THE SUBPRIME CRISIS What (the Hell) Happened and Why
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Transcript of THE SUBPRIME CRISIS What (the Hell) Happened and Why
THE SUBPRIME CRISISWhat (the Hell) Happened and Why
Presented by:
Ken Roberts
Foster Pepper, LLP
Alphabet Soap
ABS FNMA Prime
Alt-A FRB Risk-Based Assets
ARS FVA RPF
BHC GDPSecuritization
CDO GSE Shorts
CDS Hedge Funds SIV
CP LIBOR Subprime
CRA(2) MBS TARP
CSE Moral Hazard Teaser
EESA Naked Short TED
FDIC Ninja Tier 1
FHFA OCC Traunches
FHLMC OTTI
“_______* makes the
world go ‘round”
*(Perry Como – 1958)
*(Bernanke – 2008)
The Numbers
US GDP: $14.0 Trillion
Us Mortgage Debt (most held in MBS) $12.0 Trillion
US Federal Debt: $10.6 Trillion
US Debt Held by the Public $5.0+ Trillion
US Federal Obligations $60.0 Trillion($560,000
per household)
The Numbers (continued)
US Commercial Paper $1.5 Trillion
Money Market Funds $3.4 Trillion
Collateralized Debt Obligations $3.0 Trillion
Credit Default Swaps $58.0 Trillion
How To Sell Big Ticket Items?
“No One Cares what the Price is, They Only Want to Know what the _________ is.”
Why Did it Happen?
Interest Rates at Historic LowsDot.com Bubble Bust and 9/11Fed Funds Rate drops to 1% in 2003Prime Rate at 4% in 2003
Why Did it Happen?
Government Policy Promoting Home Ownership
CRA
Freddie Mac & Fannie Mae Mandated to:
Lower credit standards
Increase ownership of mortgages to
subprime borrowers
Capital ratios lowered
SEC Adopts Consolidated Supervised Entity
Why Did it Happen?
Affordability
ARMs
Interest Only
Teaser Rates
Ninja Loans
Why Did it Happen?
SecuritizationsMBSGSE
CDOSIVCredit AgenciesCDS
Why Did it Happen?
Moral Hazard“Reducing Risk too much exposes people to the Hazard of Irresponsible Risk-taking”
Mortgage Originators
Securitization
Credit Agencies
CDO & SIV
CDS
Boom in the US Housing Market
1997-2006 124% price increase
Price to median income moved from 3.0x to 4.6x
Housing starts: 2.0 million annually
The Bust
Gravity HappensExcess Supply
SpeculatorsARMs Reset
Mortgage Debt
1190: First Reported Mortgage 1908: Standard Down Payment 50% 2008: US Single Family Mortgage Debt
$12.0 Trillion
(amount held by Freddie Mac and Fannie Mae: $6.0)
Subprime & Alt-A Mortgage Debt$3.0 Trillion
(virtually all securitized)
Estimated Subprime Mortgage
Losses$500 Billion –
$1.0 Trillion
The Effect
10.0 million homeowners underwater (12%) 10% Mortgage Loans Delinquent Huge Losses (aggravated by FAS 157)
Job Losses Mounting Retail Sales – Big Ticket Items, down sharply
The Names
Barney Frank: Ranking Democrate on House Financial Services Committee (2000-2008)
Alan Greenspan: Fed Chairman (1987-2006) Mark Brickell: Managing Director JP Morgan (1994) Henry Cisneros: Secretary of HUD (1993-1997) William Donaldson: SEC Chairman (2003-2005) Richard Fuld, Jr.: CEO of Lehman Brothers (1994-
2008) Ben Bernanke: Current Fed Chairman Henry Paulsen: Current Secretary of the Treasury
The Investment Banking Meltdown Bear Stearns
June 2007: Bailed out Two Highly leveraged CDO Funds.
July 2007: Two of it’s Subprime Hedge Funds lost nearly 100% of their value
March 2008: FRB Loans $29.0 Billion backed solely by certain pledged assets; JP Morgan Purchases Bear Sterns
The Investment Banking Meltdown
July 17, 2008: IndyMac Bank closed by FDIC (largest failed bank to date)
The Investment Banking Meltdown
September 7, 2008: Fannie Mae & Freddie Mac Nationalized ($6.0+ Trillion).
The Investment Banking Meltdown
Lehman Brothers Born: 1844 Bankruptcy: September 15, 2008 ($600
Billion)
The Investment Banking Meltdown
Reserve Primary Fund September 16, 2008: Broke a Buck
($65.0 Billion)
The Investment Banking Meltdown
September 16, 2008: AIG (essentially) Nationalized
The Investment Banking Meltdown
September 22, 2008: Morgan Stanley and Goldman Sachs become
Bank Holding Companies; increased access to the Fed Window
The Investment Banking Meltdown
September 30, 2008: $25.0 Billion in US Loans available to US auto
makers FASB Statement No. 157 reinterpreted IRS revised NOL rules for Bank mergers
The Investment Banking Meltdown
October 3, 2008: EESA passes both Houses (includes $700 Billion
for TARPs) FDIC increases deposit insurance
The Investment Banking Meltdown
October 14, 2008: 30 Day T-bill rate drops to all time low of 5bp Treasury reserves $250 Billion of TARPs for
investment in banks and other financial institutions
The Investment Banking Meltdown
October 21, 2008: Fed commits $540 Billion to buy commercial
paper adding liquidity to money market funds.
The Great Depression
Unemployment: 25%
Stock Market Dropped 90%
First Mortgages in Default 44%
“I would have lost more but that was all the money I had.”
Groucho Marx, 1929
AND THIS TOO SHALL PASS