What Was - Last Version

How credit crises lunched ?
what is Emergency Economic Stabilization Act 2008

Structure and Change in Economic History
By: Gholamhossein Davani

IACPA,NYSSCPA,IMA,AIA,CFE
Jan.2009
What it all comes down to is this : my opponent's view
of the world sees a long slow decline
for our country, an inevitable fall mandated by
impersonal historic forces. But America is not in
decline. America is a rising nation. I see America as the
leader, a unique nation with a special role
in the world. This has been called the American century
because in it we were the dominant force
for good in the world. We saved Europe, cured polio,
went to the moon and lit the world with our
culture. Now we are on the verge of a new century. I say
it will be another American century.“
GW. Bush Aug.1988 Elect Lecture New Orleans
Dayarayan Auditing & Financial
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Blaming fair-value accounting for the credit
crisis is a lot like going to a doctor for a diagnosis
and then blaming him for telling you that you
are sick.''
“Dane Mott , JPMorgan Chase & Co.”

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• The Dow Jones Industrial Average (DJIA) doubled in just a
decade from 7,022 on 13 February 1997 to a peak of 14,164
on 9 October 2007. It was a Golden Decade of continuous
growth in share values and economic prosperity. But, in the
13 months since last October, virtually all this growth has
evaporated & we are almost back to where we started in
1997. Truly a decade of Boom to Bust!
• Update 20 November, 2008: The second new low this week. I
thought we were near the bottom but, not after today. The
market reached a new low of 7552, a fall of 46.7 %, from its
all time peak on 9 October 2007. This crash entered the charts
a few weeks ago but, as the market continues to dive, this
millennium crash today reached NUMBER 5 in the all time
worst crashes!

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Calculate loss
If you had $1000 on 3 September 1929, it would
have been worth only $108.14 (89.2% loss) by
July 8th, 1932. Full recovery of this loss didn’t
occur until 1954, 22 years later!
Date Started: 4/17/1930
Date Ended: 7/8/1932
Total Days: 813
Starting DJIA: 294.07
Ending DJIA: 41.22
Total Loss: -86.0%
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Three days that shook the world(12-
14 Sep.2008)
• On Sunday, September 14, it was announced

that Lehman Brothers would file for
bankruptcy after the Federal Reserve Bank
declined to participate in creating a financial
support facility for Lehman Brothers

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The amoral Elephant
• The March Of Folly
• From 1929 To 2008

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1nd Worst Stock Market Crash
1930-1932
This is the grand daddy of them all. Investors lost
86% of their money over this 813 day beast. This
market crash combined with the 1929 crash, makes
up the Great Depression. In just two months,
September and October, the stock market had lost
40 percent of its value. Black Tuesday usually marks
the point where the Roaring 20’s ended and the
Great Depression started. The stock market
continued to fall until bottoming out in July of 1932.

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2nd Worst Stock Market Crash
1937-1938
Key events: Legacy of Great Depression, war

scare and Wall street scandals
Total Days: 386
Ending DJIA: 98.95
Total Loss: -49.1%

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3rd Worst Stock Market Crash
1906-1907
Key events: The “Panic of 1907″ due to a credit
crunch in New York, as well as gloom due to
President Roosevelt’s antitrust drive
Total Days: 665
Ending DJIA: 38.83
Total Loss: -48.5%

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4th Worst Stock Market Crash 1929
Key events: End of the roaring twenties, and
kicked off the Great Depression
Total Days: 71
Ending DJIA: 198.69
Total Loss: -47.9%

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5th Worst Stock Market Crash 1919 -
1921
Key events: Followed a post war boom, bursting of
the first big tech bubble- the automobile sector (but
after bottoming, this decade saw tremendous growth
in the stock market and the economy, often called
the roaring twenties)
Total Days: 660
Ending DJIA: 63.9
Total Loss: -46.6%

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1903
Key events: Assassination of President William

McKinley; a severe drought causing alarm about US
food supplies
Total Days: 875
Ending DJIA: 30.88
Total Loss: -46.1%
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7th Worst Stock Market Crash 1973-
1974
Key events: Vietnam war, Watergate scandal

Total Days: 694
Ending DJIA: 577.60
Total Loss: -45.1%

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1942
Key events: World War 2, attack on Pearl

Harbour
Total Days: 959
Ending DJIA: 92.92
Total Loss: -40.4%

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1917
Key events: US being drawn into World War 1
Total Days: 393
Ending DJIA: 65.95
Total Loss: -40.1%

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10th Worst Stock Market Crash
2000 - 2002
Key events: Tech bubble bursting, September

11th terrorist attack
Total Days: 999
Starting DJIA: 11,792.98
Ending DJIA: 7,286.27
Total Loss: -37.8%

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Breaking the buck
• Money market funds seek a stable $1.00 net asset value (NAV): they aim
never to lose money. If a fund's NAV drops below $1.00, one says that the
fund "broke the buck".
• This has rarely happened: as of September 16, 2008, two money funds
have broken the buck (in the 37 year history of money funds), and from
1971 to September 15, 2008, there was only one failure.
• The Community Bankers US Government Fund broke the buck in 1994,
paying investors 96 cents per share. This was the first failure in the then
23 year history of money funds, and there were no further failures for 14
years. The fund had invested a large percentage of its assets into
adjustable rate securities. As interest rates increased, these floating rate
securities lost value. This fund was an institutional money fund, not a
retail money fund, thus individuals were not directly affected.
• No further failures occurred until September 2008, a month that saw
tumultuous events for money funds.

