The Financial Crisis of 2008 “The road to hell is paved with good intentions” And a lot of greed © Gaylen K. Bunker, 2008, All Rights Reserved

The Financial Crisisof 2008

“The road to hell is paved with good intentions”

And a lot of greed

© Gaylen K. Bunker, 2008, All Rights Reserved

Clinton Administration

1. The Gramm-Leach-Bliley Act of 1999: –De-regulated the banking industry (competition)–Sub-prime mortgages (help the poor)–Complex derivatives (mortgage backed securities – more options and insurance)

2. The "dot-com bubble“ of the 1990s burst climaxing in Aug of 2000 when the

S & P 500 peaking above 15003. Enron exposed manipulation of accounting---

(Sarbanes-Oxley: Fannie and Freddie Excluded)


Distribution of Income: 2006

3.48.6

14.5

22.9

50.5

Lowest Fifth

Second Fifth

Third Fifth

Fourth Fifth

Highest Fifth

The poorest 20% of the population makes 3.4% of the income

The richest 20% of the population makes 50.5% of the income



Push for lowering credit standards

In the Winter 2000 edition of the City Journal Howard Husock reported how Bill Clinton's Administration forced banks to loan large sums of money to high risk projects in inner cities. The Democrats in Congress and the White House forced banks to lower their investment standards in order to…help poor people.

http://www.parapundit.com/archives/005558.html


http://www.city-journal.org/

http://www.city-journal.org/html/10_1_the_trillion_dollar.html



Greenspan said as chairman at the Federal Reserve System's Fourth Annual Community Affairs Research Conference,

Washington, D.C. April 8, 2005.

“Innovation has brought about a multitude of new products, such as subprime loans… Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.”

Alan Greenspan Fed Res Chair 1987 to 2006


“It was our job to unfreeze the American banking system if we wanted the economy to function. This required keeping interest rates modestly low,”

Alan Greenspan (con’t)


“The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business.”



“The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace,”



Fannie Mae (10K) Dec 31, 2007The following diagram illustrates the basic process by which we create a typical Fannie Mae MBS in the case where a lender chooses to sell the Fannie Mae MBS to a third-party investor.

Trying to add liquidity to the market


Credit Default Swaps

A credit default swap (CDS) is a contract in which the buyer makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument goes into default. Credit insurance

Credit Default Swaps can be bought by any investor; it isn’t necessary for the buyer to own the underlying credit instrument.


The System and AIG


Mortgage Rate History

http://mortgage-x.com/general/historical_rates.asp

Interest rates began a long

decline early in 2001


http://calculatedrisk.blogspot.com/2008/06/existing-home-sales-not-seasonally.html

Home sales reached their peak

in 2005


Speculators & Flippers

"Historically, roughly 3 percent of all houses nationally are bought for investment purposes. During the 2004-06 period, as much as 25-35 percent of houses in hot real estate markets -- such as southern Florida, Las Vegas, and California -- were bought by investors and speculators."

Robert F. Wescott, Ph.D. President, Keybridge Research LLC


http://mysite.verizon.net/vzeqrguz/housingbubble/© Gaylen K. Bunker, 2008, All Rights Reserved

Oct 2004 House hearing on Fannie Mae

Ruben Hinojosa: “Over the last 4 years, the United States has suffered from immense job loss; an increase in the number of people living in poverty; an incredible and unsupportable switch from federal budget surplus to an ever-growing budget deficit; [and] a tremendous increase in the national debt.

“However, there is one sector of our economy that has been performing well consistently, and that is the housing market. It has served as the foundation of the U.S. economy since the stock market declined. We need to nurture it [and] ensure that nothing we do…harms it.”


Oct 2004 House hearing on Fannie Mae

Barney Frank: “We have a subset of issues involving affordable housing, and those are very important to many of us. What derailed the [regulatory] legislation was an insistence by the Bush administration on going beyond safety and soundness and…not do these new products.

“There was an article by Gretchen Morgenson in the New York Times on Sunday that said the problem is that they have done too much to bring housing to people who really cannot afford it and they have overextended by lending money to people who were below the economic level that should be there.


William H. DonaldsonSEC Chairman (2003-2005) “SEC decision allowed [five] firms

to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. Instead, the 2004 exemption allowed them to lever up 30 and even 40 to 1. "

1959: founded Donaldson, Lufkin & Jenrette. Investment Bank

Grease the wheels of credit

and growth.


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Data

Consumer Debt (pink) and Financial Profits (blue) as a Percentage of GDP (John Watkins)


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Sum of Other Financial/GDP

Sum of Fed Res Banks/GDP

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Year or quarter

Data

Financial Profits as a Percentage of GDP(John Watkins)


Mortgage Rate History

http://mortgage-x.com/general/historical_rates.asp© Gaylen K. Bunker, 2008, All Rights

Reserved

Hurricane Katrina

Hurricane Katrina was the costliest hurricane, as well as one of the five deadliest, in the history of the United States. It formed over the Bahamas on August 23, 2005, and crossed southern Florida. The most severe loss of life and property damage occurred in New Orleans, Louisiana.

At least 1,836 people lost their lives in the actual hurricane and in the subsequent floods.

The storm is estimated to have been responsible for $81.2 billion (2005 U.S. dollars) in damage, making it the costliest tropical cyclone in U.S. history.


