Antecedents of the Panic of 2007-2008


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It took decades of increasing complexity to build the forces leading to the Panic of 2007-2008

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Antecedents of the Panic of 2007-2008

  1. 1. Antecedents of the Panic of 2007-2008 Roger G. Powell Managing Director Investment Banking Financial Institutions Group Phone: 215-665-6687 Janney Montgomery Scott LLC February 2009
  2. 2. <ul><li>“ That which does not kill me makes me stronger.” </li></ul><ul><li>Friedrich Nietzsche Die Götzen-Dämmerung ( Twilight of the Idols, 1888) </li></ul>Quote of the Day Source: The Encyclopedia of Greek Mythology.
  3. 3. Where are we in the storm?
  4. 4. Bank Stock History - A Story of 3 decades + 1/2 Source: SNL Financial.
  5. 5. Bank Stock History January 1973 NASDAQ Bank = 120 July 1980 NASDAQ Bank = 120 Source: SNL Financial.
  6. 6. October 1974 Franklin National P&A August 1998 Russia Default January 1994 Metallgesellschaft AG CP Default June 1974 Herstatt Bank Insolvency Liquidity/Credit Episodes January 1997 Mercury Finance CP Default July 1986 1 st National OK P&A May 1984 Continental Illinois P&A April 1980 First Pennsylvania Bank NA Open Bank Assistance October 2008 UK to invest in bank equity Source: SNL Financial. Wall Street Journal. New York Times, etc. 1974 REITs / Atlanta Real Estate June 1970 Penn Central Railroad CP Default October 1983 1 st National Midland (TX) P&A September 1988 American Savings P&A April 1988 First City (TX) P&A July 1988 First RepublicBank P&A March 1989 MCorp (TX) P&A July 1989 TexasAmerican P&A January 1991 Bank of New England P&A June 1991 Columbia Gas System CP Default August 1989 Wang Labs and Wang Credit CP Default September 1989 Lomas Financial Lomas Life Leasing CP Default March 1990 Mortgage & Realty Trust CP Default May 1991 Goldome FSB P&A March 2002 Adelphia Funding Crisis September 1991 Southeast Banks (FL) P&A January 1992 Crossland Savings P&A July 1997 Thai Baht Devaluation September 1998 LTCM Insolvency March 2008 BearStearns Assisted Transaction September 2008 Lehman Bros Insolvency September 2008 Fannie Mae / Freddie Mac Conservatorship September 2008 Wachovia Change in Control April 2007 New Century Financial Insolvency August 2007 American Home Mortgage Insolvency September 2007 Northern Rock Bank Run November 2007 Money Market Funds SIV losses / Sponsor support July 2008 IndyMac Conservatorship September 2008 Ireland Deposit Guarantee October 2008 Fed to invest in CP October 2008 Emergency Economic Stabilization Act (EESA) authorizes Troubled Asset Relief Program (TARP) FDIC (temporarily) raises Deposit Insurance to $250,000 FDIC Temporary Liquidity Guarantee Program - Deposit Insurance to total of non-interest bearing transaction accounts - Principal guarantee on certain bank and BHC debt obligations Capital Purchase Program – Treasury issues Standard Term Sheets for Senior Preferred Stock in banks - Additional investments in large banks and broker-dealers
  7. 7. 3Q:06 What is Different? 4Q:06 1Q:07 2Q:07 3Q:07 4Q:07 1Q:08 2Q:08 3Q:08 4Q:08 Credit Crisis Recession Accounting Change Liquidity Crisis And global! Government Interventions Source: New York Times.
  8. 8. <ul><li>Credit Crisis </li></ul><ul><ul><li>Significant declines in timely repayment of debt obligations, primarily to commercial banks </li></ul></ul><ul><li>Recession </li></ul><ul><ul><li>Reduced levels of overall economic activity resulting in declining Gross Domestic Product and decreased levels of non-farm payroll and increased levels of unemployment </li></ul></ul><ul><li>Accounting Change </li></ul><ul><ul><li>Adoption of FAS157 requiring ‘mark-to-market’ adjustments to balance sheets, primarily impacting financial assets </li></ul></ul><ul><li>Liquidity Crisis </li></ul><ul><ul><li>Reduced ability to refund maturing liabilities in capital and borrowing markets </li></ul></ul><ul><li>Government Interventions </li></ul><ul><ul><li>Actions which impart ‘political’ risk into business transactions </li></ul></ul>What is Different?
