U.S. Subprime Mortgage Market Meltdown

Transcription

1 U.S. Subprime Mortgage Market Meltdown James R. Barth Auburn University and Milken Institute 14 th Dubrovnik Economic Conference The Croatian National Bank Dubrovnik, Croatia June 25 28, 2008

2 Any real-estate investment is a good investment

3 Any real-estate investment is a good investment NOT!

4 Homeownership Rate Reaches Historic High in 2004 Percent % in September % in March Source: U.S. Census Bureau.

5 Index, January 1987 = Home Prices Peak in California median home price S&P/Case-Shiller home price index OFHEO conventional and conforming home price index Sources: U.S. Office of Federal Housing Enterprise Oversight (OFEHO), Standard & Poor's, California Association of Realtors, Moody's Economy.com.

6 Home Price Appreciation Peaks in 2005 House-price indices, % change on a year earlier OFHEO S&P/Case- Shiller national S&P/Case- Shiller 10 city

7 A Longer-Term Perspective on Home Prices 1890= Current Boom World War I Great Depression World War II 1970 s Boom 1980 s Boom Source: Robert J. Shiller, 2006.

8 History Repeats Itself: Home Prices Don t Just Go Up Change in Home Prices in 100 plus years Percentage change, year ago 40% World War I Great World Depression War II 1970 s Boom 1980 s Boom Current Boom 30% 20% 10% 0% -10% -20% Source: Robert J. Shiller, 2006.

9 4.8 Homes for Sale Take Off Millions Millions Existing homes (Left axis) New homes (Right axis) Source: U.S. Census Bureau.

10 Single-family Home Sales Reach New High Before Plunging Millions, SAAR 6.5 Millions, SAAR New homes (Right axis) Existing homes (Left axis) Sources: U.S. Census, National Association of Realtors, Moody s Economy.com.

11 Existing Home Sales Are Down Everywhere Over the Past Two Years Percent change in existing home sales Fourth-quarter 2005 through fourth-quarter 2007 Source: Freddie Mac. Existing home sales nationwide down 29%

12 Median Existing Single-family Home Price: Too Good to Last Percent change, year ago Sources: National Association of Realtors, Moody s Economy.com.

13 Forty-six States Had Falling Prices in the Fourth Quarter 2007 United States: - 9.3% (fourth-quarter annualized growth) Source: Freddie Mac.

14 Percent change, year ago 40 Single-family Housing Starts Sources: U.S. Census Bureau, Global Insight.

15 Single-family Building Hit a Record in 2005 But Was 53% Lower Two Years Later Housing starts: Single-family privately owned Thousands, SAAR 2,000 1,800 1,600 1,400 1,200 1, Source: U.S. Census Bureau

16 Homes Sit Longer on the Market Millions Homes available for sale (Left axis) Months Months supply (Right axis) Sources: National Association of Realtors, Moody s Economy.com.

17 Home Prices and Credit Boom Index, January 2000 = Total originations (R) US$ billions 4,500 4,000 3, S&P/Case- Shiller home price index (L) Subprime originations (R) ,000 2,500 2,000 1,500 1,

18 Interest Rates: Too Low Too Long? Fed Funds Rate vs. Rate on Long-term Government Bonds Percent Government bond rate Fed funds rate Sources: Federal Reserve, Global Insight.

19 Mortgage Rates: ARMs Appear Attractive to Many Percent yr fixed yr ARM Sources: Mortgage Banker s Association, Moody s Economy.com.

20 ARM Share of Mortgages Percent Share of all applications Share of all loans Sources: U.S. Federal Housing Finance Board, Freddie Mac, Moody s Economy.com.

21 ARM Share of Mortgages Source: Mortgage Bankers Association Q Q Percent of all loans Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 2007

22 Q ARM Mortgage Share by Loan Type Percent of loan type FHA Prime Subprime Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Mortgage Bankers Association.

23 Prime and Subprime Home Mortgage Originations Year Total Originations (US$ Trillions) Prime Originations Share of Total (%) Subprime Originations Q Source: Inside Mortgage Finance.

