Core Messages

1
Core Messages

• Some causes of the housing bubble
• Differences
• Banks, nonbanks
• Community banks, Too Big to Fail Banks
• Banks are lending
• Part of solution, not part of problem

2
What Caused Turmoil?

• Government home ownership policy, specifically,
  no down payments
• Instant gratification, expectations speculation
• People ignored finances, financial illiteracy
• Excessive mortgage brokering securitization
• Others like rating agencies
• Loose lenders primarily nonbanks, but few among
  banks

3
The Perfect Storm

• The core problem Excessive leverage (debt) by
  businesses consumers
• Massive scale, most of society
• Easy money by the Federal Reserve Bank
• Combined with
• Poor values behind securitized debt
• Shrinking asset values in most sectors
• Declining income consumers businesses
• Investor/lender nervousness
• Economic uncertainty unemployment, sales
• Consumer caution drop in loan demand
• Regulatory pressure on banks
• Increase capital
• Improve loan quality
• Constrain lending (for various reasons)

4
Bad Practices

• Regulation was lacking BUT NOT IN BANKING, in
  INVESTMENT BANKING
• Mortgage brokers no risk in loans compensation
  on quantity, not quality risk separated from
  reward
• Loan securitization excessive leveraging
• Lipstick on pigs, credit default/insurance
  provisions
• No regulations for private equity funds
• New loop holes for Special Investment Vehicles
  (SIVS)
• Some mortgage lenders/banks had poor loan
  underwriting (made some bad loans, unlikely to be
  repaid) Wamu IndyMac
• Those dubious loans were sold, packaged in a
  pool, and small parts of that pool were sold by
  brokerage houses as securities backed by the
  mortgages including good bad loans
• Wall Street sold them to investors everywhere
  European banks, mutual funds (maybe yours),
  pension plans (also maybe yours), insurance
  companies (again), hedge funds, countries
• We are all burned by this maybe not directly,
  but indirectly

5
Massive Leverage

• Investors thought these mortgage backed
  securities were good investments relied on the
  selling entity (brokerage house) without knowing
  it was leveraged to extreme levels
• Bankers and their regulators get nervous at
  leverage of 12x capital never see a bank at 15x
• Brokerage houses routinely had 30x and 35x (even
  50x) capital in leverage very risky
• Govt created Fannie Mae Freddie Mac had 60x
  fueled housing
• That means capital (the safety net there to
  protect the business) is too small to absorb
  losses

6
Lending in U.S.
7
Who Were Major Players?
Purchased by a bank Converted to a bank/BHC
Govt assistance Failed FDIC paid 100 of
insured deposits, extreme media coverage of runs

• Banks shored up other faltering financial firms
  (inaccurately called banks), or many of those
  firms converted to banks to survive
• Banks have not escaped problems, but
  comparatively are in good shape Failures of
  real banks have been minor, FDIC has handled 100

8
Nervousness Spread within Credit Markets

• Investment Banks, TBTF Banks, Hedge funds, some
  mutual funds, all were leveraged
• Lehman Failure, no trust in ratings, caused a
  freezing of credit on Wall Street
• Small banks do not issue commercial paper, their
  funding was not materially effected.
• Large banks and Investment banks make up 90 of
  all lending in dollar volume

9
Capital Purchase Program
Regulatory Rating
10
U.S. Govt Conflicting Messages

• Treasury (and Congress, public, media)
• Use CPP capital to lend more, revive economy
• Bank Regulators (Fed, FDIC, OCC, OTS)
• Take CPP capital, but engage only in prudent
  conservative lending
• Regulators mission is to protect public with
  safe banks and banking system not provide easy
  credit
• If banks were a lending machine
• Treasury/Congress/public/media foot on
  accelerator
• Bank regulators foot on brake
• Regulators pressures on banks
• Capital reserves (compounded by accounting)
• Targeted landing practices- especially
  construction
• Regulators have complete authority

