1 1 1 1 Credit & Mortgage Market Credit & Mortgage Market Analysis & Update Analysis & Update James R. Barth Auburn University and Milken Institute [email protected]2009 Financial & Economic Crisis Bank Leadership Symposium Alabama Bankers Association Point Clear, Alabama June 4-7, 2009
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2009 Financial & Economic Crisis Bank Leadership SymposiumAlabama Bankers Association
Point Clear, AlabamaJune 4-7, 2009
22
BankingBankingWildcat
Savings and Loan Holding Company Act (1968)- Permit unitary SLHs to engage in any activity even those unrelated to S&L business
Phases out deposit rate ceiling by April 1, 1986
Monetary Control Act)---
--
-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
-
Bank Merger Acts(1960 & 1966)
-
Establishes merger guidelines
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
International Banking Act(1978)-- Puts foreign banks on equal
footing with U.S. banks
NationalCurrency
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency-Federally chartered banks-Uniform currency-Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. Treasury- Loans to state banks with temporary liquidity problems- Limit state bank note issuance- Part private bank and part central bank
)
1st Commercial Bank(1781)
U.S. Constitution gives -Congress the power "to coin
money and regulate the value thereof"(1787)
1st Mutual Savings Bank(1816)
1st Savings & Loan (1831)
People begin using checks(1865)
1st Credit Union(1909)
Federal Reserve Act(1913)-Furnishes "elastic currency"-Establishes the Federal Reserves System as the central banking system of the U.S.
MacFadden Act (1927)-National banks could branch to same extent permitted state banks
Stock Market Crash(1929)
Bank Holding Company Acts(1956 & 1970)-Restricted interstate ownership of banks-BHCs could engage in activities deemedby the Federal Reserve to be "closely related to banking"-defined a bank
Riegle- Neil Interstate Bankingand Branching Efficiency Act(1994)-BHCscan acquire banks nationwide after Sept. 29, 1995-Branching nationwide after June 1, 1997 unless state opts out
Garn-St Germain Depository Institutions Act (1982)-Allows possibility of interstate and interinstitutionalmergers-Gives S&Ls authority to make some commercial loans
Financial Institutions Reform, Recovery, and Enforcement Act (1989)-Changes structure of S&L institution regulation-Replaces FHLBB with OTS-Replaces FSLIC with SAIF
Federal Home Loan Bank Act(1932)-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
Great Depression-Securities & Exchange Commission-Federal Deposit Insurance for CBs and SLs-Banking Act of 1933 (Glass Steagall) separates commercial banking from investment banking -Federal Home Loan Banking System
-and denotes competition as a criteria
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
Competitive Equality Bank Act (1987)- Limits growth of nonbank banks
Gramm-Leach-Bliley Financial Services Modernization Act (1999)-Repeal last vestiges of the Glass-Steagall Act of 1933
- Expands the permissible scope of activities for bank holding and bank subsidiaries
NationalCurrency Act
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency---Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. -- Limit - Part private bank and part central bank
Federal Deposit Insurance Corporation Improvement Act (1991)-Mandates “prompt corrective action”
Federal Housing Finance Regulatory Reform Act (2008)
Emergency Economic
Stabilization Act (2008)
Savings-and-Loan Crisis
-- Allows NOW account at all depository institutions- Allows S&L to make consumer loans and issue credit cards
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Wildcat
(1836 1863)
Savings-and-Loan Crisis
Savings and Loan Holding Company Act (1968)- Permit unitary SLHs to engage in any activity even those unrelated to S&L business
1986
Monetary Control Act)---
--1986
Monetary Control Act)---
--
-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
-
Bank Merger Acts(1960 & 1966)
-
Establishes merger guidelines
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
International Banking Act(1978)-- Puts foreign banks on equal
footing with U.S. banks
NationalCurrency
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency-Federally chartered banks-Uniform currency-Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. Treasury- Loans to state banks with temporary liquidity problems- Limit state bank note issuance- Part private bank and part central bank
1st Commercial Bank(1781)
U.S. Constitution gives -Congress the power "to coin
money and regulate the value thereof"(1787)
1st Mutual Savings Bank(1816)
1st Savings & Loan (1831)
People begin using checks(1865)
1st Credit Union(1909)
Federal Reserve Act(1913)-Furnishes "elastic currency"-Establishes the Federal Reserves System as the central banking system of the U.S.
MacFadden Act (1927)-National banks could branch to same extent permitted state banks
Stock Market Crash(1929)
Bank Holding Company Acts(1956 & 1970)-Restricted interstate ownership of banks-BHCs could engage in activities deemedby the Federal Reserve to be "closely related to banking"-defined a bank
Riegle- Neil Interstate Bankingand Branching Efficiency Act(1994)-BHCscan acquire banks nationwide after Sept. 29, 1995-Branching nationwide after June 1, 1997 unless state opts out
Garn-St Germain Depository Institutions Act (1982)-Allows possibility of interstate and interinstitutionalmergers-Gives S&Ls authority to make some commercial loans
Financial Institutions Reform, Recovery, and Enforcement Act (1989)-Changes structure of S&L institution regulation-Replaces FHLBB with OTS-Replaces FSLIC with SAIF
Federal Home Loan Bank Act(1932)-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
Great Depression-Securities & Exchange Commission-Federal Deposit Insurance for CBs and SLs-Banking Act of 1933 (Glass Steagall) separates commercial banking from investment banking -Federal Home Loan Banking System
-and denotes competition as a criteria
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
Competitive Equality Bank Act (1987)- Limits growth of nonbank banks
Gramm-Leach-Bliley Financial Services Modernization Act (1999)-Repeal last vestiges of the Glass-Steagall Act of 1933
- Expands the permissible scope of activities for bank holding and bank subsidiaries
NationalCurrency Act
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency---Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. -- Limit - Part private bank and part central bank
Federal Deposit Insurance Corporation Improvement Act (1991)-Mandates “prompt corrective action”
Federal Housing Finance Regulatory Reform Act (2008)
Emergency Economic
Stabilization Act (2008)
Depository Institutions Deregulation and
-- Allows NOW account at all depository institutions- Allows S&L to make consumer loans and issue credit cards
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Savings-and-Loan Crisis
(1836 1863)
Savings-and-Loan Crisis
BankingBankingWildcat
Savings and Loan Holding Company Act (1968)- Permit unitary SLHs to engage in any activity even those unrelated to S&L business
Phases out deposit rate ceiling by April 1, 1986
Monetary Control Act)---
--Phases out deposit rate ceiling by April 1, 1986
Monetary Control Act)---
--
-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
-
Bank Merger Acts(1960 & 1966)
-
Establishes merger guidelines
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
International Banking Act(1978)-- Puts foreign banks on equal
footing with U.S. banks
NationalCurrency
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency-Federally chartered banks-Uniform currency-Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. Treasury- Loans to state banks with temporary liquidity problems- Limit state bank note issuance- Part private bank and part central bank
)
1st Commercial Bank(1781)
U.S. Constitution gives -Congress the power "to coin
money and regulate the value thereof"(1787)
1st Mutual Savings Bank(1816)
1st Savings & Loan (1831)
People begin using checks(1865)
1st Credit Union(1909)
Federal Reserve Act(1913)-Furnishes "elastic currency"-Establishes the Federal Reserves System as the central banking system of the U.S.