24 Mortgage Originations by Product Subprime and Alt A shares quadruple between 2001 and 2006, then fall in % 2.6% 8.0% 8.4% 14.4% 2.7% 13.4% 33.2% 14.4% 4.9% 11.3% 47.3% 19.4% 56.9% 7.9% 20.1% 16.1% 14.3% 2001 $2.2 trillion Source: Inside Mortgage Finance $3.0 trillion Conventional, conforming prime Subprime FHA & VA 2007 $2.4 trillion Jumbo prime Alt-A Home equity loans

25 2/28 ARMs Dominate Subprime Home-purchase Loan Originations in 2006 Fixed 9% Other ARM Other ARM 4% 30Yr ARM Balloon W/ 2-year & 3-year Yr hybrids Amtz 26% 61% Other ARM 23% Fixed 31% ARM hybrids 46% Other ARM 7% ARM Hybrids 23% Fixed 70% Subprime Alt-A Prime conventional Source: Freddie Mac.

26 Subprime Mortgage Loans Outstanding US$ billions 1,400 1,200 1, Source: Inside Mortgage Finance , , Q 895

27 Distribution of Prime and Subprime Residential Mortgage Originations by FICO Score (2006) Percent of Total Originations 16% 14% Subprime Prime 12% 10% 8% 6% 4% 2% 0% FICO Score

28 National Distribution of FICO Scores Percentage of Population up to

29 Origin of Securitization But I don t know any other word to describe what we are doing. You will have to use it (securitization). Lewis Ranieri The Origins of Securitization, Sources of Its Growth, and Its Future Potential, A Primer on Securitization

30 Surge in Amount and Diversity of U.S. Asset-backed Securities Outstanding US$ trillions Other Student Loans Home Equity Credit Card Automobile Non-agency MBS Agency CMO Agency MBS Source: Securities Industry and Financial Markets Association.

31 U.S. Asset-backed Securities Outstanding 1999, Total = US$4,235 Billions 2007, Total = US$9,682 Billions Student Loans 1% Home Equity 3% Credit Card 6% Automobile 3% Non-agency MBS 9% Agency CMO 16% Other 8% Agency MBS 54% Student Loans 3% Home Equity 6% Credit Card 4% Automobile 2% Non-agency MBS 14% Agency CMO 14% Other 11% Agency MBS 46% Source: Securities Industry and Financial Markets Association.

32 Home Mortgage Security Issuance 1985, Total = $110 Billion 2006, Total = $2.1 Trillion 2007, Total = $1.9 Trillion FNMA 21% Non- Agency 2% GNMA 42% GNMA 4% FHLMC 18% Non- Agency 38% GNMA 5% FHLMC 24% Non- Agency 56% FNMA 22% FHLMC 35% FNMA 33%

33 Outstanding Home Mortgage Securities 1986, Total = $548 Billion 2006, Total = $5.7 Trillion 2007, Total = $6.6 Trillion Non- Agency MBS Fannie 3% Mae MBS 18% Non- Agency MBS 32% Ginnie Mae MBS 48% Ginnie Mae MBS 7% Freddie Mac PCs 26% Non- Agency MBS 32% Ginnie Mae MBS 7% Freddie Mac PCs 26% Freddie Mac PCs 31% Fannie Mae MBS 35% Fannie Mae MBS 35%

34 Private-label Mortgage-backed Security Issuance Has Fallen Sharply Dollar amount of Issuance, US$ billions 200 Subprime & other Alt-A Prime Jumbo Freddie Mac & Fannie Mae March 2007 $191 Billion June 2007 $181 Billion Sep $137 Billion Dec $109 Billion April 2008 $102 Billion Source: Inside Mortgage Finance.

35 Origination Shares of Mortgage Brokers Account for Majority of Home Mortgage Originations 1987 Number of mortgage brokers: 7,000 Brokers 20% 2006 Number of mortgage brokers: 53,000 Others 42% Brokers 58% Others 80% Source: Wholesale Access.

