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The Future of Wall Street and the Financial IndustryTuesday, May 3, 2011; 9:30 AM – 10:45 AM
Moderator:
Antonio Quintella, Regional CEO Americas, Credit Suisse
Speakers:
Chris Brummer, Senior Fellow, Milken Institute; Professor of Law,
Georgetown University Law Center
Josh Friedman, Co-Founder, Co-Chairman and Co-CEO, Canyon Partners LLC
Bill Lockyer, Treasurer, State of California
Duncan Niederauer, CEO, NYSE Euronext
1
Financial institutions received largest
government bailouts (all countries)
2Note: Data are as of April 20, 2011.
Source: Bloomberg.
$25
$25
$26
$45
$51
$55
$70
$75
$84
0 20 40 60 80 100
Wells Fargo & Company (U.S.)
JPMorgan Chase & Co. (U.S.)
Commerzbank AG (Germany)
Bank of America Corp. (U.S.)
Freddie Mac (U.S.)
Citigroup (U.S.)
AIG (U.S.)
Royal Bank of Scotland Group (U.K.)
Fannie Mae (U.S.)
Bailout funds received from governments (US$ billions)
United States, $232
United Kingdom, $99
Germany, $68
Ireland, $31
Netherlands, $23
Belgium, $18Rest of the world, $20
Government capital investments in financial firmsMost recently available data, as of April 6, 2011 (US$ billions)
Source: Bloomberg.
Total outstanding = $491 billion
U.S. bank bailout returns 9.4%
Return on TARP investment
TARP
bailouts ($B)
Return on
TARP ($B)
Return on
TARP (%)
Citigroup 45 12.4 27.5
Bank of America Corp 45 4.3 9.5
Wells Fargo & Company 25 2.3 9.2
GMAC Financial Services 16.3 2.2 13.4
JPMorgan Chase & Co 25 1.7 7.0
Goldman Sachs Group Inc 10 1.4 14.2
Morgan Stanley 10 1.3 12.7
Hartford Financial Services group 3.4 0.8 24.8
PNC Financial Services group 7.6 0.7 9.8
Others 144.0 3.9 2.7
Total 331.3 31.2 9.4%
4Note: Data are as of April 20, 2011.
Source: Bloomberg.
Five largest banks control almost half of
the U.S. national banking assets (2010)
5Sources: Federal Reserve and FDIC.
JPMorgan
Chase, 13.5%
Bank of
America, 12.3%
Citibank, 9.6%
Wells Fargo,
9.1%
US Bank, 2.5%
Other
commercialbanks
53.0%
All FDIC insured commercial banks
Total assets = US$12 trillion; Total number = 6,529 banks
Large U.S. banks become larger Top U.S. banks ranked by total assets
End of 1989Consolidated
assets (US$
billions)
Citicorp 204
Chase Manhattan 96
Bank of America 93
JPMorgan 83
Security Pacific 78
Total banking assets 3,128
Top five banks
(% of total banking assets) 18%
6
End of 2010Consolidated
assets (US$
billions)
JPMorgan Chase 1,631
Bank of America 1,482
Citigroup 1,154
Wells Fargo 1,102
Wachovia (Wells Fargo) 302
Total banking assets 12,067
Top five banks
(% of total banking assets) 47%
Source: Federal Reserve; FDIC; the Banker, July 1990 issue.
The world’s ten largest commercial banks
Each has trillion dollars in assets
Total assets
(US$ trillions)
1. BNP Paribas France 2.67
2. Deutsche bank Germany 2.55
3. Mitsubishi UFJ Japan 2.47
4. HSBC Holdings United Kingdom 2.45
5. Barclays United Kingdom 2.32
6. Royal Bank of Scotland United Kingdom 2.27
7. Bank of America United States 2.26
8. Credit Agricole France 2.13
9. JPMorgan Chase United States 2.12
10. Ind and Comm Bank China 2.04
7Note: the 2011 data are as of April 5, 2011.
Source: Bloomberg.