MacFadden Act (1927)-National banks could branch to same extent permitted state banks
Stock Market Crash(1929)
Bank Holding Company Acts(1956 & 1970)-Restricted interstate ownership of banks-BHCs could engage in activities deemedby the Federal Reserve to be "closely related to banking"-defined a bank
Riegle- Neil Interstate Bankingand Branching Efficiency Act(1994)-BHCscan acquire banks nationwide after Sept. 29, 1995-Branching nationwide after June 1, 1997 unless state opts out
Garn-St Germain Depository Institutions Act (1982)-Allows possibility of interstate and interinstitutionalmergers-Gives S&Ls authority to make some commercial loans
Financial Institutions Reform, Recovery, and Enforcement Act (1989)-Changes structure of S&L institution regulation-Replaces FHLBB with OTS-Replaces FSLIC with SAIF
Federal Home Loan Bank Act(1932)-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
Great Depression-Securities & Exchange Commission-Federal Deposit Insurance for CBs and SLs-Banking Act of 1933 (Glass Steagall) separates commercial banking from investment banking -Federal Home Loan Banking System
-and denotes competition as a criteria
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
Competitive Equality Bank Act (1987)- Limits growth of nonbank banks
Gramm-Leach-Bliley Financial Services Modernization Act (1999)-Repeal last vestiges of the Glass-Steagall Act of 1933
- Expands the permissible scope of activities for bank holding and bank subsidiaries
NationalCurrency Act
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency---Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. -- Limit - Part private bank and part central bank
Federal Deposit Insurance Corporation Improvement Act (1991)-Mandates “prompt corrective action”
Federal Housing Finance Regulatory Reform Act (2008)
Emergency Economic
Stabilization Act (2008)
Savings-and-Loan Crisis
-- Allows NOW account at all depository institutions- Allows S&L to make consumer loans and issue credit cards
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Wildcat
(1836 1863)
Savings-and-Loan Crisis
Savings and Loan Holding Company Act (1968)- Permit unitary SLHs to engage in any activity even those unrelated to S&L business
1986
Monetary Control Act)---
--1986
Monetary Control Act)---
--
-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
-
Bank Merger Acts(1960 & 1966)
-
Establishes merger guidelines
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
International Banking Act(1978)-- Puts foreign banks on equal
footing with U.S. banks
NationalCurrency
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency-Federally chartered banks-Uniform currency-Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. Treasury- Loans to state banks with temporary liquidity problems- Limit state bank note issuance- Part private bank and part central bank
1st Commercial Bank(1781)
U.S. Constitution gives -Congress the power "to coin
money and regulate the value thereof"(1787)
1st Mutual Savings Bank(1816)
1st Savings & Loan (1831)
People begin using checks(1865)
1st Credit Union(1909)
Federal Reserve Act(1913)-Furnishes "elastic currency"-Establishes the Federal Reserves System as the central banking system of the U.S.
MacFadden Act (1927)-National banks could branch to same extent permitted state banks
Stock Market Crash(1929)
Bank Holding Company Acts(1956 & 1970)-Restricted interstate ownership of banks-BHCs could engage in activities deemedby the Federal Reserve to be "closely related to banking"-defined a bank
Riegle- Neil Interstate Bankingand Branching Efficiency Act(1994)-BHCscan acquire banks nationwide after Sept. 29, 1995-Branching nationwide after June 1, 1997 unless state opts out
Garn-St Germain Depository Institutions Act (1982)-Allows possibility of interstate and interinstitutionalmergers-Gives S&Ls authority to make some commercial loans
Financial Institutions Reform, Recovery, and Enforcement Act (1989)-Changes structure of S&L institution regulation-Replaces FHLBB with OTS-Replaces FSLIC with SAIF
Federal Home Loan Bank Act(1932)-Creates the Federal Home Loan Bank Board- Creates the Federal Home Loan Banks
Great Depression-Securities & Exchange Commission-Federal Deposit Insurance for CBs and SLs-Banking Act of 1933 (Glass Steagall) separates commercial banking from investment banking -Federal Home Loan Banking System
-and denotes competition as a criteria
Federal Credit Union Act(1970)-Federal Deposit Insurance for CUs
Competitive Equality Bank Act (1987)- Limits growth of nonbank banks
Gramm-Leach-Bliley Financial Services Modernization Act (1999)-Repeal last vestiges of the Glass-Steagall Act of 1933
- Expands the permissible scope of activities for bank holding and bank subsidiaries
NationalCurrency Act
(1863)
NationalBank Act(1864)
Office of the Comptroller of the Currency---Tax on state bank notes
1st Bank of the U.S.(1791-1811)
2nd Bank of the U.S.(1816-1836)
-Fiscal agent for U.S. -- Limit - Part private bank and part central bank
Federal Deposit Insurance Corporation Improvement Act (1991)-Mandates “prompt corrective action”
Federal Housing Finance Regulatory Reform Act (2008)
Emergency Economic
Stabilization Act (2008)
Depository Institutions Deregulation and
-- Allows NOW account at all depository institutions- Allows S&L to make consumer loans and issue credit cards
Savings-and-Loan Crisis
Savings-and-Loan Crisis
Savings-and-Loan Crisis
(1836 1863)
Savings-and-Loan Crisis
Major U.S. banking lawsMajor U.S. banking laws
33
Major U.S. banking lawsMajor U.S. banking laws
Federal Deposit Insurance CorporationImprovement Act (1991)-Mandates prompt corrective action
Federal Reserve Act (1913)-Furnishes “elastic currency”-Establishes the Federal Reserve System as the central banking system of the U.S.
Depository Institutions Deregulation and Monetary Control Act (1980)- Phases out deposit rate ceilings by April 1986- Allows NOW accounts at all depository institutions - Allows S&Ls to make consumer loans and issue credit cards
National Currency Act(1863)
National Bank Act
(1864)
Office of the Comptroller of the Currency- Federally chartered banks- Uniform currency- Tax on state bank notes
Bank Holding Company Acts (1956 and 1970)-BHCs could engage in business deemed to be “closely related to banking” by the Federal Reserve- Restricted interstate bank ownership- Defined a bank
Garn-St. Germain Depositary Institutions Act (1982)- Allows possibility interstate and interinstitutional mergers- Allows S&Ls to make some commercial loans
Great Depression- SEC- Federal deposit insurance for banks and S&Ls-Banking Act of 1933 (Glass-Steagall) separates commercial and investment banking- Federal Home Loan Bank System
Financial Institutions Reform, Recovery and, Enforcement Act (1989)- Changes structure of S&L institution regulation- Replaces FHLBB with OTS- Replaces FSLIC with SAIF
Riegle-Neil Interstate Banking and Branching Efficiency Act (1994)-BHCs can acquire banks nationwide-Nationwide branching after June, 1997 unless state opts out
Gramm-Leach-Bliley Financial Services Modernization Act (1999)- Repeals last vestiges of the Glass Steagall Act of 1933-Expands the permissible scope of activities for bank holding companies and bank subsidiaries
Sarbanes-Oxley Act (2002)-Establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
1860
1880
1900
1920
1940
1960
1980
2000
Federal Housing Finance Regulatory Reform Act (2008)
Emergency Economic StabilizationAct (2008)
44
Most U.S. banking laws response to crises
National Currency
Act(1863)
1860
1880
1900
1920
1940
1960
1980
2000
Federal Deposit Insurance Corporation
Improvement Act (1991)(Banking crisis)
Federal Reserve Act (1913)(Bank runs)
Depository Institutions
Deregulation and Monetary Control
Act (1980)(S&L crisis)
National Bank Act
(1864)
Garn-St. GermainDepository
Institutions Act (1982)
(S&L crisis)
Glass-Steagall Act & Federal Deposit Insurance & SEC(Great Depression)
Financial Institutions Reform, Recovery and
Enforcement Act (1989)(S&L crisis)
(Civil War & wildcat banking)
Sarbanes-Oxley Act (2002)(Enron and WorldCom bankruptcies)
Federal Housing FinanceRegulatory Reform Act (2008)
Emergency Economic Stabilization Act (2008)
55
Bank Holding Company Acts (1956 and 1970)
(Prevent nationwide banking)
Riegle-Neil Interstate Banking and Branching Efficiency Act (1994)
(Allows nationwide banking: but acquisitions limited to 10% of nationwide deposits and 30%
of individual state deposits )
1860
1880
1900
1920
1940
1960
1980
2000
Gramm-Leach-Bliley Financial Services
Modernization Act (1999)(Broadens allowable
activities)
Some U.S. banking laws not crisis response
Note: Bank acquisitions and mergers are subject to an evaluation of the impact on competition by bank supervisory
agencies and the Justice Department. If an increase in concentration is too large, “divestitures” of competing
branches may be required.
