SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
Prepared By: Kumar Dhananjay Rakesh Amar Ranu Deepak Thakkar Rohitesh Hota Shakti Satapathy
Under Guidance of: Dr. S K Ghosh Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
What are we here for ?
Lets understand the CRISIS - 1980’s . . . Objective SAVINGS & LENDING
SUBPRIME CRISIS - 2008
What is Crisis all about ?
Lets Understand the Crisis . . .
Numbers Speak . . .
Lets have a look at the facts & figures. . .
When did all this occur? What went Wrong ?
Lets understand the Time Line of Events . . .
Lets Compare the Causes . . . .
What was the fallout ?
Lets Understand the Effects . . .
What was the Action taken ?
Lets Understand the Role of Government . . .
What are the Lessons Learnt? Analysis Comparative
Lets Conclude. . .
SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What are we here for ? Lets understand the Objective . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Objective
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
To compare and analyze Similarities and Differences in the Savings & Loan Crisis of 1980s vis-à-vis Subprime Crisis of 2008.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What is Crisis all about ? Lets Understand the Crisis . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
What was Crisis all about?
SAVINGS & LENDING CRISIS - 1980’s The savings and loan crisis of the 1980s and 1990s (commonly referred to as the S&L crisis) was the failure of 745 savings and loan associations (S&Ls aka thrifts). Saving and Loan Associations (thrift institutions) are deposit-taking institutions initially created for the purpose of taking in deposits from private citizens and using them to make home mortgage loans. SUBPRIME CRISIS - 2008 The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages. When U.S. house prices began to decline in 2006-07, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world.
The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government—that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts—which contributed to the large budget deficits of the early 1990s.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Some Common Ingredients
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
Incompetence Greed Fraud Policy Blunders Inadequate Regulatory Oversight Sharply Shifting Financial landscape
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
Numbers Speak? Lets have a look at the facts & figures. . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Facts & Figures
SAVINGS & LENDING CRISIS - 1980’s 1. Core Loan Assets Portfolio (Real Estate & Commercial Loans) Introduction of “FIRREA “ with $ 50 bn as Toxic Asset Buyer (Financial Inst. Reform, Recovery & Enforcement Act) RTC (Resolution Trust Corp) acted as Reselling Agent Total Cost of Crisis: $ 1.53 tn 1. SUBPRIME CRISIS - 2008 Derived Loan Assets Portfolio (Structured Products) Introduction of “TARP” with a corpus of $ 700 bn as “Toxic Asset Buyer”.
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3. 4.
3. 4.
$ 1 tn “TALF” SPV established for “AAA” ABS lending. Total Cost is more than $ 7.7 tn till date.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Facts & Figures
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
Fig: Unemployment Rate of USA
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Facts & Figures
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Facts & Figures
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
When did all this occur? Lets understand the Time Line of Events . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Time Line of Events
SAVINGS & LENDING CRISIS - 1980’s Stable Interest Rate & Focus on Long Term Home Mortgage Lending Leeds to S&L Growth (1950s-1960s) SUBPRIME CRISIS - 2008 Cut in Interest Rate 2000-2001
Due to High Inflation in The US, Deposit Funds Begin to Flow out of S&Ls (1970s)
S&L Industry Starts Showing First Sign of Becoming Insolvent (Late 1970s) DIDMCA Began Phasing Out Interest Rate Ceilings on Deposits (1980s) Recession Hits The U.S. economy. Major Increase in S&L Failures. (1981-82) FIRREA Finally Eliminated FHLBB and the Bankrupt FSLIC. (1989) Recession Hits the U.S. economy. Likely connections between savings inst. And drops in GDP. (1990-91)
Triggered Borrowings and Availability of Cheap Money
Growing Demand Led to Irrational Rise in Prices
Prices Fell and The Housing Bubble (in Aug 2006)
Lending Industry Resorted to Exotic Loans and Riskier Practices (to keep this boom going) Assumptions That The Situation will Remain Same and Refinancing Would Be Possible
Defaults / Foreclosures
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What went Wrong ? Lets Compare the Causes . . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Causes
SAVINGS & LENDING CRISIS - 1980’s 1. Interest rate gyrations caught many institutions borrowing money at high rates and lending at relatively low ones. Banks overextended themselves in the commercial real estate sector. Weak regulation and disturbingly low capital levels made S&Ls vulnerable to failure. Non-performing loans leading to forced liquidations and resulting losses. Losses on poor investments; junk bonds, commercial real estate. Bank management fraud and embezzlement; long list of “players”. 1. SUBPRIME CRISIS - 2008 Boom and bust in the housing market
Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption.
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2. 3.
Speculation in residential real estate High-risk mortgage loans and lending/borrowing practices
In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including illegal immigrants, just one indication of poor underwriting
4. 5. 6. 7.
Securitization practices Inaccurate credit ratings Financial institution debt levels and incentives Investment in U.S. by foreigners of their proceeds from America's net imports
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What was the fallout ? Lets Understand the Effects . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Effects
SAVINGS & LENDING CRISIS - 1980’s SUBPRIME CRISIS - 2008
1.
