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2
Japan Then vs. The US Now
Focus on less-known factors
Private decisions made by corporate treasuries
When losses became obvious versus when they were
recognized in financial statements
Accounting issues that have affected both crises
What prevented Japanese banks from returning to
profitability
Using Japan as a metric, how far along is the US?
3
Methodology
Interview treasury managers, including outside of
Tokyo:
Sapporo – Hokkaido Takushoku Bank
Kobe – Hyogo Bank
Osaka – Kizu Credit Cooperative
Aggregate data from print resources, private Japanese
data sources, other researchers, etc.
4
Stages of the Crisis
How should we look at the natural progression of
credit-driven recessions in major economies?
Speculative financial products grow
Recognition of first losses
First wave of credit impairment write-downs
Regulatory actions begin
Worst stages of crisis
Regulations tighten
… but then what?
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Banks at Risk
Table 2. Implications of Bank Stress Test: Ability to Issue Capital and Pay Back TARP Funds
How should the US (balances in billions, data as of May 12, 2009 and adjusted for recent capital actions)
Ability to be well-capitalized without government
assistance Ability to issue debt
TARP capital?
Regions 3.6 3.9 110.3 A+
Fifth Third 3.5 4.6 96.5 A-
Bank of America 45.4 65.0 83.5 A 188
PNC 7.8 7.7 39.2 AA-
= May be unable to raise sufficient capital or issue long-term debt without FDIC assistance.
122
1
Initial investment amount plus value of warrants to purchase common stock, when possible based on
Congressional Oversight Panel, Assessing Treasury’s Strategy: Six Months of TARP, April 2009.
2
Estimate based on Supervisory Capital Assessment Program required capital buffer and TARP receipts.
3
Simple average of applicable Moody's, Standard & Poors and Fitch long-term unsecured debt ratings.
4
GMAC is privately held, therefore market value of equity and financial statements are unavailable.
6
From the late 90s onward, many cash-flow producing assets
were securitized—pooled together, repackaged and sold to
investors. The process made credit more accessible, but greatly
increased systemic risks.
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Early 2000s Lending Environment
In previous downturns, certain areas of housing
suffered
Regional economies (i.e. Texas during the oil shock)
Luxury homes (homeowners “downgraded”)
A low federal funds rate encouraged increased lending
Borrowers had never defaulted en masse
Traditional fixed-rate loans had low rates of return
Home prices had only been going up
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Securitization’s Promises
Reduce regional risk – Pooled together loans from
across the country
Regional economies
Ensure stable demand for borrowers’ homes – Lent to
low-to-middle income borrowers
What could possibly go wrong?
9
The Results
Securities were traded according to correlation, not
based on a loan-by-loan analysis of a borrowers’ credit.
In fact, no buyer of mortgage securities had access to
information on the original loans.
Instead of eliminating regional risk, securitization
created uniformly poor credit standards in many
states, triggering a massive wave of defaults once the
economy slowed.
10
S&P/Case-Shiller Home Price Index
250
200
150
100
50
0
1988 1992 1996 2000 2004 2008
11
The types of assets held by US financial institutions, and the
potential risks going forward.
12
Asset Types Among Major US Banks ($bn)
$1,000
$750
Other
$500 Other Consumer
Credit Card
$250
Home Equity
Residential Mortgage
$-
Construction
Commercial
13
Unsustainable US Banking Profits
Supplemental liquidity programs – Access to pre-trade
order flow that may be banned
Dealing in government bonds – The US may issue over $3
trillion in debt this fiscal year, largely to pay for banking
bailouts. Prime dealers will collect hundreds of millions in
fees.
Mortgage refinancing
Risk absorbed by Fannie Mae and Freddie Mac, which may
require a net $200 billion bailout
Very low mortgage rates mean people who refi now probably
won’t refi again
Coming write-downs in commercial real estate, credit
cards
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Major Obstacles Going Forward
Reputational risk
To stem losses, banks may have to foreclose more
aggressively
In 2008, banks that received TARP money paid out $32.6
billion in bonuses despite losing $81.0 billion. Public
support for programs without immediate results is
limited.
Lack of profitable assets
Fewer businesses and consumers are borrowing
15
Parallels to Japan
Lacking good assets after the bubble collapse, many
Japanese banks invested their deposits in other banks
Despite initial support for some bailout programs,
lawmakers found it harder to address the crisis as it
continued
Low borrowing rates and high government spending
may not be the key to economic growth
16
Some charts based on data from the Federal Reserve and
Bloomberg
17
US Securitization Market Volume ($bn)
Non-mortgage Mortgage
$1,000
$750
$500
$250
$-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
18
US Securitization Market Mix ($bn)
2007 2008
Other Other
Auto
Student loan
Auto
Student loan
Credit card
Home
equity
Residential Residential
mortgage mortgage
Home equity
Credit card
19
Earnings Down 30%
20
Revenues Shrinking for Most
21
Losses Are Actually Accelerating
22
Yet Stock Prices Imply Very High Growth
23
Some pages I’ve created to allow for easier dissemination of
information on Japanese and US banks
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Financial Events Calendar
25
Resources
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Data
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