Enclosed, please find the instructions for this graded project. Also, attached is the grading criteria. All the project questions found in page 107 to 108 need to be answered. In all there are 7 questions in total. To answer these questions, please read the "Reinflating Real Property Values" article found in page 105 and 106 of the graded project assignment. Also, the instructions state that "you can use google, wikipedia, or other reliable internet sources for the research. You need to also include a reference page.
G11aded岬C書 醐蝕賂臣閏$聞⑱認可$薩田田園悶㊨ ㊨曹㊨醐菌㊧闇 The declining values in Fannie Mae and Freddie Mac stocks in 2007-2008 were the result of hsky mortgages and forecIo- SureS・ This led to a surplus of declining real property values in the United States and a significantly negative impact on equity prices and financial markets in the United States and around the world. It’s likely that this topic will be studied for many years, aS Alan Greenspan, former Federal Reserve Chalrman, has referred to it as a once-in-a-Century “宜nancial tsunami. ,, On the following page are graphic representations of the stock Phce per share for Fannie Mae (FNM) (Figure l) and Freddie Mac (FRE) (Figure 2), the holders of approximately 5O percent Of the mortgages in the United States. 囲閑$軸聞㊨胡㊨開S Read the boxed article, “Reinflating Real Property Values,’’ by A. J. Cataldo and Anthony P. Curatola, from St厄tegね FinaれCe, October 2008. Then respond to the questions that follow. Feel fiee to use Google, Wikipedia, Or any Other rehable Intemet sources for your research. Be sure to verify your answers by checking multiple sources. Graded Project 国 Fannie Mae (FNM) Price per Share Novembe「 l, 20O7 thru October 31, 2OO8 Freddie Mac (FRE) Price per Share G「a由ed甲「ojeG宜 November l, 2007 th「u October 31, 20O8 Famie Mae (FNM) Price per Share November l, 2OO7 thru October 31, 2OO8 Freddie Mac (FRE〉 Price per Share G『aded P甲oject November l, 2OO7 thru October 31, 2OO8 REmVFLA7切VG REAL PROP各RTY VALUES By A, J. CataIdo, CMA, CPA, and Anthony P ⊂uratoIa Reprinted with permission f「om S rafegic Fmance, Octobe「 2008. On September 8, 2008, Freddie Mac (NYSE: FRE) and Famie Mae (NYSE: FNM), the holders of approximateIy 50% of mortgages in the United StatesI Were Seized by the U"S・ gOVemment in a ‘‘ba=out’’that may cost Ame「ican taxpaye「s between $100 b冊on and $300 b冊on,師ectiveIy, OWnerS Of common equity saw the vaIue oftheir holdings in these two firms decline by 80% to 90% as the common stock price per sha「e fo「 Freddie dropped from $5.10 to $0.88 pe「 sha「e and the ⊂OmmOn StOCk price per share for Fannie dropped from $7.04 to $0.73 per share, Because short posjtions effective!y increase the number of shares iss=ed and outstanding′ mOre than llO% of the sha「es of both Freddie and Fannie were heid by institutions, App「oximately 50% of the shares of Freddje and Fa=nie were traded o= Monday′ September 8, 2008′ foilowing the news of the seizure over the preceding weekend, Whiie many possible solutions may be under consideration, One POSSibie fiscal policy-based answer may be to simpIY reduce the depreciable iives for residentiai reaI property′ effectiveIy increasing the net p「esent value (and, therefore, the value) of these p「operties, if heid for trade o「 business purposes, Some COmParison between a less-reCent historicaI crisis and the present situation warrants 「eview, Change in Fiscal Policy: 1987 C「ash The Economic RecoverY Tax Act of 1981 (ERlA81) greatiy acceierated the dep「eciation deduc- tions avaiIab!e for訓asset ciasses, including real prope巾′, unde「 the accelerated cost recove「y SyStem (ACRS).The ltlX Reform Act of 1986 (TRA86), PaSSed by Congress on October 22, 1986, P「0Vided for an increase in the depreciabie lives of 「eal property from their ACRS-based Iives of l与years to a MACRS-based (modified ACRS) Iife of 27.5 years (O「 ionger) wh=e SeVereIy 「estricting passive activity losses (PALs). Approximately one year later; On Monday, Octobe「 19, 1987, the Dow Jones Industriai Average (DJIA) dropped