66
Dow Jones Industrial AverageCompared to the Great Depression, 1973 oil crisis, and dot-com crash
Sources: Datastream, The Milken Institute.
-95
-75
-55
-35
-15
5
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33
Percentage lost in value from the peak
Months after the peak
Crash of 1929 (9/1929-7/1932)
Dot com crash (3/2000-10/2002)
Current recession: - 54% peak at 10/9/2007: 14,165 trough at 3/9/2009: 6,547 (as of 05/20/2009)
-89%
- 47.9%
1973 oil crisis(1/1973-12/1974)
77
U.S. industrial production Compared to the Great Depression
Sources: St. Louis Federal Reserve, The Milken Institute.
Months after start of recessionSources: Bureau of Labor Statistics, Milken Institute.
99
One-year real interest rate
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1925 1935 1945 1955 1965 1975 1985 1995 2005
Real interest rate
Note: The Federal Reserve Board discontinued its 6-month commercial paper rate series August 1997. After that, the 6-month Certificate of Deposit rate, secondary market, is used. Last observation: April 2009 (annualized). Sources: Robert Shiller, Federal Reserve, Bureau of Labor Statistics, Milken Institute.
1010
One-year nominal interest rate
0%2%4%6%8%
10%12%14%16%18%20%
1925 1935 1945 1955 1965 1975 1985 1995 2005
Nominal interest rate
Note: The Federal Reserve Board discontinued its 6-month commercial paper rate series August 1997. After that, the 6-month Certificate of Deposit rate, secondary market, is used. Last observation: April 2009 (annualized). Sources: Robert Shiller, Federal Reserve, Milken Institute.
1111
Civilian unemployment rate
0
5
10
15
20
25
30
1923-2
9 193
4 193
9 194
4 194
9 195
4 195
9 196
4 196
9 197
4 197
9 198
4 198
9 199
4 199
9 200
4April
2009
% of labor force
Sources: Bureau of Labor Statistics, Milken Institute.
1212
Great Depression: legislative response
The Civilian Conservation Corps (CCC) set up camps all over the United States to tackle the problem of unemployed young men aged between 18 and 25 years old. Between 1933 and 1941 over 3 million young men served in the CCC.
Civilian Conservation Corps Act (also known as Emergency Conservative Work Act)
March 31, 1933
Established twelve Federal Home Loan Banks under the supervision of the Federal Home Loan Bank Board to advance funds to savings-and-loan associations to promote homeownership.
Federal Home Loan Bank ActJuly 22, 1932
Created to loan up to $2 billion to aid banks, railroads, factories, farmers, and other sectors of the economy. It also allowed some loans to state and local governments that sponsored employment-generating construction projects.
Provided cash benefit payments to farmers to cut the production of major farm commodities to raise farm prices. The law was later declared unconstitutional by the Supreme Court but a new act correcting for the Court’s concerns was passed in 1935. At first, money for these payments to farmers came from special taxes on food processors, and later, after the correction in 1936, from the U.S. Treasury.
Agricultural Adjustment ActMay, 1933
Provided for the regulation of securities exchanges, and brokers and dealers in securities, to prevent manipulative and unfair practices in the securities markets. Established the Securities and Exchange Commission.
Securities ActSecurities and Exchange Act
May 27, 1933June 6, 1934
Provided funds to transform the economies of depressed, rural Southern states along the Tennessee River. The program included dam-building, electric power-generation, and flood control. It provided relatively high-wage jobs in construction in a region the President Roosevelt called “the nation’s number one economic problem.”
Tennessee Valley Authority ActMay 18, 1933
Key provisionsLegislationDate of enactment
1414
Great Depression: legislative response
Encouraged industry to avoid deflationary “cutthroat competition” by selling below cost to attract customers and driving weaker competitors out of business. The government temporarily suspended enforcement of anti-monopoly laws and sponsored what amounted to price-fixing as an emergency measure in an attempt to stimulate economic recovery.
National Industrial Recovery ActJune 16, 1933
Created the Federal Deposit Insurance Corporation (FDIC); prohibited the payment of interest-on-demand deposits; establishes Regulation Q (which limited the interest rates that U.S. banks and savings-and-loans could pay on deposits); and forced a separation between banking and the securities businesses.
Banking Act of 1933 (and Glass-SteagallAct)
June 16, 1933
Created federal savings-and-loan associations. Also created the Home Owners’ Loan Corporation to purchase delinquent home mortgages from financial institutions and refinance the mortgages over longer terms and at lower interest rates.
Home Owners’ Loan ActJune 13, 1933
Key provisionsLegislationDate of enactment
1515
Great Depression: legislative response
Set up the National Labor Relations Board to guarantee the right of collective bargaining for workers.
National Labor Relations ActJuly 5, 1935
Established the Work Progress Administration (WPA) to provided work for the unemployed. By 1936 over 3.4 million people were employed on various WPA programs.
The Emergency Relief Appropriation Act
April 8, 1935
Created the Federal Savings and Loan Insurance Corporation and authorized the FSLIC to regulate savings-and-loan holding companies.
National Housing ActJune 27, 1934
Authorized federal credit unions in all states. The initial maximum maturity of loans was two years.
Federal Credit Union ActJune 26, 1934
Key provisionsLegislationDate of enactment
1616
Great Depression: legislative response
Amends the Banking Act of 1933 and the Federal Reserve Act to restructure the Federal Open Market Committee and the Federal Reserve Board. Also permits national banks to make five-year real estate loans.
Banking Act of 1935August 23, 1935
Enacted to provide a steady income for retired workers aged 65 or older. Social Security ActAugust 14, 1935
Key provisionsLegislationDate of enactment
1717
Great Depression: legislative response
Seeks to prevent abuses through mandating disclosure regarding the investment company’s structure, operations, financial condition, and investment policies when shares of the investment company are initially offered to the public and, thereafter, on a regular periodic basis. Investment companies register with the SEC under the 1940 act and typically register their securities under the 1933 act.The provisions in the 1940 act govern, among other things: registration of investment companies; transactions between the investment company and an affiliate (e.g., the investment adviser to the investment company); purchases and sales of investment company shares; and responsibilities of the investment company’s directors or trustees. Congress, the SEC, the self-regulatory organizations (SROs), and state regulators are responding to allegations of recent wrongdoing within the mutual fund industry.