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The world’s largest companies in
detail (Top 10)
Rank Company Country Business Turnover in USD Million
1 Wal-Mart USA Commerce 348650
2 Exxon Mobil USA Energy 335086
3 Shell NL Energy 318845
4 BP UK Energy 262285
5 GM USA Car 207349
6 Toyota Japan Car 204773
7 Chevron USA Energy 195341
8 Daimler Germany Car 190200
9 ConocoPhillips USA Energy 167578
10 Total France Energy 166486

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The world’s most valuable companies
in detail (Top 10)
Rank Company Country Business Market capitalization in USD Million
1 Petro china China Energy 723794
2 Exxon USA Energy 511887
3 GE USA Conglomerate 374637
4 China Mobile China Telco 354025
5 I&C of China China Bank 338412
6 Microsoft USA Software 333054
7 Gas prom Russia Energy 331825
8 Shell Netherlands Energy 264330
9 AT & T USA Telco 252051
10 China P & CH China Energy 249608
(Data Source: FAZ: America varlet Führungsrolle, in FAZ, No 4, January 5th, 2008, page 11)

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Equity and Debt Capital Markets
Citigroup ranked as the leading book runner for global securities in the first quarter 2006 with
US$178.8 billion in underwriting proceeds, compared to a US$152 billion in underwriting a year ago
when the firm also took first place. In terms of global underwriting fees, based upon information
calculated by Freeman & Company, imputed fees in the opening period of 2006 jumped to over US$8.9
billion from US$7.78 billion a year ago. Citigroup generated the most underwriting fees in the current
quarter with US$788.5 million.
Global Debt, Equity and Equity related Q1 2006 ($US m)
1. Citigroup $178,780
2. JP Morgan $130,307
3. Morgan Stanley $121,445
4. Deutsche Bank AG $118,763
5. Goldman Sachs $102,160
6. Merrill Lynch $101,534
7. Credit Suisse $97,448
8. RBS $74,552
9. Barclays $72,083
unranked:
Macquarie Bank $722

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M&A
Citigroup claimed the title of top global financial advisor for announced M&A transactions,
advising on 80 transactions valued at over US$340.7 billion in Q1 2006. This represented a
244% increase in deal volume from the comparable time period last year. Goldman Sachs
ranked second with US$337.5 billion in M&A activity while JP
Morgan rounded out the top three with deals valued at US$274 billion.
(US$m)
1. Citigroup $340,671
2. Goldman Sachs $337,456
3. JP Morgan $274,044
4. Lehman Brothers $265,487
5. Merrill Lynch $224,324
6. UBS $208,724
7. Morgan Stanley $196,630
8. Deustche Bank $165,511
9. BNP $145,809
10. Rothschild $133,209
11. Credit Suisse $131,699
12. Evercore $120,162
13. HSBC $114,209
14. Lazard $95,866
15. Rohatyn $89,432
16. Calyon $72,208
17. ABN AMRO $70,72
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UK RESCUE PLANS
Much of the current crisis has been caused by the banks' unwillingness to lend to
each other, so the UK government has come up with a plan to inject billions of
pounds in capital and to guarantee loans in the hope that lending will resume.

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The government has also nationalized or part-nationalised some leading UK
banks struggling to survive the crisis.

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BILLION-DOLLAR BAIL-OUTS
Governments have spent billions of dollars on rescue packages, led by the US
with its $700bn rescue package.

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FINANCIAL CRISIS: HOW IT HAPPENED

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Most analysts link the current credit crisis to the sub-prime mortgage
business, in which US banks give high-risk loans to people with poor credit
histories.
These and other loans, bonds or assets are bundled into portfolios - or
Collateralized Debt Obligations (CDOs) - and sold on to investors globally.

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Seeking a long-term solution, the US government agrees a $700bn bail-out

that will buy up Wall Street's bad debts in return for stake in the banks.
The US government plans to borrow the money from world financial
markets and hopes it can sell the distressed assets back once the housing
market has stabilized.

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Lehman worse than Enron, say PricewaterhouseCoopers

After a closed-doors creditors meeting at the 02 Dome, Lehman’s administrators
PwC told reporters that the collapse of the financial services firm was “ten times
bigger and more complicated” than Enron.
Tony Lomas, lead administrator, said PwC had identified more than a trillion
dollars’ worth of assets and liabilities that were yet to be accounted for. Since
the biggest Big Four firm was appointed on 15 September, it has recovered $5
billion out of a potential $550 billion’s worth of outstanding obligations. Client
assets of $22.3 billion have been also identified.
Amongst the 400 trade creditors identified so far is PricewaterhouseCoopers
itself, the Bank of England, and the Financial Services Authority.
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History of bankruptcy in USA
The following is a list of the top 10 bank failures since 1934, based on the size
of their assets, as reported by the Federal Deposit Insurance Corp.
1. Washington Mutual of Henderson, Nevada and Park City, Utah; seized Sept.
25, 2008 with $307 billion in assets as of June 30, 2008
2. Continental Illinois of Chicago, collapsed in 1984 with $40.0 billion in assets
3. First Republic Bank Corp of Dallas, failed in 1988 with $32.5 billion in assets
4. Indy Mac Bank FSB of Pasadena, California, collapsed in July 2008 with assets
of $32 billion
5. The American Savings & Loan Assoc. of Stockton, California, failed in 1988
with assets of $30.2 billion
6. Bank of New England Corp collapsed in 1991 with assets of $21.7 billion
7. MCorp of Dallas, failed in 1989 with assets of $15.6 billion
8. Gilbraltar Savings of Simi Valley, California, collapsed in 1989 with assets of
$15.1 billion
9. First City Bancorp of Houston, failed in 1988 with assets of $13.0 billion
10. Homefed Bank FA of San Diego, failed in 1992 with assets of $12.2 billion

