1.
Global Connectivity and Economic Crisis - Seeing Through
the Gloom
As job losses and credit freezes plague
some of the world’s mightiest financial
systems, banking leaders find
themselves in the crosshairs. They,
along with economists and government
officials, are being called on to map a
way out of the mess — and in the
process show that their practices benefit
many, not just a few. It will be difficult
journey, according to several banking
leaders who participated in “Global
Connectivity and the Economic Crisis,”
a panel discussion sponsored by
TotalBank during the University of
Miami Global Business Forum Jan. 15 -
16, 2009.
While these panelists operate in the same industry, each came with a unique perspective on the
causes of today’s crumbling of markets, as well as the strategies needed to rebuild them. Guided
by questions from moderator Manuel Santos, professor and holder of the James L. Knight Chair
of Economics at the UM School of Business Administration, the group tackled the issues debated
both in their own offices and by world leaders.
Today’s tough times are marked by some telling statistics. Consumption is suffering thanks to a
7.6 percent unemployment rate in the United States that’s choking consumer incomes, Santos
said. With the labor market having become accustomed to the U.S. economy creating 200,000
new jobs each month, we now watch an equal number disappear during those same 30-day
increments. In Europe, the numbers are even higher, with many countries registering double-
digit unemployment rates. Spain, for example, lost 1 million jobs last year and now sees 14
percent of its workforce without paychecks, Santos said.
The United States and Europe are used to driving international trade, but a shift is coming. “The
paradox is that the rest of the world may now bring money to us,” Santos said.

2. How did we get here? Financial experts and economists are forced to look back over the past few
years and retrace the steps that brought on the current situation so they can be corrected,
recorded and, if our children are lucky, never repeated.
Roberto Higuera, of Banco Popular Español, pointed to the subprime loan, likening them to
bacteria that spread disease throughout the world’s markets, sickening everything they touch.
“We had poor insufficient hygienic conditions in the financial world,” he said.
As banks peddled these loans to markets, buyers and sellers and even spectators were overly
confident about a continued rise in values. “Nobody had the guts to put an end to this situation,”
Higuera said, pinning blame on the rating agencies, auditors and supervisors. “There [was]
failure in the control chain.”
TotalBank CEO Bill Heffernan, however, defended the intent of the quasi-government agencies
Ginnie Mae, Fannie Mae and Freddie Mac that securitized home loans. Their objectives, pure
and simple, were to help people own real estate. “It was a great idea,” he said.
But there were problems underlying those good intentions, said Heffernan. Mortgages became a
commodity; backed by strong institutions, people believed that, once securitized, the mortgages
carried little risk. Soon everyone was introduced to the so-called “NINJA” loan—mortgages
made to people who could barely make the payments because, as the acronym implies, they had
No Income, No Job or Assets. “Mortgages became a joke,” he said.
However, economist Ricardo Lago, who has held senior positions at the European Bank for
Reconstruction and Development, the World Bank and the Inter-American Development Bank,
doesn’t blame the subprime loans for the country’s worsening economic health. Rather, he said,
these types of business conditions commonly follow periods of rapid expansion. The latest wave
of prosperity was fueled by several factors, including China’s growing economy, the crumbling
of the Berlin Wall and the opening of markets in a number of Latin American countries. As more
consumers generated an appetite for products, productivity rose to meet the demand and, as we
might have expected based on past history, the house of cards fell.
The Great Depression, he pointed out, came almost immediately after the invention of radio, the
introduction of the automobile, and the expansion of electricity across the United States.
“Prosperity and financial investment eventually generated permissiveness, high leverage and a
crash,” Lago said.
Given the severity of the economic situation, economists have no choice but to compare it to the
stock market crash of 1929. Still, the panelists all agreed, today’s conditions have not come close
to matching the economic destruction seen 80 years ago. Back then, pointed out Santos,

3. unemployment clocked in at 25 percent, output fell by 40 percent, prices dropped by 50 percent,
and half of all banks disappeared.
It will take more than cash infusions from the federal government, said Higuera, to get the
banking system to start lending again. “There is a lack of confidence,” he said. “That’s why
banks are not lending.”
Heffernan agreed, saying that if competition is going to be fair, banks will have to compete with
their own capital. “I don’t want to see the government in my bank,” he said.
Lago, meanwhile, cited Peru as a pillar of economic health, and suggested that troubled countries
consider following its financial regimen. Economically fit and slated to grow another 4 percent
to 6 percent this year, the country has little debt and its central bank is capable of paying every
depositor. “Free markets work,” he said.
Both monetary policy — in which the Federal Reserve Board adjusts interest rates to control the
money supply — and fiscal policy of government spending will eventually provide some relief,
Lago predicted. In the meantime, the U.S. economy could be trapped as Japan was in the 1990s
with a liquidity problem and a dearth of fresh credit. Or, perhaps, demand will improve but be
accompanied by a rise in prices — inflation or even hyperinflation, he warned. “It’s a razor-
blade issue,” said Lago. “It’s hard to stay at edge.”
Even considering the sources that brought us here, mortgages are critical to the U.S. economic
flagship of home ownership. That’s why Heffernan is bringing TotalBank into tomorrow’s
economy by creating a residential mortgage business. “We believe it will come back,” he said.
“There’s plenty of real estate out there.”
By Brett Graff
www.umglobalforum.com