 Great Recession

History  Great Depression  Further Regulation  No Speculating

1980’s  Explosion of Financial Services Industry  Banks went public  WS became rich  Regan appoints Treasury Secretary

1980 – Early 2000’s  Period of Deregulation  Particularly in Savings & Loans  Allows speculation with deposits

Charles Keating  American Continental Corporation  Bought Lincoln Savings and Loan  Assets = 1.1Billion – 5.5 Billion (In four years)  Against regulation  Keating 5  Partnered with Alan Greenspan

1990’s  Too big to fail..  Citicorp and Travelers Merger  Too big to fail = Government Bailout  Oil Tanker

Dot-Com Bubble  End of 1990’s  5 Trillion in Losses  IBanks promoted companies they knew would fail (Recurring theme…)  Infospace

Infospace

Deregulation  Led to illegal activity from banks

Freddie Mac  Accounting Fraud  Fined $125 Million

Fannie Mae  Accounting Fraud  Overstated earnings by $10Billion  Fined $400Million  CEO receives $52 Million in bonuses that year

UBS  Helped wealthy Americans evade taxes  Fined $780 Million

Deregulation = Derivatives  1990’s deregulation led to boom in derivatives  Could gamble on anything  Derivatives market = $50 Trillion in late 1990’s  All unregulated  Greenspan + Summers wanted to keep derivatives unregulated

Derivatives Market Chart

Leverage and Leverage Ratio

Loans then  Typically the loan involved only two parties  Small bank and individual  Mortgage payments given directly to bank  Bank held mortgage until maturity  Self-fulfilling regulation

Loans Now

Growth in Lending

Growth in Subprime Lending

CDO  Collateralized Debt Obligation  Similar to MBS, just other structured debt  Sold to investors  Offsets risk  Exploded before crisis

CDO Issuance

CDS  Transfers credit exposure  From one party to next  Buyer makes payments to seller  Default gives buyer premium and IR to maturity

CDO Goldman Sachs  Goldman purchases CDS  Bets against own CDOs  $22Billion in CDS from AIG  More customers lost, more Goldman gains

Growth in CDS

Growth in MBS

Rating Agencies  Biggest rating agencies were Fitch, S&P, and Moody’s  They made money off of rating credit  The more AAA ratings they gave, the more $$  Toxic loans received AAA  Lehman rating  Court response

Revenue of Big 3

Ratings Downgrades

Consumer Credit

Home Prices

WS Exorbitance  Became “pissing contest, who’s was bigger?”  Lehman owned 6 jets (One a 767)  Escorts

Wall Street Bonuses

Delinquency Rates

Foreclosures and CDO collapse

Who fell?  Bear Sterns  Fannie & Freddie (Rated AAA day before takeover)  Lehman  Meryl Lynch

US Failed Banks

Commercial Papers Collapse

Thank you!