IBUS Banking Quiz 2

History of credit cards

1. Department stores gave best customers a bill at the end of the month instead of charging them

2. Creation of charga plate where customer gives to department store to press (first cc)

3. you can use charga plate at multiple department stores

4. Diner's card the first form of corporate card

5. Then came plastic card they put on top and imprint cc on sales slip

Who were the stakeholders in the UBS case?

• Swiss regulators

• US regulators

• Clients

• Shareholders

• Employees

Asset Bubbles

An asset bubble in banking happens when the market price of assets climbs far above their fundamental worth, driven by heavy speculation and easy credit from banks. Stress on system

Tulip Bubble

• First financial bubble from 1636-37

• Rare diseased tulips were very sought after, becoming a self fulfilling market

• Started trading futures (before flower was a seed)

• Sudden demand change people stopped buying and the price collapsed

British South Sea Company Bubble

• First fraud induced bubble 1700s

• Followed 100 year war

• Newton told the king he will buy back some of his loans

• Borrowing money to buy his own stock

• People realized company was not what they thought it was and pulled out their money

Mississippi Company Bubble

• Caused by lack of trust in the system 1700s

• France broke down no central bank

• John Law economist and gambler goes to king and asks for charter to start bank and will pay debt and finance treasury

• King grants national charter and becomes de facto CB

• People found there was not much value and sold

• Caused so much fear French didn’t make banks until far in the future

1929 Wall Street Bubble

• Economic boom after WW1 causing craze in stock market

• Burst was caused by inflation and high interest not sustainable

• by 1931 the stock market lost 80% of value leading to depression

Margin Loan

A collateralized loan from a brokerage firm that allows you to borrow cash using the eligible securities in your investment portfolio as security.

Non purpose loan

• Borrow money to buy tangible assets but no securities

Barrings Bank Rogue Trader

• 1.4 billion loss

• Nick Leeson worked in back office but then became a trader in Singapore

• Was supposed to do low risk trades but starts speculating

• Asking for more money and leveraging his positions more

• Over 100 million pounds betting on Nikkei

• Earthquake in Japan caused collpase

• Don’t mix operational/complicate roles with traders

Societe Generale Rogue Trader

• 4.9 billion loss

• Jerome Kerviel used to be back office but then became a junior trader

• Low risk hedge trades but starts trading European Index

• Bosses aware of what he’s doing but turn a blind eye

JP Morgan Rogue Trader

• 6.9 billion loss

• Bruno Iksil in London trading credit default swaps

• Traders trading against him realize someone was making crazy massive bets

• Lack of supervision and control

Credit Default Swap

A financial derivative contract that lets an investor transfer the risk of a borrower defaulting on a debt to another party

Riggs Bank Scandal

• Bank of the Capital, embassies, presidents, etc

• - General Augusto dictator in Chile hid his account there bankers changed his name

• Equitorial New Guinea dictator had account hidden

• Authorities found out and fined them they got sold to PNC

Banco Ambrosiano Bank Scandal

• Italy bank very close to the bank of Vatican

• Roberto Calvi head of bank and part of Free Masonry pr lodge with Italian politicans

• Shady loans- Calvi escapes to London but is killed

Credit Lyonnais Bank Failure

• 1993-1998

• Largest bank in France. Role in railroads around the world

• New CEO Haberer lended money no questions asked

• Very hierarchical culture so no one second guessed

• Everyhting collapsed no due dilligence

Country and Regional Banking Crises

• Nordic Banking Crisis

• Japanese Banking Crisis

• US savings & Loan Crisis

• Iceland and Ireland Banking Crisis

US Savings and Loans Crisis

• 70s and 80s interest rates were 20% mortgages 14-15%

• Savings and loans needed to pay huge rates

• Lobby lawmakers on what they can invest in ex) High yield bonds, savings loans

• Thousands of institutions went belly up and government creation of Resolution Trust Co. to step in

Mortgage Market Collapse Culprits

• Subprime Mortgages

• Appraisers

• Real Estate Agents

• Mortgage Brokers

• Bankers/lenders

• Credit Rating Agencies

• Investment Banks

• CDOs

Subprime mortgages aka Ninja loans (Mortgage Market Collapse)

A home loan given to a borrower with a low credit score or unstable financial background (no income, no job, no assets)

MBSs

• Mortgage-Backed Securities: Financial institutions gathered thousands of individual mortgages (including subprime loans) and bundled them into a single bond-like pool. Investors who bought these MBS received payouts from the monthly mortgage payments

CDOs

Collateralized Debt Obligations: Investment banks took the slices (tranches) of MBSs—often the riskier, lower-rated slices—and re-pooled them into a new structured financial product called a CDO

Appraisers (Mortgage Market Collapse)

After you buy house independent party find value of house

Real Estate Agents (Mortgage Market Collapse)

Finds houses for buying individuals. They were in a frenzy to sell

Mortgage Brokers (Mortgage Market Collapse)

Finds you mortgage and they were in a frenzy finding NINJAs and loans

Credit Rating Agencies (Mortgage Market Collapse)

• Ex) Moody’s, S&P, Fitch

• Rates credit of financial instruments

• Gave AAA ratings to risky subprime mortgage

Investment Bankers (Mortgage Market Collapse)

• 8.6 trillion in mortgage backed securities

• Bought up thousands of individual subprime and NINJA mortgages. They pooled them into MBSs and CDOs

ARM

• Adjustable Rate Mortgage

• Low-interest "teaser" loans that triggered mass foreclosures when rates reset to unaffordable levels, trapping borrowers who could neither pay nor refinance due to crashing home values.

• As long as you can sell your house at a higher rate it’s fine

First signs of Financial Crisis

• People with subprime loans started defaulting. Simultaneously, mortgage-backed investments lost value fast.

• Lehman Brothers (major investment bank) had borrowed heavily to buy CDOs and MBSs. When housing collapsed and those assets lost value, it couldn’t cover its losses or find lenders, so it went bankrupt in September 2008.

Latin America Debt Crisis

• Price of Barrel of oil 1973 $3 to 1980 $36 (due to oil shock and Iranian Revolution

• Mexico Default: September 1982

• Brazil Default: February 1987

• Brady Plan: July 1989 came up with Brady Bonds that were backed by US but linked to respective countries.

Asian Sovereign Debt Crisis 1997

• Asian Miracle: Asian Tigers were manufacturing powerhouses due to cheap labor

• Booming stock markets: went up 65%

• Booming Real Estate Market

• Lending by foreign leaders

• Triggers: Deteriorating exports to due China and Vietnam, oil price increase, Thai Baht Attack

• Crisis spread to other Asian countries

• IMF rescued by lending and restructuring

Thai Baht Attack

Thailand pegged baht to the dollar. Investors doubted it could hold. So they sold baht in huge amounts, forcing Thailand’s central bank to spend its foreign reserves buying baht to defend the peg. When the reserves ran low, Thailand gave up and floated the baht on July 2, 1997

Russian Sovereign Debt Crisis

• Russia rich in minerals and oil

• Communist regime meant mismanaged economy

• Got very rich when price of oil increased

• Eventually defaulted

• Europe and IMF rescued

European Sovereign Debt Crisis

• Triggered by Lehman Brothers substantial exposure to subprime debt causing financial crisis

• Greek Crisis: European banks overexposed to Greek Debt

• Needed to be bailed out by European Central Bank and IMF

• 2010 Irish Debt Crisis: The Celtic Tiger

• 2011 Collapse of Dexia

• 2012 Spain Bankia failure and collapse of real estate market

• 2012 European Central Bank rescue