Julie Stackhouse Senior Vice President Federal Reserve .../media/Files/PDFs/Financial Crisis... ·...
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Julie Stackhouse Senior Vice President Federal Reserve Bank of St. Louis May 22, 2009 The views expressed are those of Julie Stackhouse and may not represent the official views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Transcript of Julie Stackhouse Senior Vice President Federal Reserve .../media/Files/PDFs/Financial Crisis... ·...
Julie StackhouseSenior Vice President
Federal Reserve Bank of St. LouisMay 22, 2009
The views expressed are those of Julie Stackhouse and may not represent the official views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
Today’s Challenges are Tied to Overuse of Debt in an Unsustainable Housing Market
Large amounts of international capital flowed into our financial markets resulting in low long-term interest rates.
Low rates combined with excess liquidity led to a boom in the credit markets.
Much of this excess liquidity flowed into the housing market. With so much liquidity, credit standards eased and subprime mortgages grew. The “originate to distribute model” largely kept the assets off the lenders’ balance sheets.
These mortgages were transformed into complex structured financial products that were underestimated or misunderstood by investors and by credit ratings agencies.
As house prices began to fall, losses ensued.
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The Size and Growth of the Non-Prime Mortgage Market
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1000
2000
3000
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2001 2002 2003 2004 2005 2006 xx 2007 Q2 Q3 Q4 2008 Q2 Q3 Q4
Bill
ion
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f d
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Mortgage Originations
Prime Home-Equity Lines/Loans
Alt A
Subprime
Prime Jumbo
Prime Conventional/ Conforming
FHA/VA
Quarterly figures for 2007 and 2008 expressed at an annual rate.Source: Inside Mortgage Finance, Jan. 30, 2009.
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Presenter
Presentation Notes
The Size and Growth of the Non-Prime Mortgage Market
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2000
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4000
2001 2002 2003 2004 2005 2006 2007 Q2 Q3 Q4 2008 Q2 Q3 Q4
Bill
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s o
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olla
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Mortgage Originations
Prime Home-Equity Lines/Loans
Prime Jumbo
Prime Conventional/ Conforming
FHA/VA
Alt A
Subprime
Quarterly figures for 2007 and 2008 expressed at an annual rate.Source: Inside Mortgage Finance, Jan. 30, 2009.
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Presentation Notes
The Elements of Risk Layering:Adjustable Rates
Sources: Mortgage Bankers Association, Loan Performance Corp.
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25
50
75
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Percent
Share of Mortgages with Adjustable Rates, Including Hybrids
ARM share of subprime mortgages issued (Loan Performance)
ARM share of prime mortgages outstanding (MBA)
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The Elements of Risk Layering:Reduced Documentation
Source: Loan Performance Corp.
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30
40
50
2000 2001 2002 2003 2004 2005 2006 2007
Percent
Share of Subprime Mortgages Underwritten With Reduced Documentation
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The Elements of Risk Layering: Nominal Equity at Risk
Source: Loan Performance Corp.
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90
95
100
2000 2001 2002 2003 2004 2005 2006 2007
CLTV ratioin %
Combined Loan-To-Value Ratio For Subprime MortgagesIncludes all mortgage debt on property
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The Elements of Risk Layering:Cash-Out Refinancing
Source: Loan Performance Corp, Freddie Mac.
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50
75
2000 2001 2002 2003 2004 2005 2006 2007
Percent of loans
Share of Subprime Mortgages That Were Cash-Out Refinances
Fraction of subprime loans that were cash-out refinances
Fraction of conforming (prime) loans that were cash-out refinances
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The Elements of Risk Layering:3rd Party Originators
Source: Loan Performance Corp.
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60
70
80
90
2000 2001 2002 2003 2004 2005 2006 2007
Percent of loans
Share of Subprime Mortgages Originated Through Broker or Wholesale Channel
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Subprime MBS becomes part of many CDOs
Cash Flows From Questionable Mortgages were Transformed into Securities and Derivative
Products – often with AAA Ratings
Source: Federal Reserve Bank of New York, “A Primer on the Mortgage Market: The Primary Market”, by Michael Holscher and Jason Miu, April 20, 2007.
