Industry sign banking arkansas presentation easy
you so we want to get back to our discussion today of the this history of basically banking and I think we'll finish that up in just the next few minutes the glass-steagall Act was passed in 1933 you remember it created this firewall or this separation between banking and all other industries and the reaction to that was bankers didn't like it we talked last time about how they set up bank holding companies and the bank holding company would own a bank but then the bank wouldn't get into these other activities it would be the bank holding company would set up subsidiaries to get into these other activities right and I believe I had this picture bank holding company would own a bank and then would also own some subsidiary and that subsidiary would get into the not quote non banking activities and that didn't go on very long until we got a Bank Holding Company Act of 1970 you remember we had already had a Bank Holding Company Act of 1956 and it regulated the multi bank bank holding companies the bank holding companies that were set up to get around the McFadden act the ones that were set up to allow banks to jump over state borders not by the bank opening a branch in the next state but by the bank holding company owning banks in various states and so then we said no you can't do that the bank holding company is confined to a single state also anyway so now here we have bank holding companies that are getting into non banking activities the bank was prohibited from getting into some non banking activities so now the bank holding company will do that and so we get an act and it says the Federal Reserve is the regulator of bank holding companies and then the Federal Reserve will be the one that decides whether this subsidiary is legal or not and legal or not will be basically the same criteria that were used with glass-steagall is the bank holding company obeying glass-steagall I believe where I ended last time was to say that the Federal Reserve was very skeptical the Federal Reserve is it's run by economists PhD economists for the most part and there's no law that says that that's the way it works out but these PhD economists who had studied this topic of the Great Depression the bank failures and so forth and they said you know we're not persuaded that banks and getting involved in other types of activities that that was the cause of the Great Depression and so we are not gonna be as harsh on these banks so when banks come along and apply can I open a subsidiary the answer will frequently be yes and so the Federal Reserve in regulating bank holding companies would came up with a list of permissible Bank activities I'll just say permissible permissible activities and the Federal Reserve put some things on that list and said if it's on this list you need to notify us when you do these things you know when you set up a subsidiary to get involved in these things you need to notify us but don't worry about getting permission we're gonna give you permission on that and then as time went by the list of things that they got permission to do just grew longer and longer okay now let me give you an idea of the type of logic and we'll just kind of pick something out here the type of logic that would be applied the bank would come to or I should say the bank holding company you remember the bank holding company is run by the same people that are running the bank they would you would just be made an official of the bank holding company rather than the bank president or CEO you're the bank holding company president or CEO so the bank would come to the Federal Reserve and say you know we would like to let's say operate an armored car service we would like to go out and buy some and/or armored truck we'd like to buy some trucks and get them all beefed up with a lot of iron and so forth to make them you know like impermeable to bullets thick glass get some guards carrying the guns and we'd like to carry money around town and the Federal Reserve said in the early days well how is that pull related to banking why should we allow you to do that and I said well look we've got a customer as a bank and they've got a deposit here and if they call us up and want some money we need to be able to carry money to our customer this is just a direct extension of our banking business and carrying money to a customer yeah we can see that okay well now that we've got this truck and the guards and blah blah blah all this stuff that goes with it well then how about letting us use that truck and the guards and all the stuff that we've already acquired to service our customer how about letting us use that and basically sell that service to other people like if another bank wants to deliver money to their customer could that other bank call us up and say hey send your truck over pick up some cash no ever and the Federal Reserve said well you know you were doing this stuff to service your own customers it's not like you've gone out there and established a business that's unrelated to banking you are already doing this and now all you want to do is just when the truck is setting idle and not being used you want to use it to deliver money over here yeah it's pretty closely related your banking activities go ahead and so then it goes on the list and so then at some point some banker goes to the Federal Reserve and makes application they say hey we've got this trust Department and which is totally legal you know I mean banks and have a trust Department trust apartment is this you turn your money over to the bank with instructions and say something like I want I've got this money I want to set it up I want you to pay this out to my beneficiaries I'd like you to pay each one of my kids five thousand dollars a month kind of an allowance or something like that or I want you to take this money and manage it you know invest it for me and then pay money to my grandkids or whatever