 speaking part again. Doesn't include saying I do this year. Inside for joke for those who were here last year. This is a wonderful event and I again want to thank Hans and Gulchin for their wonderful hospitality. I've put on a few conferences in my career. I know how difficult it is and I can't imagine doing that and playing travel agent and room and board and three squares a day for three days like this in this wonderful location. So we just can't give these guys enough thanks and enough round of applause. So please for Hans. As Hans mentioned I was tasked with the same topic of what do bankers know and don't know and it was such a quick answer for me of nothing that I had to I had to tweak this a little bit so it's it's more like what do bankers do and don't do and I thought that for a crowd like this it'd be very appropriate to quote that famous economist that we all revere John Maynard Keynes and Keynes said a sound banker alas is not one who foresees danger and avoids it but one who when he is ruined is ruined in a conventional way along with his fellows so that no one can really blame him and for those who know my past I somehow take some of that to heart I'm gonna tell this story by talking about a couple of books one's an older book that you'd have a hard time finding and one is a brand new book to tell the story of bankers and and what they do and what they don't do and the first one is a book called Dead Bank Walking which I think is probably the best title of any book about banking as written by Robert Smith who was the president of Security Pacific Bank in California and it was a big California bank and had the goal of being quote a diversified financial services company with a worldwide presence the monetary equivalent of McDonald's but the brand name prestige of Sax Fifth Avenue and grow the bank they did they grew the bank through acquisitions during the 1980s Security Pacific bought big banks in northern California in Arizona in Oregon in Washington and they did buy the third largest bank in Nevada is a little bank called Nevada National Bank and I happen to happen to work at Nevada National Bank so eventually I work for Security Pacific and the best money that Security Pacific ever spent was paying for my master's degree at UNLV where I ran into Murray Rothbard and of course Hans Hoppe so I'm sure they feel the same way about this expenditure but Smith tells his story he says he said during this time and I think he's talking about the late 80s here late 80s leading up to the California real estate crash but he says during this time the cockiness of bankers security Pacific bankers in particular was Leviathan in scope and the queasy extravagance of the time was epitomized by the American Bankers Association conventions these were elaborate brag fest of leisure and self congratulation a high-class Mardi Gras for financiers these events were accelerating with promise and blind to the inevitable eventuality of economic downturn now his credit officer a guy named Bob Courtaway what's at the time skeptical and discussion about how great the prospects were for Security Pacific amongst senior managers he said it's rather natural that when things are going well and everyone is comfortable there is a tendency for an individual an institution and even an entire industry to become somewhat self-pleased but the wind was at the back of security Pacific Courtaway's warnings were not heated and they from the security Pacific funded everything they funded leveraged buyouts massive real estate deals they even made a 10 million dollar loan unsecured to a guy named Donald Trump security Pacific would write that entire 10 million dollar loan off two years later and if the rumors were true that I heard when I was at the bank Donald Trump never made a payment they also funded Hawaiian the construction of Hawaiian resorts and they made a loan to Peter Uber off who may some of you may remember was the commissioner of baseball he had the dream of taking over Hawaiian airlines and security Pacific made that loan and it didn't work out well in fact none of these loans worked out very well but in 1990 things were still going well the bank had record earnings of 740 million but it was at that point that everything fell apart California real estate cratered and this aggressive real estate lending that security Pacific had engaged in had caught up with them and the next thing you know one of Bob Smith senior managers guy named Nick Binkley is telling him he says quote Bob we must not fight this thing to death it's painful business but we've got to sell our horse before it dies and at that point here's the guy Bob Smith who had five trustee on his house personally to securing loans to buy a security Pacific stock so this is certainly a guy who believed in his business had indebted himself to the tune of five million dollars on his house buying stock and also investing himself in California real estate unsuccessfully I might add well at the end of 1990 from the end of 1990 to April 2nd 1992 when security Pacific was purchased by Bank of America the bank's capital fell from 4.71 billion dollars to 1.6 billion dollars amazingly though security Pacific was able to get Bank of America to pay them five and a quarter billion dollars for that 1.6 billion in other words they paid 3.25 times book and that is a rich price to book in any sort of environment especially when a bank is going downhill that quickly so shareholders SB shareholders receive the equivalent of $41 for each one of their shares Smith estimates in his book that without the buyout the shares probably would have went for $4 on their way to zero when the bank probably would have failed so he was able to sell his horse before it died now the next bank I want to talk about in the next book I want to talk about Joe Salerno talked about WAMU this morning Washington Mutual there's a wonderful book out by a woman named Kirsten grind her book is called The Lost Bank and WAMU had started out as a good-sized Washington State savings and loan and they would grow into one of the