UNITED ASIA SCHOOL

OF MANAGEMENT

PROGRAM:- ADVANCE DIPLOMA IN INTERNATIONAL

HOSPITALITY AND TOURISM MANAGEMENT

MODUAL CODE:- AHM1003

SUBJECT:- FINANCIAL MANAGEMENT

LECTURER:- MR. DESMOND

SUBMISSION DATE:- 24th NOVEMBER 2008

STUDENT NAMES: AISHA

RAHUL
PIYUSH
Answer - 1

TRADING A/C OF LITTLEWOODS FOR

30 JUNE 2004

Sales 28,794

Purchases 23,803

Gross profit 4,991

PROFIT AND LOSS A/C OF LITTLEWOODS FOR

30 JUNE 2004

INCOME : $ $
Gross profit (from trading A/c) 4,991
EXPENSES:
Rent 854
Lighting & heating expenses 422
Salaries & wages 3,164
Insurance 105
Sundry expenses 506
Motor running expenses 1,133
6,184
Net loss 1,193
Answer-2

BALANCE SHEET OF LITTLEWOODS FOR

30 JUNE 2004

Assets
$ $
Fixed assets:
Building 50,000
Fixtures 1000
Motor van 5,500
56,500
Current assets:
Debtors 3,166
Cash at bank 3,847
7013
63,513

Liabilities and Owner’s Equity

Liabilities:
$ $
Creditors 1,206
Owners Equity:
Capital 65,900
Drawings 2,400
Net loss (from profit and loss a/c) 1,193
62,307
63,513
 Answer 3

 When a security has been newly issued, it is said to be a primary

market security.

 The Secondary market is where used or previously owned securities

are bought and sold
For example, when a company decides to issue new shares, the initial
sale of those securities takes place in the primary market. Once the
shares have been sold to an investor, that investor can sell those
shares to someone else in the secondary market.

 Usually the volume of trading is higher in secondary markets as

compared to primary markets.

Answer 4
The three major financial intermediaries are as follows:
Commercial Banks:

 An important source of capital for the hospitality industry.

 They take in funds from investors in the form of deposits and lend them
out to businesses and other individuals in the form of loans.

 Many commercial banks intermediate both domestically as well as

internationally.

 For a small hospitality organization – owner operated restaurants –

commercial banks are usually the only source of capital, apart from
private funding from friends and relatives.
Life Insurance Companies:

 They take in policy premiums and invest them – usually long term – to
be available to pay out benefits when needed.
 Life Insurance Companies find the hospitality industry very attractive as
hospitality properties represent long term assets and tend to offer
protection against inflation.
Brokerage Firms:

 Intermediate primarily between individuals or institutions that want to

purchase financial securities and those wanting to sell them.

 Also intermediate for firms that wish to issue new shares in the market –
firms that specialize in this function are called investment bankers.
 A hospitality firm that wants to issue new shares or bonds goes to a
brokerage firm. The firm charges a fee and markets the new securities
through its network of brokers.

Answer 5
Asset Structure: Relates to which assets the firm should invest in and
how much money should be invested in the assets. Such decisions
typically involve the left side of the balance sheet.
Capital Structure: Involves determining how to pay for the firms
investments. Such decisions are on the right side of the firm’s balance
sheet.
It’s easier for a hospitality manager to create value using the asset
structure rather than the capital structure:

 Competing firms can easily duplicate any capital structure

innovation that the manager of a particular firm may develop.
Thus, we can say that its virtually impossible for a capital
structure innovation to generate sustained value creation
opportunities.

 Asset structure innovations can lead to potentially sustained

competitive advantages – copyrights, trademarks, development
of a new property in a unique location.

 Usually in larger hospitality firms, the investment function and the

financial function are two separate entities. The ones responsible
for capital expenditure decisions are the unit managers while the
financing of such decisions is arranged through corporate
headquarters.

 Many smaller and moderate sized capital expenditure projects

are financed out of a pool of resources generated by the firm
from time to time.
Thus, hospitality managers tend to lean more towards asset structure or
investment project decisions.
Answer-6

T- Account for the month of may 2007

Bank A/c Proprietor A/c

1/5 2,000 3/5 150 31/5 44 1/5 2,000

21/5 5 24/5 300

Purchase A/c M. Mills A/c

2/5 175 18/5 23 18/5 23 2/5 175
6/5 114

Fixtures & Fittings A/c Cash A/c

3/5 150 5/5 275 10/5 15
12/5 27
30/5 177
31/5 44

S. Waites A/c
Sales A/c
6/5 114 5/5 275
23/5 77

Rent A/c Stationery A/c

10/5 15 21/5 5 12/5 27

U Henry A/c Motor Van A/c

23/5 77 24/5 300

Salary A/c
30/5 177
 Answer 7: FANNIE MAE

The Federal National Mortgage Association (FNMA), is commonly

known as Fannie Mae. It was established as a federal agency in 1938
(during the Depression), and is a private shareholder-owned company,
it was chartered by Congress in 1968 as a government sponsored
enterprise (GSE) On September 6, 2008, Director James Lockhart of
the Federal Housing Finance Agency (FHFA) appointed FHFA as
conservator of Fannie Mae. In addition, the U.S. Department of the
Treasury agreed to provide up to $100 billion of capital to ensure that
the company continued to provide liquidity to the housing and mortgage
markets.