so we've got a trust apartment and one of the things that we do for our customers ordinary part of banking one of the things that we do is we calculate their taxes at the end of the year you know we're handling their finances they've turned their money over to us and they have to calculate taxes so helping them with that and the federal reserve's is no problem and then the banker says well now that we have got these experts that know how to calculate taxes and they're helping these customers out how about if somebody come in off the sidewalk and ask us to calculate their taxes could we do that yeah that's the same activity it's just a matter of somebody coming in off the sidewalk rather than a customer you already have but it's the same activity okay we'd allow that and so this list keeps growing it's things bankers are already doing for their customers and now they want to do it for strangers that's not so strange and so the list gets longer and longer and longer okay now after a while bankers start saying things like this hey let's add one to the list down here that we kind of like we would like to sell insurance that is to say we want to set up a subsidiary that would sell insurance and we're mainly talking about I'll say the word casualty insurance casualty insurance and not life insurance we're not live insuring people lives but cash over the insurance would insure would insure property will insure homes will insure businesses you know like equipment that the business might have vehicles and so forth computers building structures we'd like to do that well I don't know what the Federal Reserve would have said if they were just left on their own but let me tell you that insurance company said no no no no this is evil and insurance companies are regulated at the state level and so one problem there is is the federal reserve sand two bankers y'all go ahead and get in the insurance business and then the state of Illinois or Arkansas or Missouri or Kansas or Texas wherever it go just a second who do you think you are we regulate insurance companies in this state and part of the problem is the insurance companies do not like competition and so then they just squawked they squawk at the state level they went to a congressman congresswoman and representatives and said oh you've got to block this the federal reserve's getting ready to let bankers in our business and they are gonna compete with us and put us out of business maybe make it where nobody can make a profit in this business you got to stop it well bank holding companies tried to get into the insurance business for years and years and years and I don't mean to say a hundred years but year after year it just went on and on and on 10 15 years and it was always this kind of standoff and by the way there were other things that bankers wanted to do they wanted to get into the brokerage business I'll say stock and bond they wanted to say oh call us up tell us that you want to buy some stock and General Electric or whatever but just place your order we'll buy that stock on your behalf and deliver it to you but and charge you a fee we will become a stock broker and then the brokerage firm said no no no don't let those guys do that this would be evil evil to hit well we don't want the competition and then there be like the investment banks you know they got that word a bank in it but an investment bank is not a bank the way we have been talking about banks here's what a bank is a commercial bank it takes in deposits and makes loans right well an investment bank is this an investment banks key service is helping companies do a couple of things one it helps companies one thing it helps companies do is issue stocks and bonds so if like you have a company over here and you say gosh we're trying to grow our company we need some finance some capital then we could go to an investment bank and say he helped us give us the ins and outs of it about issuing some stock to the public or help us issue a bond to the public and then the investment bankers say oh okay we'll help you with that and then the investment bank could be an advisor and in the end to this company and then the investment bank would say okay now that we've got these stocks or bonds all printed up what we're gonna do is we're gonna go out there and find investors that are interested in these stocks and bonds and we'll help you sell these things place them find investors and one specific activity that they were very involved in you know you mainly think about companies wanting to sell stocks and bonds so they can build a new factory so they can grow or something like this one thing is called M&A mergers and acquisitions what investment banks would do is some company might come and say hey we want to buy up that other company over there we've got an airline we want to buy that other airline right now they are let's say competing with us or maybe that other airline is serving the cities that we don't serve we want to merge with them help us do that and so then you go to an investment bank and they say okay here's our advice we'll maybe print up some stocks or maybe what we'll do is we'll go and help you arrange a loan we get a bunch of money and then we will buy that other airline will help you buy acquisition so anyway investment banks and bankers are saying hey we got to get in that business that sounds pretty good they're making lots of money so anyway in each case bankers are getting in these things like we can help people calculate their taxes and we can what an operator armored car service and things like this ATM machines and sell the services we can do those things and then they start saying this is pretty closely related to banking why don't you let us set up a subsidiary that would do these things and the problem is this is not like creating a new business and this is you know adding these things and it's not like going out and competing against a few small companies