THE SUBPRIME CRISIS What (the Hell) Happened and Why Presented by: Ken Roberts Foster Pepper, LLP.

THE SUBPRIME CRISISWhat (the Hell) Happened and Why

Presented by:

Ken Roberts

Foster Pepper, LLP

Alphabet Soap

ABS FNMA Prime

Alt-A FRB Risk-Based Assets

ARS FVA RPF

BHC GDPSecuritization

CDO GSE Shorts

CDS Hedge Funds SIV

CP LIBOR Subprime

CRA(2) MBS TARP

CSE Moral Hazard Teaser

EESA Naked Short TED

FDIC Ninja Tier 1

FHFA OCC Traunches

FHLMC OTTI

“_______* makes the

world go ‘round”

*(Perry Como – 1958)

*(Bernanke – 2008)

The Numbers

US GDP: $14.0 Trillion

Us Mortgage Debt (most held in MBS) $12.0 Trillion

US Federal Debt: $10.6 Trillion

US Debt Held by the Public $5.0+ Trillion

US Federal Obligations $60.0 Trillion($560,000

per household)

The Numbers (continued)

US Commercial Paper $1.5 Trillion

Money Market Funds $3.4 Trillion

Collateralized Debt Obligations $3.0 Trillion

Credit Default Swaps $58.0 Trillion

How To Sell Big Ticket Items?

“No One Cares what the Price is, They Only Want to Know what the _________ is.”

Why Did it Happen?

Interest Rates at Historic LowsDot.com Bubble Bust and 9/11Fed Funds Rate drops to 1% in 2003Prime Rate at 4% in 2003

Why Did it Happen?

Government Policy Promoting Home Ownership

CRA

Freddie Mac & Fannie Mae Mandated to:

Lower credit standards

Increase ownership of mortgages to

subprime borrowers

Capital ratios lowered

SEC Adopts Consolidated Supervised Entity

Why Did it Happen?

Affordability

ARMs

Interest Only

Teaser Rates

Ninja Loans

Why Did it Happen?

SecuritizationsMBSGSE

CDOSIVCredit AgenciesCDS

Why Did it Happen?

Moral Hazard“Reducing Risk too much exposes people to the Hazard of Irresponsible Risk-taking”

Mortgage Originators

Securitization

Credit Agencies

CDO & SIV

CDS

Boom in the US Housing Market

1997-2006 124% price increase

Price to median income moved from 3.0x to 4.6x

Housing starts: 2.0 million annually

The Bust

Gravity HappensExcess Supply

SpeculatorsARMs Reset

Mortgage Debt

1190: First Reported Mortgage 1908: Standard Down Payment 50% 2008: US Single Family Mortgage Debt

$12.0 Trillion

(amount held by Freddie Mac and Fannie Mae: $6.0)

Subprime & Alt-A Mortgage Debt$3.0 Trillion

(virtually all securitized)

Estimated Subprime Mortgage

Losses$500 Billion –

$1.0 Trillion

The Effect

10.0 million homeowners underwater (12%) 10% Mortgage Loans Delinquent Huge Losses (aggravated by FAS 157)

Job Losses Mounting Retail Sales – Big Ticket Items, down sharply

The Names

Barney Frank: Ranking Democrate on House Financial Services Committee (2000-2008)

Alan Greenspan: Fed Chairman (1987-2006) Mark Brickell: Managing Director JP Morgan (1994) Henry Cisneros: Secretary of HUD (1993-1997) William Donaldson: SEC Chairman (2003-2005) Richard Fuld, Jr.: CEO of Lehman Brothers (1994-

2008) Ben Bernanke: Current Fed Chairman Henry Paulsen: Current Secretary of the Treasury

The Investment Banking Meltdown Bear Stearns

June 2007: Bailed out Two Highly leveraged CDO Funds.

July 2007: Two of it’s Subprime Hedge Funds lost nearly 100% of their value

March 2008: FRB Loans $29.0 Billion backed solely by certain pledged assets; JP Morgan Purchases Bear Sterns

The Investment Banking Meltdown

July 17, 2008: IndyMac Bank closed by FDIC (largest failed bank to date)


September 7, 2008: Fannie Mae & Freddie Mac Nationalized ($6.0+ Trillion).


Lehman Brothers Born: 1844 Bankruptcy: September 15, 2008 ($600

Billion)


Reserve Primary Fund September 16, 2008: Broke a Buck

($65.0 Billion)


September 16, 2008: AIG (essentially) Nationalized


September 22, 2008: Morgan Stanley and Goldman Sachs become

Bank Holding Companies; increased access to the Fed Window


September 30, 2008: $25.0 Billion in US Loans available to US auto

makers FASB Statement No. 157 reinterpreted IRS revised NOL rules for Bank mergers


October 3, 2008: EESA passes both Houses (includes $700 Billion

for TARPs) FDIC increases deposit insurance


October 14, 2008: 30 Day T-bill rate drops to all time low of 5bp Treasury reserves $250 Billion of TARPs for

investment in banks and other financial institutions


October 21, 2008: Fed commits $540 Billion to buy commercial

paper adding liquidity to money market funds.

The Great Depression

Unemployment: 25%

Stock Market Dropped 90%

First Mortgages in Default 44%

“I would have lost more but that was all the money I had.”

Groucho Marx, 1929

AND THIS TOO SHALL PASS

THE SUBPRIME CRISIS What (the Hell) Happened and Why Presented by: Ken Roberts Foster Pepper, LLP.

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