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BANKS AFFECTED BY THE GLOBAL CRISIS - 2008
Giants of the business world, such as Lehman
Brothers and Merrill Lynch, have crumbled or
been bought out.
Bank Date Status Website
Fannie Mae 07 Sep Nationalized Fannie Mae
Freddie Mac 07 Sep Nationalized Freddie Mac
Lehman Bros 15 Sep Collapsed Lehman Bros
Merrill Lynch 15 Sep Taken over Merrill Lynch
AIG 16 Sep Part-nationalised AIG
HBOS 17 Sep Taken over HBOS
WaMu 25 Sep Collapsed and sold WaMu
Fortis 28 Sep Nationalized Fortis
Bradford & Bingley 29 Sep Nationalized Bradford & Bingley
Wachovia 29 Sep Taken over Wachovia
Glitnir 29 Sep Nationalized Glitnir
Hypo Real Estate 06 Oct Rescue package Hypo Real Estate
RBS 13 Oct Part-nationalised RBS
Lloyds TSB 13 Oct Part-nationalised Lloyds TSB
Source: BBC news. Finance crisis: In graphics

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Who were Bankrupt in credit crises
• Washington Mutual –WaMu

• Bear Streamrn
• American International Group (AIG Amaranth
Advisors
• Lehman Brothers Bank
• Fanni Mae
• Freddie Mac
• Merrill Lynch
• UBS and
• Next ?? Dayarayan Auditing & Financial
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Who were investor of Fannie Mae &
Freddie Mac !!
• China 359.9 BL.$
• Japan 228.2
• Russian 75.3
• South Korea 63
• Taiwan 54.9
• Source: The Fannie/Freddie bailout: What next

Business week, New York 22,Sep.2008

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Stock Market Crash Time Line
• The most famous crash happened on October
29, 1929.
• The second Crash was happened on October
1987
• The third Crash was happened on 2001
• Enron,Worldcom,Parmalat,….
• And now biggest world crisis in globalization
age ! 2008
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Trends In Mutual Fund Investing
October 2008
• Washington, DC, November 25, 2008 - The combined assets of the
nation's mutual funds decreased by $1.087 trillion, or 10.2 percent, to
$9.600 trillion in October, according to the Investment Company
Institute's official survey of the mutual fund industry. In the survey,
mutual fund companies report actual assets, sales, and redemptions to
ICI.
• Total Net Assets of Mutual Funds
(billions of dollars)
• Oct 08Sept 08% chg Dec 07 Stock Funds3,935.44,954.8R-

20.66,521.4RHybrid Funds511.4600.8R-14.9713.4RTaxable Bond
Funds1,211.91,318.9R-8.11,305.1RMunicipal Bond Funds350.8370.7R-
5.4373.8RTaxable Money Market Funds3,102.92,971.7R4.42,642.1RTax-
Free Money Market Funds487.2469.8R3.7465.1RTotal9,599.610,686.7R-
10.212,020.9RR=Revised data

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What are Fannie Mae and Freddie
Mac?
The Federal National Mortgage Association

(Fannie Mae ) and
Federal Home Loan Mortgage Corporation
(Freddie Mac)
are the largest purchasers and insurers of
mortgages in the country.

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Why were they created?
• Fannie Mae was founded - in 1938 - during the Great Depression with a simple
purpose in mind: to give lower- and middle-income Americans more access to the
Great American Dream of home ownership with a reasonable interest rate. It did it
by guaranteeing if a homeowner defaulted on a loan the bank would get paid.
• The money they provide to banks to lend to people also is supposed to help
stabilize the mortgage market in times of stress by ensuring sufficient resources
for loans.
• First established as a government agency, Fannie Mae in 1968 became a private,
shareholder-owned company with a charter from Congress requiring the company
to support the housing finance system.
• Freddie Mac was established in 1970 to expand the secondary market for
mortgages in the U.S.
• Today Fannie and Freddie hold a pivotal place in the home loan market - one that
has grown to include special advantages, such as guaranteed lines of credits from
the U.S. Treasury, exemption from state and local taxes and limited government
oversight.

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So they are owned by the
government?
No ! !
Both Fannie (FNM/NYSE) and Freddie
(FRE/NYSE) are now publicly owned and their
stock is traded on the open market.

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What problems do they currently
face?
• Over the past year, mortgages have defaulted at a faster rate,
and companies have had to take billions of dollars in losses.
Fannie and Freddie are required by their government
regulator to have a financial cushion - cash or securities to fall
back on. With losses rising, that cushion has been dwindling.
That has forced them to raise new money during a time
where it has been expensive and difficult to do so.
• Most of the mortgages Fannie and Freddie insure or own are
traditional, prime mortgages that are among the safest in the
market. The pair backed very few of the exotic sub prime
mortgages that have caused the most problems over the past
year.

