Blecture #1 (Beta)
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Columbia Business School Retrospective (1990-2009): "What On Earth Have We Done to Ourselves?"
"We're Gonna Need a Bigger Boat"
We Need to Teach the Dog to Fish
Who: Stickman and Professor Tomek Piskorski's Real Estate Finance (B8314)
When: Thursday April 2, 2009 (9:00 am - 10:30 am)
Where: Columbia Business School, Uris Hall Room 301
Why: Because
WTF? NEWS
Published Irregularly Weather or Not We Feel Like ItAny Damned Time We Please
Important Dislaimer: In case any reader doesn't quite get it, this is parody protected under the first amendment of the Constitution of United Statements of America. If you don't like the law then feel free to go try and change it. If you are interested in further information on freedom of the press we suggest you start with John Milton's masterful essay "Areopagitica" (1644) http://www.uoregon.edu/~rbear/areopagitica.html
Stickman Comes Out of Retirement; Tiny Tim Still Dead!
Stickman circa1990 @Uris Hall Tiny Tim on Laugh-in
Star Date log entry: Thursday, March 26, 2009 at 01:50AM
Tiptoe thru the Tulips-- The History of Bubbles and Bursts
"Greed is good Buddy boy"
"I helped caused this mess-- I intend to help clean it up"
"Extraordinary Popular Delusions and the Madness of Crowds"by Charles MacKay (1841)
Tulipomania
South Sea Bubble
John Law and the Mississippi Land Scheme
Manias, Panics and Crashes" by Charles Kindleberger
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company.
-Too Big to Fail
Mini-case study: Continental Illinois
Banking Flashback: 1976-1981
Growth in Banking Assets
5-8-3 yield curve
Reg Q/Disintermediation/Inflation
Distress
The Continental Illinois National Bank and Trust Company experienced a fall in its overall asset quality during the early 1980s. Tight money, Mexico's default and plunging oil prices followed a period when the bank had aggressively pursued commercial lending business, Latin American syndicated loan business, and loan participations in the energy sector. Complicating matters further, the bank's funding mix was heavily dependent on large CDs and foreign money markets, which meant its depositors were more risk-averse than average retail depositors in the US.
Payments crisis
The bank held significant participation in highly-speculative oil and gas loans of Oklahoma's Penn Square Bank. When Penn Square failed in July 1982, the Continental's distress became acute, culminating with press rumors of failure and an investor-and-depositor run in early May 1984. In the first week of the run, the Fed permitted the Continental Illinois discount window credits on the order of $3.6 billion. Still in significant distress, the management obtained a further $4.5 billion in credits from a syndicate of money center banks the following week. These measures failed to stop the run, and regulators were confronted with a crisis.
Regulatory crisis
The seventh-largest bank in the nation by deposits would very shortly be unable to meet its obligations. Regulators faced a tough decision about how to resolve the matter. Of the three options available, only two were seriously considered. Even banks much smaller than the Continental were deemed unsuitable for resolution by liquidation, owing to the disruptions this inevitably caused. The normal course would be to seek a purchaser (and indeed press accounts that such a search was underway contributed to Continental depositors' fears in 1984). However, in the tight-money financial climate of the early 1980s, no purchaser was forthcoming.
Besides generic concerns of size, contagion of depositor panic and bank distress, regulators feared the significant disruption of national payment and settlement systems. Of special concern was the wide network of correspondent banks with high percentages of their capital invested in the Continental Illinois. Essentially, the bank was deemed "too big to fail," and the "provide assistance" option was reluctantly taken. The dilemma now became, how to provide assistance without significantly unbalancing the nation's banking system?
Stopping the run
To prevent immediate failure, the Federal Reserve announced categorically that it would meet any liquidity needs the Continental might have, while FDIC gave depositors and general creditors a full guarantee (not subject to the $100,000 FDIC deposit-insurance limit) and provided direct assistance of $2 billion (including participations). Money center banks assembled an additional $5.3 billion unsecured facility pending a resolution and resumption of more-normal business. These measures slowed, but did not stop, the outflow of deposits.
Resolution
The final deal saw FDIC buy $4.5 billion of nonperforming assets, which Continental would manage for them. The bank wrote off $1 billion of this amount, and FDIC infused a like sum via the bank's holding company. FDIC required the dismissal of top management, and acquired a controlling interest.[5]
Chimerica
-Niall Feguson and the G2
Nothing really new but WOW this one is really different!