Investment Company Act of 1940August 22, 1940
Key provisionsLegislationDate of enactment
1818
Great Depression: legislative response
Requires the registration of certain investment advisers with the SEC. The act has rules covering such matters as: record-keeping; substantive content of advisory contracts; advertising; custody of client funds and assets; and proxy voting.In addition, the act imposes certain anti-fraud provisions upon individuals who meet the statute’s definition of “investment adviser,” even if the act does not require those persons to register with the SEC.
Investment Adviser Act of 1940August 22, 1940
Key provisionsLegislationDate of enactment
1919
Deep recession, strong recovery?U.S. history shows strong recoveries after many recessions
Note: Shade areas represent the periods of recessions; Sources: Bureau of Economic Analysis, NBER, and The Milken Institute.
Where we are in the current recession NBER business cycle dates
Start End Duration in monthsAugust 1929 March 1933 43May 1937 June 1938 13February 1945 October 1945 8November 1948 October 1949 11July 1953 May 1954 10August 1957 April 1958 8April 1960 February 1961 10December 1969 November 1970 11
November 1973 March 1975 16January 1980 July 1980 6
July 1981 November 1982 16July 1990 March 1991 8March 2001 November 2001 8
December 2007 ? Now: 18 monthsSource: National Bureau of Economic Research.
2121
Recoveries from financial crises take longer than other types of crises
Notes: Estimates are based on 122 recessions in 21 advanced economies.
Sources: International Monetary Fund.
Average time until recovery to previous peak (quarters)
2.8
3.0
3.6
4.0
5.6
0 1 2 3 4 5 6
External demand shocks
Fiscal policy contractions
Oil shocks
Monetary policy tightening
Financial crises
2222
The Current Crisis: The Rise and Fall of the
U.S. Mortgage and Credit Markets
2323
OverviewFactors that contributed to credit boom and bust
Lax monetary policy and global imbalancesReach for yield, short-term wholesale funding and risky/substantial leverageFinancial innovationOpacityProcyclicality of regulation and mark-to-market accountingToo big to failIncentive/compensation systemPublic policyFlight to safety
2424
Overview of the housing market
Note: total residential and commercial mortgages = $14.6 trillion at year-end 2008.
Sources: Federal Reserve, Milken Institute.
Equity in housing stock$7.8 trillion
Mortgage debt $10.5 trillion Prime
92.7%
Subprime7.3%
Securitized60%
Non-Securitized
40%
Government -controlled
48%
Privatesector -
controlled52%
2525
The mortgage problem in perspective
Note: The data is at year-end 2008.Sources: U.S. Census, Freddie Mac, Mortgage Bankers Association, Milken Institute.
25 million or 31% are paid off80 million houses
55 million have mortgages 49 million or 89% are paying on time
6 million are behind11% of 55 million with 3% in foreclosure
This compares to 50% seriously delinquent in the 1930s.
26262626
I. Low interest rates and a lending boom
27272727
Did the Fed lower interest rates too much and for too long?
Federal funds rate vs. rates on FRMs and ARMs
Sources: Federal Reserve, Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.
Note: Shaded area represents fluctuation within one standard deviation from mean (1.15%)Sources: Mortgage Bankers Association, OFHEO, Moody’s Economy.com, Milken Institute.
-60
-45
-30
-15
0
15
30
1998 2000 2002 2004 2006 2008
April 2008: -43.2%March 2008: -49.7%
Percent change, year ago
0
2
4
6
8
10
12
1998 2000 2002 2004 2006 2008
Number of months that homes sit on the market
Existing homes
New homes-20
-10
0
10
20
1999 2001 2003 2006 2008
0
2
4
6
8
10
12
Percentage change from year ago in median home sales price (left axis)
Number of months homes stay on
market (right axis)
Percent Months
5858
Real Commercial Property Price Index
Source: Moody's Economy.com.
50
100
150
200
2001 2002 2003 2004 2005 2006 2007 2008
ApartmentIndustrialOfficeRetail
Index (2000 Q4 = 100)
5959
Commercial mortgage asset-backed securities
Sources: Federal Reserve, IHS Global Insight.
20082007200620052004200320022001200019991998
200
150
100
50
0
-50
-100
US$ billions, SAAR
60606060
VIII. Delinquencies and foreclosures
6161
0
500
1,000
1,500
2,000
2,500
Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008
SubprimeFHA and VAPrime (includes Alt-A)
Number of home mortgage loan foreclosures started (annualized rate in thousands)
Q4 2008Subprime: 12% of loans serviced
6161
Subprime mortgages accounted for half or more of foreclosures since 2006
Sources: Mortgage Bankers Association, Milken Institute.
Percentage of homes purchased between 2004 and 2008 that now have negative equity
Sources: Zillow.com, Milken Institute.
United States = 41%
67676767
Percentage of homes sold for a loss (Q2 2008)
< 15%>= 15% and < 30%>= 30% and < 45%>= 45%
Sources: Zillow.com, Milken Institute.
United States = 32.7%
68686868
Percentage of homes sold that were in foreclosure (Q2 2008)
< 1%>= 1% and < 25%>= 25% and < 40%>= 40%
Sources: Zillow.com, Milken Institute.
United States = 18.6%
69696969
IX. Damages scorecard
7070
Losses/write-downs, capital raised byfinancial institutions worldwide
Sources: Bloomberg, Milken Institute.
1,103.9 1,288.1 Grand total 633.2621Others23.742.2HSBC, United Kingdom78.542.7Bank of America, United States12.145.3Washington Mutual, United States32.150.6UBS, Switzerland29.955.9Merrill Lynch, United States30.871.3Fannie Mae, United States51.681.6Freddie Mac, United States91.787.3AIG, United States
109.388.3Citigroup, United States11.0101.9Wachovia, United States
Capital raisedLoses/Write-downsUS$ billions, through April 10, 2009
Capital raised (left axis)April 10, 2009: $1,104 billion
Sources: Bloomberg, Milken Institute.
Cumulative losses/write-downs, capital raised, and jobs cut by financial institutions worldwide
What is the cumulative damage?
7272
Total assets of selected failed or acquired financial institutions
Sources: Bloomberg, Milken Institute.
Purchased by Wells Fargo
Total assets= $3.0 trillion
172
310
399
639
668
764
Countrywide,6/30/2008
Washington Mutual,6/30/2008
Bear Stearns,3/31/2008
Lehman Brothers,6/30/2008
Merrill Lynch,12/31/2008
Wachovia,9/30/2008
US$ billions
Acquired by Bank of America
Filed for bankruptcy
Sold to JPMorgan Chase
Purchased by Bank of America
Sold to JPMorgan Chase
Purchased by Wells Fargo
Total assets= $3.0 trillion
172
310
399
639
668
764
Countrywide,6/30/2008
Washington Mutual,6/30/2008
Bear Stearns,3/31/2008
Lehman Brothers,6/30/2008
Merrill Lynch,12/31/2008
Wachovia,9/30/2008
US$ billions
Acquired by Bank of America
Filed for bankruptcy
Sold to JPMorgan Chase
Purchased by Bank of America
Sold to JPMorgan Chase
Total assets= $3.0 trillion
172
310
399
639
668
764
Countrywide,6/30/2008
Washington Mutual,6/30/2008
Bear Stearns,3/31/2008
Lehman Brothers,6/30/2008
Merrill Lynch,12/31/2008
Wachovia,9/30/2008
US$ billions
Acquired by Bank of America
Filed for bankruptcy
Sold to JPMorgan Chase
Purchased by Bank of America
Sold to JPMorgan Chase
7373
Financial stocks take big hits
Note: Bear Stearns stock price is to May 2008. Countrywide stock price is to June 2008. Merrill Lynch and Wachovia stock prices are to December 2008.Sources: Bloomberg, Milken Institute.