this is like these are enormous businesses with a lot of political influence and they are all just telling Congress don't allow those bankers in our business evil and then they have all sorts of terrible things that would result you know if banks are allowed in these businesses meanwhile while they are saying no no no glass-steagall don't let those subsidy or don't let those bank holding companies get in our business meanwhile while they're doing that each one of them is trying to buy banks they want to get in the banking business okay just don't want the banks in their business and so there's this really oh and the bankers don't want them in the banking business they just want banks to get in this business so everybody's just hypocritical as can be why cuz it comes down to money yeah the rule should allow me to sell insurance but not a lot insurance companies sell banking services yeah okay and insurance companies are saying no those bankers shouldn't be selling insurance but we ought to be alone a bank what's the matter of that this just goes on and on and on it's and there's these powerful political forces on either side of it and so basically for 10 or 12 years there was this sort of you know situation that was just not working out okay so what happened so what happened is this in 1998 two companies got together just conversations at first one of them is Citicorp and it was a bank holding company and it owned a bank of course bank holding companies do that or else we wouldn't call a bank holding company and it's Bank with Citibank I double dotted that line so here's city core it's a bank holding company it owns this big bank and it depends on what year you looked at but it's the number one or number two or number three biggest bank in the United States for like the last 50 years seventy-five years so a huge Bank and then they got in a conversation with traveler's insurance maybe group you and this is the CEOs of each one of these and these are huge companies we're talking hundreds of billions of dollars on either side of the deal and so they get involved in this conversations they're sitting around kind of talking and I've already talked to you about some of the shortcomings of glass-steagall doesn't allow diversification doesn't allow them to achieve economies or efficiencies and managing their companies and it didn't allow them to cross market products so these two get together and they say oh that is so sad that we can't basically have a single company because you know a Citibank has got offices around the world branches and it's got lots of big businesses as customers and it's lending money too and those big businesses both in the United States and elsewhere those big businesses they need insurance and it's too bad that when somebody comes in and says hey I want a loan for 300 million dollars or whatever that you can't say oh well would it's sort of like going to McDonald's you want fries to go with that so you come in you say I want to be going I say you want fries to go with that you want insurance to go with that you're gonna build a big building you need to insure that building well we can't do that because Citicorp Citibank can't sell insurance and city says the Travelers is too bad when somebody comes in says gosh we need a lot of insurance that we can't say what would you like a loan or do you need some maybe banking services checking account services transferred money around the world for you and stuff like that can't do it because that's a different business insurance some of these economies of scope would be economies of we need some expertise and one expert or maybe one group of experts could provide help to these people and managing money because that's what they do insurance companies are taking in premiums I mean what we mainly think about insurance companies as they bring in a premium you'd pay them and then they pay out if a building burns down and they do that but the point is they bring the money in today and the building doesn't burn down for 17 years right and so what happens is you pay your premiums today and they are investing this money okay well so maybe some experts that will help them invest this money those same experts would help the banks invest their money because they're bringing in deposits and then making loans and hey where's a good place to loan or should we be buying bonds or whatever we're making investment decis
ons too bad we can't have one group of experts financial experts economists and so forth help out both groups yeah but you can't just hire two groups of experts that's not efficient too bad we can't just have one big office in New York City that we got to have a big office for this company in New York and a big office for this company in New York Rin is high in New York and we're talking about lots of people too bad we can't consolidate these offices bring them together maybe save just that New York go on maybe save 10 20 30 40 million dollars a year and ran too bad so these guys are sitting around talking and then they say hey got an idea I'm thinking martinis are involved because these are the kinds of ideas that you know sober people don't come up with and what they say is that hey got an idea this is totally illegal so don't tell anybody but let's merge anyway because if you go and you read the glass-steagall Act and read between the lines it basically says this if a company is breaking glass-steagall they've got five years to come into compliance or else if you get a company that is doing things it's not supposed to do then five years from that's all they got to break those companies apart and so what they said is okay well let's break glass steagle let's just merge and then five years from now we'll break the company apart in compliance with glass steagle if the law doesn't change they said okay let's do that and now their total assets are in the hundreds of billions but their net worth you know like what it would