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House Prices Appreciated Beyond Sustainable Levels
US House-Price Appreciation: S&P/Case-Shiller Home-Price IndexPercent per year
80-Year Historical Annual Average: 5 PercentPercent per year
10050095Sources: S&P, Fiserv, and MacroMarkets LLC, Haver Analytics
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1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
% of disposableincome
Over Time, Consumers Forgot how to Save
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2000 2002 2004 2006 2008 2010 2012
December 2008
June 2006
S&P/Case-Shiller
Composite-10 Metro-Area House-Price
Index set equal to 100 in May
2006
Forward curve on Mar. 2, 2009, based on contracts
traded at the Chicago Mercantile Exchange
Actual data
And then, House Prices Fell – Major MarketPrices Down 29%
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Mortgage Delinquency Rates Accelerated
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The Financial System Faced a Crisis
3-Month LIBOR-OIS Interest Rate SpreadPercentage points
1-Month LIBOR-OIS Interest Rate SpreadPercentage points
0807Source: Haver Analytics
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1
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The Fed’s Response to the Crisis
Financial Institution Facilities Lender Current RatePrimary Credit District Reserve Banks Federal Funds plus 25 basis pointsSecondary Credit District Reserve Banks Primary Credit rate plus 50 basis pointsSeasonal Credit District Reserve Banks PublishedTerm Auction Facility District Reserve Banks Set at auction
Section 13(3) Facilities Lender Date of FacilityJPMC/Bear Stearns FRB New York March 16, 2008Primary Dealer Credit Facility FRB New York March 17, 2008AIG FRB New York September 16, 2008/November 10, 2008
AIG– Residential Mortgage-Backed Securities Facility FRB New York November 10, 2008
AIG- Collateralized Debt Obligations Facility FRB New York November 10, 2008
AMLF - Asset-Backed Commercial Paper Money Market Mutual Fund Lending Facility
FRB Boston September 19, 2008
CPFF- Commercial Paper Funding Facility FRB New York October 7, 2008
MMIFF – Money Market Investor Funding Facility FRB New York October 21, 2008
TALF – Term Asset-Backed Securities Loan Facility FRB New York November 25, 2008
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900
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Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr
Federal Reserve Assets Billions of dollars
Other LoansCurrency swaps and other assetsCommercial Paper Funding Facility (CPFF)Money Market Mutual Fund LiquidityFacility (AMLF)Primary Dealer Credit Facility (PDCF)Primary CreditTerm Auction Facility (TAF)Repurchase AgreementsTerm Securities Lending Facility (TSLF)and Overnight Lending
Securities held outright minus those lent
2007 2008 2009
Changes in the Fed’s Balance Sheet
Capital Purchase Program (CPP) Stress testing of the largest banking organizations and Capital
Assistance Program (CAP) Public-Private Investment Program (P-PIP) Consumer and Business Lending Initiative (Super TALF) Targeted Investment Program (TIP) Auto Industry/Auto Supplier Program Systemically Significant Failing Institutions Program Affordable Housing Support and Foreclosure Prevention (Making
Homes Affordable Program)
Congressional Response to the Crisis: $700 Billion TARP and the Financial Stability Plan
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Source: www.financialstability.gov/roadtostability/programs.htm
Transaction Report as of May 13, 2009May 13, 2009
Capital Purchase Program (CPP) $197.8 billion
Capital Assistance Program (CAP) $0
Consumer and Business Lending Initiative (Super TALF) $20 billion in LLC
Public-Private Investment Program (P-PIP) $0
Targeted Investment Program (TIP) – Citi, BoA $40 billion
Asset Guarantee Program - Citi $5 billion
Auto Industry/Auto Supplier Program – GM, GMAC, and Chrysler $35.6 billion
Systemically Significant Failing Institutions - AIG $69.8 billion
Affordable Housing Support and Foreclosure Prevention (Making Homes Affordable Program)
14 servicersIncentive caps of $15.1
billion
19Source: www.financialstability.gov
Capital Purchase Program (10/14/2008) 579 institutions currently participating (as of 5/13/2009) Total purchases: $199 billion Total repayments: $1.3 billion Investments:
Preferred Stock: Pays cumulative dividends of 5% per year (first 5 years); 9% per year after 5 years May not be redeemed for three years except with the proceeds from a “Qualified Equity
Offering” (sale of Tier 1 qualifying perpetual preferred stock or common stock for cash) Warrants: Treasury can purchase common shares of stock with an aggregate market
price equal to 15% of the Preferred Stock amount on the date of investment. Term: 10 years
More about the Capital Purchase Program and Capital Assistance Program
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Presentation Notes
Capital Purchase Program (CPP) Announcement Date: 10/14/2008
Capital Assistance Program (2/10/2009) “Big 19” were primary participants via stress tests. Other publicly traded
banks may apply (deadline: 6/9/2009) Investments:
Convertible Preferred Securities: Convertible to common equity at a 10 percent discount to the prevailing price prior to February 9 (with regulator approval). Carry a 9% dividend yield Automatically converts to common equity after 7 years Recipients must submit a plan on how they intend to “preserve and strengthen their
lending capacity”. Banks must submit detailed monthly lending reports which will be made public.