Note: Counterparty Risk index averages the market spreads of the credit default swaps (CDS) of fifteen major credit derivatives dealers, including ABN Amro, Bank of America, BNP Paribas, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, HSBC, Lehman Brothers, JPMorgan Chase, Merrill Lynch, Morgan Stanley, UBS, and Wachovia. Sources: Datastream, Milken Institute.
OverviewGovernment responses to liquidity freeze and credit crunch
Government/private sector purchases of toxic assetsGuarantees for selected assets and liabilities Capital injections into financial institutionsSubsidization of loan modifications by financial institutions Debt for equity swapsEasier monetary policies, including lowering interest rates and quantitative/ credit easingCoordinated responses by countries (e.g., central bank currency swaps)
9595
Estimated U.S. total bailout costs The government has extended the bailouts to nearly $US10 trillion
Source: The Milken Institute.
Federal Reserve, Treasury, FDIC:
$362
FDIC: $926
Treasury: $2,466Federal Reserve:
$6,139
Estimated U.S. total bailout costs as of March 2009 (including guarantees and all commitments):
US$9.9 trillion
US$ billions
9696
Federal Government Comes to the Rescue of Main Street and Wall Street
Upper limit to total funds provided/cost under these Upper limit to total funds provided/cost under these programsprograms……$9.9 trillion plus ?$9.9 trillion plus ?
Federal Reserve 6,139
Congress and White House 2,466
Federal Deposit Insurance Corporation 926Treasury, Federal Deposit Insurance Corporation and Federal Reserve 362
Total amount committed (US$ billions) 9,893
Source: Milken Institute.
9797
Federal Reserve programs
Announced on 12/12/2007. The Fed auctions off loans under the TAF every Thursday for a term of 28 days. Outstanding TAF credit may potentially be expanded up to $900 billion.469
Term Auction Facility (TAF)
ProgramAmount
committed (US$ billions)
Description
Term Discount Window Program (TDWP) 64
Announced on 10/17/2007. Extends the term of discount window loans from overnight to up to 90 days.
Term Securities Lending Facility (TSLF) 106
Announced on 3/11/2008. Establishes term swaps between the Fed and primary dealers. Collateral can be Treasury securities, federal agency securities, and other highly rated debt securities. On December 2, 2008, TSLF was extended through April 30, 2009.
9898
Federal Reserve programs
Announced on 3/16/2008. Extends overnight borrowing from the Federal Reserve to primary dealers. On December 2, 2008, PDCF was extended through April 30, 2009. As of 3/18/2009, credit extended under PDCF was less than $20.1 billion.20
Primary Dealer Credit Facility (PDCF)
Announced on 3/14/2008. The Fed acquired $29 billion in mortgage backed securities from JPMorgan Chase to fund its purchase of Bear Stearns. As of 3/18/2009, the market value of these mortgage-backed securities is $26.2 billion.29 Bear Stearns
Announced on 3/11/2008. Establishes term swaps between the Fed and primary dealers. Collateral can be Treasury securities, federal agency securities, and other highly rated debt securities. On December 2, 2008, TSLF was extended through April 30, 2009.
106 Term Securities Lending Facility (TSLF)
Announced on 12/12/2007. The Fed auctions off loans under the TAF every Thursday for a term of 28 days. Outstanding TAF credit may potentially be expanded up to $900 billion.469
Term Auction Facility (TAF)
Announced on 10/17/2007. Extends the term of discount window loans from overnight to up to 90 days.64
Term Discount Window Program (TDWP)
Description
Amount committed
(US$ billions)
Program
9999
Federal Reserve programs
First announced on 9/16/2008. AIG received an $85 billion, two-year secured loan on September 16, 2008, in exchange for warrants for a 79.9 percent equity stake in the firm. It was given an additional $37.8 billion on October 8, and another $20.9 billion credit line under CPFF on October 30, 2008. On November 10, Treasury purchased $40 billion of newly issued AIG preferred stock under the TARP (potentially reducing the original loan from $85 billion to $60 billion), terminated the $37.8 billion lending facility previously established, created a new lending facility to purchase up to $22.5 billion MBS from AIG, and another facility to lend up to $30 billion to purchase CDOs on which AIG had written CDSs. On 3/2/2009, Treasury announced it would exchange its existing $40 billion cumulative perpetual preferred shares for new preferred shares with revised terms. Also, the Treasury will create a new equity capital facility, which allows AIG to draw down up to $30 billion as needed over time in exchange for non-cumulative preferred stock to the U.S. Treasury. As of 3/18/2009, $18.4 billion was extended to purchase MBSs, and $27.6 billion was extended to purchase CDOs.
185 AIG
Description
Amount committed
(US$ billions)
Program
100100
Federal Reserve programs
Announced on 9/29/2008. The Federal Open Market Committee authorized a $330 billion expansion of its swap lines for U.S. dollar liquidity operations by other central banks, raising the total cap to $620 billion (up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by DanmarksNationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the SverigesRiksbank, and $60 billion by the Swiss National Bank).
620
Expansion of the Federal Open Market's temporary reciprocal currency arrangements (swap lines)
Announced on 9/19/2008. Loans to banks so that they can buy asset-backed commercial paper from money market funds. On December 2, 2008, AMLF was extended through April 30, 2009. As of 3/18/2009,credit extended under AMLF was $7.6 billion.
53
Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
Description
Amount committed
(US$ billions)
Program
101101
Federal Reserve programs
Announced on 10/7/2008. The CPFF is a credit facility to a special purpose vehicle (SPV). The SPV purchases from eligible issuers three-month U.S. dollar-denominated commercial paper through the New York Fed's primary dealers. Eligible issuers are U.S. issuers ofcommercial paper, including U.S. issuers with a foreign parent company. The SPV only purchases U.S. dollar-denominated commercial paper (including asset-backed commercial paper (ABCP)) that is rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, is rated at least A-1/P-1/F1 by two or more major NRSROs. The maximum amount of a single issuer's commercial paper the SPVmay own at any time is greatest amount of U.S. dollar-denominated commercial paper the issuer had outstanding on any day between January 1 and August 31, 2008. The SPV does not purchase additional commercial paper from an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer's limit. As of 3/18/2009, $240.7 billion was outstanding.
1,777
Commercial Paper Funding Facility (CPFF)
Description
Amount committed
(US$ billions)
Program
102102
Federal Reserve programs
Announced on 10/21/2008. The MMIFF provides assurance that moneymarket mutual funds can liquidate their investments if cash is needed to cover withdrawals from customers. On 1/7/2009, the set of eligible institutions was expanded to also include a number of other money market investors, including U.S. based securities-lending cash-collateral reinvestment funds, portfolios, and accounts; and U.S. –based investment funds that operate in a manner similar to moneymarket mutual funds such as certain local government investment pools, common trust funds, and collective investment funds. As of 3/18/2009, outstanding amount was zero.