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• The Emergency Economic Stabilization Act of
2008 , Div. A, enacted October 3, 2008),
commonly referred to as a bailout of the U.S.
financial system, is a law authorizing the
United States Secretary of the Treasury to
spend up to US$700 billion to purchase
distressed assets, especially mortgage-backed
securities, from the nation's banks. The Act
was proposed by U.S. President George W.
Bush and Treasury Secretary Henry Paulson
during the global financial crisis of September–
October 2008.
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What happens in a government
bailout?
In a bailout scenario, called a conservator ship,
Fannie and Freddie's regulator - the Office of
Federal Housing Enterprise Oversight - would
take control of the companies and oversee their
operations. Treasury Secretary Henry Paulson
says the government wants to keep the
companies operating in their current form
without a government takeover.

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What has the Federal Reserve done to
help Fannie and Freddie?
• Sen. Christopher Dodd, D-Conn., said the Federal

Reserve was considering opening up its discount
borrowing window to Fannie or Freddie. He cited
conversations with Fed Chairman Ben Bernanke
and Paulson. But a Fed spokeswoman said the
central bank had not talked with Fannie and
Freddie about the emergency lending program.
The spokeswoman declined to discuss any other
options being considered.

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• U.S. Treasury Secretary Henry Paulson proposed a plan under
which the U.S. Treasury would acquire up to $700 billion
worth of mortgage-backed securities. The plan was
immediately backed by President George W. Bush and
negotiations began with leaders in the U.S. Congress to draft
appropriate legislation.
• President Bush meets with Congressional members, including

presidential candidates John McCain and Barack Obama, at
the White House to discuss the bailout, September 25, 2008
• Consultations among Treasury Secretary Henry Paulson,

Chairman of the Federal Reserve Ben Bernanke, U.S.
Securities and Exchange

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Can they fail?
If they did, says Brad Neigel, a senior analyst at
Aite Group, a financial services research firm, "It
would be the collapse of the entire mortgage
industry as we know it.
A government takeover would be the last option
of choice, Neigel added.

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How do Fannie and Freddie's current
problems affect
If the government were to step in to help the pair, it

would likely lead to lower interest rates on mortgages
because investors would be assured of repayment, said
Dan Green, a certified mortgage planning specialist and
author of the mortgage reports. COM. But those
declines in rates would probably be offset by an
increase in fees, Green added.

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Lehman History
1840–1859
The history of Lehman Brothers parallels the growth of
the United States and its energetic drive toward
prosperity and international prominence. What would
evolve into a global financial entity began as a general
store in the American South. Henry Lehman, an
immigrant from Germany, opened his small shop in the
city of Montgomery, Alabama in 1844. Six years later,
he was joined by brothers Emanuel and Mayer, and
they named the business Lehman Brothers. 1850
•Henry, Emanuel and Mayer Lehman founded the Firm
in Montgomery, Alabama
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Where were auditors ?!
Ernst & Young gave Lehman a clean bill of health
in a July 10 report to the SEC for the quarter
ended May 31. Despite the growing financial
crisis, auditors expressed no reservations about
the value of the company's derivatives or any
scenarios under which the company might be
unable to meet its obligations.
“Two months later, Lehman collapsed !!”

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Lehman auditor's report 2007:
"Our audit included obtaining an understanding
of internal control over financial reporting,
assessing the risk that a material weakness
exists, testing and evaluating the design and
operating effectiveness of internal control based
on the assessed risk, and performing such other
procedures as we considered necessary in the
circumstances."

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What was Deloitte’s Opinion
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
the criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Tread way Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board United States), the consolidated
financial statements as of and for the year ended December 31, 2007 of the
Company and our report dated February 26, 2008 expressed an unqualified
opinion on those financial statements.
Deloitte & Touche LLP

Washington, DC .February 26, 2008

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Stability of Freddie MAC 2007
• Freddie Mac plays a vital role by moderating
cyclical
• swings in the housing sector, equalizing the
flow of mortgage
• funds regionally throughout the United States
and making
• mortgage funds available in a variety of
economic conditions.
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Board Directors’ report
it is important to note that the accounting change from the
previous model results in an increase in our guarantee obligation
balance for PCs held by us and a decrease in our guarantee
obligation balance because
our guarantee obligation is not re-measured at fair value when
PCs previously purchased by us are subsequently sold. As such,
the change in the income on guarantee obligation line item is
not distinguished between no longer extinguishing our
guarantee obligation and our guarantee obligation amortization
change, as doing so is not operationally feasible given activity
levels in the various periods presented. This diaÇculty highlights
the fact that the change will provide financial statement users
with improved transparency of operating results under the new
method, in that it presents results using a single model.
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I, Richard F. Syron, certify that:
I have reviewed this Information Statement of the Federal Home
Loan Mortgage Corporation, or Freddie Mac; Based on my
knowledge, this Information Statement does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such
statements were made, not misleading with respect to the period
covered by this Information Statement; and . Based on my
knowledge, the consolidated financial statements, and other
financial information included in this Information Statement, fairly
present in all material respects the financial condition, results of
operations and cash flows of Freddie Mac as of, and for, the
periods presented in this Information Statement.
Date: February 28, 2008 Richard
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AIG’s Social Responsibility
AIG recognizes that its investments in support of our
customers, employees and the communities in which
we operate are critical to our success. AIG’s ongoing
efforts to be an outstanding corporate citizen and
promote responsible and sustainable business practices
are essential to our long-term business objective of
creating value for our shareholders and serving the
interests of our clients.

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It is funny!!
The complaint alleges that the defendant underwriters violated
Section 12(a)(2) of the Securities Act of 1933. Plaintiff alleges
that the Offering Circular and other offering materials for the $6
billion preferred stock offering, failed to warn investors about
Freddie Mac's fatal exposure to mortgage-related losses, poor
underwriting standards and risk management procedures, and
the negative impact of those failings on the adequacy of Freddie
Mac's capital. Defendants were underwriters of the Series Z
Preferred initial public offering. They sold the shares to the
public in a firm commitment underwriting at $25 per share less
than a year ago. The shares now trade at $2 per share.