more than 22% in a singIe trading daY. Wh=e there′s no denying that program trading led the list of contributing variables to the 1987 stock ma「ket ‘‘crash,’’another possjble causa川nk is the extension of depreciable Iives-the move from ACRS to MACRS-and the imposition of passive activity loss =mitations (PALs), Which together pIaced downward pressu「e on real property values as an asset class. These provisions ofTRA86 may have made e⊂OnOmic sense on one dimension, but they were aiso =keiY tO have contributed to the end ofthe real estate boom in the earlY tO mid-1980s as We= as to the savings and Ioan (S&L) ‘‘c「isis’’and the formation of the Resolution Trust Corporation (RTC) that fo=owed葛 (Conunue少 Graded Project RErNflA7TNG REAL PROPERTY VALUES-Continued Change in Monetary Poiicy: 2008 Crash The stage was set fo「 the current housing crisis during the 2002 through 2004 period, ManY Americans refinanced their existjng home mortgages at lower interest rates, effectiveIy ‘‘cash- 1ng in’’and consuming much of their equity′ but the real probiem arose when no-quaIrtying and no-documentatjon (no-doc) mortgages were approved by lende「s, In many cases, these we「e negative amortization Ioans for the first few years of the life of the mo巾gage and/or adjustable 「ate mortgages, and, aS interest rates recovered (June 2004), PaymentS On these mortgages Were reSet at highe「 inte「est rates and higher monthiy payme=tS" Many new homeowners′ aS Well as specuiators antjcipating a continujng rise in reai property values, Were Unable (Or unw冊ng) to make these higher payments as thei「 equity positions evaporated, Lenders′ decijnjng co!iate「al positions in these real properties, ioan defauits, and home fo「ecIosures grew, increasing the nonperfo「ming components of Iender portfoIios of home mortgage ioans. The Mortgage Fo「giveness Debt ReIief (MFDR) Act of 2007 provided some reiief to taxpayers. As reaI prope巾y vaiues dec=ned and mortgages exceeded the fair market vatue of these P「OPerties, financia=nstitutions holding these nonperforming, Or ‘‘at risk,′′ ioans experienced increased sho由ng and even naked sho由ng of their equity securities. (‘‘Naked shorting’’is the Saie of a stock that you don′t own in anticipation of buying or ucovering′′ this position at a future date and a lower price for a profit.) The Securities & Exchange ⊂ommission, the Federal Reserve, and the Secretary of the廿easury joined forces to suspend ‘‘naked shorting’’of F「eddie, Fannie, and 17 other financia=nstitutions, but the suspension was only tempora「y. During the early portion ofthe suspensjon pe「iod (JuIy ll, 2008, through Ju!y 23, 2008), nearly one-third of a tr冊on doIia「s of market capitaiization recovery occurred for these financiai institutions, Stabilizing Residential Housing Values and Stimuiating De軸and One of many possibie solutjons might incIude a reduction in亡he dep「eciable Iives for residentiai housing. Increases in depreciation expense increase the depreciation tax shieid, after-taX CaSh flow, and net present values for long-1ived assets. Whiie this may not solve the p「obiem for homeowne「s, the consensus in the business and generai press is that home forecIosures and mortgage defauits combined with the increase of these nonperforming loans in lende「s’portfo輸 iios suggests that many of those approved for these troubied Ioans simply weren’t economic訓y abIe to purchase these homes at t:he time these mortgages were approved, Therefore, it appears that an insufficient number of c「editworthy homeowners maY be ava=able t:O absorb the increased invento「y of 「esidentiai housing, and the only alte「native may be to provide fiscai POlicy-based economic incentives to investors to absorb the surplus supply for the near term. Perhaps it’s me「ely a question of the ‘‘fo「m’’of the bailout: (1) a tax-incentive-based fiscal POlicy measure or (2) direct governmentaI ownership of Famie and Freddie, A. J. Caね/do,均CMA, CPA, Ph.D., is a professor ofaccounung /n的e Schoo/ ofBusiness and Pub/ic A/商irs a亡West Ches亡er UniveI5i亡y, Wes亡ChesteI; P∂, He c∂n be conねCted ∂r acaね
