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S
Great Recession
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History
Great Depression
Further Regulation
No Speculating
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1980’s
Explosion of Financial Services Industry
Banks went public
WS became rich
Regan appoints Treasury Secretary
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1980 – Early 2000’s
Period of Deregulation
Particularly in Savings & Loans
Allows speculation with deposits
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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
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1990’s
Too big to fail..
Citicorp and Travelers Merger
Too big to fail = Government Bailout
Oil Tanker
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Dot-Com Bubble
End of 1990’s
5 Trillion in Losses
IBanks promoted companies they knew would fail (Recurring theme…)
Infospace
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Infospace
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Deregulation
Led to illegal activity from banks
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Freddie Mac
Accounting Fraud
Fined $125 Million
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Fannie Mae
Accounting Fraud
Overstated earnings by $10Billion
Fined $400Million
CEO receives $52 Million in bonuses that year
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UBS
Helped wealthy Americans evade taxes
Fined $780 Million
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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
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Derivatives Market Chart
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Leverage and Leverage Ratio
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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
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Loans Now
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Growth in Lending
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Growth in Subprime Lending
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CDO
Collateralized Debt Obligation
Similar to MBS, just other structured debt
Sold to investors
Offsets risk
Exploded before crisis
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CDO Issuance
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CDS
Transfers credit exposure
From one party to next
Buyer makes payments to seller
Default gives buyer premium and IR to maturity
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CDO Goldman Sachs
Goldman purchases CDS
Bets against own CDOs
$22Billion in CDS from AIG
More customers lost, more Goldman gains
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Growth in CDS
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Growth in MBS
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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
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Revenue of Big 3
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Ratings Downgrades
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Consumer Credit
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Home Prices
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WS Exorbitance
Became “pissing contest, who’s was bigger?”
Lehman owned 6 jets (One a 767)
Escorts
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Wall Street Bonuses
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Delinquency Rates
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Foreclosures and CDO collapse
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Who fell?
Bear Sterns
Fannie & Freddie (Rated AAA day before takeover)
Lehman
Meryl Lynch
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US Failed Banks
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Commercial Papers Collapse
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Thank you!