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Explaining the 2008 financial meltdown
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Explaining the 2008 financial meltdown


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  • 1.
  • 2. EXPLAINING THE 2008 FINANCIAL MELTDOWN It was not just the housing collapse!
    By Ed Lette, CPA, CEO
    Business Bank of Texas, N.A.
  • 3. The History
    • 1907 - Bucket Shops cause Panic and Stock Market Crash
    • 4. 1913 resulted in the formation of the Federal Reserve Bank
    • 5. 1920 States began campaigns to ban them, and they were finally made illegal.
    - No more wagering on the stock market
    • 1933 – Glass-Stegall Act
    • 6. Separated Banking, Insurance, and Brokerage
    • 7. 1998 – Citi Corp violates Glass-Stegall Act
    • 8. By purchasing Travelers Insurance
  • Beginning of the End?
    1998 Citicorp and Travelers agree to combine two companies. Financial times labeled “a merger that redefines world finance
    Merger required repeal of Glass-Steagall Act
    Citi spent millions in lobbying for change
    Growing support in Academia and most importantly with Fed chief Alan Greenspan
    1999 Congress passed the Gramm-Leach-Bliley
    Which repealed the Glass-Steagall Act of 1933
  • 9. The History continued
    • 1999 – Commodity Futures Modernization Act
    • 10. Credit Default Swaps
    • 11. Bucket Shops allowed AGAIN !
    • 12. Cause of AIG collapse
    • 13. 1999 - Glass-Stegall Act repealed
    - Banks, Insurance, and Brokerage no long segregated by law.
  • 14. Bucket Shop of the early 1900’s
  • 15. More of the Beginning of the End ?
    Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley and Goldman Sach ask and receive increase in leverage above 12x capital
    Decision not made in a vacuum
    Granted US international banks right to leverage up to compete with dominating European international banks
    Hedge funds add to problem
  • 16. Mortgage Loan and S&L History
    ***Savings & Loans Banks (S&L) “infected” by financing long term mortgages with short term deposits***
    1960’s Regulation Q
    Govt. set Savings and Certificate of Deposit rates
    1970 Rule change - S&L’s to become Real Estate Developers
    1980 S & L s went broke – took 20 years
  • 17. Freddie Mac & Fannie Mae systems are the answer to the S&L interest mismatch problem
    • Good idea –
    Relief of interest rate mismatch in S&L industry (buying and selling of MBS in the open market)
    Should be government regulated not government operated!
  • 18. Freddie Mac and Fannie Mae unforeseen consequences
    Effect of Common and Preferred Stock Purchase by Federal Savings Banks
    Allowed to purchase w/o limitations
    Political (govt.) agenda – homes for everyone!
  • 19. Market Engineering the real collapse
    Credit Default Swaps
    Bucket shops/gambling on the stock market
    Loans to individuals that couldn’t afford them
    MSB (mortgage back securities)
    Pooled security – secured by individual mortgages
    CMOS (Collateralized Mortgage obligation)
    Pooled security – secured by commercial mortgages
    ARS (Auction Rate Securities)
    debt instrument (corporate/municipal bonds) with a long-term nominal maturity – interest rate regularly reset via a Dutch auction
  • 20. The contributing Factors
    Excessive Leverage
    Leveraged investors can not survive a sharp drop in asset prices
    Widespread Product confusion
    ARS (Auction Rate Securities)
    MSB/CMOS (Mortgage Backed Securities)
    Subprime (loans/mortgages)
    No regulator controls
    CDS (Credit Default Swaps)
  • 21. Accounting
    Fair Value Accounting – allows banks to manipulate balance sheet through continued acquisitions – not holistic growth.
    • Goodwill Accounting
    • 22. Wachovia 50% + of equity attributed to good will
    • 23. Regions Bank 59% of equity attributed to goodwill
    Accounting should be reality (cost and cash flow) not theory
  • 24. Wachovia Corp.’s Fall
  • 25. From inflation to deflation
    Deleveraging means less credit available
    Deflation seed sowed when external credit markets dried up
    Inflation comes from to much credit available
    Inflation caused by excessive credit creation outside commercial banking
    Fed gave up control of the banking system
    No opposition to repeal of 1907 and 1933 acts
    Explosive growth in non-banking lending
    UPS (united Parcel Service) making SBA loans
  • 26. Issues for the New Congress
    • limited oversight of first round of funding
    • 27. Implementation of oversight
    Financial Restructuring
    • System regulator
    • 28. Dual banking
    • 29. Thrift charters
    • 30. Office of Thrift Supervision/Office of the Comptroller of the Currency Merger
    source: Texas Bankers Assoc.
  • 31. Issues for the New Congress
    Future of Mortgage Finance
    • Federal Home Loan Bank’s
    • 32. Freddie Mac/Fannie Mae
    • 33. Regulation of the mortgage lending process
    Accounting/Mark to Market
    source: Texas Bankers Assoc.