The Role of Information Failures in the Financial Meltdown

1
The Role of Information Failures in the Financial
Meltdown

• Yale M. BraunsteinSchool of InformationUC
  Berkeley, Summer 2009

2
Introduction

• Disclaimer
• Im not a macro-economics expert, but I do know
  something about the economics of risk and
  uncertainty, and something about markets, market
  failure, and appropriate regulatory response.
• Overview
• A major source of the meltdown in the financial
  markets was the result of information failures
  and any solutions that did not address the
  information needs would not be viewed as anything
  more than holding actions that would eventually
  fail.
• Each of these attempted fixes only made the
  overall situation worse by highlighting what we
  still did not know about the underlying
  valuations of the assets and derivatives at the
  heart of the financial side of the problem.

3
Introduction

• Basic points
• Original view was this was primarily a
  "financial" crisis. Taking that view, the first
  proposed remedy was a bailout of major financial
  institutions with some government entity using
  taxpayer funds to buy securities of unknown value
  from supposedly sophisticated money managers.
• Instead we needed to both understand the scope of
  the problem (not just financial assets) and the
  underlying causes. To start, the focus should
  have been
• to resolve the information problems to help
  evaluate the suspect securities
• to assist in the renegotiation of mortgages to
  help keep homeowners in their houses.

4
Outline

• Introduction
• Background on Banking
• Background on Mortgages
• Background on Derivatives
• Background on Insurance
• Background on Ratings Agencies
• Bailout measures that did not work (and why)
• Proposed measures that probably will not work
• Summary/Conclusions
• Other topics(?)
• Stimulus
• Auto industry
• Education

5
Background on Banking (Banks, Near-banks, etc.)

• Banks and other financial institutions used to
  hold assetssome cash, real estate, securities,
  and the loans they made to their customers.
• Some still do, butfor the most partthey now are
  in the business of earning fees for originating
  loans, buying and selling obligations of one sort
  or another, etc.
• On the other side of the ledger, the liabilities
  of the financial institutions are the sums they
  owe othersthe depositors in commercial banks and
  SLs, and frequently the deposits of other
  institutions as well as government agencies.
• The basic principle of banking was to know the
  value of ones assets and liabilities, accurately
  disclosing this to regulators and the public.

6
Background on Banking -- Changes in the Industry

• As the business of banking became more fee-based,
  the functions of loan origination, loan
  processing, and asset management became more
  separable.
• Home buyers no longer dealt with a local bank
  that would be expected to hold and process their
  loan into the future. Banks provided consumer
  credit, via credit cards, homeowners lines of
  credit, and so on, but again often did not hold
  onto the asset.
• So long as the packaging and re-packaging of
  these assets (loans) into financial instruments
  was done in a transparent fashion, the result was
  mostly positive.

7
Background on Banking Changes in the Industry

• The major loss from this change was the lack of a
  personal relationship with ones banker, who
  was frequently a respected member of the local
  community.
• There were gains in this system as loanable funds
  could more easily flow to growing regions and
  industries, and the entry of non-bank financial
  institutions into some parts of the market
  provided competition that reduced costs and
  eliminated pockets of discrimination.
• Near banks and non-bank banks became common,
  and regulation was lax.

8
Background on Mortgages

• An old-fashion fixed-rate mortgage was typically
• 30-year loan on a single-family, owner-occupied,
  primary residence
• For a fixed annual percentage rate
• Held by the lender (traditionally a local bank or
  SL)
• and therefore had reasonable fees (points)

9
Background on Mortgages

• Remember that banking became more fee-based, so
  lender and loan processor were not always the
  same entity.
• Specialized lenders emerged (e.g., Countrywide)
• Two channels for loan origination
• Lenders sales organizations
• Mortgage brokers

10
Mortgages mortgage packages became more complex

• Even simple variable rate mortgages (ARMs)
  require one to understand
• Basis for the rate (the index)
• The margin (mortgage rate index rate)
• When it can be reset
• Caps
• Negative amortization possibilities
• In 2004, then FRB Chair Greenspan argued that
  ARMs were under-utilized and the reliance on
  traditional fixed rate loans was costing home
  buyers money. While the second part was
  technically correct, it ignored the increased
  risk to both borrowers and society of an
  increased reliance on variable-rate products.
  (Speech to the Credit Union National Association,
  February 23, 2004) .

