U.S. Banking Crisis: The Long Road to Rebuilding Reputation and Trust

8th Annual Financial Law CongressCartagena de IndiasOctober 23, 2009

“Those who cannot remember the past are condemned to repeat it” - George Santayana

2

When It Comes to Who Is Responsible, Americans Say There Is Enough Blame to Go

Around for the Current Recession

And, in your opinion, who do you blame MOST for the current recession? (N=1200, Margin of Error = +/-2.8%)

* October 2009

7%

15%

17%

25%

26%

0% 5% 10% 15% 20% 25% 30%

No one - this recession is a part of thenormal economic cycle of ups and downs

Consumers who took on too muchhousehold debt and mortgages they

couldn't afford

Government policies that resulted in largedeficits and too much regulation

Financial companies that made risky loansor investments

Government institutions that didn't doenough to oversee and regulate banks/

financial companies

61%

23%

11%

58%

28%

12%

56%

25%

15%

53%

23%21%

46%

31%

15%

31% 32% 33%

0%

10%

20%

30%

40%

50%

60%

InvestmentBanks

MajorCorporations

National Banks Elected Officialsin Washington

DC

Labor Unions The AmericanConsumer

LessConfidentSame

MoreConfident

In the Last 12 Months, Americans Have Lost Confidence in

“The Leadership Class.”

Now I’d like to read you a short list of institutions and groups of people. For each one, please tell me, compared to twelve months ago, whether you are more confident or less confident that they are making good financial and economic choices on decisions that affect your personal financial situation? Or do you feel the same as you did twelve months ago? (N=1200, Margin of Error =+/-2.8%)

* October 2009

- 5 - - 5 -

65%

59%

64%

70%

58%

49%

58%

63%

ALL Age 18-34 Age 35-54 Age 55+

Investment Banks

National/ Global Banks

Using a scale from “1” to “5” where “1” is no trust at all and “5” is a great deal of trust, please tell me how much you trust the following types of financial services companies.

* July 2009

In March, We Saw that the Older the Voter, the Lower the Trust Levels for Banks

% Saying They Have “No/Low Trust” by Age Group

(Source: FD Diageo/ Hotline Survey, February 28-March 2, 2009N=803 Registered Voters, MOE = +/- 3.5%)

6

Forgetting the lessons of the past ruined the banking business… but, it was ignoring the new ways people communicate (chat boards, social

websites) and the expanding importance of indirect stakeholders (NGOs, activists) that truly damaged

their reputations.

And, yes, it will prove costly.

Why reputation matters is now clear

More regulationMore legislationHigher cost of doing business (legal, etc.)Higher turnover, inability to recruit (pay) top

executivesHigher hurdles to winning new businessLower share price, valuation compared to peersLower productivity (focused on unrelated

concerns)Lower barriers to entry for competitors

How did we get here?

Glass- Steagall (1933)

10

Financial Services Modernization Act (1999)

11

Alan

Family

Lender

Fannie

Wall Street

Rating agencies

Investors

19

Bear (Stearns)

Bailout: US$8,700,000,000,000

Taxpayers to the Rescue

$8.7 trillion dollars’ worth of potential taxpayer commitments for loans, guarantees and other bailout funds for businesses and distressed homeowners.

• $1.5 trillion in FDIC loan guarantees

• $1.8 trillion in cash, tax breaks and loan guarantees for taxpayers, financial institutions and credit companies.

• $300 billion for homeowners from FHA

• $25 billion in assistance for auto companies

• $5 trillion worth of new money, loan guarantees and loosened lending requirements from the Federal Reserve

Troubled Asset Relief Program (TARP)

Change (Regulation) on the Way

Who Knew?

The Popular Answer: Bankers

Not A Pretty PictureU.S. Banking CEOs Already Departed, Leaving in 2009

Still Standing

Meanwhile, the pain grows at home …

… as well as with our banks …

…non-current assets, charge-offs rise…

TABLE I-A. Selected Indicators, FDIC-Insured Commercial Banks  

  2009* 2008* 2008 2007 2006

Return on equity (%) 0.74 5.08 1.35 9.12 13.02

Core capital (leverage) ratio (%) 8.15 7.57 7.40 7.63 7.86

Noncurrent assets plus other real estate owned to assets (%) 2.73 1.25 1.82 0.87 0.52

Net charge-offs to loans (%) 2.32 1.10 1.32 0.62 0.41

Number of institutions reporting 6,995 7,203 7,086 7,283 7,401

Percentage of unprofitable institutions (%) 26.50 16.12 23.20 11.20 7.54

Number of failed institutions 21 4 20 2 0

* Through June 30, ratios annualized where appropriate. Asset growth rates are for 12 months ending June 30

… leading to job losses at 26-year high, and personal savings rate at near 15-year high.

Making matters worse - lobbying

Financial Services Reform – Agenda

Consumer Financial Protection Derivatives

Capital Requirements Regulation & Supervision

$224 Million

How much banks and other financial services firms spent in first six months of year to lobby Congress

$140 Billion

How much major U.S. banks and securities firms are on pace to pay their employees this year -- a record high

$50,303 (US Household Income, 2008)

Backlash – reputation suffers…again

“There are a lot of small businesses, creditworthy businesses around this country,

who still can’t get the capital they need to grow, which is important for our economy, and you’ve

seen these same institutions spend tens of millions of dollars lobbying the Congress to try

and stop financial regulatory reform.”

“They have a responsibility to be part of the solution, not being the

obstacle.”

“Part of what we're going to need is for

the folks on Wall Street who are

asking for help to show some

restraint, and show some discipline, and show some sense of

responsibility."

David AxelrodSenior Adviser

Rahm EmanuelChief of Staff

Reputation of Banks - Splitting in Two

Non-TARP

Inst

itutio

nal

Consum

er

TARP

Reputation: Clear Benefits to Market Valuation vs. Peers

PerformanceDuring Past:

JPMorgan ChaseBanks

DJ U.S. TotalMarket Index

Year-to-Date 46.08% 7.42% 22.72%

5 Years 18.90% -52.69% 2.66%

JPM

DJ Index

Banks

How can banks start the long road to rebuilding reputation?

Actions, Not Spin, Can Help Recovery

Remorse – humility helpsEngage influencers (NGOs, online communities)Compensation – restructuring rewards, incentivesOppose one (any) industry position – show leadershipValues – highlight culture, not CEOEmbrace two-way dialogue (regulators, legislators)Reputation – consider repercussions early, oftenYou’re not alone – web-based participatory media is

watching and shaping perceptions (i.e. reputation)

Gracias