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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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Page 42009 Calyon Securities (USA) Inc.
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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Page 52009 Calyon Securities (USA) Inc.
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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Page 62009 Calyon Securities (USA) Inc.
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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Page 72009 Calyon Securities (USA) Inc.
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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Page 82009 Calyon Securities (USA) Inc.
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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Page 92009 Calyon Securities (USA) Inc.
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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Page 102009 Calyon Securities (USA) Inc.
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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Page 112009 Calyon Securities (USA) Inc.
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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Page 122009 Calyon Securities (USA) Inc.
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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Page 132009 Calyon Securities (USA) Inc.
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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Page 142009 Calyon Securities (USA) Inc.
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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Page 152009 Calyon Securities (USA) Inc.
The Solution Partly a function of ABC
A for Accounting
B for Bankruptcy
C for Capital
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