Basel III: Capital requirement
2011 2012 2013 2014 2015 2016 2017 2018 2019
Leverage RatioSupervisory
monitoring
Parallel run January 1st, 2013-2017
Disclosure starts January 1st, 2015
Migration to
Pillar 1
Minimum Common Equity Capital Ratio 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital Conservation Buffer 0.625% 1.25% 1.875% 2.5%
Minimum common equity plus capital conservation buffer
3.5% 4% 4.5% 5.125% 5.75% 6.375% 7%
Phase-in of Deductions from CET1 (including amounts exceeding the limit for DTAs, MSRs and financials)
20% 40% 60% 80% 100% 100%
Minimum Tier 1 Capital 4.5% 5.5% 6% 6% 6% 6% 6%
Minimum Total Capital 8% 8% 8% 8% 8% 8% 8%
Minimum Total Capital plus conservation buffer
8% 8% 8% 8.625% 9.25% 9.875% 10.5%
Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 capital
Phased out over 10 year horizon beginning 2013
Liquidity coverage ratio Observation period begins 2011 2015 Introduces minimum standard
Net stable funding ratio Observation period begins 2012 2018 Introduces minimum standard 8
Source: Basel Committee on Banking Supervision
Banks have built up more capital after the crisis
9Note: shade area indicates recession.
Source: FDIC.
6
7
8
9
10
11
12
13
14
15
16
Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010
Ratios (%) Capital ratios: All FDIC-insured financial institutions
Total risk-based capitalTier 1 risk-based capital
Equity capital to assetsLeverage ratio
The number of problem U.S. banks
continued to increase
10Source: FDIC.
0
200
400
600
800
1000
0
100
200
300
400
500
2002 2003 2004 2005 2006 2007 2008 2009 Q1 2010
Q2 2010
Q3 2010
Q4 2010
NumberUS$ billions
Assets of FDIC-insured problem institutions (left scale)
Number of FDIC-insured problem institutions (right scale)
U.S. banks’ lending still contracted due to
weak demand and tight lending standards
11
-15
-10
-5
0
5
10
15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Change in total bank loans, 1990-2010Percent, annual rate
Source: Federal Reserve.
Derivatives activity is dominated by few large banks
The top five banks hold 96% of all derivatives
12
Source: Comptroller of the Currency.
JPMorgan Chase Bank 33.7%
Citibank National 21.7%
Bank of America 21.0%
Goldman Sachs Bank USA
18.4%
Wells Fargo Bank 1.6%
Other banks3.6%
The notional amount of derivative contracts held by large U.S.
commercial banks, fourth quarter 2010 (% total)
Derivative contracts are concentrated
in top five largest banks
13
Note: Other banks include only U.S. commercial banks with derivatives activity.
Source: OCC’s quarterly report on bank trading and derivative activities, Comptroller of the Currency, fourth quarter, 2010.
0 25 50 75 100 125 150 175 200 225 250
Total
Swaps
Options
Futures & forwards
Credit derivativesQ4 2010
Top five banks
Other banks
US$ trillions
Despite significant decline after the crisis,
the CDS market is still valued at $26 trillion
14
0.6 0.9 1.6 2.2 2.7 3.8 5.48.4
12.417.1
26.0
34.4
45.5
62.2
54.6
38.6
31.2 30.426.3
0
10
20
30
40
50
60
70
Jun 2001
Dec Jun 2002
Dec Jun 2003
Dec Jun 2004
Dec Jun 2005
Dec Jun 2006
Dec Jun 2007
Dec Jun 2008
Dec Jun 2009
Dec Jun 2010
US$ trillions Credit default swaps, notional amounts outstanding
Source: International Swaps and Derivatives Association.
Bank CDS spreads
15
0
50
100
150
200
250
300
350
400
2003 2004 2005 2006 2007 2008 2009 2010 2011
United States
Eurozone
Median 10-year bank CDS spreads, basis points
Source: International Monetary Fund.
Medium term
note (MTN)
16
Traditional vs. parallel-banking system
Traditional banks
Investors
•Money market funds
Parallel-banking system
- Bank conduits
- Special investment vehicles
(SIVs) and limited purpose
finance companies (LPFCs)
- Securitizations (ABS, RMBS,
CMBS, auto loans)
- CLOs, CBOs and CDOs
- Special credit managers
•Securities lenders
•Investment managers
•Under-exposed banks
•Pension companies and
insurance companies
Commercial
paper (CP)
CP, MTN
and capital
Capital
Capital,
Debt
CD, CP,
bank equityBorrowers
-Corporate
borrowers
- Individual
borrowers
Loans
Cash Products
Source: Gary Gorton (2010).
Global stock markets are highly correlated
17
MSCI Emerging Markets
DAX 30
FTSE 100
-0.5
0
0.5
1
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
250-day rolling correlation with S&P 500
Po
sit
ive
& h
igh
ly
co
rre
late
d
Source: DataStream.