540
Money Market Investor Funding Facility (MMIFF)
Description
Amount committed
(US$ billions)
Program
103103
Federal Reserve programs
Announced on 11/25/2008. TALF loans will have a one-year term, will be non-recourse to the borrower, and will be fully secured by eligible ABS. Treasury will provide $20 billion of credit protection to the Fed in connection with the TALF. Eligible collateral will include U.S. dollar-denominated cash (that is, not synthetic) ABS that have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more major nationally recognized statistical rating organizations (NRSROs) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO. The underlying credit exposures of eligible ABS initially must be auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration. All U.S. persons that own eligible collateral may participate in the TALF. Collateral haircuts will be established by the FRBNY for each class of eligible collateral. Haircuts will be determined based on the price volatility of each class of eligible collateral. On December 19, 2008, it was announced that TALF loan maturity was extended from one to three years, and TALF loans would be provided to all eligible borrowers with eligible collateral rather than distributed through an auction. On 2/10/2009, the size of TALF was increased to $1 trillion. On 3/3/2009, TALF was formally launched. As of 03/19/2009, $4.7 billion was requested.
1,000
Term Asset-Backed Securities Loan Facility (TALF)
Description
Amount committed
(US$ billions)
Program
104104
Federal Reserve programs
Announced on 11/25/2008. The Fed will purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Fed's primary dealers through a series of competitive auctions and will begin in the first week of December. Purchases of up to $500 billion in MBS will beconducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end 2008. Purchases of both direct obligations and MBS are expected to take place over several quarters. On 3/18/2009, the FOMC decides to increase the size of the Federal Reserve's balance sheet by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.
1,450
Purchase of GSE direct obligations and MBS
Description
Amount committed
(US$ billions)
Program
105105
Congress and White House
Announced on 7/30/2008. Designed to shore up Fannie Mae and Freddie Mac. 25
Purchase of GSE Debt and Equity
Announced on 7/30/2008. The CBO estimates that the Act will increase budget deficits by about $24.9 billion over the 2008 to 2018 period. 525
Housing and Economic Recovery Act of 2008
Announced on 2/13/2008. Provided tax rebates in 2008. Most taxpayers below the income limit received rebates of $300-$600. Also gave businesses a one-time depreciation tax deduction on specific new investment and raised the limits on the value of new productive capital that may be classified as business expenses during 2008. The Congressional Budget Office (CBO) estimates the net cost of the stimulus to be $124 billion.
124 Economic Stimulus Act
Announced on 8/31/2007. Guarantees $50 billion in mortgages.50 FHA Secure
Description
Amount committed
(US$ billions)
Program
106106
Congress and White House
Announced on 9/7/2008. Treasury and FHFA established contractualagreements to ensure that each company maintains a positive net worth. They are indefinite in duration and have a capacity of $100 billion each. Treasury also established a new secured lending credit facility, available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Funding is provided directly by Treasury in exchange for eligible collateral from the GSEs (guaranteed mortgage backed securities issued by Freddie Mac and Fannie Mae, as well as advances made by the Federal Home Loan Banks). To further support the availability of mortgage financing, Treasury is initiating a temporary program to purchase GSE MBS, with the size and timing subject to the discretion of the Treasury Secretary. On 2/18/2009, an additional $200 billion investment was made in Fannie Mae and Freddie Mac under Housing and Economic Recovery Act of 2008.
400
Conservatorship of Fannie Mae and Freddie Mac
Announced on 7/30/2008. This voluntary program encourages lenders to write down the loan balances of borrowers in exchange for FHA-guaranteed loans up to 90 percent of the newly appraised home value. Program runs through September 2011.
300 HOPE for Homeowners
DescriptionAmount
committed (US$ billions)
Program
107107
Congress and White House
Announced on 10/14/2008 as part of the EESA. On November 25, Treasury purchased $40 billion of preferred shares from AIG. As of December 31, 2008, there are four programs under the TARP: Capital Purchase Program (CPP), Automobile Industry Financing Program (AIFP), Targeted Investment Program (TIP), and Asset Guarantee Program (AGP). TARP also includes on initiative: providing $20 billion to support the Fed's Term Asset-Backed Securities Loan Facility
392
Troubled Assets Relief Program (TARP)
Announced on 10/3/2008. Empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets necessary to promote financial market stability.
700
Emergency Economic Stabilization Act
Announced on 9/30/2008. Allows banks to offset their profits with losses from the loan portfolio of banks they acquire. Initial media reports indicate that Wells Fargo alone may be able to claim more than $70 billion in losses from its acquisition of Wachovia, obtaining tax savings that exceed the market value of Wachovia as of November 7, 2008.
? IRS Notice 2008-83
Announced on 9/19/2008. To restore confidence in money market funds, Treasury made available up to $50 billion from the Exchange Stabilization Fund.50
Guaranty Program for Money Market Funds
DescriptionAmount
committed (US$ billions)
Program
108108
Congress and White House
On 12/19/2008, Treasury announced a plan to make emergency loans available to General Motors and Chrysler. GM was provided with up to a total of $13.4 billion in short-term financing. Treasury funded $4 billion of this loan immediately, and an additional $5.4 billon on 1/16/2009. Treasury will provide an additional $4 billion on 2/17/2009. On 12/29/2008, Treasury also purchased $5 billion of senior preferred equity from GMAC. Additionally, Treasury agreed to lend up to $1 billion of TARP funds to GM so that GM can participate in a rights offering by GMAC in support of GMAC’s reorganization as a bank holding company. On 1/2/2009, Treasury provided a 3-year $4 billion loan to Chrysler, secured by various collateral, including parts inventory, real estate, and certain equity interests. On 1/19/2008, Treasury announced that a $1.5 billion loan to a SPV created by Chrysler Financial to finance the extension of new consumer auto loans as part of a broader program to assist the domestic automotive industry in becoming financially viable.
25
Automotive Industry Financing Program (AIFP)
Under CPP, Treasury was allowed to purchase up to $250 billion of senior preferred shares in selected banks. The first $125 billion was allocated to nine of the nation's largest financial institutions on October 28, 2008. As of 3/18/2009, $198.5 billion has been distributed to 510 institutions.
250 Capital Purchase Program (CPP)
DescriptionAmount
committed (US$ billions)
Program
109109
Congress and White House
On 12/31/2008, Treasury transmitted to Congress a report that describes the Asset Guarantee Program (AGP). This program provides guarantees for assets held by systemically significant financial institutions that face a risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. On 1/16/2009, $5 billion guarantee was provided Citigroup.
5
Asset Guarantee Program (AGP)
Treasury may invest in any financial instrument, including debt, equity, or warrants, that the Secretary of the Treasury determines to be a troubled asset, after consultation with the Chairman of the Board of Governors of the Federal Reserve System and notice to Congress. Institutions participating in this program are required to provide Treasury with warrants or alternative consideration as necessary. They also need to adhere to rigorous executive compensation standards. In addition, Treasury will consider other measures, including limitations on the institution's expenditures, or other corporate governance requirements. The $20 billion investment in Citigroup that was announced on Nov. 23 was made under the TIP. On 1/16/2009, $20 billion investment was made in Bank of America.
40
Targeted Investment Program (TIP)
DescriptionAmount
committed (US$ billions)
Program
110110
Congress and White House
Announced on 2/10/2009. This program include: 1) A new Capital Assistance Program; 2) A new Public-Private Investment Fund; 3) A new Treasury and Federal Reserve imitative to expand the existing TALF; 4) An extension of the FDIC's Temporary Liquidity Program; 5) A new framework of governance and oversight for banking industry; and 6) Affordable Housing Support and Foreclosure Prevention Plan. This plan uses EESA funds as well as other resources.