Fannie Mae functions as an intermediary in the U.S. secondary

mortgage market. Instead of making home loans directly available to
consumers, Fannie Mae works with mortgage bankers, brokers, and
other primary mortgage market partners to help ensure they have funds
to lend to home buyers at affordable rates. The mortgage investments
are primarily funded by issuing debt securities in the domestic and
international capital markets.

Fannie Mae has three businesses - Single-Family, Housing and

Community Development, and Capital Markets - that work together to
provide services, products, and solutions to lender partners and a broad
range of housing partners. Together, these businesses help to increase
the total amount of funds available in America to make homeownership
and rental housing more available and affordable.

History

1932: Fannie Mae was established as a mechanism to provide home

mortgages to the poor.

1938: It was added to the Federal Home Mortgage association, a

government agency in the wake of the Great Depression as part of
Franklin Delano Roosevelt's New Deal in order to facilitate liquidity
within the mortgage market.

1968: The government converted Fannie Mae into a private

shareholder-owned corporation in order to remove its activity from the
annual balance sheet of the federal budget. Consequently, Fannie Mae
ceased to be the guarantor of government-issued mortgages, and that
responsibility was transferred to the new Government National
Mortgage Association (Ginnie Mae).

1970: The government created the Federal Home Loan Mortgage

Corporation (FHLMC), commonly known as Freddie Mac, to compete
with Fannie Mae and, thus, facilitate a more robust and efficient
secondary mortgage market.
Since the creation of the GSEs (Government Sponsored Enterprises),
there has been debate surrounding their role in the mortgage market,
their relationship with the government, and whether or not they are
indeed necessary. This debate gained relevance due to the collapse of
the U.S. housing market and subprime* mortgage crisis that began in
2007. Despite this debate, Fannie Mae, as well as Ginnie Mae and later
Freddie Mac, has played an integral part in the development of the most
successful mortgage market in the world which has allowed U.S.
citizens to benefit from one of the highest home ownership percentages
worldwide.

*Subprime borrowers have a higher risk of defaults.

1999: Fannie Mae came under pressure from the Clinton administration
to expand mortgage loans to low and moderate income borrowers. At
the same time, institutions in the primary mortgage market pressed
Fannie Mae to ease credit requirements on the mortgages it was willing
to purchase, enabling them to make loans to subprime borrowers at
interest rates higher than conventional loans. Shareholders also
pressured Fannie Mae to maintain its record profits.

2000: Due to a re-assessment of the housing market by HUD (Housing

and Urban Development), anti-predatory lending rules were put into
place that disallowed risky, high-cost loans from being credited toward
affordable housing goals.

2004: These rules were dropped and high-risk loans were again
counted toward affordable housing goals.

Business mechanism

 Fannie Mae buys loans from mortgage originators, repackages

the loans as mortgage-backed securities, and sells them to
investors in the secondary mortgage market with a guarantee
that principal and interest payments will be passed through to the
investor in a timely manner.
 One part of Fannie Mae's income is generated through the
positive interest rate spread between the rate paid to fund the
purchase of mortgage investments and the return it earns on
those retained mortgage investments.
 Fannie Mae may hold the purchased mortgages for its own
portfolio.
 Fannie Mae's mortgage portfolio was in excess of $700 billion as
of August 2008.
 Fannie Mae also earns a significant portion of its income from
guaranty fees it receives as compensation for assuming the
credit risk on the mortgage loans underlying its single-family
Fannie Mae MBS and on the single-family mortgage loans held
in its retained portfolio.
  Investors, or purchasers of Fannie Mae MBSs, are willing to let
Fannie Mae keep this fee in exchange for assuming the credit
risk; that is, Fannie Mae's guarantee that the scheduled principal
and interest on the underlying loan will be paid even if the
borrower defaults.
 By purchasing the mortgages, Fannie Mae and Freddie Mac
provide banks and other financial institutions with fresh money to
make new loans. This gives the United States housing and credit
markets flexibility and liquidity.
 In order for Fannie Mae to provide its guarantee to mortgage-
backed securities it issues, it sets the guidelines for the loans
that it will accept for purchase, called "conforming" loans.
 Mortgages that don't follow the guidelines are called "non-
conforming"; typically the secondary market for non-conforming
loans deals in mortgages larger (termed "jumbo") than the
maximum mortgage that Fannie Mae and Freddie Mac will
purchase.
 In early 2008, the decision was made to allow TBA-eligible MBS
to include up to 10% "jumbo" mortgages.

