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 Inquiry
Commission are solely my own and do not necessarily reflect the views of my employer or any other institution or person I
am currently affiliated with or have been in the past.
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

©2009 Calyon Securities (USA) Inc.

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1) Excessive Loan Growth
Loan vs GDP growth in the 2000’s

12%

10%

Securitization (Est.)
8%

6%

4% Loans

2%

0%
GDP Growth Loan Growth

Source: FDIC - All banks, Pre-Crisis

©2009 Calyon Securities (USA) Inc.

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2) Higher Yielding Assets
Shift to higher-yielding, higher loss-rate consumer and commercial real estate loans
2008 1992 1984 1974 1942
Loan 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% nil
Credit Card 6% 7% 4% 2% nil
Other Consumer 9% 12% 14% 18% 12%
Other 13% 15% 21% 16% 25%

Source: FDIC - All banks

Growth in securities holdings

70%
62%
US Treasuries
60%
MBS

50%
40%
40%

30%
32%
20%

10%
2%
0%
1992 19 94 1996 19 98 2000 2002 2004 2 006 2008

Source: FDIC – All banks

©2009 Calyon Securities (USA) Inc.

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 3) Concentration of Assets

Real estate was the largest area of growth

Compound Annual Growth in Loans (2000s)

Leases

Agriculture

Commercial and Industrial

All Other Consumer

Farmland

Credit Cards

Total Loans

Foreign Office Real Estate

Commercial Real Estate

HIGHEST
1-4 Family Real Estate
GROWTH
Commercial Real Estate Multifamily

Commercial Real Estate Construction and Development

Home Equity

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

©2009 Calyon Securities (USA) Inc. Source: FDIC - All Banks

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4) Balance Sheet Leverage
Leverage increased
15 x
Banks
14 x

13 x

12 x

11 x
Tang assets/(Tang equity + reserves)

10 x
19 93 199 5 1997 1 999 20 01 200 3 2005 2 007

Source: FDIC - All Banks

Securities Industry
40x

35x
Assets/Total Equity
30x

25x

20x

15x

10x
1980s 1990s 2000s

©2009 Calyon Securities (USA) Inc. Source: SIFMA Balance Sheet

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5) More Exotic Securities
Fees are a larger percentage of revenues

Fees as % of Revenues

45 %

40 %

35 %

30 %

25 %

20 %

15 %
1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006
Source: FDIC -All Banks

©2009 Calyon Securities (USA) Inc.

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6) Consumer Debt - Highest in History
Household debt at record levels

Household Debt-to-GDP
120%

100%

80%

60%

40%

20%

0%
48

54

60

66

72

78

84
87

96
99
02
05
08
90
45

51

57

63

69

75

81

93
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Source: Federal Reserve, Bureau of Economic Analysis

©2009 Calyon Securities (USA) Inc.

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7) Accountants Aided

Reserves to Loans

2.0%

1.8%

1.6%

1.4%

1.2%

1.0%
1998 2000 2002 2004 2006
Source: FDIC – All banks

©2009 Calyon Securities (USA) Inc.

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8) Regulators Aided

Annual FDIC Insurance Fee

25 (bps)

20

15

10

0
1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Note: Per $100 of deposits

Source: FDIC

©2009 Calyon Securities (USA) Inc.

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9) Government Facilitated
GSE debt increased over 6 times in 2 decades

$3.5
$3.1
$3.0

$2.5

$2.0
$Trillion
$1.5

$1.0

$0.5
$0.5

$0.0
1990 2009_Q3

Source: Federal Reserve, Flow of Funds

©2009 Calyon Securities (USA) Inc.

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10) Incentives Misaligned

45%
Compensation/(Revenue less loan losses)

40%

35%

30%

25%
Compensation/Revenue

20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: Loan Losses = Provision for Loan Losses

Source: FDIC All Banks

©2009 Calyon Securities (USA) Inc.
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Industry on Steroids
Performance enhanced by excessive…
Loan growth
Loan risk
Securities yields
Bank leverage
Consumer leverage

Excesses conducted by…

Bankers
Accountants
Regulators
Government
Consumers

Side effects ignored…

Little financial incentive to slow down
Ignored long-term risks
©2009 Calyon Securities (USA) Inc.
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The Solution – Partly a function of “ABC”

“A” for Accounting

“B” for Bankruptcy

“C” for Capital

©2009 Calyon Securities (USA) Inc.

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