  9. 9. Credit Crisis Source: SNL Financial.
  10. 10. Credit Crisis Source: FDIC.
  11. 11. Credit Crisis Source: SNL Financial.
  12. 12. Credit Crisis Source: OFHEO and S&P Case-Shiller
  13. 13. Credit Crisis Source: OFHEO and S&P Case-Shiller
  14. 14. Credit Crisis Source: SNL Financial, FDIC.
  15. 15. Recession Source: BLS, BEA.
  16. 16. Recession Source: BLS.
  17. 17. Accounting Changes <ul><li>Other-than-temporary-impairment (OTTI) </li></ul><ul><ul><li>FAS 115 and 124 implemented for periods beginning after Dec 04 </li></ul></ul><ul><ul><li>What does it mean: </li></ul></ul><ul><ul><ul><li>Seen in recent Fannie Mae and Freddie preferred shares write-downs </li></ul></ul></ul><ul><ul><ul><li>Seen in recent goodwill write-off of at Regions Financial </li></ul></ul></ul><ul><li>“ Fair Value” accounting </li></ul><ul><ul><li>FAS 133 </li></ul></ul><ul><ul><li>FAS 157 and 159 implemented for periods beginning after Dec 07 </li></ul></ul><ul><ul><li>What does it mean: </li></ul></ul><ul><ul><ul><li>Bank of America </li></ul></ul></ul><ul><ul><ul><ul><li>3Q:08 $3.8B in fair value adjustments </li></ul></ul></ul></ul><ul><ul><ul><ul><li>4Q:08 $4.6B in ‘capital market dislocation’ charges </li></ul></ul></ul></ul>
  18. 18. Accounting Changes Hierarchy of Assets (FAS 157) An input that is “unobservable” in the market, that is, one that reflects assumptions about what the “market participants” would assume in pricing the asset or liability. Models should be based on “the best information available” including the risk inherent in the valuation technique used, as well as the risk inherent in the inputs into the valuation technique. Level III “ inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable market data.” Level II “ quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access as of the measurement date.” Level I
  19. 19. Liquidity Crisis Source: Federal Reserve Board of Governors
  20. 20. Liquidity Crisis Source: Markit Group Limited
  21. 21. Emergency Economic Stabilization Act of 2008 Government Interventions 29 EESA rejected by House of Representatives 16 Federal Reserve Bank of New York announces loan to AIG 15 Bank of America announces acquisition of Merrill Lynch 15 Lehman Brothers files for protection under the bankruptcy code 7 Conservatorship of Federal National Mortgage and Federal Home Loan Mortgage September 14 Announcement of Capital Purchase Program with participation by 9 major financial institutions 3 EESA passes House; signed by President 1 EESA passes Senate October
  22. 22. Emergency Economic Stabilization Act of 2008 16 Treasury announces additional support for Bank of America ? 16 Treasury extends loan to Chrysler Financial February January 23 Additional commitment of support for Citigroup 10 Restructure of AIG support November 19 Treasury approves loans to General Motors and Chrysler ; Ford does not take support December
  23. 23. Where are we in the storm?
  24. 24. Some like it hot
  25. 25. Carroll Allen Glenlake One, Ste. 610 4140 Parklake Ave. Raleigh, NC 27612 [email_address] 919-791-3820 Stuart Singer 2 Morrocroft Centre, Ste. 100 4064 Colony Rd. Charlotte, NC 28211 [email_address] 704-367-4501 Investment Banking 1801 Market St. 11 th Floor Philadelphia, PA 19103 215-665-6081 Roger Powell 1801 Market St. 11 th Floor Philadelphia, PA 19103 [email_address] 215-665-6687