36 Monoline Insurers Financial Guarantees of Securities Increase, But What Happens If They Cannot Be Honored? Net Par Outstanding = $3.5 Trillion December 2006 Structured Finance, $2.2 Trillion, 62% Public Finance, $1.3 Trillion, 38% 11% 19% 19% 6% 45% Mortgage-Backed Securities: U.S. Other Asset- Backed Securities: U.S. Mortgage-Backed Securities: International Other Asset- Backed Securities: International Other 28% 34% 8% 15% 15% General Obligation Utility Revenue Tax-Backed Revenue Transportation Revenue Other

37 Securitization: Originate to Distribute vs. Originate to Hold 100% 80% 60% Other Government-Sponsored Enterprises and Agencies Non-Agency Issuers 40% Saving Institutions 20% Commercial Banks 0%

38 S&P 500 Index 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1, Q4 Dec. 06: Ownit Mortgage, a subprime lender, files for bankruptcy Feb. 07: HSBC says it set aside $10.6 billion for bad loans, incl. subprime Subprime Crisis Overview December 2006 March 2008 Apr. 07: New Century, a mortgage broker, files for bankruptcy Jul. 07: Two Bear Stearns hedge funds file for bankruptcy Aug. 07: Fed cuts discount rate to 5.75% Jan. 11, 08: BofA agrees to buy Countrywide Oct. 07: Merrill announces $7.9b in subprime writedowns, surpassing Citi s $6.5 billion Jan. 30, 08: Fed cuts discount rate to 3.5% 2007 Q Q Q Q4 Mar. 11, 08: Fed offers troubled banks as much as $200 billion Mar. 16, 08: JP Morgan offers to buy Bear Stearns Mar. 18, 08: Fed cuts discount rate to 2.4%; Fed funds rate to 2.25% 2008 Q1 Sources: BusinessWeek (March 31, 2008), Standard & Poor s and Global Insight.

39 Ratio of Median Home Price to Median Household Income Surges Median Home Price/Median Household Income '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06

40 Home Mortgage Share of Household Liabilities Reaches a New High in 2007 Percent Source: Federal Reserve.

41 75 Leverage of U.S. Households has Increased Rapidly Since 1980 Home mortgage debts as % of disposable personal income Percent Sources: Federal Reserve and Moody s.

42 Sixty-day plus Home Mortgage Delinquency Rates Are on the Rise 25% 20% Subprime 15% 10% Alt-A A 5% Jumbo prime 0% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Sources: First American Corelogic and LoanPerformance databases.

43 Subprime ARM Defaults Are 12 Times Those for Prime Delinquent or In Foreclosure (Percent of Number) Subprime ARM, Subprime FRM, FHA & VA, Prime, 2.08 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 2007

44 Subprime Loans Accounted for Over Half of Foreclosures Since 2006 Number of foreclosures started (Annualized rate in thousands) 1,800 Subprime: 13% of 1,500 Subprime loans serviced FHA and VA (December) 1,200 Prime (includes Alt-A) 54% % 29% 34% 2003 H2 36% 29% 35% 2004 H1 37% 29% 34% 2004 H2 44% 22% 34% 2005 H1 Source: Mortgage Bankers Association National Delinquency Survey (data as of December 2007, number expanded to reflect 85% coverage). 47% 20% 33% 2005 H2 52% 17% 31% 2006 H1 55% 13% 32% 2006 H2 56% 11% 33% 2007 H1 9% 37% 2007 H2

45 Percent Change in Delinquency Rate of Subprime ARM Loans Between 2005Q2 and 2007Q2 Sources: Mortgage Bankers Association, Milken Institute. Less than 60% 60%-110% 110%-180% More than 180%

46 National Subprime Foreclosure Rates by Origination Year* Foreclosure Rates in Origination Year and Subsequent Years Origination Year Year to July 2007 Foreclosure Year Originate year st year nd year rd year th year th year th year th year th year 0.24 Total Number of Foreclosures From Origination through September , , , , , , , ,278 13,272 Total Number of Originations 787, , , ,625 1,143,037 1,716,141 1,925,780 1,368, ,934 Foreclosure Rate through September *Foreclosure rates are based on the number of loans starting foreclosure.

47 California Subprime Foreclosure Rates by Origination Year* Foreclosure Rates in Origination Year and Subsequent Years Origination Year Year to July 2007 Foreclosure Year Originate year st year nd year rd year th year th year th year th year th year 0.03 Total Number of Foreclosures From Origination through September ,160 8,389 9,528 9,137 8,944 16,161 39,198 31,295 2,973 Total Number of Originations 75,224 88,915 99, , , , , ,134 60,871 Foreclosure Rate through September 2007 *Foreclosure rates are based on the number of loans starting foreclosure.

