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THE SUBPRIME CRISIS What (the Hell) Happened and Why

THE SUBPRIME CRISIS What (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 GDP Securitization CDO GSE Shorts CDS Hedge Funds SIV CP LIBOR Subprime CRA(2) MBS TARP

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THE SUBPRIME CRISIS What (the Hell) Happened and Why

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  1. THE SUBPRIME CRISISWhat (the Hell) Happened and Why Presented by: Ken Roberts Foster Pepper, LLP

  2. Alphabet Soap ABS FNMA Prime Alt-A FRB Risk-Based Assets ARS FVA RPF BHC GDP Securitization 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

  3. “_______* makes the world go ‘round” *(Perry Como – 1958) *(Bernanke – 2008)

  4. 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)

  5. 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

  6. How To Sell Big Ticket Items? “No One Cares what the Price is, They Only Want to Know what the _________ is.”

  7. Why Did it Happen? Interest Rates at Historic Lows Dot.com Bubble Bust and 9/11 Fed Funds Rate drops to 1% in 2003 Prime Rate at 4% in 2003

  8. 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

  9. Why Did it Happen? Affordability ARMs Interest Only Teaser Rates Ninja Loans

  10. Why Did it Happen? Securitizations MBS GSE CDO SIV Credit Agencies CDS

  11. 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

  12. 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

  13. The Bust Gravity Happens Excess Supply Speculators ARMs Reset

  14. 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

  15. 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

  16. 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

  17. 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

  18. The Investment Banking Meltdown • July 17, 2008: IndyMac Bank closed by FDIC (largest failed bank to date)

  19. The Investment Banking Meltdown • September 7, 2008: Fannie Mae & Freddie Mac Nationalized ($6.0+ Trillion).

  20. The Investment Banking Meltdown • Lehman Brothers • Born: 1844 • Bankruptcy: September 15, 2008 ($600 Billion)

  21. The Investment Banking Meltdown • Reserve Primary Fund • September 16, 2008: Broke a Buck ($65.0 Billion)

  22. The Investment Banking Meltdown • September 16, 2008: • AIG (essentially) Nationalized

  23. The Investment Banking Meltdown • September 22, 2008: • Morgan Stanley and Goldman Sachs become Bank Holding Companies; increased access to the Fed Window

  24. 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

  25. The Investment Banking Meltdown • October 3, 2008: • EESA passes both Houses (includes $700 Billion for TARPs) • FDIC increases deposit insurance

  26. 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

  27. The Investment Banking Meltdown • October 21, 2008: • Fed commits $540 Billion to buy commercial paper adding liquidity to money market funds.

  28. The Great Depression • Unemployment: 25% • Stock Market Dropped 90% • First Mortgages in Default 44%

  29. “I would have lost more but that was all the money I had.” Groucho Marx, 1929

  30. AND THIS TOO SHALL PASS

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