“As long as the music is playing, you have to get up and dance” Group E (Section A) By: Taylor Nicolich, Mark Pabalan, Jamis Perrotta, Shreya Singhvi, Michael Steck, Sai Tenneti

Background Charles O. Prince, former CEO and Chairman of Citigroup Quoted in July 2007, in an interview for Financial Times Citigroup was in trouble as the subprime mortgage crisis had worsened SAI

Who is Charles Prince? Started career as an attorney with U.S Steel Corp in 1975 Became Chairman and Chief Executive of Citigroup Resigned as CEO due to the failing mortgage industry during the 2008 “Credit Crisis” Fortune named Prince as one of eight economic leaders who “didn’t see the crisis coming” SAI

Explanation Staying bullish on buy-outs So much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market Competitors kept loosening lending standards Citi couldn't afford to drop out TAYLOR Subprime mortgages is one that's normally issued to borrowers with low credit ratings The securitization of subprime mortgages into mortgage-backed securities (MBS)and collateralized debt obligations (CDOs) was a major contributing factor in thesubprime mortgage crisis. Subprime MBS and CDOs were attractive to investors due to the higher interest rates they offered versus assets backed by prime mortgages. Subprime borrowers with less than perfect credit had higher interest rates on their mortgages due to the increased risk of default….Only when property values began to decline did issues begin to appear. Adjustable-rate mortgages began to reset at higher rates, and mortgage delinquencies grew substantially. The default on subprime mortgages led to more problems. By August 2008, around 9% of all mortgages in the U.S. were in default. MBS and CDOs began to lose value with the higher default rate Race to keep up with competitors who kept loosening lending standards Liquidity- how quickly an investment can be sold/bought Subprime-interest rate is low, but rises over time In the early 2000s- low mortgage rates, but then the rate started rising, and the people couldnt pay off their mortgages, causing the recession

General Concept of the Quote If the market is moving up, keep buying. If the music (market) stops, stop buying or sell flat If the Fed is easing, don’t fight it. Federal Funds Rate vs. S&P 500 (January 1985-October 2009 Jamis

The “Music” “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Liquidity: Degree at which an asset can be bought or sold without affecting its price “Pools of liquidity” So much liquidity Disruptive events where liquidity could go the other way Mark: His comments come amid growing fears that problems in the US subprime mortgage market, rising interest rates and concerns about loose lending standards could lead to a downturn in the leveraged finance market. So much liquidity that it would not be disrupted by the turmoil in the US subprime mortgage market. Instead of liquidity filling in the gaps: way big Wall Street banks and hedge funds had picked up troubled subprime mortgage lenders

Leverage Buyouts The acquisition of another company Significant amount of borrowed money to meet the cost of acquisition 90% debt and 10% equity Company cash flow = collateral Three reason: Take public company private Spin-off a portion of an existing business by selling it Transfer private property Requirement: Company must be growing or profitable LARGE ACQUISITIONS, LITTLE CAPITAL COMMITMENT Shreya use borrowed money to make loans at higher rates of interest than they are paying for the funds they borrow = PROFIT

LBO EXAMPLE The acquisition of Hospital Corporation of America (HCA) Kohlberg Kravis Roberts & Co. (KKR) Bain & Co. Merrill Lynch in 2006 $33 billion HCA assets = collateral Future cash flow = pay off debts * Only profitable because of debt financing, and easy lending policies Shreya

The Great Recession The Great Recession had many drivers, but some of the key ones were Inflation of the subprime mortgage market Fraudulent reporting of mortgage backed securities The given quote “As long as the music is playing, you have to get up and dance”, was said during the time that mortgage backed security prices were running wild, independent of their actual value, which was near zero. Based on what happened the following year, this may not be the best strategy.

Sources https://economics.rutgers.edu/downloads-hidden-menu/undergraduate/syllabi/fall-2015/1074-fall2015hughes408-1/file https://www.nydailynews.com/news/money/chuck-prince-quote-citi-dancing-crisis-worsened-haunts-panel-inquiry-article-1.165694 https://www.investopedia.com/ask/answers/041515/what-role-did-securitization-play-us-subprime-mortgage-crisis.asp https://www.investopedia.com/terms/l/leveragedbuyout.asp