1,375 Financial Stability Plan
Signed by President Obama on February 17, 2009.787
American Recovery and Reinvestment Act of 2009
Signed by President Obama on February 18, 2009. This program: 1) provides refinancing for up to 4 to 5 million responsible homeowners to make their mortgages more affordable; 2) establishes a $75 billion homeowner stability initiative to reach up to 3 to 4 million at-risk homeowners; and 3) supports low mortgage rates by strengthening confidence in Freddie Mac and Fannie Mae. This plan is supplemented by $200 billion in additional funding to Fannie Mae and Freddie Mac by Treasury under Housing and Economic Recovery Act.
75
Homeowner Affordability and Stability Plan
DescriptionAmount
committed (US$ billions)
Program
111111111111
Congress and White House
This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
500
New Public-Private Investment Fund (PPIF)
Capital Assistance Program under Financial Stability Trust will provide a capital buffer that will operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. All banking institutions with assets in excess of $100 billion will be required to participate. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
? Capital Assistance Program (CAP)
Description
Amount committed
(US$ billions)
Program
112112112112
Congress and White House
This program includes: 1) Jumpstart credit markets for small businesses by purchasing up to $15 billion in securities; 2) Temporarily raise guarantees to up to 90 percent in SBA's 7(a) loan program; 3) Temporarily eliminate certain SBA loan fees to reduce the cost of capital; 4) Call by Secretary Geithner for new reporting requirements on bank lending to small businesses and greater efforts to extend small business loans; 5) Issue guidance for an expanded carryback provision as part of the Recovery Act's comprehensive tax cut package for small businesses.
15
Unlocking Credit for Small Businesses Program
This program includes: 1) A home affordable refinance program toprovide access to low-cost refinancing for responsible homeowners suffering from falling home prices; 2) a $75 billion home affordable modification program to prevent foreclosures and help responsible families stay in their homes; and 3)support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.
75
Making Home Affordable Program
DescriptionAmount
committed (US$ billions)
Program
113113113113
Federal Deposit Insurance Corporation
Announced on 10/14/2008. This program includes two parts: 1) Debt Guarantee Program (DGP); 2) Transaction Account Guarantee Program (TAG). The TLGP temporarily guarantees the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. On November 21, 2008, FDIC strengthened TLGP. Chief among the changes is that the debt guarantee will be triggered by payment default rather than bankruptcy or receivership. Another change is that short-term debt issued for one month or less will not be included in the TLGP. Eligible entities will have until December 5, 2008 to opt out of TLGP. On 2/10/2009, the program was extended through October 2009. As of 1/31/2009, $253 billion worth of debt was outstanding under the TLGP.
926
Temporary Liquidity Guarantee Program (TLGP)
Announced on 10/3/2008. A provision of EESA temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. Limits are scheduled to return to $100,000 after December 31, 2009.
? Increase FDIC insurance coverage
Description
Amount committed
(US$ billions)
Program
114114114114
Federal Deposit Insurance Corporation
The TAG provided for a temporary full guarantee by the FDIC for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts above the existing deposit insurance limit. This coverage became effective on October 14, 2008, and would continue through December 31, 2009.
926
Transaction Account Guarantee Program (TAG)
The DGP temporarily guarantees the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Certain newly issued senior unsecured debt on or after October 14, 2008, and before June 30, 2009, would be fully protected in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. This includes promissory notes, commercial paper, interbank funding, and any unsecured portion of secured debt. Coverage would be limited to June 30, 2012. As of 1/31/2009, $253 billion of debt was outstanding under the program.
253+? Debt Guarantee Program (DGP)
Description
Amount committed
(US$ billions)
Program
115115115115
Treasury, Federal Deposit Insurance Corporation and Federal Reserve
Program Amount committed (US$ billions) Description
Guarantee a portion of an asset pool of loans and securities backed by residential and commercial real estate and other such assets on Citigroup's balance sheet
249
Announced on 11/23/2008. Up to $306 billion of Citigroup's assets are guaranteed. Citigroup takes the first loss up to $29 billion, and any loss in excess of that amount is shared by the government (90%) and Citigroup (10%). Treasury (via TARP) takes the second loss up to $5 billion, while FDIC takes the third loss up to $10 billion. The Federal Reserve funds the remaining pool of assets with a non-recourse loan, subject to Citigroup's 10 percent loss sharing, at a floating rate of overnight interest swap plus 300 basis points.
116116
Treasury, Federal Deposit Insurance Corporation and Federal Reserve
Program
Amount committed
(US$ billions)
Description
Provide a package of guarantees, liquidity access, and capital to the Bank of America
138
Announced on 1/16/2009. Treasury and FDIC will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to market value. The large majority of these assets were assumed by BOA as a result of its acquisition of Merrill Lynch. The assets will remain on BOA’s balance sheet. As a fee for this arrangement, BOA will issue preferred shares to the Treasury andFDIC. In addition and if necessary, The Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.In addition, Treasury will invest $20 billion in BOA from the TARP program in exchange for preferred stock with an 8 percent dividend to the Treasury. The investment was made under the Targeted Investment Program.
Loans, guarantees and investments committed 9,893 The final tab for taxpayers will only become known once the crisis is
over.
117117
TARP allocated so farStatus of Troubled Asset Relief Program funds as of March 27, 2009
Median (With WFC) -17.4 26.1 -16.3 -2.2 -23.2Median (No WFC) -17.3 26.4 -17 -2.2 -24.2TOTAL (w ith WFC) $261,354 $207,292 -26.1 $246,054 18.7 $241,642 -1.8 $230,213 -4.7 -11.9TOTAL (no WFC) $226,281 $180,419 -25.4 $214,991 19.2 $191,082 -11.1 $174,162 -8.9 -23
120120120120
XI. When will we hit bottom?
121121
How far do home prices have to fall?Average = 100
Sources: Moody’s Economy.com, Milken Institute.
60
80
100
120
140
160
1981 1988 1995 2002 2009
OFHEO
Case-Shiller: 20-metro
Case-Shiller: 10-metro
Case-Shiller National
Price/rent
60
80
100
120
140
160
1981 1988 1995 2002 2009
OFHEO Case-Shiller: 20-metro Case-Shiller: 10-metro Case-Shiller National
Price/disposable income per capita
122122
Alternative measures for the affordability ofmortgage debt for California
Mortgage payment assumptions:
* Home is purchased at median price
* Buyer takes out a 30-year
conforming, fixed-rate loan
* Payment also includes 1% property
tax per year, 0.1% property
insurance
Sources: Moody’s Economy.com, Milken Institute.
20%
30%
40%
50%
60%
70%
80%
2000 2002 2004 2006 2008
Estimated monthly payment / monthly household income
100% LTV
Maximum affordablility limit is 38%of median household income
90% LTV
80% LTV
123123123123
XII. What went wrong
124124124124
2,443
879
1,410
2,067
944886
0
500
1,000
1,500
2,000
2,500
3,000
Fannie Mae:total assets
Fannie Mae:total MBS
outstanding
Freddie Mac:total assets
Freddie Mac:total MBS
outstanding
Commercialbanks: total
residential realestate assets
Savingsinstitutions:
totalresidential realestate assets
US$ billions
The importance of Fannie Mae and Freddie Mac
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
125125125125
Fannie Mae and Freddie Mac: Too big with too little capital?