48 Determinants of Delinquency and Foreclosure Rates in CBSAs January 1999 December Days Delinquent 90+ Days Delinquent Variables and In Foreclosure and In Foreclosure In Foreclosure C *** *** *** *** *** *** ARM *** *** *** *** *** *** FICO < *** 1.563* 3.266*** ** 7.767*** 4.017*** LTV > *** *** *** *** *** *** LOWNODOC *** *** 7.628*** *** 9.867*** *** Interaction of All Four Loan Characteristics *** *** *** *** *** *** Population 1.688*** 0.823** 0.949*** Median Family Income Growth *** ** *** Home Price Growth *** *** *** Unemployment 1.340*** 0.719*** 0.613*** Average Loan Size *** *** *** Adjusted R-square Number of Observations Number of CBSAs Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes corebased statistical area. Includes CBSA fixed effects.

49 Determinants of Delinquency and Foreclosure Rates in CBSAs January 1999 December Days Delinquent 90+ Days Delinquent Variables and In Foreclosure and In Foreclosure In Foreclosure C *** *** *** *** *** *** ARM *** *** *** *** *** *** FICO < *** 5.818*** 4.407*** 1.788*** 6.731*** 4.553*** LTV > *** *** *** *** *** *** LOWNODOC *** *** 6.113*** *** 7.556*** *** Interaction of All Four Loan Characteristics *** *** *** *** *** *** Population 2.161*** 1.351*** 0.964*** Median Family Income Growth *** *** *** Home Price Growth *** *** *** Unemployment 1.480*** 0.796*** 0.650*** Average Loan Size *** *** *** Adjusted R-square Number of Observations Number of CBSAs Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes core-based statistical area. Includes CBSA fixed effects.

50 Determinants of Delinquency and Foreclosure Rates in CBSAs January 1999 December Days Delinquent 90+ Days Delinquent Variables and In Foreclosure and In Foreclosure In Foreclosure C *** *** *** *** *** *** ARM *** *** *** *** *** *** FICO < ** 2.051*** 1.617*** LTV > *** *** *** *** *** *** LOWNODOC 3.752*** 9.777*** 1.451* 5.173*** 2.487*** 4.438*** Interaction of All Four Loan Characteristics *** *** *** *** *** *** Population 2.254** 1.346*** 0.877** Median Family Income Growth *** *** *** Home Price Growth *** *** *** Unemployment 1.478*** 0.799*** 0.684*** Average Loan Size *** *** *** Adjusted R-square Number of Observations Number of CBSAs Note: ***, **, and * denote significance at 1, 5, and 10 percent levels, respectively. CBSA denotes core-based statistical area. Includes CBSA fixed effects.

51 The Mortgage Problem in Perspective 80 million houses 25 million are paid off 55 million have mortgages 51 million are paying on-time 4 million are behind (8% of 55 million with 2% in foreclosure) This compares to 50% seriously delinquent in the 1930s Source: U.S. Treasury Department.

52 A A billion here, a billion there, and pretty soon you re talking real money. -- U.S. Senator Everett Dirksen,, 1961

53 A billion^here,, a billion^there, and pretty soon you re talking real money. -- U.S. Senator Everett Dirksen, 1961

54 Estimates of Losses From Subprime Crisis Date 7/19/ /17/ /8/ /15/ /16/ /19/2007 1/31/2008 2/11/2008 3/3/2008 3/3/2008 3/10/2008 3/13/2008 Estimate $ billion $ billion $150 billion $400 billion $400 billion $ billion $120 billion $400 billion $170 billion $600 billion $215 billion $285 billion Source Bernanke testimony before congress William C. Dudley, NY Fed Bernanke testimony before Congress Deutsche Bank Goldman Sachs The Economist Wall Street Journal German finance minister at G7 meeting Wikipedia Geraud Charpin, head of European credit strategy at UBS in London Head of Japan's financial regulator Standard and Poor s

55 Supbrime s Biggest Losers Citigroup UBS Merrill Lynch HSBC IKB Deutsche Royal Bank of Scotland Bank of America Morgan Stanley JPMorgan Chase Credit Suisse Washington Mutual Credit Agricole Deutsche Bank Wachovia Source: Bloomberg. Losses/write-downs through May 27, 2008, US$ billions The collapse of credit markets in the United States, driven by the subprime loan crisis, has led to major losses for banks worldwide.

