International Business Project

Graded Project

NAKED SHORT SELLING

Overview The declining values in Fannie Mae and Freddie Mac stocks in 2007–2008 were the result of risky mortgages and foreclo- 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 Chairman, has referred to it as a once-in-a-century “financial tsunami.”

On the following page are graphic representations of the stock price per share for Fannie Mae (FNM) (Figure 1) and Freddie Mac (FRE) (Figure 2), the holders of approximately 50 percent of the mortgages in the United States.

Instructions

Read the boxed article, “Reinflating Real Property Values,” by A. J. Cataldo and Anthony P. Curatola, from Strategic Finance, October 2008. Then respond to the questions that follow. Feel free to use Google, Wikipedia, or any other reliable Internet sources for your research. Be sure to verify your answers by checking multiple sources.

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Project Questions

1. Fannie Mae and Freddie Mac are GSEs. Define GSE with a brief explanation. (10%)

2. To slow the decline of market values of Fannie Mae, Freddie Mac, and 17 other financial firms, the Securities and Exchange Commission (SEC) suspended naked shorting for a short period.

a. What is a long position in a stock? (5%)

b. What is a short position in a stock? (5%)

c. What is a naked short position in a stock? (Distinguish between a short and a naked short.) (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–June 2008), did other nations follow this practice? (5%)

b. If not, explain why. If so, list 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 capitalized—there was nothing available to pay off 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.

a. Worldwide, what’s the approximate value of credit default 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%)

Writing Guidelines

1. Type your submission, double-spaced, in a standard print font, size 12. Use a standard document format with 1-inch margins. (Do not 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 (International Business, BUS 430)

d. Project number (50067000)

3. Read the assignment 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, list Web sites, journals, and all other refer- ences used in preparing the submission.

6. Proofread your work carefully. Check for correct spelling, grammar, punctuation, and capitalization.

Grading Criteria

Your project will be evaluated according to the following criteria:

■ Content 80 percent

■ Written communication 10 percent

■ Format 10 percent

Here’s a brief explanation of each of these points.

Content

The student

■ Provides clear answers to the assigned questions

■ Addresses the questions in complete sentences, not just simple yes-or-no statements

■ 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

■ Stays focused on the assigned issues

■ Writes in his or her own words and uses quotation marks to indicate direct quotations

Written Communication

The student

■ Answers each question in one or more complete sentences

■ Uses correct grammar, spelling, punctuation, and sentence structure

■ Provides clear organization when necessary (for example, uses words like first, however, on the other hand, and so on, consequently, since, next, and when)

■ Makes sure the project contains no typographical errors

Format

The paper is double-spaced and typed in font size 12. It includes the student’s

■ Name and complete mailing address

■ Student number

■ Course title and number (International Business, BUS 430)

■ Project number (50067000)

Submitting Your Assignment

Submit your research assignment online using the following procedure:

1. On your computer, save a revised and corrected version of your project.

2. Go to http://www.takeexamsonline.com and log in.

3. Go to My Courses.

4. Click on Take Exam next to the lesson you’re working on.

5. Enter your e-mail address in the box provided. (Note: This information is required for online submission.)

6. Attach your file or files as follows:

a. Click on the Browse box.

b. Locate the file you wish to attach.

c. Double-click on the file.

d. Click on Upload File.