Sources: Freddie Mac, Fannie Mae, Milken Institute.
133 41
675459
1,022803 912 851
288 316
707 576
1,301
752
1,403
2,289
0
500
1,000
1,500
2,000
2,500
FannieMae 1990
FreddieMac 1990
FannieMae 2000
FreddieMac 2000
FannieMae 2003
FreddieMac 2003
FannieMae 2008
FreddieMac 2008
US$ billions
Total assetsTotal MBS outstanding
126126126126
Fannie Mae and Freddie Mac are highly leveraged
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
60x 56x 48x 55x60x 58x 52x 57x64x 81x 56x
167x
-360x
-168x
-72x-30x
-400
-300
-200
-100
0
100
200
300
Core capital Fair value Core capital Fair value
2005 2006 2007 2008
Mortgage book of business over capital measures
Fannie Mae Freddie Mac
127127
Freddie Mac’s and Fannie Mae's retained private-label portfolios: Too much risk?
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
Fannie Mae, 2008
Fannie Mae, 2007
Fannie Mae, 2006
Fannie Mae, 2005
Freddie Mac, 2008
Freddie Mac, 2007
Freddie Mac, 2006
Subprime Alt-A All others
46.3% 23.4% 30.3%
33.8% 34.3% 32.0%
46.4% 36.1% 17.5%
32.1% 37.4% 30.5%
40.5% 24.1% 35.4%
54.4% 25.0% 20.6%$224.6 billion
$218.9 billion
$86.9 billion
$97.3 billion
$94.8 billion
$185.0 billion
29.4% 33.4% 37.2%$83.4 billion
128128
Leverage ratios of selected financial firms December 2008
Note: Leverage ratios for Freddie Mac and Fannie Mae are as of June 2008. The two institutions have negative common equities as of December 2008.Sources: FDIC, FHL Banks Office of Finance, National Credit Union Administration, Freddie Mac, Fannie Mae, Milken Institute.
9.3
10.6
11.1
31.6
26.2
21.5
67.9
0 10 20 30 40 50 60 70 80
Credit unions
Commercial banks
Saving institutions
Brokers/hedge funds
Federal Home Loan Banks
Fannie Mae
Freddie Mac
Leverage ratio, total assets/common equity
(June 2008)
(June 2008)(June 2008)
129129
Too much dependence on debt?Leverage ratios at biggest investment banks
2219
28 26
18
31
19
2724 23
33 32 3431
13
33 34
2422
13
0
5
10
15
20
25
30
35
40
Morgan Stanley Merrill Lynch Bear Stearns Lehman Brothers Goldman Sachs
2000 2005 2007 2008
Total assets/total shareholder equity
March 2008
June 2008
Sources: Bloomberg, Milken Institute.
130130
Too much dependence on debt?Leverage ratios at bank holding companies
Sources: Bloomberg, Milken Institute.
13
17
1311
19
14 13 1312 13
10
13
0
5
10
15
20
25
Citigroup Bank of America JPMorgan Chase
2000 2005 2007 2008
Total assets/total shareholder equity
13
17
1311
19
14 13 1312 13
10
13
0
5
10
15
20
25
Citigroup Bank of America JPMorgan Chase
2000 2005 2007 2008
Total assets/total shareholder equity
131131131131
Leverage vs. issuer rating
Sources: Bloomberg, Milken Institute.
18
19
20
21
22
23
24
10 15 20 25 30 35Total assets/total equity capital
Note: Credit ratings of S&P 500 companies and the associated CDS spreads for those firms for which both ratings and CDS spreads are available.A bond is considered investment grade if its credit rating is BBB- or higher by S&P.
Sources: S&P, Bloomberg, Datastream, Milken Institute.
Speculative gradeInvestment grade
141141141141
When is a AAA not a AAA?Multilayered mortgage products
Sources: International Monetary Fund, Milken Institute.
Origination ofmortgage loans High-grade CDO
Senior AAA 88%Junior AAA 5%
Pool of mortgage AA 3%loans: prime or subprime A 2%
Equity capital-asset ratio for commercial banksQuarterly, Q1 1896–Q4 2008
Sources: Historical Statistics of the United States, FDIC, Milken Institute.
149149
Reserve coverage ratio ofall FDIC-insured institutions
Sources: Quarterly Banking Profile, FDIC, Milken Institute .
0
50
100
150
200
250
2005 2006 2007 2008020406080100120140160180200
US$ billions Percent
Noncurrent loans (left axis)
Loan-loss reserves (left axis)
Coverage ratio (right axis)
150150150150
The U.S. regulatory regime: In need of reform?
Sources: Financial Services Roundtable (2007), Milken Institute.
National banks State commercial and savings banks
Federal savings banks
Insurance companies
Securities brokers/dealers
Other financial companies, including mortgage
companies and brokers
• Fed• OTS
• OCC• FDIC
• State bankregulators
• FDIC• Fed--state member
commercial banks
• OTS• FDIC
• 50 State insuranceregulators plusDistrict of Columbiaand Puerto Rico
• FINRA• SEC• CFTC• State securities
regulators
• Fed• State licensing
(if needed)• U.S. Treasury
for some products
• OCC• Host county
regulator
• Fed• Host county
regulator
• OTS• Host county
regulator
Federal branch
Foreignbranch
Limited foreign branch
Fed is the umbrella or consolidated regulator
Primary/secondaryfunctionalregulator
Notes:Justice Department: Assesses effects of mergers and acquisitions on competitionFederal Courts: Ultimate decider of banking, securities, and insurance productsCFTC: Commodity Futures Trading CommissionFDIC: Federal Deposit Insurance CorporationFed: Federal ReserveFINRA: Financial Industry Regulatory Authority GSEs: Government Sponsored Enterprises OCC: Comptroller of the CurrencyOTS: Office of Thrift SupervisionSEC: Securities and Exchange Commission
• Federal Housing Finance Agency
Fannie Mae, Freddie Mac, and Federal Home Loan Banks
Financial, bank and thrift holding companies
Justice Department• Assesses effects of mergers and acquisitions on competition
Federal courts• Ultimate decider of banking, securities, and insurance products
151151
OverviewReforms to prevent/mitigate credit booms and busts
Macro-prudential regulation (i.e., establish a systemic risk regulator or market stability regulator)A liquidity regulation to take into account maturity mismatches due to short-term funding of longer-term, illiquid assetsCountercyclical regulation (e.g., dynamic capital and/or provisioning regulations)A regulation that internalizes (taxes) a financial institution’s contribution to systemic risk (to address too-big-to-fail issue)Greater transparency by requiring clearing and settling of credit default swaps to be conducted through clearing houses or on exchanges, which provides for greater monitoring of exposures and posting of necessary collateral
152152
OverviewReforms to prevent/mitigate credit booms and busts (Continued)
Change fee structure for credit rating agencies, eliminate the Nationally Recognized Statistical Rating Organization (NRSRO) designation, and decrease use of ratings in regulatory system Consider eliminating treatment of residential mortgages as non-recourse loans (i.e., secured only by the underlying property), merging Freddie Mac and Fannie Mae, and requiring mortgage originators to have “skin in the game”Consider modifying incentive/compensation systems to discourage excessive risk takingReform structure of regulatory systemConsider establishing greater co-operation among regulators in countries or establish centralized supervision or deposit insurer in some regions