56 Recent Losses/Write-downs and Capital Raised by Financial Institutions Citigroup, United States UBS, Switzerland Merrill Lynch, United States HSBC, United Kingdom IKB Deutsche, Germany Royal Bank of Scotland, United Kingdom Bank of America, United States Morgan Stanley, United States JPMorgan Stanley, United States Credit Suisse, Switzerland World total (US$ billions) Loss /Writedown Total Capital Raised Q 2008 (through May 27) Loss /Writedown Capital Raised Source: Bloomberg.

57 Financial Stocks Take Big Hits in Subprime Crisis Percentage change in price, December 2006 March % -87% -77% -63% -56% -56% -53% -52% -52% -40% -32% -29% -18% -17% -11% Bear Stearns Countrywide Washington Mutual Freddie Mac Merrill Lynch Fannie Mae Wachovia UBS Lehman Brothers AIG Morgan Stanley Bank of America Wells Fargo Goldman Sachs JP Morgan & Chase Source: Bloomberg.

58 Leverage Ratios of Different Types of Financial Firms 2007 Government-sponsored enterprises 24.7 Brokers and hedge funds 31.6 Credit unions 8.4 Savings institutions 8.4 Commerical banks Source: David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin, 2008 Asset/Capital

59 Too Much Dependence on Debt? Leverage Ratios At Biggest Investment Banks Total assets to total shareholder equity 40 March March Bear Stearns Note: * the latest figure is as of December 2007 Sources: Bloomberg. Morgan Stanley Merrill Lynch Lehman Bros.* Goldman Sachs

60 Banks Depend Less on Debt Leverage Ratios At Bank Holding Companies Total assets to total shareholder equity 21 March 2001 December March Sources: Bloomberg. Citigroup JP Morgan Chase Bank of America

61 What Broke the Cycle? Fraud: by borrowers, brokers, appraisers, lenders. Cracks in most overheated markets (LA, Las Vegas, Miami) quickly spread everywhere. Most highly leveraged vehicles (CLOs) collapsed first Followed by second most leveraged institutions banks (not hedge funds). Difference this time: Primary losers are those who own AAA debt. Downgrades in the Asset-Backed Securities Markets AAA Downgrades In the Asset-Backed Securities Markets 7,000 6, ,000 5,000 4,000 3, , , ,000 1, Source: Moody s Source: Moody s

62 Number 1,400 Most New Securities Were Rated AAA by S&P in ,200 1, ,295 or 45% of new securities rated by S&P were rated AAA in AAA AA A A+ AA- BBB A- BBB AA+ B A1+ B- B+ CCC BB- BB+ B BB CCC C

63 When is a AAA not a AAA? Multilayered structured credit products Mortgage loans Mortgage bonds High-grade structured-finance CDO Senior AAA 88% Junior AAA 5% AA 3% A 2% BBB 1% Unrated 1% AAA 80% AA 11% A 4% BBB 3% BB-unrated 2% Source: International Monetary Fund. Mezzanine structuredfinance CDO Senior AAA 62% Junior AAA 14% AA 8% A 6% BBB 6% Unrated 4% CDO-Squared Senior AAA Junior AAA AA A BBB Unrated 60% 27% 4% 3% 3% 2%

64 Most Texas Banks Were AAA in the 1980s First RepublicBank Corporation

65 Foreclosures in Houston 30,000 20,000 10,000 1,000 Source: Harris County Foreclosure Listing Service

66 Widening Spreads Mortgage-backed and High-yield Bonds Basis point spread above 10-year treasury bond ML BBB Mortgage-Backed Securities Index 800 ML High-Yield Bond Index Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: Bloomberg.

67 Widening Spreads Municipal Bonds Basis point spread over 10-year treasury bond 120 ML municipal master index yield spread Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: Bloomberg.

68 Market for Liquidity Freezes Percent Thirty-Day AA Rated Commercial Paper Rates Asset-backed Commercial Paper Nonfinancial Commercial Paper Financial Commercial Paper 1.5 May 07 Jun 07 Source: Federal Reserve. Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08

69 Thousands 60 Mortgage Loan Fraud Surges Source: Financial Crimes Enforcement Network.

70 Dollar Losses in Reported Cases of Mortgage Fraud US$ Millions 1,200 1,000 1, Source: Federal Bureau of Investigation.