11
Mortgages mortgage packages became more complex

• And then there were even more complex versions
• GPARMs (Gip-ims)
• Hybrid ARMs, interest-only ARMs, payment-option
  ARMs, etc.
• Consider the result of a complex, no-doc mortgage
  on a home with an inflated appraisal. The
  outcome is that the underlying value of the
  property is unknown, the credit-worthiness of the
  borrower is unknown, and the precise terms of the
  loan and the stream of payments are also unknown.
  This is the exact opposite of how a reasonable
  credit market should operate.

12
Mortgages What is the extent of the problem?

• Current mortgage delinquency rates (July 2009)
• 6.8 of non-agency prime mortgages
• 21 of Alt-A mortgages
• 40 of sub-prime mortgages

Source Fitch Ratings, as reported in Brett
Arends, Should You Invest In Toxic Assets?,
WSJ, July 29, 2009
13
Pay-option ARMs at Countrywide (1)

• Both Mozilo and Sambol were aware as early as
  June 2006 that a significant percentage of
  borrowers who were taking out stated income loans
  were engaged in mortgage fraud. On June 1, 2006,
  Mozilo advised Sambol in an email that he had
  become aware that the Pay-Option ARM portfolio
  was largely underwritten on a reduced
  documentation basis and that there was evidence
  that borrowers were lying about their income in
  the application process. On June 2, 2006, Sambol
  received an email reporting on the results of a
  quality control audit at Countrywide Bank that
  showed that 50 of the stated income loans
  audited by the bank showed a variance in income
  from the borrowers IRS filings of greater than
  10. Of those, 69 had an income variance of
  greater than 50. These material facts were never
  disclosed to investors.
• SEC Complaint, SEC v. Mozilo, Sambol Sieracki,
  CV09-03994, filed June 4, 2009

14
Pay-option ARMs at Countrywide (2)

• On June 1, 2006, one day after he gave a speech
  publicly praising Pay-Option ARMs, Mozilo sent an
  email to Sambol and other executives, in which he
  expressed concern that the majority of the
  Pay-Option ARM loans were originated based upon
  stated income, and that there was evidence of
  borrowers misrepresenting their income.
• Mozilo met with Sambol the morning of September
  25, 2006 to discuss the Pay-Option ARM loan
  portfolio. The next day Mozilo sent an e-mail to
  Sambol and Sieracki expressing even greater
  concern about the portfolio. In that e-mail,
  Mozilo wrote we have no way, with any
  reasonable certainty, to assess the real risk of
  holding these loans on our balance sheet. ... The
  bottom line is that we are flying blind on how
  these loans will perform in a stressed
  environment of higher unemployment, reduced
  values and slowing home sales.
• SEC Complaint, SEC v. Mozilo, Sambol Sieracki,
  CV09-03994, filed June 4, 2009

15
The Placid Mortgage case (from John Grishams The
Associate)

• Starting in 2001, when a new wave of government
  regulators took over and adopted a less intrusive
  attitude, Placid and other huge home mortgage
  companies became aggressive in their pursuit of
  new loans. They advertised heavily, especially on
  the Internet, and convinced millions of lower-
  and middle-class Americans they could indeed
  afford to buy homes that they actually could not
  afford. The bait was the old adjustable-rate
  mortgages, and in the hands of crooks like Placid
  it was adjusted in ways never before imagined.
  Placid sucked them in, went light on the
  paperwork, collected nice fees up front, then
  sold the crap in the secondary markets. (pp.
  152-153)

16
Packaging Mortgages

• Secondary markets Packages of loans had been
  sold to investors for years (e.g. via GNMA)
• Computerization made it even easier to track
  these.
• But it also made it easier for the packages to
  become more complex.