Includes restrictions on the payment of dividends (maximum of $0.01 per share per quarter), repurchasing shares and pursuing cash acquisitions
Warrants: Treasury receives warrants to purchase shares of common stock with an aggregate market value equal to 20% of the Convertible Preferred amount on the investment date. Term: 10 years
More about the Capital Purchase Program and Capital Assistance Program
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Presentation Notes
The Capital Assistance Program (CAP): Announcement Date: 02/10/2009
Federal Deposit Insurance Coverage increased to $250,000 per owner through December 31, 2009; banks also had option to fully cover all non-interest bearing accounts
Temporary government guarantee of participating money market mutual funds until September 19, 2009
$800 billion economic stimulus package
Congressional Response to the Crisis: Expanded FDIC Insurance Coverage and an
Economic Stimulus Bill
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11000
11500
12000
12500
13000
13500
14000
14500 SAAR, Bil. Chn.2000$
$ 11.6 Trillion
$ 7.1 Trillion
Economists Estimate that Stimulus Might Save One-Third to Half a Year’s GDP
Is the Current Crisis as Bad as the Great Depression?
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Months into Crisis
S&P 500Great Depression versus 2008/2009 Recession
Great Depression Current Recession
Great Depression total Stock Mkt Return: -52%08/09 Recession Stock Mkt Return to date: -43%
Presenter
Presentation Notes
Data are from Robert Schiller’s website on historic economic data Roughly, here are the business cycle dates: For the current recession: June 2007 – present For the Great Depression: November 1929 – December 1941. This differs from the NBER business cycle dating. The NBER shows that the Great Depression was actually two separate recessions, one from 1929 – 1933 and another from 1935 - 1938
Is the Current Crisis as Bad as the Great Depression?
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Inde
xed
CPI
Gro
wth
Months into Crisis
Inflation: Great Depression versus Current Recession
Current Recession Great Depression
Presenter
Presentation Notes
Data are from Robert Schiller’s website on historic economic data Roughly, here are the business cycle dates: For the current recession: 2007 – present For the Great Depression: 1929 – 1941. This differs from the NBER business cycle dating. The NBER shows that the Great Depression was actually two separate recessions, one from 1929 – 1933 and another from 1935 - 1938 Prices still are positive from the inception of the current crisis until now. Despite an intermediate drop, primarily due to falling commodity prices, an increase in overall price levels have returned.
Is the Current Crisis as Bad as the Great Depression?
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Years into Crisis
Industrial Production Still Stronger than Great DepressionAutomotive Industry Could drag Industrial Production Further Down
The Great Depression Current Recession Current Recession -- Automotive Products
Industrial Production decline since 2007: -11.4%Automotive Industrial Production decline since 2007: -37%
Industrial Production growth during Great Depression: 46%
Presenter
Presentation Notes
Data are from Robert Schiller’s database of historical economic time series. Roughly, here are the business cycle dates: For the current recession: 2007 – present For the Great Depression: 1929 – 1941. This differs from the NBER business cycle dating. The NBER shows that the Great Depression was actually two separate recessions, one from 1929 – 1933 and another from 1935 - 1938
Is the Current Crisis as Bad as the Great Depression?