1979 Inflation rears its ugly head, prime rate breaks into the teens, tops out at 21.5%
1982 Henry Kaufman and the bull market for bonds
1987 October 19th
1991-1995 Real Estate Crisis/S & L Debacle/ Junk Bonds/ Golden Age of Drexel/ Resolution Trust Corporation (RTC)
Commercial Real Estate Actual Loan Losses $50 billion
1998 Long Term Capital Management/ Asian Flu/ Russian Currency Crisis
How did it feel? Oscar Meyer Weiner Realty Roast
2001 Dot Com Bubble Bursts; Age of Greenspan; "Irrational Exuberance"
"Never Short the Fed"
2004-2007 Every Credit has some level of AAA
64,000 AAA Rated Securities
8 (oops) 7 (oops) 6 AAA-Rated Corporate Credits
Currently, only six US corporations hold a AAA credit rating from S & P (as of 2/26):
Automatic Data Processing
Exxon Mobil
General Electric
Johnson & Johnson
Pfizer Inc
Microsoft
Welcome to the AAA Graveyard
GE (just downgraded)
Berkshire Hathaway (just downgraded)
Cash-on-Hand Litmus Test: "Cash is King"
Exxon Mobil - Total Cash: $32.007 Billion
Cisco Systems - Total Cash: $29.531 Billion
Apple - Total Cash: $25.647 Billion
Berkshire Hathaway - Total Cash: $25.539 Billion
Pfizer Inc - Total Cash: $23.731 Billion
Toyota Motor- Total Cash:$23.151 Billion
Microsoft -Total Cash: $20.298 Billion
Google - Total Cash: $15.846 Billion
Royal Dutch Shell - Total Cash: $15.188 Billion
Wyeth - Total Cash: $14.54 Billion
IBM -Total Cash: $12.907 Billion
Johnson & Johnson - Total Cash: $12.809 Billion
Intel-Total Cash: $11.843 Billion
Hewlett Packard - Total Cash: $11.255 Billion
Oracle- Total Cash: $10.646 Billion
2007/8 Subprime starts a nuclear reaction
How a $500 billion problem (okay call it a trillion) turned into a $100 trillion meltdown
Fannie and Freddie
The Madoff Ponzi Scheme
Evisceration of Trust
The problem with the rating agencies
2009 Commercial Real Estate Outlook
1990's versus 2009 Bad Assets versus Bad Liabilities
Financial Crisis Has Created an Economic Crisis
Not whether banks will lend again but rather on what terms:
-Advance rates
-Low rates, lowe values, excess cashflow- pigs at the trough
-Senior/junior/equity food fight
Shut down of Securitization market
Will TARP/TALF/PeePips do anything
Credit Losses versus liquidity losses
Diminishing cash flow versus maturity risk:
What do you do when the music stops
Deleveraging- Car going 80 mph gets thrown into reverse the laws of physics take over
Need for Speed Bumps
Too Big to Fail or Too Big to Succeed? A Doctrinal Re-assessment
The Art of Toast Making
Mark-to-market accounting
FAS 157
SIVs and off-balance sheet exposure
Margin Calls
Sub-prime
CDO/CDO Squared/Synthetic CDOs and other Financial Exotica
Credit Default Swaps $62 Trillion Omelette
Bear Stearns Yes-- Lehman No-- AIG Yes
TARP, Pee-Pips and other financial follies?
Asset Liability Mismatch
Single election remedy problem: LIAR Loans and NINJA Loans
Rules of Engagement Crisis Management (denial/paralysis/acceptance/resolution) Share the pain equitably and fairly
Nouriel Roubini (insolvency regime) NB read www.rgemonitor.com
George Soros (massive anti-biotics for non-correlative derivatives)
John Paulson (the other Paulson) "laughing all the way to the bank"
The summer share: Infinite ability to misjudge people
GM: Tough Love from the CEO-in-Chief
Pre-pack City
AIG Bonus Problem
Tyrrany of the Majority: 90% tax on bonuses
Federalist 10
de Tocqueville
Solutions: Anybody got any good ideas?
Innovation and Entrepreneurship
Shakespeare: First thing we do is kill all the Lawyers
Other tools: fraudulent conveyance/ unjust enrichment/impossibility of performance/ ultra vires
Change mark-to-market/ FAS 157
Mark to Model
The Markets Are Dysfunctional
Prohibit/disaffirm all/some non-correlative hedging credit and speculative derivatives
Eliminate the Information Discount
Will Geitner make it?
Whose in Charge?
Rebuilding Trust
Rebuild confidence
Never let a good crisis go to waste
The $17 trillion question
Premier Wen: You gonna pay me back Obama?
We're gonna need a bigger boat!
Turning an Ocean Liner in the harbor -- David Gergen
Moment of great fortunes; change in sensibilities
Financial values versus ethical values
Capitalism at a crossroad
New Global Currency
The Dollar, the Zeitgeit and the Shark
Petro-currency
Gold: To Russia with Love
The Theory of Negative Interest Rates
How to Create 10 million Jobs
The bottom billion
Conclusions
"We're gonna need a bigger boat"
"We gotta teach the dog to fish"
Location, Location, Location (very 80s)
Timing, Timing, Timing (very 90s)
Confidence, Confidence, Confidence (timeless)
