Testimony Presentation

8/14/2019 Testimony Presentation

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Financial Crisis Inquiry Commission

Mike Mayo, CFA

January 2010

The views and opinions expressed in this document and the oral testimony I will provide to the Financial Crisis InquiryCommission are solely my own and do not necessarily reflect the views of my employer or any other institution or person Iam currently affiliated with or have been in the past.


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Page 32009 Calyon Securities (USA) Inc.

Industry on Steroids

1) Excessive Loan Growth

2) Higher Yielding Assets

3) Concentration of Assets

4) High Bank Balance Sheet Leverage

5) More Exotic Securities

6) Consumers Went Along

7) Accountants Assisted

8) Regulators Aided

9) Government Facilitated

10) Incentives Encouraged Behavior


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Loan vs GDP growth in the 2000s

1) Excessive Loan Growth

Securitization (Est.)

Loans

Source: FDIC - All banks, Pre-Crisis

0%

2%

4%

6%

8%

10%

12%

GDP Growth Loan Growth


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Shift to higher-yielding, higher loss-rate consumer and commercial real estate loans

2) Higher Yielding Assets

Growth in securities holdings

Source: FDIC - All banks

Source: FDIC All banks

2%

32%

62%

40%

0%

10%

20%

30%

40%

50%

60%

70%

1992 1994 1996 1998 2000 2002 2004 2006 2008

US Treasuries

MBS

2008 1992 1984 1974 1942Loan Type % of Total % of Total % of Total % of Total % of Total

Residential Mortgage 19% 17% 12% 15% 17%Home Equity 11% 6% nil nil nil

C&I 21% 26% 37% 37% 41%Core CRE 14% 13% 6% 9% 5%

Construction 8% 4% 5% 3% nilCredit Card 6% 7% 4% 2% nil

Other Consumer 9% 12% 14% 18% 12%Other 13% 15% 21% 16% 25%


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Real estate was the largest area of growth

3) Concentration of Assets

HIGHEST

GROWTH

Compound Annual Growth in Loans (2000s)

Source: FDIC - All Banks

-5% 0% 5% 10% 15% 20% 25%

Home Equity

Commercial Real Estate Construction and Development

Commercial Real Estate Multifamily

1-4 Family Real Estate

Commercial Real Estate

Foreign Office Real Estate

Total Loans

Credit Cards

Farmland

All Other Consumer

Commercial and Industrial

Agriculture

Leases


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Leverage increased

4) Balance Sheet Leverage

Banks

Securities Industry

Source: SIFMA Balance Sheet

Source: FDIC - All Banks

Assets/Total Equity

10x

15x

20x

25x

30x

35x

40x

1980s 1990s 2000s

10x

11x

12x

13x

14x

15x

1993 1995 1997 1999 2001 2003 2005 2007

Tang assets/(Tang equity + reserves)


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Fees are a larger percentage of revenues

5) More Exotic Securities

Source: FDIC -All Banks

Fees as % of Revenues

15%

20%

25%

30%

35%

40%

45%

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006


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Household debt at record levels

6) Consumer Debt - Highest in History

Household Debt-to-GDP

0%

20%

40%

60%

80%

100%

120%

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Source: Federal Reserve, Bureau of Economic Analysis


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Reserves to Loans

7) Accountants Aided

Source: FDIC All banks

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

1998 2000 2002 2004 2006


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Annual FDIC Insurance Fee

8) Regulators Aided

(bps)

0

5

10

15

20

25

1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Note: Per $100 of deposits

Source: FDIC


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GSE debt increased over 6 times in 2 decades

9) Government Facilitated

Source: Federal Reserve, Flow of Funds

$0.5

$3.1

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

1990 2009_Q3

$Trillion


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10) Incentives Misaligned

Source: FDIC All Banks

Compensation/Revenue

Compensation/(Revenue less loan losses)

Note: Loan Losses = Provision for Loan Losses

20%

25%

30%

35%

40%

45%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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Industry on Steroids

Performance enhanced by excessiveLoan growth

Loan risk

Securities yields

Bank leverage

Consumer leverage

Excesses conducted by

BankersAccountants

Regulators

Government

Consumers

Side effects ignored

Little financial incentive to slow down

Ignored long-term risks


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The Solution Partly a function of ABC

A for Accounting

B for Bankruptcy

C for Capital

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