Great Recession. History Great Depression Further Regulation No Speculating

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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!