PCAOB and the 2008 Crisis

PCAOB and the 2008 Crisis

Introduction

In 2008, the mortgage crisis caused the United States to lose billions of dollars. The cause of this crisis was due to the government itself. The government allowed the (PCAOB) committee to regulate to Freddie Mac and Fannie Mae mortgage and loan operations. In other words, the government allowed the market to regulate itself which caused a conflict of interest between the regulation committee and those they regulated. This crippled the mortgage market and dispossessed many home owners. I believe the current committee should remain independent and without influence of Fannie Mae and Freddie Mac. Also, the regulator should be the internal control to oversee and monitor mortgage transactions and criteria. This paper would focus on the study and analysis of how Freddie Mac and Fannie Mae contributed to the crisis of 2008.

Thesis Statement

The regulation of Freddie Mac and Fannie Mae by PCAOB was a huge error made on behalf of the PCAOB, considering the fact that it became one of the major causes of the crisis of the year 2008.

Discussion

Fannie Mae and Freddie Mac in the Turmoil of the Subprime

Two key players in the U.S. housing market to come to know a few setbacks. During the week of July 7 to 12, the share price of these two giants fell by 47% (Fannie Mae) and 45% (Freddie Mac). They represent, between them, 45% of current loans incurred in the United States, or a whopping 5,300 billion. Risk of failure of one of these two pillars have those cataclysmic consequences for the U.S. economy and the dollar as debt issued by these two agencies is considered as safe as government bonds. It is understandable, therefore, the willingness of the U.S. Treasury to rescue these two organizations through a rescue plan including an increase of credit for the benefit of both institutions as well as a plan to purchase their shares.

During the thirties, after the collapse of Wall Street in the famous Black Thursday in 1929, President Franklin Roosevelt inaugurated a new economic policy in the United States mainly characterized by state intervention in the economy (the New Deal). To inject liquidity in the mortgage industry and thus support growth through the building sector, the Roosevelt administration will create the Federal National Mortgage Association (FNMA), better known in the United States under the name of Fannie Mae. Before 1938, the U.S. mortgage market was the fact that private institutions financed their lending through the deposits of savers. As such, these institutions bore only market risk (that is to say, the risk of fluctuations in financial results, including changes in interest rates). Hence, there was reluctance at the time to lend. With all the consequences this could involve the level of economic activity.

In addition, this technique cover loans had the characteristic (embarrassing incidentally) to finance long-term assets with short-term capital (liquidity risk level). Explanation: The rate for a mortgage is set for many years. This is obviously not the case of a deposit whose rate ...