largest banks in the country and started in the 1990s when subprime lending actually got very very hot at that time number of lenders tripled to more than 2,000 lenders in 1997 and WAMU wanted to be a player they wanted to increase their market share in subprime lending so the president at the time was a guy named Kerry Killinger and he announced that he wanted his company to have 20% of the mortgage market that was four times the mortgage market that they had in 2000 his new advertising campaign in 2001 I don't know if any of you remember it for those in the US it was called the power of yes WAMU can make getting a mortgage easier said the commercials and actually had the commercials debut during the Academy Awards that is expensive time to be buying now the home division's annual sales meeting where they grew or they drew their sales consultant for mortgages it was held in Atlanta that year they had a large convention hall is decorated as a huge revival tent which would be appropriate in Atlanta they had a gospel choir shipped in from LA to sing between speeches they even had an evangelist in a white suit work in the crowd 1500 WAMU representatives in a frenzy shouting WAMU Hula instead of hallelujah it was WAMU Hula and the company tripled the number of mortgages they did between 2000 2001 WAMU salespeople made double or triple by the way on subprime mortgages what they made on prime mortgages so it only makes economic sense that those were the type of loans that they were chasing and Wall Street by the way couldn't buy enough of these mortgage backed securities markets surpassed surpassed 1.8 trillion dollars in 2002 and that had been a 200% increase in the last two years and WAMU earned a lot of money they earned 1.8 billion dollars selling its mortgages they were so good that American Banker magazine named Killinger the banker of the year in 2001 one Wall Street analysts called him the Alexander the Great of the thrift business his credibility on Wall Street is unquestioned said another but he was an interesting character Ms. Ms. Grind writes that executives have learned long ago that the best way to bring Killinger an issue was one-on-one otherwise he avoided confrontation he would ignore emails he would avoid phone calls until the problem resolved itself on its own no three Killinger compared WAMU's growth and plans to category killers like Sear or like Walmart Starbucks Costco and Home Depot company earned a billion dollars for the first time it had 3,000 branches and ATMs it had 50,000 employees stock at $45 a share things couldn't be going better Killinger well he had divorced his wife found a new wife started dyeing his hair spiffed up his wardrobe worked out constantly he was a guy that used to only fly commercial suddenly he would only fly private they spent all his time flying across the country having brand-name rallies these were three-hour productions to pump up the troops to inspire selling and the selling of what mortgages the compensated compensation kept rolling in for Killinger he and his new wife bought a couple houses they bought a new boat they would move the WAMU headquarters into a 300 million dollar skyscraper in downtown Seattle complete the dining room was buffet style outdoor garden where employees could walk around and enjoy themselves Killinger was obsessed with WAMU being a growth he wanted the bank to grow at 10% a year what the economic environment was he wanted the bank to be 500 billion by 2009 he planned to grow the bank 250 branches a year and Wall Street was pushing him all this time and he responded most to Wall Street's urges because he cared about the stock price they cared about earnings so in 2004 he developed a new five-year plan Killinger by the way was continually doing five-year plans it almost sounds like the Soviet Union back in the day but this one called for a higher risk lending strategy he consciously at that point in 2004 wanted to have more option arms and more home equity loans arguably the risk he has mortgage loans you can make however what really drove Killinger and probably a number there on number of other bankers out there is that he wanted to beat his nearest competition which was country-wide country-wide was the big dog of lenders and he actually had tried to buy Angelo Mazzillo's firm couldn't make the deal happen so whatever country-wide did WAMU tried to do it better at the time a loan underwriter for Washington Mutual actually was interviewed by the the New York Times and the the underwriter said I swear 60% of the loans I approved I was made to and what him what he or she was meant by that was that they were he was made to by senior management no matter what the local underwriters were doing senior management wanted the loans approved now meanwhile WAMU was doing training seminars that didn't have anything to do with credit around writing this is what happens when banks are in growth mode and they want loans I don't care about credit underwriting instead managers were required to read the book who moved my cheese and prepare book reports the company actually hired a blues band to write songs to help new employees adjust to the WAMU culture they weren't getting along well now Killinger he expressed some concerns about the housing bubble on an email to his risk manager but you know it's just a passing thought and WAMU pressed on I mean Killinger was concerned about the company's earnings he was concerned about the stock price and besides at the time all the Federal Reserve chairman Ben Bernanke had dismissed the notion completely that there could ever be any sort of nationwide housing bubble you the end of 2005 nearly half of WAMUs seven billion dollars in option arms were negatively amortizing and what that means is is that people weren't paying enough on their payments to completely play it pay the interest so the interest was being added to the principal now because account accounting standards they could actually WAMU could actually count these as interest income so in other words WAMU customers had avoided through these option arms paying 316 