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outstanding claims against the
biggest six Auditors under fire !
• BDO Seidman — last August a jury ordered BDO Seiman to pay $521m in
damages for its negligence in a Portuguese bank audit, almost as much as
the firm’s estimated revenue for that year.
• KPMG — A US Justice Department report concluded that KPMG either
helped perpetrate the fraud at New Century or deliberately ignored it.
Class action lawsuits are also pending. KPMG also faces a lawsuit by
Fannie Mae, which is trying to reclaim more than $2 billion from its old
auditors. KPMG already paid $400 million to settle the SEC’s case against
it related to Fannie Mae.
• Ernst and Young — will likely face lawsuits related to the bankruptcy of its
audit client, Lehman Brothers.
• PwC — lawsuits are likely for its audit of what was once the world’s
largest insurance company, AIG.
• Deloitte- Washington Mutual fund
• Madoff scandal- Friehling & Horowitz Auditing firm has not peer review
more than 15 years !!!.

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Emergency Economic Stabilization
plan was expected to be announced for the Treasury to
buy equity stakes in 9 American Banks, and potentially
thousands of smaller banks, using the first $250 billion
dollars allotted to the program. The banks receiving
money would include Goldman Sachs Group Inc.,
Morgan Stanley, J.P. Morgan Chase & Co., Bank of
America Corp. (including Merrill Lynch), Citigroup Inc.,
Wells Fargo & Co., Bank of New York Mellon and State
Street Corp.

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Action Plan !!
• The law which created the fund gives the
Treasury $250 billion immediately, then
requires the President to certify that an
additional $100 billion in funds are needed,
and finally $350 billion are subject to
Congressional approval

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What will the housing bill do? (1)
• Provisions of the housing bill that President Bush signed into
law on Wednesday, July 30, 2008:
• Gives the Federal Housing Administration $300 billion in new
lending authority and relaxes standards to provide affordable,
fixed-rate mortgages to an estimated 400,000 debt-ridden
homeowners. Any losses will be covered by an affordable
housing fund financed by Fannie Mae and Freddie Mac, the
government-sponsored companies that finance mortgages.
• Allows the Treasury Department temporary authority to lend
money to Fannie and Freddie or buy their stock to avert a
collapse of one or both of the mortgage giants. The authority
expires on Dec. 31, 2009.

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What will the housing bill do? (2)
Creates a new regulator and tighten controls on Fannie
and Freddie, including power for the regulator to
approve pay packages for company executives. Creates
a new affordable housing fund drawn from their
profits. Permanently raises the limit on the loans they
may buy to $625,000 in the highest-cost areas. Allows
them to buy loans 15 percent higher than the median
home price in certain cities.
Provides $3.9 billion in grants to the hardest-hit
communities for buying and fixing up foreclosed
property

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Potential effects
The maximum cost of a $700 billion bailout would be $2,295 estimated cost
per American (based on an estimate of 305 million Americans), or $4,635 per
working American (based on an estimate of 151 million in the work force). It
should be noted however, that it makes little sense to merely divide the
number 700 billion by the number of Americans or even by the number of
American families, as the debt would not be paid in this fashion even if it were
all entirely used and squandered. America pays the interest on its debt, and
many Americans do not make a significant contribution to this payment or to
taxes in general. The bulk of this money would be spent to purchase
mortgage backed securities, ultimately backed by American homeowners,
which possibly could be sold later at a profit, by the government. Economist
Michael Hudson predicts that the bailout would cause hyperinflation and
dollar collapse. However, there is no persuasive evidence of prices rising and
the U.S. Dollar. has actually risen to higher levels than before the plan's
announcement Indeed, during the week before and after the EESA was
agreed, investment bank UBS was continually flatly rejecting that bailouts such
as these were inflationary, emphasizing instead that they were anti-
deflationary, not inflationary.
The 2008 federal budget submitted by the president is $2,900 billion, meaning
a $700 billion bailout would constitute a 24% increase to $3,600 billion, which
would in fact far exceed the $3,100 billion 2009 budget. The total government
commitment and proposed commitments so far in its current and proposed
bailouts is reportedly $1 trillion compared to the $14 trillion United States
economy. Dayarayan Auditing & Financial
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I didn’t want to have to do that !
“Henry Paulson “
U.S. Treasury Secretary
There is much more volatility and uncertainty
in the market. We will see a big change in
trading habits over the next few years,"
Economic Hit Man

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Manager on side shareholders inside
Remarkably, Mr. Viniar was able to do all of the

above, and for that he earned $58.5 million in total
compensation in 2007, including a $22.6 million
bonus and $21.1 million in stock. All told, his pay
was at least 21/2 times richer than that of any other
CFO on Wall Street . Mr. Viniar's comp was also
more than 23 times the average $2.5 million raked
in by the finance chiefs on FW's list of 1,000 CFOs
at publicly traded companies.

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Who were main Planner !!
The original proposal was three pages, as
submitted to the United States House of
Representatives .The purpose of the plan was to
purchase bad assets, reduce uncertainty
regarding the worth of the remaining assets,
and restore confidence in the credit markets.
The text of the proposed law was expanded to
110 pages

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What is Socialism for the rich and
capitalism for the poor
Socialism for the rich and capitalism for the poor is a
classical political-economic argument, formulated
around 1970, stating that in the advanced capitalist
societies, what actually happens is that the state
gives much more resources to help the rich than the
poor. The argument has different formulations, one
of the most common is, the capitalist political
economy toward big corporations is "privatizing
profits and socializing losses."