71 Tightened Standards For Real Estate Loans Net percentage of domestic respondents tightening Percent standards for commercial real estate loans 100 The end of S&L crisis Subprime 80 LTCM Dotcom Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Source: Federal Reserve.

72 Despite Federal Funds Rate Cuts, Mortgage Rates Remain Relatively Flat Freddie Mac 30-year fixed mortgage rate Federal funds rate Spread January 2007 June 2007 November 2007 April 2008 Sources: Federal Reserve, Freddie Mac.

73 Is Adequate Information Disclosed to Consumers? Percentage of people in a study who could not correctly identify various loan terms using current mortgage disclosure forms Annual percentage rate: 20 Monthly payment: 21 Loan amount: 51 Existence of prepayment penalty: 68 Total upfront Cost: Percent Source: Los Angeles Times, June 14, 2007.

74 Looking For a Bottom Economists say the economy isn t at its low point yet, and house prices likely won t get there until 2009 Does this feel like the bottom of a downturn? Yes: 27% When will home prices hit bottom? 1 st half 6% nd half 29% 2009 No: 73% 1 st half % 2 nd half % 1 st half % Source: The Wall Street Journal, April 11, 2008.

75 How Far Do Home Prices Have to Fall? Annual rents as % of house prices Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 Source: : The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing, December 2007.

76 History of Credit Disruptions: 1998 Today Recent credit disruption was preceded by 5 years of benign credit market Nov - Aug Q Jul Present Key Causes Russian credit default Long Term Capital Weak credit fundamentals Major corporate defaults and accounting scandals (Enron, WorldCom) Deteriorating housing/subprime market Market de-leveraging Investment Grade Spread Widening 70+ bps 80+ bps bps Key Issues Significant counterpart y risk Corporate scandals and fraud Tremendous supply/demand imbalance Recapitalization of financial institutions

77 What Went Wrong: 1960s 1980s Today 2020s?

78 Enough Blame to Go Around Nonresident speculators Regulators/central bankers Brokers/other intermediaries Rating agencies Institutional investors Home buyers Appraisers

79 $1 Trillion Losses The Nifty Fifty stocks - early 1970s Sovereign debt: 1980s Texas banks/southwest real estate: 1980s Japanese real estate/equities: 1980s-90s Technology: 2000 Housing-related investments:

80 Credit Issues Ratings consistency Real estate price fluctuation Interest rate volatility Sovereign debt risk Leverage Business volatility Liquidity risk Counterparty risk Currency risk Unexpected regulatory requirements Complexity

81 1974: The most important year in financial history since World War II.

82 1974: Interest rates double in one year; highest level in recent recorded U.S. history Regulation restricts lending Energy prices skyrocket U.S. stock market plunges 50%

83 1974: RESULT Companies with the highest returns on capital, fastest rates of market share and employment growth, greatest contributions to technological and new- product innovation were denied access to equity and debt capital.

84 For 1975 through 1976, the return on investment non-investment debt-grade portfolios to investors was 100% unleveraged. Fewer than 1 percent of those companies projected to be candidates for bankruptcies actually defaulted.

85 Index 1,100 1,000 I ll Never Own a Stock Again Dow Jones Industrial Average 1052 on 11 Jan on 6 Dec

86 Index 1,100 1,000 I ll Never Own a Stock Again Dow Jones Industrial Average 1052 on 11 Jan on 6 Dec

87 The $55 Billion Misunderstanding Investing in the Nifty Fifty 12/31/72 12/31/81 90% of the Nifty Fifty showed a negative return over nine years. The average inflation-adjusted rate of return was -46%.

88 The $55 Billion Misunderstanding Investing in the Nifty Fifty 12/31/72 12/31/81 The average P/E ratio of these 16 companies dropped from 66 to 11. Avon ADP Coke Disney Dr. Pepper Kodak H-P J&J Eli Lilly Marriott McDonald s Merck Polaroid Rite-Aid Wal-Mart Xerox

89 Imperial Palace (Tokyo) 1990 US$5.1 trillion Residential Property (California) 1990 US$2.4 trillion

90 Imperial Palace (Tokyo) 2006 US$1.7 trillion Residential Property (California) 2006 US$6.5 trillion

91 Real estate prices collapsed, credit dried up, house building stopped...

92 Real estate prices collapsed, credit dried up, house building stopped... in 1792.