The News: The Credit Crisis & the Upcoming Presidential Election

In a departure from past Tiburon CEO Summit Opening Keynote Presentations, Mr. Roame avoided a broad synopsis of the last six months of news to instead address the specific topic on everyone's mind: the news, including the credit crisis & the upcoming presidential election. Mr. Roame wasted no time in getting to the root causes & growing magnitude of the crisis, the effects on financial services industry giants, the response thus far, & a bigger picture perspective:

• The root causes of the credit crisis included artificially low interest rates & the rapid growth in subprime mortgages, with outstanding subprime loans more than doubling from $600 billion in 2006 to $1.3 trillion in 2007
• An amazing 41% of subprime mortgages were granted without full documentation, up from 22% in 1999, with Mr. Roame pointing out that these loan applications misstated income
• Subprime & other non-prime mortgages account for over 90% of all resetting mortgages in 2007 & 2008
• Hence, it is pretty easy to conclude that the intersection of adjustable rates & subprime mortgages was a disaster waiting to happen
• Over one-quarter of subprime adjustable rate mortgages are now 90 days or more past due, up from 5% to 10% in 2002 to 2006
• The GSEs became the big buyers of mortgages, purchasing almost two-thirds of mortgage originations, up from a low of 33% in 2006
• Meanwhile, the commercial & investment banks transformed themselves into packagers of products, with collateralized debt obligations issuances increasing rapidly to $310 billion, up 100% since 2005
• Hence, subprime write-offs have been staggering, led by those at UBS, Merrill Lynch, & Citigroup, with $37.1, $25.1, & $23.9 billion respectively
• Mr. Roame noted that various observers blame consumers (misstated income), commercial banks (knowingly made bad loans), investment banks (over-leveraged), & the US government (did nothing) for the credit crisis ...
• And said that the bailout strategy was established in March 2008 when Bear Stearns went under and Bernanke was quoted as saying the Federal Reserve action was "necessary to sustain the viability of the American financial system"
• Lehman Brothers lost 80% of its value, falling from $28 billion to just $6 billion and causing big hits for Alliance Bernstein ($476 million) & other large shareholders
• The failure of Washington Mutual was the largest bank collapse in United States history and Texas Pacific Group took a huge loss on its $2.0 billion investment made in April
• Wachovia Corporation's value has sunk to an amazing low, even less than the $25 billion it had paid for Golden West Financial
• The five largest US government bailouts have all been of financial services companies, including four this year,
• Mr. Roame noted that there has been significant skepticism regarding giving more power to the government, with one past CEO Summit attendee saying "when you look at the quality of the people attracted to the Federal Reserve, I do not want them to have any more power"
• The stock market has declined sharply in 2008, with the indices being down 30% to 38% at one point
• While overall hedge funds have outperformed global markets in 2008, many large hedge funds have got clobbered
• Mr. Roame presented a slide including logos of financial services firms brought down this year that could have easily made up the leaders board recently
• There have been 760,000 jobs lost in 2008, the biggest loss since 2001
• Mr. Roame reminded attendees that the bigger picture public policy issue here is the threat to baby boomers' ability to retire as the losses in real estate equity will challenge the liquidation
• There were a few winners, including Bank of America Corporation, JP Morgan Chase, & Wells Fargo Corporation, as well as those consumers who use oil
• Mr. Roame said that Senator Obama will be elected President in November, due in large part to the current economy, briefly mentioning the so-called Bradley effect as a possible obstacle to this eventuality
• In keeping with the honest & balanced perspective adhered to at Tiburon CEO Summits, Mr. Roame reminded attendees that some had it even worse than any of us (Eliot Spitzer & OJ)

A Step Back: A Reminder About Fundamental Industry Trends

Mr. Roame then brought attention away from the immediate news noise and back to the long-term fundamental industry trends, presenting some high-level Tiburon research findings:

Fundamental Trends

US households control almost three-quarters of all investable assets, two-thirds of that invested via financial advisors
More than half of consumer households have less than $100,000 of investable assets, with 28% having less than $10,000
Baby boomers are not saving the traditional way, with negative savings starting in 2005 and continuing in 2006 & 2007
Only 2% of baby boomers will receive an inheritance of more than $100,000
Even more critical is the fact that more than half of 65 year old males will reach age 85 and over one-third will reach 90
Mr. Roame took a moment here to point out that the commonly held life expectancy of ~77 years is therefore meaningless, as it fails to take into account the fact that those who reach retirement age will out-live the projected retirement period and go broke
Baby boomers' pending retirement will drive more assets into the investable assets market