2. EXPLAINING THE 2008 FINANCIAL MELTDOWN It was not just the housing collapse! By Ed Lette, CPA, CEO Business Bank of Texas, N.A.

4. 1913 resulted in the formation of the Federal Reserve Bank

6. Separated Banking, Insurance, and Brokerage

7. 1998 – Citi Corp violates Glass-Stegall 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13. 1999 - Glass-Stegall Act repealed- Banks, Insurance, and Brokerage no long segregated by law.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

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 Subprime 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 Volatility Widespread Product confusion ARS (Auction Rate Securities) MSB/CMOS (Mortgage Backed Securities) Subprime (loans/mortgages) No regulator controls CDS (Credit Default Swaps)

22. Wachovia 50% + of equity attributed to good will

23. Regions Bank 59% of equity attributed to goodwillAccounting 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

28. Dual banking

29. Thrift charters

30. Office of Thrift Supervision/Office of the Comptroller of the Currency Mergersource: Texas Bankers Assoc.

32. Freddie Mac/Fannie Mae

33. Regulation of the mortgage lending processAccounting/Mark to Market source: Texas Bankers Assoc.