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New Ways of Making Money

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What Are Derivatives?
A derivative is a financial contract whose value

is linked to the price of an underlying
commodity, asset, rate, index or the occurrence
or magnitude of an event. The term derivative
refers to how the price of these contracts is
derived from the price the underlying item. It
was like riding a tiger, not knowing how to get
off without being eaten !?
Dayarayan Auditing & Financial Services Firm 69

Warren Buffett
Chairman’s Letter to shares holders of Berkshire Hathaway
Financial instruments are time bombs and "financial weapons of mass

destruction” their buyers and sellers, but the whole economic system.
Large amounts of risk have become concentrated in the hands of relatively
few derivatives dealers ... which can trigger serious systemic problems .
During the past 37 years, the company has delivered an average annual return
of 22.6%. Since 1965 the company's book value has gone up by 194,936%.
BBC News-Tuesday, 4 March, 2003

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Some Figures and Statistics
Global equity capital $51.2 trillion (Wikipedia: Reuters March
2007) $165 trillion "total traded securities" (Economist,
19/01/2008)
Global physical trade
Daily ForEx trade volume $3.2 Trillion (BIS 2007)
Total Derivatives Nominal $516 trillion (BIS 2007)
Total Derivatives Value $11.1 trillion (BIS 2007)
Total Swaps Nominal $408 trillion, 79% of all derivatives
% Interest Rate Swaps 75 (BIS 2007)

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Free market ideology comes down to socialism
for the rich, capitalism for everybody else.
•Market watch reminds us that the U.S. gross domestic product
(GDP) is about $15 trillion. The GDP of all nations combined is
approximately $50 trillion. The total value of all the real estate in
the world is estimated at $75 trillion and the total value of all
the world's stocks and bonds is about $100 trillion. But there's a
$500 trillion market in derivatives!
(Source: By Gonsalves, AlterNet. Posted September 22, 2008.
Sean)

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What problems do they currently
face?
• Over the past year, mortgages have defaulted at a faster rate,
and companies have had to take billions of dollars in losses.
Fannie and Freddie are required by their government
regulator to have a financial cushion - cash or securities to fall
back on. With losses rising, that cushion has been dwindling.
That has forced them to raise new money during a time
where it has been expensive and difficult to do so.
• Most of the mortgages Fannie and Freddie insure or own are
traditional, prime mortgages that are among the safest in the
market. The pair backed very few of the exotic sub prime
mortgages that have caused the most problems over the past
year.

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Some recent cases of market
manipulation using derivatives:
Avista Energy, electricity, in 1998.
Enron, electricity, 1998.
Enron, etal, electricity and gas, 2000 and 2001.
Arcadia, crude oil, in 2001.
Salomon Brothers, U.S. Treasury securities, 1991.
Individual traders, U.S. Treasury securities, 1992.
Fenchurch, U.S. Treasury securities, 1993.
Ferruzzi, soybeans, 1989.
Sumitomo, copper, 1995 through 1996.
Source: Backgrounder Derivatives By :Randall Dodd

http://www2.gsb.columbia.edu/ipd/j_derivatives.html
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• A mortgage-backed security (MBS) is an asset-
backed security whose cash flows are backed by the
principal and interest payments of a set of mortgage
loans. Payments are typically made monthly over the
lifetime of the underlying loans. However not all
securities backed by mortgages are considered
mortgage-backed security (MBS). Housing Bonds
(Mortgage Revenue Bonds) are backed by the
mortgages which they fund, but aren't classified as
mortgage-backed security (MBS).

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• The secondary mortgage market is the market for the sale of
securities or bonds collateralized by the value of mortgage
loans. The mortgage lender, commercial banks, or specialized
firm will group together many loans and sell grouped loans as
securities called collateralized mortgage obligations (CMOs).
The risk of the individual loans is reduced by that aggregation
process. citation needed] These securities are collateralized
debt obligations (CDOs). The CDOs are sometimes further
grouped in other CDOs. Mortgage delinquencies, clarify]
defaults, and decreased real estate values can make these
CDOs difficult to evaluate. This happened to BNP Paribas in
August, 2007, causing the central banks to intervene with
liquidity.