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Years Into Crisis
House Prices In Current Recession Steeper than Great DepressionNominal House Prices
Current Recession Great Depression
House price depreciation during The Great Depression: -16%House Price depreciation, 2007 - present: -20%
Presenter
Presentation Notes
Data are from Robert Schiller’s database of historical economic time series. Roughly, here are the business cycle dates: For the current recession: 2007 – present For the Great Depression: 1929 – 1941. This differs from the NBER business cycle dating. The NBER shows that the Great Depression was actually two separate recessions, one from 1929 – 1933 and another from 1935 - 1938
Impact for the Future: The Market for Private-Label Mortgage-Banked Securities is Gone
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2000 2003 2006 2009
Billions of dollars
Net Lending Via Private-Label ABS
Consumer, trade credit, other loans
Commercial mortgages
Multifamily mortgages
Residential mortgages
Treasury and agency securities
Source: Federal Reserve Flow of Funds Accounts, Third Quarter 2008.
Impact for the Future: The Cost to Banks and Investors Has been Significant
ImpliedCumulative Implied
Outstanding Loss Rate LossesLoans Billions of $ (Percent) Billions of $
Residential mortgage 5,117 8.4 430Commercial mortgage 1,913 9.8 187Consumer 1,914 14.2 272Corporate 1,895 5.2 99Municipal 2,669 3 80
Total for loans 13,507 7.9 1067
Securities
Residential mortgage 6,940 14.3 992Commercial mortgage 640 34.8 223Consumer 677 14.2 96Corporate 4,790 7 335
Total for securities 13,047 12.6 1644Total for loans and securities 26,554 10.2 2709
Source: International Monetary Fund 29
Impact Today and in the Future: The Number of Bank Failures is Rising
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Number of Failed and Assisted Banks and Thrifts
Assisted
Failed
Presenter
Presentation Notes
YearNumber Failed (Banks & Thrifts)Number Assisted (Banks & Thrifts) 1981 9 31 1982 34 85 1983 50 49 1984 83 23 1985 139 41 1986 162 42 1987 217 45 1988 232 238 1989 531 3 1990 381 1 1991 268 3 1992 179 2 1993 50 0 1994 15 0 1995 8 0 1996 6 0 1997 1 0 1998 3 0 1999 8 0 2000 7 0 2001 4 0 2002 11 0 2003 3 0 2004 4 0 2005 0 0 2006 0 0 2007 3 0 2008 25 5 2009 32 0
The Size of Failed Banks has Dwarfed the 1980s
0
200,000,000
400,000,000
600,000,000
800,000,000
1,000,000,000
1,200,000,000
1,400,000,000
1,600,000,000
1,800,000,000
Assets in Failed and Assisted Banks and Thrifts
Assisted
Failed
Where Does the Economy Stand?(based on the views of Blue Chip Forecasters)
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-5
-3
-1
1
3
5
7
2008 2009 2010
Percent
Real GDP GrowthTop 10 Blue Chip Forecasts (As of 5/10) Bottom 10 Blue Chip Forecasts (As of 5/10)
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Post-Recovery Implications
The IMF is now expects that “the deleveraging process will be slow and painful, with economic recovery likely to be protracted.
As predictable in a recession, credit standards have tightened considerably, although some recent improvements have been seen in the corporate debt markets for financially strong firms.
Riskier and larger credits were often securitized or syndicated. Those markets remain weak. The market for securitized subprime mortgages may not return for a long time. This has implications for recovery of the housing market.
The positive effects of the recently passed economic stimulus legislation will take time to work through the economy.
Excellent Resources
Financial Crisis Timeline:http://timeline.stlouisfed.org/
A Word on the Economy for High School Students:http://www.stlouisfed.org/education/AWordontheEconomy/player.html
Credit Card and Mortgage Delinquency Maps:http://data.newyorkfed.org/creditconditionsmap/
Crisis and Liquidity Programs and the Federal Reserve’s Balance Sheet:http://www.federalreserve.gov/monetarypolicy/bst.htm
Emergency Economic Act Stabilization Updates:http://www.treas.gov/initiatives/eesa/
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