GNMA PL042341X DTD 07/01/1980 R/MD 12.50
06/15/2010 105.00 (5/26/09) N/A N/A 25,000
17
Background on Derivatives

• Derivatives can be economically useful
• Provide flexibility to buyers/sellers
  (lenders/borrowers)
• Their value depends on the value of the
  underlying assets (claims)
• But the asset values themselves can be uncertain
  (hence there is risk)
• Derivatives can range from relatively simple to
  incredibly complex
• Therefore, derivatives can be good or bad
  depending on the circumstances
• Linkage to underlying assets STRIPS GNMA
  obligations are very direct (so much so that some
  do not consider them to be derivatives).
• I probably should refrain from making simplistic
  value judgments, but I wont. But there are a
  number of unstated caveats and qualifications to
  much of what follows.
• Im not the only one using this terminology bad
  assets, bad bank, etc.

18
A Good Derivative

• First, a relatively simple example with little or
  no risk STRIPS
• STRIPS is the acronym for Separate Trading of
  Registered Interest and Principal of Securities.
• STRIPS let investors hold and trade the
  individual interest and principal components of
  eligible Treasury notes and bonds as separate
  securities.
• STRIPS are popular with investors who want to
  receive a known payment on a specific future
  date.
• STRIPS are called zero-coupon securities. The
  only time an investor receives a payment from
  STRIPS is at maturity.
• STRIPS are not issued or sold directly to
  investors. STRIPS can be purchased and held only
  through financial institutions and government
  securities brokers and dealers.

Source http//www.treasurydirect.gov/instit/marke
tables/strips/strips.htm
19
More on STRIPS

• In the old days a bond was a combination of
  return of principal and coupons (usually one
  every 6 months)

• Now they are all electronic entries

20
More on STRIPS

• A financial intermediary (bank, brokerage house,
  etc.) would combine various coupons from a number
  of bonds so that an investor could find the
  maturity and rate of return desired independent
  of what the borrower had originally offered.
• It was a straight-forward operation to determine
  the value with a computer.
• Also, there was no physical coupon as such,
  just the computer entry.
• The intermediary charged a small fee to record
  and manage the transactions.

21
A Bad Derivative - 1

• Tom Wolfes Giscard (from Bonfire of the
  Vanities, 1987)
• The (fictional) Giscard Bond, issued by the
  French government, had coupons and maturity value
  linked to the French Franc value of a fixed
  weight of gold.
• So as the price of gold when up and down, so did
  the value of the Giscard. (p. 65)
• The only real problem was the complexity of the
  whole thing. (Ibid.)

22
Bad Derivative - 2

• Simply put derivatives are the weapon of choice
  for gaming the system.Derivatives provide a
  means for obtaining a leveraged position without
  explicit financing or capital outlay and for
  taking risk off-balance sheet, where it is not as
  readily observed and monitored.Viewed in an
  uncharitable light derivatives and swaps can be
  thought of as vehicles for gambling they are,
  after all, side bets on the market.
• --Richard Bookstaber, author of A Demon of Our
  Own Design, in congressional testimony.

23
Bad Derivative - 3

• Even when derivatives do allow financial risks
  to be transferred, that is not always a good
  thing. John Kay, a leading Scottish economist,
  noted recently that he used to teach along with
  most other economics professors that
  derivatives allowed risks to be transferred to
  those better able to bear them. But, he added,
  experience had shown that to be wrong. Now, he
  said, he teaches that derivatives allow risk to
  be shifted from those who understand it a little
  to those who do not understand it at all.
• --Floyd Norris, New York Times, June 25, 2009.