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• The bond market (also known as the debt, credit, or fixed
income market) is a financial market where participants buy
and sell debt securities, usually in the form of bonds. As of
2006, the size of the international bond market is an
estimated $45 trillion, of which the size of the outstanding
U.S. bond market debt was $25.2 trillion.
• Nearly all of the $923 billion average daily trading volume (as
of early 2007) in the U.S. bond market takes place between
broker-dealers and large institutions in a decentralized, over-
the-counter (OTC) market. However, a small number of
bonds, primarily corporate, are listed on exchanges.
• References to the "bond market" usually refer to the
government bond market, because of its size, liquidity, lack of
credit risk and, therefore, sensitivity to interestrates. Because
of the inverse relationship between bond valuation and
interest rates, the bond market is often used to indicate
changes in interest rates or the shape of the yield curve.
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Bond market volatility
For market participants who own a bond, collect the coupon and hold it to
maturity, market volatility is irrelevant; principal and interest are received
according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to
many risks, most importantly changes in interest rates. When interest rates
increase, the value of existing bonds fall, since new issues pay a higher yield.
Likewise, when interest rates decrease, the value of existing bonds rise, since
new issues pay a lower yield. This is the fundamental concept of bond market
volatility: changes in bond prices are inverse to changes in interest rates.
Fluctuating interest rates are part of a country's monetary policy and bond
market volatility is a response to expected monetary policy and economic
changes.
Economists' views of economic indicators versus actual released data
contribute to market volatility. A tight consensus is generally reflected in
bond prices and there is little price movement in the market after the release
of "in-line" data. If the economic release differs from the consensus view the
market usually undergoes rapid price movement as participants interpret the
data. Uncertainty (as measured by a wide consensus) generally brings more
volatility before and after an economic release. Economic releases vary in
importance and impact depending on where the economy is in the business
cycle.
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Bond investments
Investment companies allow individual investors
the ability to participate in the bond markets
through bond funds, closed-end funds and unit-
investment trusts. In 2006 total bond fund net
inflows increased 97% from $30.8 billion in 2005
to $60.8 billion in 2006. Exchange-traded funds
(ETFs) are another alternative to trading or
investing directly in a bond issue. These
securities allow individual investors the ability to
overcome large initial and incremental trading
sizes.
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Bond market
Bond · Debenture · Fixed income
Types of bonds by issuer Agency bond · Corporate bond (Senior
debt, Subordinated debt) · Distressed debt · Emerging market
debt · Government bond· Municipal bond· Sovereign bond
Types of bonds by payout Accrual bond · Auction rate security ·
Callable bond · Commercial paper · Convertible bond ·
Exchangeable bond · Fixed rate bond · Floating rate note · High-
yield debt · Inflation-indexed bond · Inverse floating rate note ·
Perpetual bond · Puttable bond · Reverse convertible · Zero-
coupon bond
Securitized Products Asset-backed security · Collateralized debt
obligation · Collateralized mortgage obligation · Commercial
mortgage-backed security · Mortgage-backed security

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Derivatives
Bond option · Credit derivative · Credit default swap · CLN
Pricing
Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty
price · Maturity · Par value
Yield analysis
Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration · Bond
convexity · TED spread
Credit and spread analysis

Credit analysis · Credit risk · Credit spread· Yield spread· Z-spread · Option adjusted
spread
Interest rate models

Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-Ingersoll-
Ross · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela
Organizations
Commercial Mortgage Securities Association (CMSA)
International Capital Market Association (ICMA)
(Securities Industry and Financial Markets Association (SIFMA)
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All CDS positions (CDS = credit default swaps) have to be cleared and
processed. Their sum has been estimated about 1400 to 1600 billion USD.
(The total market size is 62000 billion USD).
The total of mortgage based securities (e.g. mortgage backed securities)
that have been issued from Freddie Mac and Fannie Mae counts for 5500
billion USD. This is nearly 50 % of the US market, which counts for 12000
billion USD.
The US government is ready to invest 200 billion USD in preferred shares.
The sum of all public spending was 2700 billion USD in 2007.
The month the US government will spend 5 billion USD for bond issues of
Freddie and Fannie.
Two month ago the Congressional Budget Office estimated the financial
burden resulting to rescue Freddie Mac and Fannie Mae. The forecast was
25 billion USD.
Indeed the cost of this rescue measure will account for 300 billion USD
(outcome of a new forecast). This amount would nearly twice the number
in terms of US net raising of credit in 2007.
(Source:http://www.eddielogic.com/)
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Storm in Accounting profession (1)
FASB Adopts Guidance to Ease Crisis
"fair value" accounting where there is no market for a
security. Fair value accounting, also known as "mark-
to-market" accounting, requires banks to value their
mortgage-related assets at current market prices.
Devastated by the write-downs they have taken on
mortgage assets since the collapse of the housing
market, banks - with the backing of congressional
Republicans - have been pushing hard for the Securities
and Exchange Commission to suspend the requirement

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But critical says

That suspending the fair value rule would
muddy the validity of financial statements and
encourage exactly the kind of dodgy accounting
that defined the Enron era of corporate scandals
earlier in the decade.

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Recent professional guidance, such as SAS 99,

Consideration of Fraud in a Financial Statement
Audit, and Public Company Accounting Oversight
Board (PCAOB) Auditing Standard 2, has brought
more attention to the auditor's responsibility to
uncover the warning signs of fraud, but there is
still some ambiguity about where the auditor's
responsibility ends and the fraud examiner's
begins.

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New accounting Standard (FASB)
Under the change, when an active market for a
security doesn't exist, companies will be allowed
to use their managers' estimates of value, taking
into account expected future cash flows and risk
discount rates.

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Noteworthy language in the relief regarding

market transparency, oversight and audit, and
mark-to-market (MTM) FAS157 treatment:
Section 114. Market Transparency. 48-hour
Reporting Requirement: The Secretary is
required, within 2 business days of exercising
authority...

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The FRC Guidance on Audit Committees
(formerly known as the Smith Guidance) was
first published in 2003 and updated in 2005. It is
intended to assist company boards when
implementing the sections of the Combined
Code on Corporate Governance dealing with
audit committees and to assist directors serving
on audit committees in carrying out their role.