Stock prices around the world gained strongly,
but remained below their pre-crisis peaks
18Note: Data are as of April 20, 2011.
Source: Bloomberg.
40
80
120
160
200
2006 2007 2008 2009 2010 2011
January 2006 = 100
Emerging markets
Europe
S&P 500
Unprecedented rise in market volatility during
the 2008 market crash
19
0
10
20
30
40
50
60
70
80
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Volatility index (VIX)
VIX long-term average,1990-April 2011 Lehman Brotherscollapsed (September 2008)
Dot-com bubble burst (March 2000)
Long-Term Capital Management bailout (September 1998)
Note: VIX is the Chicago Board Options Exchange's volatility index. Source: DataStream.
Will 2011 be another strong year for
global stock markets?
Note: the regional equity indices are based on the MSCI equity indices.
Source: Bloomberg.
1.6%
12.8%
13.4%
16.4%
21.5%
0 10 20 30
Europe
U.S. (S&P 500)
Japan
Emerging markets
Frontier markets Africa
2010
Annual index return (%) in US$
-8.7%
-0.7%
3.8%
5.8%
9.7%
-10 -5 0 5 10
Emerging markets
U.S. (S&P 500)
Europe
YTD (as of 4/20/2011)
Annual index return (%) in US$
Frontier markets Africa
Japan
20
Strong financial recovery in U.S. stock market
Particularly in much of 2009 and early 2010
21Note: Data are as of April 19, 2011.
Source: Bloomberg.
5
10
15
20
2004 2005 2006 2007 2008 2009 2010 2011
U.S. stock market capitalizationUS$ trillions
Highest point: $19.1 trillion
on 07/23/2007
$16.2 trillion as of
04/19/2011
2011: U.S. stock market is off to a good start
22Note: Data are as of April 19, 2011.
Source: Bloomberg.
3.0
3.1
5.6
5.8
6.2
6.9
7.1
7.6
9.0
0 2 4 6 8 10
Dow Jones transports
Dow Jones utility
Nasdaq composite
S&P 500
NYSE composite
S&P small-cap
Russell 2000
Dow Jones industrial avg
S&P mid-cap
2011 YTD gains for key U.S. stock indexes (%)(as of 04/20/2011)
The U.S. small- and mid-cap stocks outperform
large cap stocks
23Note: Data are as of April 19, 2011.
Source: Bloomberg.
S&P 600 Small Cap
S&P 400 Mid Cap
S&P 100 Large Cap
50
100
150
200
250
300
350
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
January 1998 = 100
U.S. stock market’s share is shrinking
Share of the world’s market capitalization
24Note: The 2011 data are as of April 18, 2011.
Source: Bloomberg.
U.S., 50%
Japan, 9%China,
1%
U.K., 9%
Rest of the
world, 31%
2001
U.S., 30%
China, 8%
Japan, 7%U.K., 6%
Rest of the
world, 49%
2011
Gold prices hit record highs and
silver rallied to its strongest since 1980
25
0
10
20
30
40
50
60
0
400
800
1,200
1,600
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Gold price (US$/oz) Silver price (US$/oz)
2011
Gold price (left axis)
Silver price(right axis)
Source: Bloomberg.
Credit spreads have returned to low levels
United States
26
0
5
10
15
20
25
Percent
Investment-grade AAA-rated bond yield
High-yield bond index yield
Treasurybond 10-year yield
Source: Bloomberg.
A record issuance of high-yield bonds in 2010-11
United States
27* Year to date, annualized.
Source: Securities Industry and Financial Markets Association.
0
200
400
600
800
1,000
1,200
1,400
1,600
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Total issuance (US$ billions)
High yield
Investment grade
U.S. high-yield bond spread over Treasury is
at its historical average
28
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Hig
h-Y
ield
Bo
nd
Sp
rea
ds
(ba
sis
po
ints
)
Long-term average
(1986-March 2011)
Note: Spread is the difference between the U.S. high-yield Merrill Lynch Master II index and 10-year treasury bondSource: Bloomberg.
Issuance of U.S. private mortgage-backed
securities (MBS) remains at depressed levels
29* Year to date, annualized.
Source: Securities Industry and Financial Markets Association.
0
1
2
3
1997 1999 2001 2003 2005 2007 2009 2011*
Private-label MBS issuance
US
$ t
rillio
ns
0
1
2
3
1997 1999 2001 2003 2005 2007 2009 2011*
Gov't agency MBS issuance
US
$ t
rillio
ns
The secondary market remains stagnant
U.S. asset-backed securities issuance
30* Year to date, annualized.
