The%20Global%20Response%20to%20the%20Financial%20Crisis:%20Can%20We%20Avoid%20a%20Repeat?

1
The Global Response to the Financial Crisis Can
We Avoid a Repeat?

• Robert C. Pozen
• ChairmanMFS Investment Management

The views expressed in this presentation are
those of the speaker and are subject to change at
any time.
14173.1
2

• Never let a serious crisis go to waste.
• Niccolo Machiavelli, 15th century philosopher
• Rahm Emanuel, current White House Chief of Staff

3
Major financial crises World War II to 1995-97

• 22 major banking crises in advanced industrial
  societies
• Including Europe, Turkey, Russia, Japan, Canada,
  U.S., Australia, and New Zealand

1945 to 1995
Source Carmen M. Reinhart and Kenneth Rogoff,
This Time is Different Eight Centuriesof
Financial Folly, 2009
Source Michael Bordo and Barry Eichegreen,
Crisis Now and Then What Lessons from the Last
Era of Financial Globalization?, National Bureau
of Economic Research Working Paper No. 8716.
4
U.S. exports and imports
U.S. international trade in goods and services
(B)
Current Account Deficit ( of GDP)
Exports
Imports
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1,071 1,005 977 1,020 1,159 1,281 1,452 1,646 1,8
36 1,411
1,450 1,370 1,399 1,515 1,769 1,997 2,212 2,346 2
,517 1,752
4.2 3.9 4.3 4.7 5.3 5.9 6.0 5.2 4.9 3.0
Through 11/30/09. As of 9/30/09. Sources
U.S. Census Bureau National Bureau of Economic
Research
5
Continuing negative savings by U.S.(Personal and
government)
U.S. Personal Saving Rate
Sources Federal Reserve Bank of St. Louis
Congressional Budget Office Brookings Institution
U.S. Budget Deficits

External debt at end of fiscal year (FY) 2008
5.8 trillion Budget deficit in FY 2009 1.4
trillion External debt at end of FY 2009 7.2
trillion Projected budget deficits in FY 2010
2018 9.0 trillion Projected external debt at
end of FY 2018 16.2 trillion



6
Can the Fed be an effective inflation fighter?
Maximum and Actual Exposure of Federal Reserve to
the Financial Bailout (B)
As of March 25, 2009
Maximum Exposure
Actual Exposure
7
U.S. Treasury Bailing out institutions
Problem
Solution

• Recapitalized too many banks without clear
  rationale
• AMEX and State Farm allowed to become bank
  holding companies
• Recapitalize troubled banks with preferred stock
  (15 warrants)

• New statute to justify rationalefor every
  bailout of each institution
• Provide liquidity support, not capital, to
  non-banks
• Preferred stock with warrants to purchase 100 of
  preferred

8
FDIC Government guarantees
Problem
Solution

• Fed did good job in allowing swaps of Treasuries
  for illiquid securities
• Stay at 100,000, whichcovers 98 of depositors
• Limit FDIC guarantee to 90of debt of banks and
  thrifts(not their holding companies)

• Short-term liquidity crisis after Lehmans
  failure
• Deposit insurance increasedto 250,000 (through
  2013)
• Guarantee 100 of debt of banks, thrifts, and
  their holding companies

9
Government actions Executive compensation for
financial institutions

• Legislative limit for assisted institutions
• Bonus no more than 1/3 of base
• Example Wells Fargo CEO
• Special Master for six TARP institutions
• Approve compensation specifics of top-25
• Approve compensation structure of next 75
• Federal Reserve for all 8,200 banks
• Proposal to ensure appropriate incentive
  compensation
• Will reject arrangements with excessive risks

10
Improving boards of mega-banks

• Existing mega-bank board model
• Large boards 12 to 18 members
• Lack of industry expertise
• Meet 6 times per year
• Board of Super-Directors
• Smaller number of directors 5 to 7
• All directors with relevant experience
• Devote 2 to 3 days per month

11
Mortgages Securitization process
Problem
Solution

• Brokers sold mortgages without retaining any risk
  of loss
• Securitization vehiclesMultilayered and opaque
• Credit rating agencies haveconflicts of interest

• Sellers of loans should retain atleast 5 risk
  of loss
• Simpler vehicles with moreongoing disclosures
• SEC-appointed representativeto choose credit
  rating agency

12
Banks Capital requirements
Problem
Solution

• Basle I reduced capital requirements for
  mortgages, MBS
• Basle II based on internal risk models of banks
• Loan loss reserves limited to probable losses

• Should have distinguished between more and less
  risky mortgages
• 12 to 16 categories of risk capital plus
  subordinated debt
• Allow contingent loanloss reserves plus
  disclosure

13
Key Canadian virtues

• Require 20 down payments for most home mortgages
  and no tax deduction for interest paid on home
  mortgages
• Set higher amount and quality of capital for
  banks
• Did not buy products without understanding them
• Combination of commercial banking and securities
  underwriting Not a problem for Canadian banks

14
Close gaps in U.S. financial regulation
Problem
Solution

• Customized financial derivatives exempt from most
  regulation
• Hedge funds, aggressive short sellers, grew
  rapidly
• Global insurers regulatedby 50 states
• Inadequate regulatory focuson systemic risks

• More standardized contracts through one clearing
  corp
• Require managers of hedge funds to register as
  investment advisers
• Federal charter for a fewglobal life insurers
• Council of regulators, with Fed,to monitor
  systemic risk

15
Proposed restructuring of financial agencies
Current Proposal
Better Approach

• Merge Office of Thrift Supervision into
  Comptroller
• Limit new agency oversight to home mortgages,
  nonbank lenders
• Merge with joint sub-committee from Agriculture
  and Banking

• Merge all four banking agenciesinto one new
  agency
• Create new agency to regulate all retail
  financial products
• No merger of CFTC with SEC because of Senate
  conflict

16
Five key recommendations

• Stop bailing out so many institutions
• Adopt a totally different board model
• Revamp loan securitization process
• Increase and redesign capital requirements
• Close gaps in federal regulation

17
The Global Response to the Financial Crisis Can
We Avoid a Repeat?

• Thank you.

The views expressed in this presentation are
those of the speaker and are subject to change at
any time.