take to buy a they call that the market cap or capitalization what it would take to buy all the stock in these two companies in the marketplace it's not in hundreds of billions but I mean it's billions of millions of billions I don't know maybe fifty seventy five hundred billion dollars to buy all the shares of stock into both companies we're talking like big operation here and so they just say let's take these and these are two of the biggest like if you just said let's make a list of the top ten biggest financial companies in the United States these are both beyond it and so what they say is and this is pretty gutsy stuff by the way right taking this really conservative company that's got a lot to risk you know like you can take a company that's small and nobody's ever heard of and if you ruin it then people go in but if you have something that's really safe and secure and worth a lot this really great asset and then you do something really reckless and they're responsible I mean Congress can pass the death penalty in a in a sense Congress and the regulators and so forth so they were taking a real gutsy move here and so they just say well let's merge and then we will tell our regulator will tell the world that oh if this is not permitted than five years from now we will break up and what they were betting on is that this merger of these two huge companies will be the thing that will break this logjam and get everything moving for deregulation and so they merged and they were betting that by 2003 glass-steagall would be if not eliminated modified so that's what they did now as soon as they did that they started spending lots of money and a lot of political capital trying to get that law changed because they had a lot riding on that and then as soon as they did this the other insurance company said hey we ought to do that and the other bank said hey we ought to do that and not only did the other bank say hey we ought to do that go with an insurance company why not get with some brokerage company or why not get with some investment bank hey we ought to do that why don't we give that a shot see if we can't get five years and so all of a sudden the dynamic change it's not these two groups that are facing each other off and each one I'm saying stay away stay away stay away now somebody two of the leading companies and these two different sides got together and said hey let's get a five year head start on everybody if it does change by 2003 we're together we're already we hit the ground running and everybody else had just come on board in so while the others say let's do the same and all of a sudden we get these financial companies that are trying to get together and that did lead to Congress changing the law the federal reservists in this is not that bad of a deal there's a lot of logic behind it they can save a lot of money they can you know like achieve efficiencies lower their cost of doing business and so we kind of go along with this a Federal Reserve saying to the Congress and so there was a lot of political pressure and glass-steagall Dan it was it's not like they just went in with a big eraser and erased it and usually it's described as the elimination or the repeal of glass-steagall it's really a rewording of glass-steagall and like taking a lot of that firewall down and making a lot of those rules that separation a lot less severe and this and what 1999 gramm-leach-bliley bli le UI act and it's very often called the repeal of glass-steagall but like I say glass-steagall still exists but it is just the watering down of glass-steagall and so these major laws 1927 1933 these major laws that were passed only six years apart that were basically getting rid of interstate banking and forcing banks to just stay within their own domain and keeping Everett you know them separated from everybody else those laws five years apart 1994 and then 1999 we basically reversed all that and banks were allowed to cross state borders through mergers and banks were allowed to basically jump across those other boundaries into other industries here's my little story on this because I had a little bit of experience about that relates to this what happens that we're in the st. Louis Federal Reserve District here and so there's a president of each Federal Reserve Bank we have 12 Federal Reserve banks each one has a president and the president goes around and makes a tour of the district and so they'll come to you know smaller cities most every city in the district is smaller than st. Louis anyway make a tour of different cities and just come into town meet the bankers and other prominent citizens I was there so I don't know if that term would apply anyway and so I went to this meeting and there was dinner and then after dinner they go into a room and there's maybe yeah 40 or 50 you know the mayor was city manager and a couple people from the City Council and a couple of us were there economist a teacher and in the city and there were maybe 30 bankers there because those bankers want to meet the president of their Federal Reserve District that's kind of their regulator and and so they want to be on good terms of them he's an economist and I sat next to him at dinner and had like a chat I had used a text book that he wrote years ago when he was a college professor and so we chatted and all that kind of stuff and so that was all over with and we went into this room and it was a question-and-answer session and so people are asking questions you know about various laws that are regulations many of which I had never heard about and so this had been announced this quote illegal merger had been announced and I was still kind of trying to understand what's going on okay so they did something that's illegal but they've got five years to undo it and I was trying to come to grips with that so I'm sitting in the room and we go around and the bankers are asking about this that and the other and after a while there's