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Speakers at the Moore School

Professor, Alumnus Speak on Current Financial Crisis

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(l to r) Tom Sargeant and Tim Koch

"We have to have action," said Professor Tim Koch, describing the current financial crisis on Wall Street to an overflow audience at the Moore School September 26. "The question is, what action, and who is going to manage it?"

Koch, chair and professor of finance, appeared with alumnus Tom Sargeant (BS ’80), chief financial officer of AvalonBay Communities, at a University of South Carolina Parents’ Weekend event at the Moore School that attracted a huge audience of parents, students, and businesspeople.

Koch recounted recent events that led up to the current crisis, including the failures of Bear Stearns and Lehman Brothers; the government rescue of Fannie Mae, Freddie Mac, and AIG; Bank of America’s purchase of Merrill Lynch; and more recently, the failure of Washington Mutual (WAMU). The federal government is now trying to build a "firewall" to stop the dominoes, Koch said.

Sargeant agreed with Koch. "We need to get something passed by Congress, that's essential. If we don’t bail out Wall Street, everyone in this room will feel the effects of it."

Sargeant told the audience the current financial crisis is due to "people, politics, and process.... The first place to try to understand the financial meltdown is that there was a natural demand for buying a home and for financing that home with a mortgage" as Baby Boomers (people) reached their prime home buying age in the mid-1990s. Second, government adopted policies to support homeownership (politics).

The third "P", process, is the substance of the current debate. "Wall Street, in all their wizardry, found a way to take all those mortgages and encourage brokers to package these mortgages, bring them to Wall Street... and [Wall Street] redistribute[ed] these synthetic mortgages or securities out to anybody who is willing to buy."

These are loans that "Freddie and Fannie wouldn't make because there was no down payment, or no mortgage insurance on them, or very little documentation about where you work or even if you have a job," Sargeant said. "Whether you could actually make the mortgage payment two years later when the reset rate happened really wasn’t a concern of the origination process."

Combined with investors' demand for very high interest, he added, "due diligence slipped."

Koch and Sargeant agreed government action is needed soon. "We do need something to happen in terms of a program that will stabilize the markets," Sargeant said. "And I'm sure hoping that today or over the weekend something will happen… the government will provide the rescue package that we need."

Sargeant said the taxpayers should recoup much of the expenditures. "At the end of the day, bailouts will probably not end up costing us [taxpayers] a lot."

"Housing values must stabilize," Koch said. He predicted that part of the government solution will be conditions on mortgages, such as those proposed by Sheila Bair, chairman of the Federal Deposit Insurance Corporation, to stem the tide of foreclosures.

Koch said government bailouts are nothing new, "we have a history of it, we do this systematically." But probably nothing rivals the scope of the current proposal. "We've never seen this, how complex this is, the liability."

"It's the end of the banking model that we've known," said Sargeant. "Banks such as Morgan Stanley are no longer investment banks... they no longer create these synthetic products; they've become bank holding companies... and Wall Street as we know it has been reshaped."

Gail Crouch
September 2008

		Tim Koch's presentation in pdf format		Tom Sargeant's presentation in pdf format