11
Perception of Credit Freeze

• Perception
• Theres no credit available
• Reality
• Lenders have tight credit standards
• Kept banks safe loose lenders in trouble or
  failed
• Some borrowers are less creditworthy
• Assets (collateral) have dropped in value
• Incomes (to repay loan) are lower
• Banks increased lending amounts cant fill the
  void left by nonbank lenders
• Recently banks provided 30 of credit in U.S.
  still doing
• Nonbanks (often inaccurately called banks)
  recently provided 70 of credit many nonbank
  lenders are gone or are lending much less

12
12/31/08 Bank Data CHARTERED in Colorado

• More
• Good News!

13
Evaluating a Loan
14
Whats the Impact?

• Despite media perception, credit still is
  available in Colorado
• Banks more money loaned, but tighter standards
• Nonbank lenders reduced lending or gone
• Lower loan demand in addition to reduced
  ability to borrow, many consumers and small
  businesses have reduced willingness to borrow
• Tight loan standards (previous reasons) banks
  voluntarily, regulators require
• Many borrowers less creditworthy, harsher
  economic conditions
• Regulators pressure on banks
• Banks increased lending cant fill the void left
  by no/less lending by nonbank lender

15
How Do I Know My Money is Safe in a Bank?

• ? FDIC insurance
• ? Capital reserves
• ? Regulation examination
• ? Attitudes skills

16
? FDIC Insurance

• Paid for by banks to benefit customers
• FDIC protects depositors dollar for dollar
  including principal and interest up to the
  insurance limit temporarily raised to 250,000
  until 12/31/2009
• Since FDIC was created in 1933 no depositor has
  ever lost a penny of insured deposits
• FDIC is safe
• 19 billion in reserves
• Another 5 billion added in 2008 by banks
• Increased premiums for 2009
• Special assessment proposed
• Full faith and credit of U.S. government
• No taxes fund FDIC banks have paid tens of
  billions of dollars in FDIC premiums

17
? Strong Capital and Reserves

• Nationally banks have 1.3 trillion in capital
• Capital is owners investment in the bank, lost
  by the owner if things go badly
• Another 173 billion in U.S. banks in reserves
  for potential loan losses

• FDIC 12/31/08
• 97 of the 8,305 banks in the U.S. are well
  capitalized (highest possible rating)

18
? Regulation and Examination

• Assures bank safety soundness to protect
  public (your deposits)
• Only industry that must meet rigid standards of
  financial strength and stability
• Only industry routinely, frequently examined by
  government
• FDIC and other regulators scrutinize banks
  operations to ensure safeguards are met
• They order corrective action as necessary

• Troubled banks are the rare exception, not the
  rule
• Now 252 banks nationwide considered troubled (out
  of 8,305 3 of banks 1.1 of industry assets)
  1,496 on list in 1990
• Only FDIC/regulators know who is troubled

19
Regulation and Examination (Continued)

• Since 1982, 87 of troubled banks worked their
  way back to health with extra attention
• Like a patient gets in a hospital
• Those 87 never failed
• Some banks admittedly have some issues to address
  in this tumultuous environment

20
What is the Status of Banks?

• Bank Failures
• 25 nationwide in 2008 including WaMu (SL 8x
  larger than previous biggest failure)
• Still no depositor has ever lost a penny of
  insured deposits
• 1,617 banks failed in the 1980s and early 1990s

average 10 per week
21
? Attitudes and Skills

• Know the management style of your bank
• Banks generally, Cautious, conservative by nature
• Attention to detail sometimes frustrating to
  borrowers recent appraisals, tax returns

22
What is Ahead?

• Duration and depth of economic woes depend on
  three things (3 Cs)
• Credit restoring the normal flow of credit
  takes time and confidence
• Confidence public confidence in financial
  system and economy takes reliability of
  income/assets, willingness to borrow/invest
• Corrections government policy to deal with
  long-term problems takes careful policy
  decisions (concern unintended consequences)

23
Thank You

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