kind of a lull in the conversation and I raised my hand I said yeah I want to ask about this whole deal right here I said of course I don't have any inside information but it seems to me like if you've got a bank and it's worth let's just say the market capitalization all the stock might be worth fifty billion dollars and you've got some insurance company in all of its stock its market capitalization it might be thirty billion dollars I don't know but let's just use numbers like that it seems to me like if you've got these two huge companies and they're regulated so much and they've got so much to lose if they just go out and break the long-ago you know how do you like that it doesn't seem like they would have just done that it seems to me like they would have gone to the Federal Reserve and said hey what do you think about this and got any advice got any guidance you can offer any insights it's gonna be a problem and when I say go to the Federal Reserve I don't mean to say in st. Louis because there are these branch offices around the United States you know twelve district offices but the Federal Reserve Board is in Washington DC so I'm thinking and that's the way I expressed it is it seems like they before they made this gutsy move they would have gone to the Federal Reserve and said let's have kind of a quiet dinner conversation and just kind of bring this issue up and see what the reaction is what do you think that's what I said you think they did that and the rumor really cold and the president of that the st. Louis Federal Reserve Bank said absolutely not the law is established by Congress we were created by Congress we the Federal Reserve we work for the Congress not on a daily basis we don't answer to them for what we do on a daily basis but we were created by the Congress we can be changed by the Congress of bhavish by the Congress we would not be we the Federal Reserve would not be meeting behind closed doors with some bank helping them break some law absolutely not and then but I mean he said this to me like that and then when he got done I thought boy that was pretty bad you know and I'm kind of going like this and then he turns and he's got a vice president there who is their legal vice president and then it was a woman and she stood up there absolutely not there is no way this would happen you know and I mean just and I am said all right I mean just kind of going oh my god everybody in the room was looking at me like why did you say such a thing anyway I said well you know like I said I don't have any inside information I just thought this would make sense to do something like that because it's a well but it didn't happen okay and I said okay fine and then I shut up for the rest of the meeting anyway so the next morning I came to the office and I was kind of embarrassed I talked to this colleague of mine about later I thought oh my god I wish I hadn't asked that question he goes yeah that was pretty dumb so anyway the next day I came to the office I got at The Wall Street Journal and on the first page column six that the right-hand column it had just been released and now there's a story on the first page of The Wall Street Journal that city core and traveler's insurance had met with the Federal Reserve Board you know behind closed doors and sought their advice and opinions and all other stuff that they just had no way did that happen that would be wrong they had done it all and the Federal Reserve was basically working with them to try to find a way but I mean not telling them to do it but just giving advice and insight because the Federal Reserve the way it was managing the people that ran it thought that lists ought to be longer and that there ought to be more competition in the financial services economists like competition and that is really another way of looking at all this it is how do we have more competition in the insurance business more competition of brokerage more competition of investment banks how do we get more competition the banking industry and so the Federal Reserve as economists sorta lean pretty heavily toward let's increase competition anyway this did break the log jam and we did get this act in the next year and since then there has been this merging of the financial services industries and there's a term about a financial supermarket but the whole idea would be and it's a dream I don't know how much further we'll go in that direction is that you can just kind of imagine some big supermarket there's a bank in there and then there's insurance and then here is a brokerage and then here you know but basically a big financial company that can take care of all your financial needs and that is the dream of some of these people that are doing this stuff and so we've talked about them achieving economies of scope there is also this issue of diversification of risk reducing risk of the company and there's one other motive or reason for bringing these companies together and it's not an economic thing but there is empire building or in three letters ego there is just I want to run the biggest damn company in the world kind of a thinking and this is very common thinking among people who are already running pretty big companies they're just thinking what would it take for me to make my company twice as big and then guess what after it's twice as big they want twice as big again and there is it's very difficult to satisfy those desires there was a guy named Sandy Weill that ran this company travelers and he had started off with a much much smaller company 20 years before and he just started buying out and merging with other companies and basically kicking out the guy you know like if you bring two companies together you say no we'll be partners you know you run your part I'll run my partner and you get them together and then you do something to engineer a coup where that guy's out and then you run the whole thing and this guy was pretty good at that