FIN 431—January 10, 2013: Lecture #1 (CHAPTER 13)

* Glass-Stegall Act: segregated the ability of banks for investing and such. * Merrill Lynch and BOA * Commercial bank and investment bank combined * Moral Hazard: doing something bad again (we’ve been through it already) * Son at police station example * Bankers needing bailout continuously * Michael Milken reference * Banks too big to fail * Screw up the economy, so they have to bail them out * But by combining big financial institutions, now they’re even bigger to fail. * Wachovia bank/Wells Fargo & Merrill Lynch/BOA example * Why do you have to follow their orders/agree? * You don’t HAVE to, but they can make life miserable for you * IRS audits, etc. * Audits to make sure you’re complying with things, not just because they think you did something wrong. * Uses of funds (assets) = Sources of funds (Liabilities + Capital) * Uses: Cash Assets, Investments, Loans & Leases, Other assets * Sources: Deposit Liabilities, Non-deposit liabilities, Capital Accounts * If you want to start a bank, you need capital accounts, you need money to start with * Rigorous process with the Fed to start a bank * Very highly leveraged; 9:1 debt to equity ratio * Start with capital, solicit depositors (put your money in our bank), lend it out and make loans. * Giving you less than 1/10th of 1% for putting money in their bank but lends it out at 5%. * Invest your money; commercial banks were supposed to take your money and lending it to people, not invest * Investing it in derivatives * Two major sources we will concentrate on are deposits and capital accounts * FDIC –Federal Deposit Insurance Corporation * 1930’s—bank runs during the depression * Was not set up to withstand what happened the past couple years * Banks have the opportunity to invest in different places * Home loans—problems * Deposits are money that banks are borrowing –liabilities * The more you get entrenched in a bank, it’ll be harder to move * Long process to change banks * Capital in relation to liabilities –90% of their capital footing is in liabilities * Banks would never lend to people who are 90% leveraged * 67% are the deposits in there * This is all 2006 data; before the economy went to shit * Major portion of their