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					Financial Crisis Inquiry Commission

Mike Mayo, CFA

January 2010
The views and opinions expressed in this document and the oral testimony I will provide to the Financial Crisis Inquiry Commission are solely my own and do not necessarily reflect the views of my employer or any other institution or person I am currently affiliated with or have been in the past.

Industry on Steroids
1) Excessive Loan Growth 2) Higher Yielding Assets 3) Concentration of Assets 4) High Bank Balance Sheet Leverage 5) More Exotic Securities 6) Consumers Went Along 7) Accountants Assisted 8) Regulators Aided 9) Government Facilitated 10) Incentives Encouraged Behavior
©2009 Calyon Securities (USA) Inc.

Page 3

1) Excessive Loan Growth
Loan vs GDP growth in the 2000’s

12%

10%

Securitization (Est.)
8%

6%

4%

Loans

2%

0% GDP Growth Loan Growth

Source: FDIC - All banks, Pre-Crisis

©2009 Calyon Securities (USA) Inc.

Page 4

2) Higher Yielding Assets
Shift to higher-yielding, higher loss-rate consumer and commercial real estate loans
Loan Type Residential Mortgage Home Equity C&I Core CRE Construction Credit Card Other Consumer Other
Source: FDIC - All banks

2008 % of Total 19% 11% 21% 14% 8% 6% 9% 13%

1992 % of Total 17% 6% 26% 13% 4% 7% 12% 15%

1984 % of Total 12% nil 37% 6% 5% 4% 14% 21%

1974 % of Total 15% nil 37% 9% 3% 2% 18% 16%

1942 % of Total 17% nil 41% 5% nil nil 12% 25%

Growth in securities holdings
70% US Treasuries 60% 50% MBS

62%

40%
40% 30% 20% 10%

32%

2%
0% 1992 19 94 1996 19 98 2000 2002 2004 2 006 2008

Source: FDIC – All banks ©2009 Calyon Securities (USA) Inc.

Page 5

3) Concentration of Assets
Real estate was the largest area of growth

Compound Annual Growth in Loans (2000s)
Leases Agriculture Commercial and Industrial All Other Consumer Farmland Credit Cards Total Loans Foreign Office Real Estate Commercial Real Estate 1-4 Family Real Estate Commercial Real Estate Multifamily Commercial Real Estate Construction and Development Home Equity
-5% 0% 5% 10% 15% 20% 25%

HIGHEST GROWTH

©2009 Calyon Securities (USA) Inc.

Source: FDIC - All Banks

Page 6

4) Balance Sheet Leverage
Leverage increased
15 x

Banks
14 x

13 x

12 x

11 x

Tang assets/(Tang equity + reserves)

10 x 19 93 199 5 1997 1 999 20 01 200 3 2005 2 007

Source: FDIC - All Banks

Securities Industry
40x 35x 30x 25x 20x 15x 10x 1980s 1990s 2000s

Assets/Total Equity

©2009 Calyon Securities (USA) Inc.

Source: SIFMA Balance Sheet

Page 7

5) More Exotic Securities
Fees are a larger percentage of revenues

Fees as % of Revenues
45 % 40 % 35 % 30 % 25 % 20 % 15 % 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Source: FDIC -All Banks

©2009 Calyon Securities (USA) Inc.

Page 8

6) Consumer Debt - Highest in History
Household debt at record levels

Household Debt-to-GDP 120% 100% 80% 60% 40% 20% 0%
19 45 19 48 19 51 19 54 19 57 19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99 20 02 20 05 20 08
Source: Federal Reserve, Bureau of Economic Analysis ©2009 Calyon Securities (USA) Inc.

Page 9

7) Accountants Aided
Reserves to Loans

2.0% 1.8% 1.6% 1.4% 1.2%

1.0% 1998
Source: FDIC – All banks

2000

2002

2004

2006

©2009 Calyon Securities (USA) Inc.

Page 10

8) Regulators Aided
Annual FDIC Insurance Fee

25

(bps)

20

15

10

5

0 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Note: Per $100 of deposits
Source: FDIC

©2009 Calyon Securities (USA) Inc.

Page 11

9) Government Facilitated
GSE debt increased over 6 times in 2 decades

$3.5

$3.1
$3.0

$2.5

$2.0 $Trillion $1.5

$1.0

$0.5
$0.5 $0.0 1990 2009_Q3

Source: Federal Reserve, Flow of Funds

©2009 Calyon Securities (USA) Inc.

Page 12

10) Incentives Misaligned

45%

Compensation/(Revenue less loan losses)
40%

35%

30%

25%

Compensation/Revenue

20% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Note: Loan Losses = Provision for Loan Losses

Source: FDIC All Banks ©2009 Calyon Securities (USA) Inc.

Page 13

Industry on Steroids
Performance enhanced by excessive…
Loan growth Loan risk Securities yields Bank leverage Consumer leverage

Excesses conducted by…
Bankers Accountants Regulators Government Consumers

Side effects ignored…
Little financial incentive to slow down Ignored long-term risks
©2009 Calyon Securities (USA) Inc.

Page 14

The Solution – Partly a function of “ABC”
“A” for Accounting

“B” for Bankruptcy

“C” for Capital

©2009 Calyon Securities (USA) Inc.

Page 15


				
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