and so then it got a bigger company emerges somebody else and then somehow or another they had to go sometimes pay them off just give them money and say leave here's you know ten million dollars or whatever they go okay and sometimes it's go to the board of directors and say this guy is totally incompetent we can't have him running a company I got to do it all okay and so then he just started doing a series of these mergers and not like you know one every year but a series of mergers and he just started building a bigger and bigger bigger company and finally he had the biggest company in the insurance industry and then he said Wow let's get together at this guy I'm already the biggest an insurance let's be the biggest of all financial companies and so this guy that run this company is John Reid he kind of thought the same thing huh I don't have to get in that interest business this would be the biggest company in the world and this guy's kind of old John Reid was I'm 15-20 years younger anything well let's just merge and I'll hang out and I'll be the number two guy in this merged organization okay Citigroup I'll be the number two guy in this big organization and Sandy's pretty close to retirement age he'll probably retire in five six years and when he retires I'll take over so they merge it all together and in Sandy's got the Eagle working for him he's number one today and in this John Reed's number two he'll be number one in a few years and so what happens is they get together and they're going along for a while what do you know John Reed loses his job he's gone and the sandy wild then he ran the whole company and so ego and then he finally did retire and somebody took over from him and the company started having financial problems and more and more and then that guy lost his job just from I don't want to say incompetence because who knows if anybody could have management but they got into some problems and that guy lost his job so somebody else took over for him and that guy's in trouble today and what that maybe says is you can build an empire where it's too big and it just becomes unmanageable you know these economies of scope we want to get in all different kinds of business it may be that you get into businesses you just don't understand and that you just can't manage them and you take risk that you just shouldn't be taking and that you know how to run a bank and you know how to deal with these things that we talked about what the information asymmetries and how to make good loans and and so forth and how to collect on those loans and you know how to do that better than anybody but that doesn't mean you know how to run a brokerage company or an investment bank or an insurance company and for sure you can go out and hire people to do those things but then there may be a point where the
want to do something you don't like and then what you say is no you do it my way and the boss and then oops we made a mistake and then oops we made a mistake means we lost a billion dollars oops or ten billion or more and then when you do that you got to tell the shareholders and shareholders say we don't need any more that you're out and so what I'm saying to you is economies of scope there's no textbook that tells us how far you can go and achieve economies of scope and how that pays off for the company we have to find this out glass-steagall didn't say we're going to find out glass-steagall said this the scope is gonna be limited to this and so we're not gonna find out how far your managerial talents could be spread and still make a profit glass-steagall said that's it but as soon as we lower the barriers and we let that Bank start getting into all these other businesses we have found out that you know it is possible for that company that big financial company to just get into businesses they cannot manage that's beyond their expertise and you know that comes down to this whole empire built in an ego idea you're gonna say something no so anyway that's a little bit of this story but nowadays when these companies lose money it started in what 2007 went into 2008 part of 2009 what happened is these big companies and I don't mean to just focus on this one but this was the one that broke the logjam that got us to quote repeal glass-steagall and that's why it's getting all the focus but these big companies in oh seven oh eight oh nine they started making decisions you know like making decisions over in all these peripheral areas they started making decisions that were so bad their losses would be in the order of 20 40 60 80 hundred billion dollars and that's the kind of stuff that just make them go out of business and so even if glass-steagall was promised on the wrong idea to begin with this idea of keeping banks out of everything else all these other businesses maybe wasn't a bad instinct totally because when we repealed that glass-steagall and we let those banks get into everything else it didn't take very many years a decade until sure enough they were at the point of going out of business and then what happened taxpayers stood up handed a bunch of money over to these institutions to keep them in business how much is a bunch of money a bunch you know like if you'd fill up this room with hundred-dollar bills we'd need to get billed on to this room and what do we I think some of these fifty billion dollars and up I'll put a plus sign in there we're handing over to these companies to keep them in business now in theory they're gonna give all that back and so this was something to tide them over well that tied me over but something to tide them over through this rough time that they were going through but the rough time they were going through was partly of their own making they just made a bunch of bad decisions now a lot of criticism of that should we have done that my answer is yeah we shouldn't have let them get into this situation but once they got into the situation here's your choice