[email protected]. An勅ony P. C即ato伯is的e Joseph F向rd Professor ofAccounung at DI℃Xe/ Universify in Phibde佃hi∂, Pa. you can I℃ad7 tony at (2上手) 895-」453 or CuratO居@drexe/.edu. ⑥ 2008 A. P. Curatoh. Graded Project 酢嘲㊨㊨竜の聞㊧S髄⑱聞$ 1. Fannie Mae and Freddie Mac are GSEs. De宜ne GSE with a bhef explanation. (1O%) 2. To sIow the decline of market values of Fannie Mae, Freddie Mac, and 17 0ther financial firms, the Securities and Exchange Commission (SEC) suspended naked Shorting for a short period. a. What is aわれgpOS読o7L in a stock? (5%) b. What is a sho7tpOS寂oれin a stock? (5%) C. What is aれaたec! shortpos拒oれin a stock? (Distinguish between a shorC and aれaたed shoγt.) (10%) d. Are retail investors or traders permitted to naked Short a stock? (10%) e. Who is permitted to naked short a stock (assuming there has been no suspension of this practice)? (5%) 3. a. Following the first SEC suspension of naked shorting (POSt」une 2008), did other nations follow t址s practice? (5%) b・ Ifnot, eXPlain why. Ifso, 1ist a few. (5%) 4. When the temporary suspension of naked shorting was imposed by the SEC, StOCk prices increased, due to a ``short squeeze.’’Explain the term “short squeeze.’’(10%) 5. The problems with Fannie Mae, Freddie Mac and other financial institutions were said to have been caused by the securitization of risky mortgages issued to uncredit- WOrthy borrowers along with credit default swaps to insure these risky mortgages. The credit default swaps Weren’t cc躯taZZzed-there was nothing available to pay O鱒on these credit default swaps, SO When the borrower defaulted on the mortgage and the credit default swap WaS tO be “cashed in,’’there was nothing available and these securitized mortgages became worthless. Graded P「oject a. Worldwide, What’s the approximate value of credit defalllt swaps in circulation during this period? (5%) b・ How did this amount compare to U.S. and worldwide gross domestic product (GDP) during this period? (5%) 6. a. In what currency is oil traded? (5%) b・ In what currency are credit default swaps traded? (5%) 7・ a. Will the U.S. dollar remain the currency of choice? (5%) b・ Have any nations called for a switch from the U.S. dollar? (10%) 聞輔百聞g ㊨曲調e容抽es l. Type your submission, double-SPaCed, in a standard Print font, Size 12. Use a standard document format with l-inch margins. (Do 7tOt uSe any fancy or cursive fonts.) 2. Include the following information at the top of yOur PaPer: a・ Name and complete mailing address b. Student number C. Course title and number (Intemational Business, BUS 430) d・ PrQject number (5006700O) 3. Read the asslgnment Carefully and answer each question. Use proper citation in either APA or MLA style. 4. Be specific. Limit your submission to the questions asked and issues mentioned. 5. Include a reference page in either APA or MLA style. On this page, 1ist Web sites, joumals, and all other refer- ences used in preparing the submission. 6. Proofread your work carefully. Check for correct spelling, grammar, PunCtuation, and capitalization. G「尋ded申甲oject ㊥弼軸百聞留㊨軸㊧輔翁 Your prQject will be evaluated according to the following criteha: 臆 Content 80 percent 漢 Written communication 萱 Format 10 percent lO percent Here’s a brief explanation of each of these points・ ㊨⑱龍宮㊧押せ The student 賀 Provides clear answers to the assigned questions O Addresses the questions in complete sentences, nOt just Simple yes-Or-nO StatementS 臆 Supports his or her opinion by citing specific information from Web sites and any other references using correct APA or MLA guidelines for citations and references 臆 Stays focused on the assigned issues " Whtes in his or her own words and uses quotation marks to indicate direct quotations 忠紺轟髄㊧聞㊨①聞開聞聞冨e現噺㊤聞 The student 漢 Answers each ques仕on in one or more complete sentences 獲 Uses correct grammar, SPe11ing, PunCtuation, and SentenCe StruCture 鵜 Provides clear organization when necessary (for example, uses words like f昨ちhoLt/eZ/e7; Oれthe other haれd, CZ71d so