Source: Securities Industry and Financial Markets Association.
0
200
400
600
800
85 87 89 91 93 95 97 99 01 03 05 07 09 11*
U.S. issues of asset-backed securities (ABS)by asset type
Student Loans
CBOs & CLOs
Manufactured HousingHome Equity
Equipment
Credit Cards
Auto
US$ billions
Investment returns for selected asset classes
Sources: Bloomberg, Milken Institute.
$446
$237
$191$169
$133 $122
0
100
200
300
400
500
Emerging markets
U.S. high-yield bonds
U.S. AAA corporates
U.S. Treasuries Commodities S&P 500
As of March 2011, a $100 investment made in December 2000 gives you:
Concerns over European public debt Many countries have public debt-to-GDP ratios close to or exceeding 100%
32Source: European Commission.
6677 79 80 82 83 85
101
117125
0
20
40
60
80
100
120
140
PIIGS: Portugal, Ireland, Italy, Greece, Spain
Gross public debt (%GDP)
European sovereign debt crisis
Widening spreads over German government bond
33Source: Bloomberg.
0
200
400
600
800
1,000
01/2010 04/2010 07/2010 10/2010 01/2011 04/2011
10-year gov't bond spreads over German gov'tbond (basis points)
Greece
Spain
Ireland
Portugal
Italy
Widening credit default swaps
Selected European countries
34Source: Bloomberg.
0
200
400
600
800
1,000
1,200
4/1/2009 8/1/2009 12/1/2009 4/1/2010 8/1/2010 12/1/2010 4/1/2011
Greece
Portugal
Ireland
Spain
Italy
Senior10-year CDS, basis points
Rise in oil and nonfuel commodity prices
35
40
50
60
70
80
90
100
110
120
130
140
80
100
120
140
160
180
200
2006 2007 2008 2009 2010 2011
Dollars per barrelDecember 2005 = 100
Nonfuel commodities (left scale)
Oil price (right scale)
Sources: Bloomberg; International Monetary Fund.
Continued accommodative monetary policy
in the United States
36Source: Federal Reserve.
0
1
2
3
4
5
6
Ju
l-0
7
Oc
t-0
7
Ja
n-0
8
Ap
r-08
Ju
l-0
8
Oc
t-0
8
Ja
n-0
9
Ap
r-09
Ju
l-0
9
Oc
t-0
9
Ja
n-1
0
Ap
r-10
Ju
l-1
0
Oc
t-1
0
Ja
n-1
1
Ap
r-11
Federal funds effective rate
Target rate
U.S. federal funds rate (%)
Some central banks started raising
interest rates to counter inflation risk
37Source: Bloomberg.
0
2
4
6
8
10
12
14
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Central bank rate (%)
China
Brazil
India
EurozoneUnited States
U.S. Treasury yields remained low by
historical standards
38Source: Federal Reserve.
0
1
2
3
4
5
6
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011
Percent Interest rates on Treasury securities Percent
10-year
2-year
The dollar slid to a three-year low Trade Weighted Exchange Index: Broad
39Note: data are as of 04/15/2011.
Source: Federal Reserve.
90
95
100
105
110
115
120
2006 2007 2008 2009 2010 2011
Trade weighted exchange index (January 1997 = 100)
Weaker dollar
Josh Friedman’s slides
40
Hedge fund industryAssets
• At just over $2trn in Q111, hedge fund industry assets have rebounded
and surpassed the 2007 highs…
Source: HFR Industry Reports © HFR, Inc. 201141
Hedge fund industryNet asset flow
• After $285bn of outflows in 2008 and 2009, the industry has returned to
inflows in 2010 and YTD…
Source: HFR Industry Reports © HFR, Inc. 201142
Hedge fund industryEstimated number of funds
• While off the 2007 peak of ~7,600 funds, the number of funds bottomed
in 2008 and has begun to grow slowly…
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2007 2008 2009 2010 Q111
Source: HFR Industry Reports © HFR, Inc. 201143
Hedge fund industryFunds liquidated / launched
• Hedge fund liquidations peaked at ~1500 in 2008 – in 2010, launches
exceeded liquidations for the first time since 2007…
Source: HFR Industry Reports © HFR, Inc. 201144
Hedge fund industryFlows by firm asset tier
• In Q111, 50% of inflows went to funds with AUM over $5bn, and 78% of
flows to funds over $1bn…
Source: HFR Industry Reports © HFR, Inc. 201145