24
Uncertain Derivatives -- You decide whether
they are good or bad

• Other examples of derivatives
• Puts, calls, stock options
• SDRs, ECUs (pre-Euro bundles of currencies)
• Commodity futures

25
CMOs Combining Mortgagesand Derivatives

• Collateralized mortgage obligations (CMOs) are
  bonds based on home mortgages with a twist that
  the bonds are categorized into different tranches
  to redistribute the risk of mortgage prepayment
  and mortgage default.
• Tranche is French for slice, and is used in
  finance to refer to one portion of a group of
  related securities.
• More generally, CDO (Debt)

26
CDOs Combining Mortgagesand Derivatives

• Why some CDOs are probably worth ZERO
• Higher yield tranches have higher risk (this
  should not be a big surprise to anyone)

27
CDOs A Special Purpose EntityInitial condition
Assuming 3 tranchesEquity tranche Medium-risk
tranche Low-risk tranche
Assets
Liabilities
Calculation area 8.0 mil -2.5 mil -2.4
mil 3.1mil
10 million _at_ 31
100 mortgages x 1 million each 100
million(say at 8 each)
40 million _at_ 6
50 million _at_ 5
28
The Special Purpose EntityA few years later
Assuming 3 tranchesEquity tranche Medium-risk
tranche(75 recovery) Low-risk tranche(full
recovery)
Assets
Liabilities
Calculation area 50 refinance or pay off
loans 50 foreclosed 60 of that recovered
10 million _at_ 31
20 million(lost)
40 million _at_ 6 gets 30 million
30 million (hopefully cash)
50 million _at_ 5
50 million(cash)
29
So The CDOs are assets on someones (bank,
financial institution) balance sheet and may be
truly worth zero (depending on which tranche they
represent)
Assets
Liabilities
Possibly held by the originating institution
(i.e., not sold to investors)
10 million _at_ 31
20 million
40 million _at_ 6 gets 30 million
30 million
50 million _at_ 5(full recovery)
50 million
30
Background on Insurance

• To prevent insurance from being little more than
  gambling, one needs to have an insurable
  interest
• The cost of insurance is
• (The probability of the loss) x (the expected
  amount of the loss)
• Plus a risk premium
• Possibly plus any transactions costs

31
More on Insurable Interest

• (From an economist who is a fan of murder
  mysteries)
• To prevent (additional) incentives to murder, one
  can not buy a life insurance policy on a
  stranger. You can purchase insurance on a
  relative, a business partner, etc.
• This has been the plot device in a number of
  mysteries (often in the form of a tontine).
• R. L .Stevenson, The Wrong Box
• A. Christie, 450 from Paddington Station
• And, of course most famously, The Simpsons.
• Similar rules for other types of insurance

32
More on Insurable Interest (actually a digression
on the importance of The Simpsons in modern
culture)

• Grampa and Mr. Burns enter into a tontine during
  World War II, involving a treasure of antique
  paintings stolen from a German castle. When the
  two of them become the only surviving members,
  they compete for the rights to the prize.
  Eventually they both lose once the US State
  Department interferes and takes the paintings
  back to the German baron who is the rightful
  owner. (From Wikipedia entry for tontine.)

Season 7, episode 22 "Raging Abe Simpson and His
Grumbling Grandson in The Curse of the Flying
Hellfish. Originally aired April 28, 1996.
33
Insurancethe Good and the Bad

• Again, the good and the bad, but this time
  with the uncertain
• Good Life insurance, car insurance, maritime
  insurance, etc.
• Bad Tontines, bucket shops, sports betting
  (?)
• Uncertain Credit default swaps

34
Bucket shops

• Formally, a bucket shop is a firm that books"
  (i.e., takes the opposite side of) retail
  customer orders without actually having them
  executed on an exchange.
• From the Financial Times
• The bank panic of 1907 is remembered for J.P.
  Morgan forcing all the bankers to stay in a room
  until they agreed to contribute to fixing the
  crisis. What has been forgotten is one major
  cause of the crisis unregulated speculation on
  the prices of securities by people who did not
  own them. These betting parlours, or fake
  exchanges, were called bucket shops because the
  bets were literally placed in buckets. The states
  responded in 1908 by passing anti-bucket shop and
  gambling laws, outlawing the activity that helped
  to ruin that economy. (March 30, 2009)
• These laws were pre-empted by the Commodity
  Futures Modernization Act of 2000.