million in interest but WAMU was able to book that 316 million in interest as if they had paid it because of accounting standards so the top producing mortgage consultants were treated to what was known as the president's club events they were held in Hawaii they were held in Cancun these were full weekend affairs non-stop partying all expenses paid and the top producers were treated as rock stars but the theme of these these conventions if you will was that all of WAMUs corporate structure worked in sales and it was working 2005 WAMU made three and a half billion dollars in profit but something happened in 06 something happened that hadn't happened in the United States in a long time and that was the median price of homes nationwide decline and also the number of home sales fell but Killinger at the time told his employees at a company pep rally I don't think there's a single institution in this country that is as well positioned as Washington Mutual is so he wasn't interested in 2007 when one of his senior lieutenants came to him and said Kerry for the sake of a lot of people who stayed here and have been loyal to you you need to sell out you need to get out while you can get something for this bank well as a concern for subprime mortgages permeated Wall Street Killinger wasn't interested in selling out in fact he actually wanted to buy AmeriQuest mortgage the deal never worked out but if it had he would had billions more in subprime mortgages come into his operation and it was about this time that WAMU's bad loans jumped 45% by June of 07 the bank held 1.7 billion dollars in subprime loans another 750 million in foreclosed real estate and a year later he had 5.5 billion dollars in bad loans the default rates on the securities that WAMU assembled during 2006 and 2007 as these loans were wrapped into collateralized debt obligations to sell in the secondary market the default rates ran as high as 42% the loss rates ran as high as 65% but this is despite the fact that the rating agencies rated these securities AAA but Killinger kept the sunny side up told an audience at an investor conference this frankly may be the best times we've ever seen for making new loans in our portfolio Killinger was still living the high life he had met Bernanke met Greenspan he even tended Davos a couple years made 2000 made 21 million in 06 07 he made 11 million as the market was collapsing but at the time when the market was melting down no one could figure out why Killinger didn't revert to crisis mode in fact he didn't revoke any mode at all he couldn't make a decision he was paralyzed so the executive team had to start going to the number two man for any sort of decisions now is at this point that the office of thrift supervision which was the primary regulator for for WAMU they cut the camel rating which is an internal regulation regulator rating that for financial institutions from a satisfactory rating of two down to an unsatisfactory rating of three when one of the team reported that the OTS was going to do that Killinger said I don't like to hear bad news and he walked out of the room a fourth quarter of 07 the bank lost 1.9 billion in the first quarter of 08 it lost a billion stock price plunged 70% but at the 08 shareholders meeting a gaunt and shaken Killinger told 2,500 attendees today I believe that we are at the beginning of the road back the return to profitability but after a steady stream of shareholders blasted him from the microphone the one-time banker of the year was a little shaken up and he said I just want people to calm down have a little faith but as Joe Salerno talked about this morning faith is no match for a bank run June of 08 Chuck Schumer remember probably one of the most most loathsome senators in the United States Senate from New York he sent a letter to regulators expressing concern about another big SNL and that was Indie Mac Indie Mac had a run on their deposits when the press reeked elite this letter that Schumer had sent expressing concern about him and they lost 1.3 billion or 7% of their deposits well that illustrates to you fractalized bank and fractalized banking is it doesn't take much of a percentage of deposits to close down a bank with Indie Mac it was 7% of their deposits and it picks up steam as one bank has a run on them then it will go to another bank and in this case it went to Walmew in the three days after Indie Mac was closed Walmew lost a billion five in deposits on the fourth day they lost a billion eight and after two weeks they had lost nine point four billion dollars in deposits that was six percent of their total deposit base and it was at this point that the regulator started circling Walmew of course the OTS with their primary regulator but the entity that was ensuring the deposits of Walmew was the FDIC and the FDIC was fed up with the OTS's super supervising of of Walmew the head of the OTC was a guy named Frank Rich and the head of the FDIC was a woman named Sheila Bear they didn't like each other they didn't get along like most government regulators they don't want to have anything to do with one another and there's turf battles throughout actually the FDIC had been trying to get involved in regulating and supervising Walmew way back to 2006 and the OTS it can continually objected to them trying to interfere at this point the OTS was wanting Walmew to give Walmew time to work out their own problems the FDIC was planning for their failure and the potential buyers for Walmew were few and far between the only name that continually surfaced was JP Morgan Jamie Diamond's bank had approached Killinger a couple of times to buy him and kill Killinger had always given him the cold shoulder by the way remember Jamie Diamond is very politically connected Kerry Killinger was not and by the way you have another regulator involved the OCC is the the regulator that that oversees JP Morgan so Morgan started talking to the FDIC and the OCC about buying Walmew leaving the primary regulator the OTS out of out of the conversation which made Frank Rich at the OTS very unhappy now Diamond