The mortgage crisis from late 2007

 Following their mission to meet federal Housing and Urban

Development (HUD) housing goals, GSE's such as Fannie Mae,
Freddie Mac and the Federal Home Loan Banks (FHLBanks)
have strived to improve home ownership of low and middle
income families, underserved areas, and generally through
special affordable methods such as "the ability to obtain a 30-
year fixed-rate mortgage with a low down payment... and the
continuous availability of mortgage credit under a wide range of
economic conditions."
 In 2007, the subprime mortgage crisis began. An increasing
number of borrowers, often with poor credit that were unable to
pay their mortgages - particularly with adjustable rate mortgages
(ARM), caused a great increase in home foreclosures.
 As a result, home prices declined as increasing foreclosures
added to the already large inventory of homes and stricter
lending standards made it more and more difficult for borrowers
to get mortgages.
 This depreciation in home prices led to growing losses for the
GSEs, which back the majority of US mortgages.
 The Treasury Department and the Federal Reserve took steps to
bolster confidence in the corporations, including granting both
corporations access to Federal Reserve low-interest loans (at
similar rates as commercial banks) and removing the prohibition
on the Treasury Department to purchase the GSEs' stock.
  By August 2008, shares of both Fannie Mae and Freddie Mac
had tumbled more than 90% from their one-year prior levels.
 Fannie Mae and smaller Freddie Mac own or guarantee almost
half of all home loans in the United States. They face billions of
dollars in potential losses, and may need to raise additional,
potentially substantial, amounts of new capital as the current
downturn in the U.S. housing market continues.
 Markets assume that the taxpayer will if necessary take on the
burden of all their mortgages because they underpin the whole
U.S. mortgage market. If they were to collapse, mortgages would
be harder to obtain and much more expensive. U.S. Treasury
Secretary Henry Paulson has said the government's primary
focus is in supporting Fannie Mae and Freddie Mac in their
current form.

Federal Subsidies

The FNMA receives no direct federal government aid. However, the

corporation and the securities it issues are widely believed to be
implicitly backed by the U.S. government.

 Fannie Mae and Freddie Mac are allowed to hold less capital
than normal financial institutions e.g., it is allowed to sell
mortgage-backed securities with only half as much capital
backing them up as would be required of other financial
institutions.
 Regulations exist through the FDIC Bank Holding Company Act
that govern the solvency of financial institutions. The regulations
require normal financial institutions to maintain a capital/asset
ratio greater than or equal to 3%.
 The GSEs, Fannie Mae and Freddie Mac, are exempt from this
capital/asset ratio requirement and can, and often do, maintain a
capital/asset ratio less than 3%.
 The additional leverage allows for greater returns in good times,
but put the companies at greater risk in bad times, such as
during the current subprime mortgage crisis.
 FNMA is also exempt from state and local taxes.
 FNMA and FHLMC are exempt from SEC filing requirements;
however, both GSEs voluntarily file their SEC 10-K and 10-Q.
Freddie Mac and Fannie Mae placed into US government
conservatorship

September 7, 2008:

 Federal Housing Finance Agency (FHFA) Director James B.

Lockhart III announced pursuant to the financial analysis,
assessments and statutory authority of the FHFA, he had placed
Fannie Mae and Freddie Mac under the conservatorship of the
FHFA.
 FHFA stated that there were no plans to liquidate the company.
 The announcement followed reports two days earlier that the
Federal government was planning to take over Fannie Mae and
Freddie Mac and had met with their CEOs on short notice.
 The authority of the U.S. Treasury to advance funds for the
purpose of stabilizing Fannie Mae, or Freddie Mac is limited only
by the amount of debt that the entire federal government is
permitted by law to commit to.
 The July 30, 2008 law, enabling expanded regulatory authority
over Fannie Mae and Freddie Mac increased the national debt
ceiling US$ 800 billion, to a total of US$ 10.7 Trillion in
anticipation of the potential need for the Treasury to have the
flexibility to support the federal home loan banks.

SCANDALS

Accounting Scandal

June 15, 2000: The House Banking Subcommittee On Capital Markets,

Securities And Government Sponsored Enterprises held hearings on
Fannie Mae.

September 20,2004: Fannie Mae was under investigation for its

accounting practices.

 The Office of Federal Housing Enterprise Oversight released a

report alleging widespread accounting errors.

2006: Fannie Mae was expected to spend more than $1 billion to

complete its internal audit and bring it closer to compliance.

 The necessary restatement was expected to cost $10.8 billion,

but was completed at a total cost of $6.3 billion in restated
earnings.
December 18, 2006: U.S. regulators filed 101 civil charges against chief
executive Franklin Raines; chief financial officer J. Timothy Howard;
and the former controller Leanne G. Spencer.

 The three are accused of manipulating Fannie Mae earnings to

maximize their bonuses.
 The lawsuit sought to recoup more than $115 million in bonus
payments, collectively accrued by the trio from 1998–2004, and
about $100 million in penalties for their involvement in the
accounting scandal.

LEADERSHIP

 Herbert M. Allison (2008- )

 Daniel Mudd (2005-2008)
 Franklin Raines (1999-2004)
 James A. Johnson (1991-1998)