35
What is a Credit Default Swap?

• A contract between two parties, in which one
  party makes periodic payments, while the other
  agrees to pay a sum of money if a certain event
  occurs. A CDS takes place in the world of
  financial markets, and the "event" that triggers
  the payoff is when a credit instrument, such as a
  bond or loan, goes into default.
• Investors use CDSs primarily for two reasons
• as an insurance vehicle to hedge an investment in
  a company
• as a gambling mechanism to make a profit if the
  company fails.

36
Credit Default Swap valuation

• CDS pricing The spread is an annual amount that
  the buyer must pay to the provider of the CDS
  over the length of the contract, expressed as a
  percentage of the notional amount. This is very
  much like the premium paid in insurance. In
  general, a company with a higher CDS spread is
  considered more likely to default by the market,
  and a higher fee would be charged to protect
  against this happening.
• Other valuation issues the length of the
  contract, the amount of protection, health of
  the issuer (as well as of the covered entity).
• Partial payments (to counter-parties) required
  as underlying conditions change.

37
Credit Default Swap markets

• No organized exchange therefore, no clear
  understanding of amount outstanding.
• Gretchen Morgenson estimated 30 billion
  outstanding in Jan. 2009.
• Some estimate that as much as 90 were not used
  for hedges.
• But there may have been offsets included in this
  estimate.

Source http//www.nytimes.com/2009/01/25/business
/25gret.html
38
Background on Ratings Agencies

• Standard Poors, Moodys Fitch
• If the ratings agencies had done a better job,
  we wouldnt be having this conversation. Larry
  White (NYU), on NPR Planet Money, June 5, 2009.

39
Bailout measures that did not work (and why)

• Banks
• Original plan to take bad assets off the
  booksno credible way to value them
• Preferred stockviewed as just another obligation
• Stress tests
• Odd assumptions about revenue projections, etc.
  (WSJ, May 28, 2009)
• As of June 5, 2009, it appears as though even the
  FDIC does not accept the results.

40
Bailout measures that did not work (and why)

• More on the too big to fail logic
• Size political power (even noticed by the WSJ)
• Congress Helped Banks Defang Key Rule (June 3,
  2009) about mark-to-market and Banks Try to
  Stiff-Arm New Rule (June 4, 2009) off-balance
  sheet accounting
• Secret Sanctions (WSJ, July 17, 2009)
• Bank of America Corp. is operating under a
  secret regulatory sanction that requires it to
  overhaul its board and address perceived problems
  with risk and liquidity management, according to
  people familiar with the situation. Citigroup
  Inc. has been operating since last year under a
  similar order with the Office of the Comptroller
  of the Currency, according to people familiar
  with the matter. The company recently has been
  negotiating with the Federal Deposit Insurance
  Corp. about entering into a similar agreement
  with that agency, these people say. Spokesmen
  for Citigroup and the FDIC declined to comment.

41
Bailout measures that did not work (and why)

• Mortgages
• Refinance plans too small, poorly implemented
• 17,000 loans modified through May 31, 2009 (NPR)
• Some 9 of eligible borrowers have received
  trial modifications under the Obama
  administration's ambitious effort to help
  struggling homeowners, according to data released
  by the Treasury Department on Aug. 4,
  2009.Maya Jackson Randall Jessica Holzer,
  WSJ
• Ignored differing incentives of originators,
  servicers, and holders of loans
• Exacerbated by revision of mark-to-market rule
• (technical digression needed here)

42
Bailout measures that did not work (and why)

• Mortgages
• Confounded by second mortgages and homeowner
  lines of credit (HLOC)
• Second mortgages HLOC are profitable for
  lenders. But they are subordinate to first
  mortgages. If a lender and borrower want to
  re-negotiate a first, they may need the holder of
  the second (or HLOC) to also take a write-down in
  order for the borrower to afford the revised
  first.
• Recognizing this, the book value of the second
  should be reduced, forcing the bank to incur
  additional losses.
• Lesson Mark-to-market rules really do matter.