ended up making a bid for Walmew it was low at five dollars a share at least the guys at Walmew thought it was low there was a provision in it that he might pay another three dollars a share if the home equity portfolio perform better than expected but Walmew was insulted and instead they were able to get 7.2 billion investment from a equity fund called TPG and politically the OTS wanted wanted Walmew to survive and at the same time the FDIC wanted Walmew to survive in some way or at least not take a loss because the the insurance fund could not take the hit that a Walmew failure would create so and it was at this point that Killinger who had been banker of the year a few years ago was suddenly called by Jim Kramer on mad money one of the worst CEOs in the world in fact Kramer put the Walmew board of directors on his wall a wall of shame these were desperate times Walmew stocks was trading at three dollars a share Killinger called Treasury Secretary Paulson if you remember at the time this would have been in late oh a they had stopped short selling on financial institution stock 19 shares in financial institutions you couldn't short sell them Walmew was not included in that 19 and they wanted to try to become have that same protection but Paulson told him he should he refused to include Walmew and in fact Paulson said you should have sold out to JP Morgan and you should you should do so now and Paulson told Killinger things could get a lot more difficult for you well he wasn't kidding the FDIC and the OTC we're now doing battle over Walmew every day remember the OTS thought Walmew had a camel rated three the FDIC thought Walmew was should be rated a four which is essentially just this side of being a failure and it was at that point that Walmew or the FDIC started shopping around making phone calls to see who would buy Walmew if they fail at that point Killinger is fired finally our banker of the year is fired a guy named Alan Fishman is take he takes over Fishman and the first thing he does when he gets on the job he calls Sheila bear at the FDIC who tells him you're okay I checked you out but adds I hate this thing sell your bank and at that point the stock had dipped to two dollars a share and another run on the deposits started and the JP Morgan team started taking a look at what a government assisted failed bank bid might look at if they were going to look at Walmew and at this point this is the point when Lehman brothers fail two days later AIG is bailed out or in other words Goldman Sachs was bailed out the Walmew run intensified again and at that point bear called up Sheila bear at the FDIC called up Jamie Diamond and ask if JP Morgan would buy the failed Walmew in a way that wouldn't cost the FDIC any money and he said maybe and hoping that increase in the deposit insurance would would save the bank Fishman was trying to get the FDIC to raise it from a hundred thousand dollars to two hundred thousand dollars thinking that would stem the bank run that was going on they didn't do it at that point but eventually of course they did they did raise the deposit insurance later on to 250,000 actually in the case of non-interest bearing deposits too unlimited but that they didn't do it in time to to help Walmew at that point bring trucks were restocking the ATMs at Walmew to the tune of 250 million dollars a day 30 million was the normal so over eight times the amount of cash was being drawn out of Walmew ATMs during this crisis at that point Paulson announced tarp the FDIC seeks bids for the failed Walmew and JP Morgan is the only bidder 1.888 billion why did they bid 1.888 billion lucky Chinese numbers the number 8 is lucky FDIC a close proves closing the bank that's the theoretical so Throtpros behind thought used by bankers lucky numbers FDIC approved closing the bank and selling it to JP Morgan and on September 25th 2008 JP Morgan seized the bank the shareholders the bondholders were wiped out JP Morgan took over a month later JP Morgan accepts 25 billion dollars in tarp money from the United States Treasury three years later Time Magazine names Jamie Diamond as one of the world's most influential people in fact in her new book Sheila Bear writes that Diamond was a tower towering figure in height as well as leadership ability and described him as the smartest executive in the room well perhaps but Jamie hasn't retired to be secretary treasurer yet and after all and after all his bank has derivatives exposure of over 70 trillion dollars so I would contend that there are accidents that could happen in fact he did have an accident happen in London that I believe is still ongoing of a few billion dollars so ambitious bankers think they're operating a business like any other when demand is high you just provide more supply and you grow your franchise but fractionalized commercial banking is not like selling coffee it is not like selling garden tools or designer clothes the power and force and government of government privilege is required for banks to stay in business in the long term no matter how successful they are in the short term recently FDIC board member Thomas Honing he actually made this point in a speech to the Exchequer Club said in several recent television commercials one large bank he's referring to Citibank is advertising its celebration of 200 years in business I congratulate them he said but it is well documented that this bank has received US government support four times in the last hundred years he said he went on to say we have slowly perhaps unintentionally expanded the safety net and its subsidy beyond what is justified to serve the long-term interests of the economy what started out as a means to approve stability of the payments system and intermediation process both vital in our economy has become a tool of leverage subsidized expansion and activities that has led to greater instability so like Cain said bankers should run their banks to ruin in the conventional way because there's really no other choice but I would add bankers always remember to sell your horse before it dies thank you