Introduction to the Credit Crisis

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Slide 1: Introduction to the Credit Crisis Louie Castoria Wilson Elser San Francisco Wilson Elser Moskowitz Edelman & Dicker LLP Slide 2: The Credit Crisis How do we know there is one? What’s a dollar worth? 2 Slide 3: What’s a dollar worth? Cost in U.S. Dollars to Buy a Euro 3 Slide 4: The Credit Crisis What’s your house worth? How do we know there is one? 4 Slide 5: The Credit Crisis How are financial sector stocks doing? How do we know there is one? 5 Slide 6: How are financial sector stocks doing? XLF Financial Select Sector SPDR ETF DJIA XLF 6 Slide 7: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Credit Suisse $2 Billion 7 Slide 8: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Royal Bank of Scotland $2.6 Billion 8 Slide 9: The Credit Crisis How do we know there is one? How have international financial institutions been hit? IKB $2.6 Billion 9 Slide 10: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Barclay’s $2.6 Billion 10 Slide 11: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Bayern $3.2 Billion 11 Slide 12: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Bank of America $5.3 Billion 12 Slide 13: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Deutsche Bank $7.1 Billion 13 Slide 14: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Morgan Stanley $9.4 Billion 14 Slide 15: The Credit Crisis How do we know there is one? How have international financial institutions been hit? HSBC $17.2 Billion 15 Slide 16: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Citigroup $21.1 Billion 16 Slide 17: The Credit Crisis How do we know there is one? How have international financial institutions been hit? Merrill Lynch $22 Billion 17 Slide 18: The Credit Crisis How do we know there is one? THE BIGGEST LOSER (so far): $37.4 Billion 18 UBS Slide 19: The Credit Crisis By ignoring the fundamentals • • • • Lender discipline Borrower ability to pay Loan servicing standards Fiscal Responsibility How’d We Get Here? 19 Slide 20: The Credit Crisis The same way we always do Some trips down memory lane… How’d We Get Here? • 1986 Tax Reform Act • Savings & Loan • “Irrational Exuberance” in Tech 20 Slide 21: The Credit Crisis 1986 Tax Reform Act How’d We Get Here? • 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 . . . 21 Slide 22: The Credit Crisis • $160 Billion impact • $124.6 Billion paid by US Government • Cut in half the number of new home starts from 19861991 22 Savings & Loan How’d We Get Here? Slide 23: The Credit Crisis The Tech Meltdown How’d We Get Here? March 2000 to March 2002 NASDAQ fell from 5,048 to 1,800, a 64% drop. 23 Slide 24: The Tech Meltdown 01/01/1998 01/03/2003 24 Slide 25: What is “Subprime?” 25 Slide 26: Terminology “Collateralized Debt CDOs Obligations” A type of assetbacked security, constructed Or from a portfolio of fixed “Goldibucks income assets. The assets are classified in and the three levels or Three “tranches”: AAArated (or Tranches” “senior”), AA to BBrated (or “mezzanine”), and Unrated (or “equity”). 26 Slide 27: Terminology “Special Purpose SPVs 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. 27 Slide 28: Terminology “Tranches” of bonds Senior, Mezzanine and Equity The SPV issues three kinds of bonds and equity securities: • AAArated bonds (“senior” paid first) • Lowerrated bonds (“mezzanine” paid after senior) • Unrated bonds (“equity” – you’re kidding, right?) 28 Slide 29: Terminology Underwriter A CDO needs an “underwriter,” to select the debtorequity ratio, design the tranches, and set the prices on the coupons for investors in the equity notes. The underwriter is typically an investment bank. 29 Slide 30: Terminology Asset Manager A CDO needs an “asset manager” to select the initial assets of the CDO and continually manage them throughout its life. 30 Slide 31: Terminology Rating Agencies SPV issued bonds are rated by rating agencies. Those agencies opinions can be the basis on which investors buy the three tranches of bonds. 31 Slide 32: $2 TRILLION That’s $2,000,000,000,000 32 By the end of 2006, CDOs issued globally were estimated at Slide 33: Whose ox might be gored? 33 Slide 34: Cast 34 Slide 35: Cast 35 Slide 36: 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% 36 Slide 37: Thank you for your interest. 37