Impact on the GDP of US was less severe, in the case of S&L crisis. The GDP fell to the range of 1.8% to 2% as a result of the systemic shock. The impact on the rest of the world was less severe in S&L crisis. Tough it turned out as a big shock to the economy as a whole, comparatively less impact was felt when it came to failures and filling Chapter XI.
1.
The impact on the GDP of US was a lot severe in the case of the Subprime crisis. The GDP fell to sub zero levels in 2008-09. The impact had a systemic effect and it has now turned around as a Global Financial Turmoil, impacting practically the entire globe which is even distantly related to US. The crisis led to the failures of a number of once ‘Stalwarts’ of the Wall Street. Lehman Bros, Meril Lynch, Bear Sterns to name a few. Apart from that it also lead to a number of M&A in the specific domain.
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Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What was the Action taken ? Lets Understand the Role of Government . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Action Taken
SAVINGS & LENDING CRISIS - 1980’s 1.
a) b)
SUBPRIME CRISIS - 2008 1. Federal Reserve and central banks
The central bank of the USA, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. a) Lowered the target for the Federal funds rate from 5.25% to 2%, and the discount rate from 5.75% to 00.25%. b) Undertaken, along with other central banks, open market operations to ensure member banks remain liquid.
Provisions of FIRREA (Financial Inst. Reform, Recovery & Enforcement Act) 1989
Increased authority over state chartered institutions Abolished FSLIC and FHLBB. FDIC reorganized into BIF, SAIF divisions Created the RTC and Office of Thrift Supervision Permitted Bank Holding Companies (BHC) to acquire healthy thrifts Stiffened penalties for fraud and embezzlement Created the Federal Housing Finance Board to oversee 12 FHL Banks Required regulators to develop and enforce minimum standards for property appraisal Lowered tax benefits to acquirers of failed or failing thrifts
c) d)
e) f) g) h)
2.
Economic Stimulus
a) A $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. b) American Recovery and Reinvestment Act of 2009, an $800 billion stimulus package with a broad spectrum of spending and tax cuts.
2.
a) b) c)
Provisions of FDICIA (Federal Deposit Insurance Corp. Improvement Act ) 1991
Deposit insurance premiums based on riskiness of institution Detailed rules for the conduct of federal regulators Increased borrowing authority for FDIC and reserve requirements Established a "tripwire" system for early problem detection Expanded FDIC authority over foreign bank expansion and termination's in US required foreign banks to obtain insurance.
3.
Bank solvency and capital replenishment
Losses on mortgage-backed securities and other
d)
e)
assets purchased with borrowed money have dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Action Taken
SAVINGS & LENDING CRISIS - 1980’s 4. The U.S. government ultimately appropriated 105 billion dollars to resolve the crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of approximately $124 billion dollars by the end of 1999. The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990–1991 economic recession. Between 1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II. Some commentators believe that a taxpayer-funded government bailout related to mortgages during the savings and loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis. 4. SUBPRIME CRISIS - 2008 Homeowner assistance
Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (i.e., refinancing, loan modification or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives.
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5.
Homeowners Affordability and Stability Plan
A $75 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages.
6.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
What are the Lessons Learnt? Lets Conclude. . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Lessons Learnt
SAVINGS & LENDING CRISIS - 1980’s 1. We have learned the damaging effects of high inflation and interest rates on financial intermediaries, an obvious argument for controlling domestic inflation. We have learned the negative effects of quick deregulation and lack of oversight as well as the moral-hazard and adverse-selection problems caused by deposit insurance. Also, the lack of depositor oversight caused by insurance cannot be ignored either. Deposit insurance should be established so that it minimizes these problems and yet provides the stability and protection needed by small depositors. S&L failures were a leading cause of the recessions of the early 1980s and early 1990s. The failed institutions may have had as much as a 23% effect on GDP. This is much greater than previously believed. The recessions partially caused by the S&L crisis were from deadweight losses, slow payouts to depositors, and unemployment. Also there was a general loss of faith in deposit institutions. 1. 2. 3. 4. 5. 6. SUBPRIME CRISIS - 2008 Distorted Incentives without Accountability can spell disasters Central Banks face Moral Hazards which needs to be resisted Risk Allocation does not mean Risk Elimination Complex mathematic al Models can also fail True Risk Assessments of Securities is Crucial Resist pressure for bailouts
Losses should be dispersed to exposed investors rather than taken over by taxpayers.
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Improve consumer protection
With lending standards tightening, the appropriate policy response needs to balance improving consumer protection with maintaining the viability of the securitization model that has successfully dispersed credit risk away from systemically important financial institutions.
8.
Tighten Oversight
Federal banking regulators have recently tightened guidance on nontraditional and hybrid ARM mortgage lending.
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
Action Taken
SAVINGS & LENDING CRISIS - 1980’s 4. Standard capitalization ratios in general do not go far in determining savings and loan failures. Risk-based ratios may be more reliable indicators. Risk assessments were not required during the period of the savings and loan crisis. SUBPRIME CRISIS - 2008
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)
SAVINGS & LENDING CRISIS - 1980’s
SUBPRIME CRISIS - 2008
THANK YOU . . . .
Comparative Analysis SAVINGS & LOAN CRISIS (1980’s) VS SUBPRIME CRISIS (2008)