP capital injections, guarantees for money-market programs, stress tests (2009), mortgage modification programs, and fiscal stimulus (2009 ARRA).

Near-term forecast and recommendations

Forecast (one year following the crisis window considered here): modest GDP recovery (annual growth between 2–4% as credit conditions normalize) and very accommodative short-term interest rates (near zero) with long-term rates subdued by QE and risk premia compression (IMF, 2009).

Key recommendations (prioritized):

1. Strengthen prudential regulation and macroprudential tools: require higher capital and leverage limits for systemically important institutions; implement countercyclical capital buffers (Acharya & Richardson, 2009).
2. Enhance transparency and standardization in securitization: require loan-level data disclosure and retention rules to align originator incentives (reduce originate-to-distribute moral hazard).
3. Reform derivatives markets: central clearing for standardized OTC derivatives to reduce bilateral counterparty risk (Dodd-Frank steps continued).
4. Create robust resolution regimes: statutory resolution authority for nonbank financial firms (living wills, orderly liquidation authority) to avoid ad-hoc bailouts.
5. Improve consumer protection: stronger mortgage underwriting standards and a durable Consumer Financial Protection Bureau (CFPB) to guard against predatory lending.

These recommendations balance practicality and cost: improved transparency and resolution regimes are relatively low-cost and high-impact; capital buffer increases require phased implementation.

Ethics and investigations

Definition: ethical standards in business include honesty, fiduciary duty, avoidance of conflicts of interest, transparency, and accountability. Parties warranting investigation include mortgage originators for deceptive underwriting and falsified documentation; securitization sponsors and investment banks for misrepresentation of collateral quality; rating agencies for conflicts of interest and flawed models; some proprietary desks and hedge funds for market manipulation; and regulators for regulatory capture or enforcement failures (FCIC, 2011). Investigations should focus on misrepresentation of asset quality, conflicts of interest, and failures to disclose material risks.

European debt crisis summary and U.S. role

The European debt crisis (2010–2012) arose from high sovereign deficits, fragile banking sectors, and the single-currency structure that limited exchange-rate adjustment for weaker members (Greece, Ireland, Portugal, Spain, Italy). Bank-sovereign linkages and contagion risk pushed yields higher; ECB interventions (LTRO, OMT) restored confidence after 2012 (Draghi’s “whatever it takes” speech) (ECB, 2012). Causes were largely domestic (imbalanced fiscal positions, competitiveness divergences) though global financial integration and U.S.-originated securitized products amplified stress via cross-border exposures. Americans were not primary causal agents for Eurozone fiscal choices, though global financial contagion and international bank exposures increased the transmission of stress (Reinhart & Rogoff, 2009).

Conclusion

The subprime crisis exposed incentive failures across origination, securitization, rating, and risk management. Government interventions stabilized the system but created political and ethical controversies. Long-term resilience requires stronger macroprudential frameworks, transparency in structured finance, robust resolution mechanisms for systemically important firms, and ongoing oversight to protect consumers and investors.

References

• Financial Crisis Inquiry Commission (FCIC). (2011). The Financial Crisis Inquiry Report. U.S. Government Printing Office. https://www.govinfo.gov
• Brunnermeier, M. K. (2009). Deciphering the Liquidity and Credit Crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77–100.
• Gorton, G. (2008). The Panic of 2007. In Maintaining Stability in a Global Economy (pp. 131–151). Federal Reserve Bank of Kansas City.
• Reinhart, C. M., & Rogoff, K. S. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
• Bernanke, B. S. (2009). The Crisis and the Policy Response. Stamp Lecture, London School of Economics. Board of Governors of the Federal Reserve System.
• U.S. Department of the Treasury. (2009). Troubled Asset Relief Program (TARP) Reports and Reviews. https://home.treasury.gov
• International Monetary Fund (IMF). (2009). Global Financial Stability Report. IMF Publications.
• Acharya, V. V., & Richardson, M. (Eds.). (2009). Restoring Financial Stability: How to Repair a Failed System. Wiley.
• European Central Bank (ECB). (2012). ECB speech: “Address to the Global Investment Conference” (Mario Draghi) and OMT announcements. https://www.ecb.europa.eu
• Federal Reserve Bank of St. Louis (FRED). (2009–2012). Macroeconomic data: GDP, unemployment, household net worth. https://fred.stlouisfed.org