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A new edition of the guidance was issued in October
2008. A limited number of changes have been made
to implement some of the recommendations of the
Market Participants Group (MPG), which was
established to provide advice to the Financial
Reporting Council on market-led actions to mitigate
the risk that could arise in the event of one of more
of the Big Four audit firms leaving the market. The
Group’s final report, containing 15 recommendations
to enhance the efficiency of the UK audit market,
was published in October 2007
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Helpless standards
The amendments arise as a consequence of the amendments to
IAS 39 and IFRS 7 published by the International Accounting
Standards Board (IASB) on 13 October 2008. The amendments
issued by the IASB address the desire expressed in a number of
quarters, including EU leaders and finance ministers, to reduce
the differences between IFRS and US Generally Accepted
Accounting Principles.
In moving to issue the amendments, the ASB – like the IASB – has
not followed its normal due process, given the need to take
urgent action to address the rare circumstances of the current
credit crisis. The ASB wants to ensure that entities applying FRS 26
and FRS 29 have the same ability to be able to make
reclassifications as those applying IFRS.
Entities may use the reclassification amendments, if they so wish,
from 1 July 2008.
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In September 2008, the IASB and FASB issued a progress report and a
timetable for completion for the projects initially discussed in their 2002
Memorandum of Understanding. Both Boards are clearly working hard to
bring the standards more in line with one another. In addition, the SEC
recently removed the reconciliation requirement for foreign issuers to
reconcile their financial statements from IFRS to U.S. GAAP; and certain U.S.
companies may file their financial statements under IFRS starting for years
ending December 15, 2009. In addition, the SEC has recently issued a release
with a proposed roadmap for the potential mandatory adoption of IFRS in the
U.S.
With the fast pace of the convergence project, understanding the differences
between IFRS and U.S. GAAP is becoming more important for businesses of all
sizes. This course outlines the major differences between IFRS and U.S. GAAP.
Objectives:
Recognize the significant differences and similarities between U.S. GAAP and
IFRS
Analyze financial statements prepared in accordance with IFRS
Standardize reporting in an international environment
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• ACCA's written evidence to the Committee contains eight recommendations to help frame
the final report from the Committee:
• There is a need to separate the activities of retail (i.e. taking deposits and making loans) from
all other forms of banking. We welcome the Government's moves to ring-fence depositor
accounts, as this is key.
• ACCA recommends that remuneration design needs to be carefully thought through with a
clear eye to any unintended consequences as far as humanly possible.
• Remuneration design should be linked to cash flow and clear performance measure, rather
than profitability and less well-defined measures of performance.
• Banks are already heavily regulated, but the regulations are not supervised very effectively.
ACCA recommends that existing regulation for banking institutions is more effectively
supervised.
• Ethical behavior and professionalism has to be at the heart of any solution.
• There is a role for regulators, credit rating agencies, institutional investors and analysts in
understanding and better explaining to the wider world what the banks are doing. This has
implications for the training of these professions and the effectiveness of their
communications.
• There is a continuing need for convergence to international reporting standards.
• The principles outlined in the OFR should be considered, and organizations should think
about how these can be injected into their reporting. ACCA is doing this and the principles
are proving useful.

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• Into account market capitalization Chinese and European companies have gained
more importance. Opposite to this development the importance of North
American companies as well as Japanese Companies declined. Among the top 100
most valuable companies firms from China were able to more than double their
market value (+123 per cent). American companies had to face a decline of 10 per
cent.
• Within the list of top 100 world’s largest companies three countries head the list:
United States, UK, and China. This list represents an example of the increasing
importance of emerging markets (countries), in particular China. (Note: Another
example for the importance of emerging market countries were recent measures
by sovereign wealth funds. Of course, it cannot be for granted that the enormous
market capitalization of Chinese companies will be stable for the future. But it
illustrates very well that the importance of US companies have been declined. In
addition the weak USD, the sub prime crisis and the weak economic development
did influence the position of US companies in that list. Due to the stronger EURO
companies from Europe were able to achieve a better position.
• But see for yourself in the following to tables. Table A contains the world’s largest
companies in terms of their turnover; table B contains the world’s most valuable
companies in terms of market capitalization.

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Sources
• http://www.cbsnews.com/elements/2008/07/
16/in_depth_business/whoswho4265160.sht
ml
• American Banker- October 15. 2008, where
were auditors Fannie Mae report spotlight,
Accounting errors. Bloomberg.com. Feb. 24,
2006

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How credit crises lunched ?

what is Emergency Economic Stabilization Act 2008

By: Gholamhossein Davani

“Dane Mott , JPMorgan Chase & Co.”

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

• On Sunday, September 14, it was announced

Dayarayan Auditing & Financial

• The March Of Folly

• From 1929 To 2008

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Key events: Legacy of Great Depression, war

Dayarayan Auditing & Financial

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Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Key events: Assassination of President William

Key events: Vietnam war, Watergate scandal

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Key events: World War 2, attack on Pearl

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Dayarayan Auditing & Financial

Key events: Tech bubble bursting, September

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Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

FINANCIAL CRISIS: HOW IT HAPPENED

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Seeking a long-term solution, the US government agrees a $700bn bail-out

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Dayarayan Auditing & Financial

Lehman worse than Enron, say PricewaterhouseCoopers

Dayarayan Auditing & Financial

Source: BBC news. Finance crisis: In graphics

• Washington Mutual –WaMu

• Source: The Fannie/Freddie bailout: What next

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• Oct 08Sept 08% chg Dec 07 Stock Funds3,935.44,954.8R-

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The Federal National Mortgage Association

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Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

Dayarayan Auditing & Financial

• Sen. Christopher Dodd, D-Conn., said the Federal

Dayarayan Auditing & Financial

• President Bush meets with Congressional members, including

• Consultations among Treasury Secretary Henry Paulson,