43
Credit Default Swap markets (1)

• Proposed solutions
• Buyers should take the hit.
• If you live in a house and you dont buy
  reputable insurance and a fire burns it down,
  its your fault.
• Unwind the contracts (inversion)
• Insurance premiums would be refunded to buyers of
  credit protection from the entity that wrote the
  initial contract. And the seller would no longer
  be under any obligation to pay if a default
  occurred. The premium repayments would be made
  over the same period and at the same rate that
  they were paid out. If a contract was struck
  three years ago and charged quarterly premiums,
  the premiums would then be refunded quarterly
  over the next three years.
• Counter argument from an insider Unwinding CDS
  would harm the integrity of financial market.
  Kind of like if I place a bet with a bookie that
  doesn't pay, the bookie can't pick and choose
  after the fact which games he wants to payout on
  and which he wants to cancel. Not without risking
  have customers fleeing.

44
Credit Default Swap markets (2)

• Proposed solutions (continued)
• Use bailout funds to pay counter-parties.
• (Longer-term) Create exchange(s) or
  clearinghouse(s), regulator, reserve
  requirements.
• Worry about the exemptions!

45
Credit Default Swap markets (3)

• CDS what we actually did (difficult to
  document)
• AIG loans at 18 p.a.
• Possible rationales hide transfers to
  counter-parties, especially foreign banks
  institutions prop up insurance subsidiaries
• Bear Stearns guaranteed contracts
• J. P. Morgan ----------------

CW (early July 2009) Actually, these last two
seem to have worked reasonably well, at least
when compared to the AIG bailout. But were they
worth the cost?
CW (late July 2009) The dozens of insurance
companies that make up AIG show signs of
considerable weakness even after their corporate
parent got the biggest bailout in history, a
review of state regulatory filings shows. NY
Times, July 30, 2009
46
Proposed measures that probably will not work
(and why)

• Use Treasury/Fed funds to assist private entities
  to buy troubled assets
• (I guess) the theory is that if one only has to
  put up (say) 5-20 of the purchase price, the
  correct valuation isnt too much of an issue.
• But this leads to its own set of strange
  incentives
• Some banks are prodding the government to let
  them use public money to help buy troubled assets
  from the banks themselves. Banking trade groups
  are lobbying the Federal Deposit Insurance Corp.
  for permission to bid on the same assets that the
  banks would put up for sale as part of the
  government's Public Private Investment Program.
• PPIP was hatched by the Obama administration as a
  way for banks to sell hard-to-value loans and
  securities to private investors, who would get
  financial aid as an enticement to help them
  unclog bank balance sheets. The program, expected
  to start this summer, will get as much as 100
  billion in taxpayer-funded capital. That could
  increase to more than 500 billion in purchasing
  power with participation from private investors
  and FDIC financing. (WSJ, May 27, 2009)

47
What is wrong with letting the banks be both
buyers and sellers of toxic assets?

• Some critics see the proposal as an example of
  banks trying to profit through financial
  engineering at taxpayer expense, because the
  government would subsidize the asset purchases.
• "To allow the government to finance an
  off-balance-sheet maneuver that claims to shift
  risk off the parent firm's books but really
  doesn't offload it is highly problematic," said
  Arthur Levitt, a former Securities and Exchange
  Commission chairman who is an adviser to
  private-equity firm Carlyle Group LLC.
• "The notion of banks doing this is incongruent
  with the original purpose of the PPIP and wrought
  with major conflicts," said Thomas Priore,
  president of ICP Capital.
• One risk is that certain hard-to-value assets
  mightn't be fairly priced if banks are
  essentially negotiating with themselves. Inflated
  prices could result in the government overpaying.
  Recipients of taxpayer-funded capital infusions
  under the Troubled Asset Relief Program also
  could use those funds to buy their own loans.
  (WSJ, May 27, 2009)