you can either give them a chunk of money and keep them in business or not and if you don't then what happens is you get these institutions that are a trillion dollars in total assets and just boom they're gone and when they bloom they're gone then that means oh there's a panic now everybody that's given money to other financial institutions go hey that can happen to me if that trillion dollar institution can be wiped out just like that will wake up on a Monday morning and there it is in the newspapers said that banks gone if that can happen then any bank can be gone you know what I think I'd just better get my money back away from those banks and so then it would be the same kind of panic that was under way back in the 1929 to 33 period I want my money I want my money I don't trust this bank to hold on to it I won't get it back if I don't get it today bank panic financial system shuts down Great Depression so let's make a distinction do we give this money to these big institutions because they're nice guys and deserve it no not nice guys I think don't deserve it for sure I mean why would average Americans hand over money to rich people it wouldn't that couldn't be justified but do it because if these institutions start failing then it's what we get as a financial panic that ends up with a Great Depression where the unemployment rate is twenty five thirty percent and everybody goes why didn't we stop that from happening and so temporarily hand them the money and that's what we did do and I think that was the right move I think it's a sad thing and shows mismanaging mismanagement by the financial institutions are not careful regulation where we ever got to that point but we did arrive at that point and then you can't go back and change the past question is what do you do today let's probably won't finish today but let's turn our attention to a couple of other related issues to what we've been talking about before which finish this discussion it'll probably be a little bit into tomorrow but we'll finish the discussion then other there's another that's just a nice heading for whatever I want to talk about GSEs government-sponsored enterprises let me see if I can set this up where it doesn't seem like just these random topics but it's kind of related to what we've been talking about your salt we talked about before asymmetric information there are problems in this whole lending business that we as individuals cannot cope with okay asymmetric information and we talked about moral hazard problems right and this sort of stuff so anyway what we do is we say well we'll have some specialists who make loans and they'll deal with asymmetric information and those specialists were the banks well the banks can do a better job I mean much better job than we can in dealing with asymmetric information but that doesn't mean they're perfect and so there are still some quote deserving people who that if we had all the information if it were symmetric and we had all the information in the world we would make a loan but banks are not making those loans because they don't have all the information in the world and so there's still some quote deserving borrowers out there that aren't getting loans and so what the government says is hate and those rare cases lets us get involved lets us the government get involved now we're gonna help some people out here people in businesses and so forth get loans that they can't otherwise get I'll come back to it later but think in terms of a student loan it's hard for students to go out and get a bunch of loans and I mean enough money to go to college now if your parents will give you the money that's different but that's not what we mean by alone that's parents but if you have income of $5,000 a year and you want to borrow $50,000 to go to college who's gonna lend you $50,000 and you go oh I'll pay you back later when well several years from now well how much will you pay me this month nothing next month nothing next four years nothing okay so I'm gonna lend you 50,000 dollars you're not gonna pay me anything for four years at least you're gonna take this money and go have parties and then I'm gonna hope that someday you get a job and pay me back the answer is no there be no student loans are practically none if you just had to go out there and compete in the marketplace and I mean bankers want to make loans they make profit from making loans but bankers are just going I don't know to some people come pay us back easily and others will never pay us back I don't know so then what we have is a government-sponsored enterprise but the government is set up to basically help those student loans well anyway I'm just giving you a for a for example there is why there's still some quote deserving borrowers out there that are not getting loans even through banks even to banks with the expertise they have let's talk about homeowners I mentioned students small businesses those are the big ones I believe I already talked about this acronym the federal National Mortgage Association have I mentioned them before yes no and then what we do is take that first letter F in M a from each word and create an acronym now the next thing we do and this is ha ha ha kind of funny but by the way this organization was set up I believe in 1938 so it's been around a long time so the next step we do is hmm what does that acronym sound like if we were to just say it mm-hmm Oh Fannie Mae and so a lot of these organizations have got their acronyms there's a Fannie Mae and I'm not trying to I'm not gonna list them all but there's a Fannie Mae there's a Freddie Mac there's a Ginnie Mae the Student Loan Marketing Association Student Loan Marketing Association Sallie Mae okay but we've got these government-sponsored enterprises that are helping to get credit into the hands of these quote deserving people and companies and we're going to talk about them a little bit next time and I'll see you then so long
