How Did We Get Here

1
How Did We Get Here?
Ethics, Leadership, Financial Crisis
October 08
CFA Institute Centre for Financial Market
Integrity
2
Cultural Norms?
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Heroes Villains

• Lack of Prudence at All Levels
• Homeowners
• Mortgage Brokers
• Commercial Investment Banks
• Securities Underwriters
• Credit Rating Agencies
• Corporate Investors
• Corporate Shareowners
• Regulators

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Homeowners or Consumers

• American Dream or Quick Buck (Ownership vs.
  Speculation)
• Flip That House
• Prices Only Go Up
• Leverage Profits
• Buy Now Pay Later
• Is it a home or an ATM?

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Housing Prices Only Go Up
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Buy Now Pay Later
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No Recession Please!

• Cheap Money
• from the Fed
• Soft Landing Managing Economic Growth
• Feeding the Fire?
• Oops Maybe too Much!

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Promoting Subprime Loans

• Government Policy Makers
• Home Ownership for All
• Lowering Standards
• Fannie and Freddie Unleashed Unsupervised
• Lend Dont Discriminate

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Lend - Dont Discriminate
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Mortgage Brokers Banks

• Mismatch of Incentives
• No Money, No Job, No Problem!
• No Skin in the Game
• Sales No Service
• Predatory Lending
• Zero Down Interest Only
• ARMs Ticking Time-bomb

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Higher Return Lower Risk?

• Investment Banks Investors
• Creation of Complex Mortgage Plays CDOs - CDO2 -
  CDO3
• Bundling Marketing High Returns
• Due Diligence? Suitability?
• Mismatching Assets Liabilities
• Excess Concentration of Risk
• Excess Leverage

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Sure Thing for Investors
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Global Phenomenon
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AAAs or Junk Bonds?

• Credit Rating Agencies
• Homeowners Always Pay
• Credit Risk not Economic Risk
• Mislabeling or Over-rating
• When is a AAA not a AAA?
• Who is pays the Rating Agencies?

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But the Bonds are Insured?

• Mono-line Insurance Companies
• Guarantees for CDOs
• Counterparty or Enabler
• Undercapitalized
• Concentration of Risks
• AAA Ratings Again?

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Our Banks Are Safe?

• Accounting Standards
• Mortgage Pass-throughs?
• Clearing the Balance Sheets
• Asset Valuations?
• CDOs come home to roost

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Banks That Went Bust
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Where are the FEDs?

• Legislative Regulatory Failures
• Relaxing the Rules
• Complex, but Inadequate Supervision
• Congressional Interference
• Failure to Understand
• Failure to Enforce

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Lobbyists Policy Makers

• Freddie, Fannie Scam Hidden in Broad Daylight
  Commentary by Jonathan Weil
• SEPT. 9, 2008 (Bloomberg) ? When the history is
  written on the collapse of Fannie Mae and Freddie
  Mac, it will go down in the annals of corporate
  scandals as one of the greatest accounting scams
  committed in broad daylight.

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Not BailOut RESCUE Plan
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Recovery Solutions?
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What Is Next?
Ethics, Leadership, Financial Crisis
October 08
CFA Institute Centre for Financial Market
Integrity