48
Proposed measures that probably will not work
(and why)

• CDS or derivatives clearinghouse
• Too many possible exemptions
• Profits for the custom CDS are much higher than
  for the plain vanilla ones
• There are a number of facilitators and
  intermediaries, all of whom make large fees
• Intermediaries will be on the hook and someone
  has to insure and/or regulate them
• ICE Trust (in NYC) wants this business
• CDS contracts are inherently easy to manipulate
• WSJ, June 11, 2009

49
Proposed measures that probably will not work
(and why)

• Create database to help evaluate mortgages and
  ABS
• To deal with the problem, issuers of
  asset-backed securities should provide extensive
  detail in a uniform format about the composition
  of the original pools and their subsequent
  structure and performance, whether they were sold
  as SEC-registered offerings or private
  placements. By creating a centralized database
  with this information, the pricing process for
  the toxic assets becomes possible. Making such a
  database a reality will restart private
  securitization markets and will do more for the
  recovery of the economy than yet another redesign
  of administrative agency structures.(Ken Scott
  John Taylor, WSJ, July 21, 2009)
• Insufficient data are collected on individual
  loans, and often the data are of questionable
  accuracy or timeliness, so the analysis of
  mortgages and other types of loans which have
  been sliced and diced through multiple levels of
  securitization will be subject to substantial
  error. Accordingly, the valuation of such ABS
  will be highly suspect, even if the data reside
  in a centralized databaseRather than using
  securitization to shift individual loans toward
  their funding source, public policy should seek
  to encourage lenders to retain ownership of the
  loans they make.(Bert Ely, WSJ, July 27, 2009)

50
Proposed measures that probably will not work
(and why)

• Current proposal to overhaul financial regulation
• (See earlier slide on political power of
  financial institutions)
• Suspicion of giving the FRB more power
• Treasury Secretary Timothy Geithner blasted top
  U.S. financial regulators in an expletive-laced
  critique last Friday as frustration grows over
  the Obama administration's faltering plan to
  overhaul U.S. financial regulation, according to
  people familiar with the meeting.The proposed
  regulatory revamp is one of President Barack
  Obama's top domestic priorities. But since it was
  unveiled in June, the plan has been criticized by
  the financial-services industry, as well as by
  financial regulators wary of encroachment on
  their turf.Mr. Geithner, without singling out
  officials, raised concerns about regulators who
  questioned the wisdom of giving the Federal
  Reserve more power to oversee the financial
  system. Ms. Schapiro SEC and Ms. Bair FDIC,
  among others, have argued that more authority
  should be shared among a council of regulators.
  WSJ, Aug. 4, 2009
• Need more specific guidance!

51
Summary or Conclusions

• More disclosure needed
• Off balance sheet entries
• Nature of CDS and derivatives
• Property and asset (re)valuations
• Strong mark-to-market rules
• Other options
• Return to traditional banking (at least in part)
• Improved regulatory system
• Systemic regulator

52
Summary or Conclusions

• Certainly confidence is crucial to the open and
  fair operating of markets. Bailouts did not
  build confidence. What confidence is created by
  is a clarity of the problem.
• Interview with Gretchen Morgenson on NPRs Fresh
  Air, June 9, 2009

53
Questions Other topics(?)

• Q A
• Stimulus
• Auto industry
• Education

54
Additional sources

• Our paper (http//people.ischool.berkeley.edu/b
  igyale/financial_crisis.html )
• WSJ
• New York Times (Gretchen Morgenson Floyd Norris
  even Ben Stein)
• Khan Academy sections on Credit Crisis
• Wikipedia (surprisingly good in several areas)
• Planet Money (from NPR)

Thanks to Patrick Riley for graphics editing
support. Official disclaimer The opinions or
statements expressed herein should not be taken
as a position of or endorsement by the University
of California, Berkeley.