Great Recession of 2007-2010

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					The Great Recession
   of 2007-2010
Making the Case for Educating on
   the Basics of Saving and
Red Shoe Research
    Teaching Principles of Saving,
     Investing, and Planning for

•Use Historical Context
•Use Current Events
•Use Memorable Examples
Teaching Through
Historical Context
As The Pendulum
    Swings . . .

 (A Brief History of
 Financial Regulation)
         The Roaring Twenties
• The Free Market
• Levels of stock
  market participation
  at a peak
• Gap between rich
  and poor is at a peak
The Crash and the Aftermath
                 1929 crash and the
                 Great Depression
                 are the “big
                 events” that cause
                 the pendulum of
                 regulation to
                 swing back
    The Era of Increasing Government
         Regulation (1933-1979)

• Modern financial regulatory framework
• Social welfare systems established
• Highly regulated economy
Stagflation and Soaring Interest Rates
         The Pendulum Swings Back
(The Reagan Revolution and Trickle Down Economics)

• Deregulation
  of the
• Government
  The Free Market Rules (1981-2008)

• Government   Regulators
Reigned In?
• Increasing Globalization
• Increasing Financial        “Government is
Innovation                    not the solution;
                             government is the
Teaching Through
 Current Events
   The Recession of 2008-2009
           How Did We Get Here?

1. Lack of Supervision over
   Bank Risk-Taking.
2. Slow Pace of Government
3. Huge Asset Bubble
   Created by Loose
   Monetary Policy
Mortgages = Income
Stream for the Bank
Limits Bank funds to make
more loans so they sell
them off                    CDO/CMO/MBS
                            Pooled Mortgages
                            Make a Security that
                            pays Interest
Payouts are Tiered because not all
Mortgages are Paid
First Paid=Lower Interest Rate
Last Paid=Higher Interest Rate due to
the Risk
In good times, there’s enough mortgage
payments coming in to pay every
tranch, but if there’s not enough…
The Housing Bubble
The Bubble Bursts
Loans Dry Up
Sales Fall

Less Demand
Prices Drop
Stock Market Collapse
                                LOSSES SO FAR
                                Citigroup: $40.7bn
                                UBS: $38bn
                                Merrill Lynch: $31.7bn
                                HSBC: $15.6bn
                                Bank of America: $14.9bn
                                Morgan Stanley $12.6bn
                                Royal Bank of Scotland: $12bn
                                JP Morgan Chase: $9.7bn
                                Washington Mutual: $8.3bn
                                Deutsche Bank: $7.5bn
                                Wachovia: $7.3bn
                                Credit Agricole: $6.6bn
                                Credit Suisse: $6.3bn
                                Mizuho Financial $5.5bn
But that’s not the end of the   Bear Stearns: $3.2bn
                                Barclays: $3.2bn
          story . . .           Source: Bloomberg and
                                company reports
Credit Default Swaps work
 great as bond insurance,
          but . . .

    . . . the completely
unregulated market turned
        into a casino.
              Collapse of Bear Stearns
When Bear Stearns
went under it had
$190 billion of debt
                       BUT. . .

                                  There were more than
                                  $2 trillion of credit
                                  default swaps
                                  guaranteeing this debt.
                                 Who wrote the Credit
                                Default Swap contracts?

No set capital requirements to back
up the credit default swap contracts.
When the big one hits . . . there’s no
money to pay out.
The Feds Come to the Rescue

                     Timothy Geitner
Economic Stimulus Bill – 2009
        $787 Billion
Which all brings
us back to . . .
 Teaching Through
Memorable Examples
Top 10 Ways to lose your Money
1.    Ponzi Schemes
2.    Unsecured Promissory Notes
3.    FOREX Trading Schemes
4.    Equity Stripping Schemes
5.    High-Yield Investment Schemes (Prime Banks)
6.    Unethical Variable Annuity Sales Practices
7.    Unlicensed Individuals Selling Securities
8.    Unregistered Investment Products
9.    Unscrupulous Brokers
10.   Affinity Fraud
             1. Ponzi Schemes
• Promise High Rates of Return, Little or No Risk
• Use Money From New Investors to Pay Earlier Investors
• Typically No Legitimate Business Revenue
2. Unsecured Promissory Notes
• Typically Issued by Little Known or
  Non-Existent Companies
• Promise High Returns, Little or No
• Insurance Agents Often Targeted to
  Promote These Notes
• Example: VesCor
   3. FOREX Trading Schemes

• Claims of
  “proprietary” or
  “secret” software
• Guaranteed returns
• Not suitable for
  individual investors
  4. Equity Stripping Schemes
• Use good credit score to take out loan for
  more than 100% of asset value (real estate
  or vehicle)
  – Lender is usually complicit in the scheme
• Invest the excess equity into a high return
  investment that will generate income to pay
  the monthly payment
• Sounds great until . . .
   5. High-Yield Investment
• Promise Double or Triple-Digit Returns
  Through Access to “Risk Free Guaranteed
  High-Yield Instruments”
• Prime Bank Schemes
     • Access to Investment Portfolios of the World’s Elite
• “Secret Off-Shore Trading Programs”
• Often Sold Through Insurance Agents
     6. Variable Annuity Sales
•   High Surrender Charges
•   Higher Costs than Alternative Investments
•   Benefits Cost Extra
•   Steep Sales Commission Paid to Agents
•   Long-Term Investment (10 Years or More)
•   May Be Unsuitable for Many Retirees
Selling Annuities to Seniors Who
       Don’t Have Money
                               Annuity University
                                        • Use Introductory
                                        • Offer Free Meal
                                        • “Probe, Then
                                        Disturb, Then
                                        Enhance the Problem”

Wall Street Journal July 2, 2002
                                   Annuity University
    • “You’re there to solve their problems, but you have to create those
      problems first – No Problem, No Sale”

    • “Tell them you can protect their life savings from nursing-home
      and Medicare seizure of assets. They don’t know what that is, but
      it sounds scary… it’s about putting a pitchfork in their chest.”

    • “Show them their finances are all screwed up so that they think Oh,
      no! I’ve done it all wrong – this will make you money”

Wall Street Journal July 2, 2002
   7. Unlicensed Individuals

• Lured by High Commissions
• Anyone Selling Securities Must Be
  Licensed - No License, No Sale
   8. Unregistered Investment
• Bypass Stringent State Registration &
  Disclosure Requirements
• Securities – Not Just Stocks & Bonds
    • Investment Contracts
    • Promissory Notes
    • Viatical Settlements
• Promise High Returns, Little or No Risk
      9. Unscrupulous Brokers
• Unsuitable Investment Recommendations
       • Reverse Mortgages for Investing
       • Mutual Fund Class A, B, or C Shares
•   Excessive Trading in Client Accounts
•   Unauthorized Trading
•   Guaranteeing Clients Against Loss
•   Borrowing Money From Clients
10. Affinity Fraud
        • “I am also a member of (insert
          your religious, ethnic,
          professional or community-
          based organization)”
        •   Same “deal” was made with a
            prominent leader of your
            organization – “name
         What is a RELOAD?
Once a victim, twice a victim, thrice a victim…
• “I promise, you’ll make your money back if
  only you’ll invest in…”
• Promoter's will not only sell a scam to the
  same person twice, they share their list of
  “suckers” with other promoters
          Common Threads

•   Promise of High Returns
•   Promise of Little or No Risk
•   Prey on Investors’ Trust
•   Investors Don’t Ask Questions
In the end, it’s like your grandma used to always say . . .

If it sounds
to good to be
true . . .

    . . .It probably