Post on 05-Jan-2016
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Introduction to the Credit Crisis
Louie CastoriaWilson Elser San Francisco
Wilson Elser Moskowitz Edelman & Dicker LLP
The Credit Crisis
What’s a dollar worth?
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How do we know there is one?
What’s a dollar worth?
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Cost in U.S. Dollars to Buy a Euro
The Credit Crisis
What’s your house worth?
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How do we know there is one?
The Credit Crisis
How are financial sector stocks doing?
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How do we know there is one?
How are financial sector stocks doing?
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XLF Financial Select Sector SPDR ETF
DJIA
XLF
The Credit Crisis
How have international financial institutions been hit?
Credit Suisse$2
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Royal Bank of Scotland$2.6
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
IKB$2.6
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Barclay’s$2.6
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Bayern$3.2
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Bank of America$5.3
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Deutsche Bank$7.1
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Morgan Stanley$9.4
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
HSBC$17.2
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Citigroup$21.1
Billion
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How do we know there is one?
The Credit Crisis
How have international financial institutions been hit?
Merrill Lynch$22
Billion
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How do we know there is one?
The Credit Crisis
THE BIGGEST LOSER (so far):
UBS
$37.4 Billion
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How do we know there is one?
The Credit Crisis
By ignoring the fundamentals• Lender discipline• Borrower ability to pay• Loan servicing standards• Fiscal Responsibility
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How’d We Get Here?
The Credit Crisis
The same way we always doSome trips down memory lane…• 1986 Tax Reform Act• Savings & Loan• “Irrational Exuberance” in Tech
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How’d We Get Here?
The Credit Crisis
1986 Tax Reform Act• Took away the tax benefits in existing real
estate limited partnerships• Led to thousands of investor lawsuits, a drop
in the real estate market, and . . .
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How’d We Get Here?
The Credit Crisis
Savings & Loan• $160 Billion impact• $124.6 Billion paid by US
Government• Cut in half the number of new
home starts from 1986-1991
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How’d We Get Here?
The Credit Crisis
The Tech MeltdownMarch 2000 to March 2002
NASDAQ fell from 5,048 to 1,800, a 64% drop.
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How’d We Get Here?
The Tech Meltdown
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01/01/1998 01/03/2003
What is “Subprime?”
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Terminology “Collateralized Debt Obligations”
A type of asset-backed security, constructed from a portfolio of fixed-income assets. The assets are classified in three levels or “tranches”: AAA-rated (or “senior”), AA to BB-rated (or “mezzanine”), and Unrated (or “equity”).
CDOsOr “Goldibucks and the Three
Tranches”
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Terminology “Special Purpose Vehicles”
A CDO starts with the creation of a “Special Purpose Vehicle.” The SPV is typically an offshore Trust, and so a law firm is involved in its creation. It also needs a Trustee (often a bank) and an accounting firm.
SPVs
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Terminology “Tranches” of bonds
The SPV issues three kinds of bonds and equity securities:
• AAA-rated bonds (“senior” - paid first)
• Lower-rated bonds (“mezzanine” paid after senior)
• Unrated bonds (“equity” – you’re kidding, right?)
Senior, Mezzanine and Equity
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Terminology A CDO needs an
“underwriter,” to select the debtor-equity ratio, design the tranches, and set the prices on the coupons for investors in the equity notes. The underwriter is typically an investment bank.
Underwriter
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Terminology A CDO needs an “asset
manager” to select the initial assets of the CDO and continually manage them throughout its life.
Asset Manager
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TerminologySPV -issued bonds are rated
by rating agencies. Those agencies opinions can be the basis on which investors buy the three tranches of bonds.
Rating Agencies
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By the end of 2006, CDOs issued globally were estimated at
$2 TRILLIONThat’s $2,000,000,000,000
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Whose ox might be gored?
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Cast
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Cast
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Navigant Study of Federal Court Subprime Lawsuits filed in 2007
278 total
• Borrower class actions – 43%• Securities cases – 27%• Commercial contract disputes – 22%• Employment class actions – 9%• Bankruptcy and other – 4%
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Thank you for your interest.