A decline in building permits was caused by:

http://money.cnn.com/2005/11/17/news/economy/housingstarts/index.htm

1. Mortgage rates have risen steadily over the last 10 weeks, [and] Higher rates tend to depress demand for housing.

2. In addition, prices for lumber, concrete and other building materials have jumped in the wake of Hurricane Katrina.

3. The steady rise in new home prices in recent years has also helped put the brakes on building. Prices create their own drag on the market.


Housing Starts


Warren Buffett

"It's only when the tide goes out that you learn who's been swimming

naked."


Mort ZuckermanPublisher/owner of the New York Daily News since 1993 and Editor-in-Chief of U.S. News & World Report since 2007.

“The single greatest contributor to the housing bubble was Fannie and Freddie. Everybody knew these were two government sponsored institutions out of control. They made over 600 billion dollar investment in sub-prime mortgages in the first six years of this century. Paulsen, when he said the core of the problem was the collapse of housing---that’s where it all started in the sub-prime field.” McLaughlin Group Sep, 21, 2008


Mort Zuckerman (con’t)Publisher/owner of the New York Daily News since 1993 and Editor-in-Chief of U.S. News & World Report since 2007.

Cox, the SEC commissioner was the man who sat there while they doubled and even tripled the ability of financial houses to use leverage. They went from a maximum of twelve to one to as high as forty to one. This is what happened on the other side---the over uses of leverage that compounded the problem in the housing world and vice versa.” McLaughlin Group Sep, 21, 2008


http://mysite.verizon.net/vzeqrguz/housingbubble/© Gaylen K. Bunker, 2008, All Rights Reserved

Morgan Stanley (10K) Dec 31, 2007

The Company recorded $9.4 billion in mortgage-related writedowns in the fourth quarter of fiscal 2007 resulting from an unfavorable subprime mortgage-related trading strategy and the continued deterioration and lack of market liquidity for subprime and other mortgage-related instruments. Included in the $9.4 billion were writedowns of $7.8 billion related to U.S. subprime trading positions, principally super senior derivative positions in CDOs.



http://www.bls.gov/news.release/empsit.t10.htm© Gaylen K. Bunker, 2008, All Rights

Reserved

OccupationEmp’d11/07

Emp’d11/08

UnEm11/07

UnEm11/08

%11/07

%11/08

Total Chng

% of Total

Mgmt, Prof & related occupations 52348 53274 963 1786 1.8% 3.4% 823 27.1%

Service occupations 23763 24595 1651 1898 6.9% 7.7% 247 8.1%

Sales and Office occupations 36260 35205 1579 2304 4.4% 6.5% 725 23.9%

Nat'l res, constr & maint. occupations 16011 14480 955 1587 6.0% 11.0% 632 20.8%

Prod'n, transp. & Mat'l occupations 18636 17055 1117 1726 6.0% 10.1% 609 20.1%

Total 147018 144609 6265 9301 4.3% 6.4% 3036 100.0%

Unemployment Rate Nov ‘07 to Nov ’08(in thousands)

http://ww-success.com/blog/index.php/2006/10/16/millionaires-in-the-world/

“If all the national of the world are in debt, where did the money go?”Reader’s Digest, Jan. ‘09


Remedy

“We do not need much more regulation other than to put a ceiling on leverage by

investment banks and to impose, and enforce, market-based regulations. Market-

based regulations will do away with bureaucrats riding a turtle while trying to

catch up to a race horse.”

VALERIANO F. GARCIA (executive director of the World Bank from 1998 to 2000)


Ludwig von Mises

“Business cycle result from central-bank generated loose money and cheap credit, and

the cycle can only be made worse by intervention.

The Causes of the Economic Crisis: And Other Essays Before and After the Great

Depression, 1931


http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html


Lynn E. Turner

We began the decade with names such as

1. Enron and Worldcom,

2. followed by the revelations regarding Wall Street analysts misleading investors,

3. then on to the mutual fund late trading and market timing scandal,

4. then the stock option back dating at companies such as United Health, and

5. now we find ourselves in the midst of the subprime fiasco.


Lynn E. Turner (con’t)

The problem was:

Subprime loans: A high risk of not being repaid.

Executive Pay: hundreds times average employee.

Credit Rating Agencies compromised independence

Accounting Standards failed to provide transparency.

Due Diligence required of investment banks was deficient.

“Cheap” debt fueled high levels of liquidity risks.

Regulation was “a turtle chasing a race horse.”


Resets are coming


Freedom versus Equality

“Nature smiles at the union of freedom and equality in our utopias. For freedom and equality are sworn and everlasting enemies, and when one prevails the other dies. Leave men free, and their natural inequalities will multiply almost geometrically. Utopias of equality are biologically doomed, and the best that the amiable philosopher can hope for is an approximate equality of legal justice and educational opportunity.” Will and Ariel Durant, The Lessons of History, pg 20


2006 Data (billions)

Gross Domestic Product: $13,195 100%National Health Expenditures 2,105 16% Private 53% of NHE 1,135 Public 46% of NHE 970 Medicare (65+) Medicaid (Poor) VA and Military

Children 0-18 (27% of Population)© Gaylen K. Bunker, 2008, All Rights

Reserved

The Bunker Curve(an organic approach)

Benefit greater than Cost

High demand valued service

Keep commitments

Vision, Innovation, Creativity



Documents

The Financial Crisis of 2008 “The road to hell is paved with good intentions” And a lot of greed © Gaylen K. Bunker, 2008, All Rights Reserved