NBEA Conf Nov 2009 Boston I
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NBEA Conf Nov 2009 Boston I



PPTs used during my lunch time talk at the Northeast Business and Economic Conference Nov.7, 2009

PPTs used during my lunch time talk at the Northeast Business and Economic Conference Nov.7, 2009



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NBEA Conf Nov 2009 Boston I NBEA Conf Nov 2009 Boston I Presentation Transcript

  • The Financial Crisis: 2 + years and counting
    • Michael Brandl, PhD Northeastern Business & Economics Assoc
    • The University of Texas at Austin 36 th Annual Conference
    • McCombs School of Business Worchester, MA
    • November 7, 2009
  • Overview
    • Press view of the crisis
    • How we got here
    • Where we are headed
    • What our students should learn
  • The Popular Press 7 seconds view
    • The Federal Reserve lowered interest rates too low in 2003 and kept them too low through 2004.
    • Homebuyers were
    • duped by mortgage
    • lenders.
    • Unregulated financial markets lent money too freely.
    • Government bailout & stimulus spending kept us from the Great Depression II.
  • The true start of the crisis
    • Homeownership: The American Dream
      • Post War Baby Boom
      • Interstate highways
      • Federal income tax
      • deduction for interest
      • 30 yr fixed rate
      • Mortgages with 20%
      • down.
    • Result: Post War economic boom!
    • But…Savings & Loan crisis of 1980s tells us something
  • Banks caused problems before
    • US banks have continuously “mispriced risk” and had the US taxpayer bail them out.
      • “ Third World” Debt Crisis in 1980s.
      • Peso Crisis in 1995.
      • Asian Financial Crisis 1997-99.
      • Russian Ruble Crisis 1999-2000.
      • Telecom asset bubble 2000-01.
      • Argentine Financial Crisis 2001-03.
      • Next…
    • Each time: systemic risk!!!
      • But…what about moral hazard of these bailouts?
  • The push for mortgages
    • After dot.com bust Fed pushes interest rates to new lows.
      • Leads to a search
      • for returns: mortgages
      • Banks collateralize or package
      • mortgages into bundles.
      • Fee income is key.
      • As demand for mortgage backed assets increases, banks
      • and other lenders weaken underwriting standards.
        • Adjustable rate mortgages, zero down mortgages, zero documentation mortgages, etc.
        • “ subprime” market expands…
  • Our current little mess…2000
  • 2007
  • The holy trilogy
  • Timeline of the Crisis I
    • June 7, 2007: Bear Stearns announces two of its hedge funds are suspending redemptions
    • August 9, 2007: BNP Paribas stop redemptions on three funds.
    • July 19, 2007: Bear Stearns liquidates hedge funds
    • Dec 12, 2007: Fed announces creation of TAF
    • December 2007: recession begins according to the NBER
    • Feb. 17, 2008: Northern Rock taken over by UK Treasury.
    • March 11, 2008: Fed announces creation of Term Securities Lending Facility
    • March 17, 2008: Bear Stearns bought by JP Morgan Chase.
    • Sept. 7, 2008: Fannie Mae & Freddie Mac taken over by the US Treasury
    • Sept. 14, 2008: Merrill Lynch purchased by BA.
    • Sept. 15, 2008: Lehman Bros files bankruptcy.
  • Timeline of the Crisis II
    • Sept. 16, 2008: AIG gets $85b loan from Treasury & Federal Reserve
    • Sept. 19, 2008: Fed creates Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
    • Sept. 21. 2008: Goldman Sachs & Morgan Stanley become commercial banks.
    • Sept. 25, 2008: Washington Mutual fails
    • Oct. 3, 2008: Wachovia bought by Wells Fargo
    • Oct. 3, 2008: Congress passes and President Bush signs the $700bn TARP.
    • Oct. 7, 2008: Fed creates Commercial Paper Funding Facility (CPFF)
    • Nov. 12, 2008: Paulson announces TARP will not buy assets.
    • Nov 25, 2008: Fed creates Term Asset-Backed Securities Lending Facility (TALF)
  • Timeline of the Crisis III
    • Dec 22, 2008 Treasury injects capital into CIT Group
    • Dec 30, 2008: SEC calls for end of marking to market
    • Jan 9, 2009: The Congressional Oversight Panel blasts TARP
    • Jan 16, 2009: Fed, Treasury & FDIC announce rescue plan for Bank of America
    • Feb 6, 2009: Fed announces TALF will be extended to include auto loans, credit card loans, student loans & SBA loans
    • Feb 10, 2009: Geithner announces public-private plan to buy bank toxic assets
    • Feb 25, 2009: Government announces stress test plan
    • April 1, 2009: Fed and Treasury fail to answer questions posed by Congressional Oversight Panel
    • Aug 28, 2009: Fed announces reduction in auction of TAF
    • Nov. 1, 2009 CIT Group files for bankruptcy
  • Where we are headed…
  • What is being done
    • Trouble Asset Relief Program (TARP)
      • $700 billion to…well…give banks money to lend.
        • They haven’t.
    • Fed’s “quantitative easing”
      • Various programs by the Fed to pump money into financial markets.
        • Fed lends money to a variety of financial market players.
        • Fed buys up a variety of financial assets.
    • Expansionary fiscal policy
      • Federal government spending to “prime the pump.”
        • Takes awhile to spend the money….
  • What should we do?
    • Rethink the mortgage market
      • Restructure mortgage for those who need help.
      • Punish those who speculated.
      • Q: Do we really need the home mortgage interest deduction any more?
        • Is there a better use for that capital?
        • Is there a better use for those resources?
    • Rethink “too big to fail”
      • No more “heads I win, tails the government loses.”
      • Make the bankers pay for the bailouts.
  • What our students can learn…
  • Understanding markets matter
    • Far too many think finance is “just” numbers
      • Finance is so much more than excel spreadsheets.
      • Math tools without market knowledge led to mispricing CDO risk.
    • Far too few understand how markets tie together
      • Bankers thought they had gotten rid of mortgage market risk…but off balance sheet transactions brought it all back.
    • Understanding incentives is key
      • Loan to hold…to…originate to distribute
      • Bond rating agencies incentives
  • Macroeconomics & Finance
    • July 18, 2009 edition of The Economist
      • Macroeconomics often ignores the importance of finance & financial markets.
      • Finance often argues markets will regulate themselves & financial innovation is always beneficial.
  • The Economist July 18, 2009
    • “ Economists need to reach out from their specialized silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work.
    • And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.”
  • Q & A ask about anything… [email_address] http://blogs.mccombs.utexas.edu/brandl Twitter: MichaelBrandl