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Microsoft PowerPoint - Return to Normalcy_Jan 2010_FINAL.ppt
A Return To Normalcy in 2010?
Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities in the United States.
January 2010
30 Key Steps in the U.S. Response to the Economic, Real Estate, Banking and Credit Crisis in 2010
Stefan Auer(212)[email protected]
Francis Kelly(202)[email protected]
Toby Cobb(212)[email protected]
Tom Joyce(212)[email protected]
2To avert a panic, central banks should lend early and freely (and without limit), to solvent firms, against good collateral, and at high rates.
~ Walter Bagehot (1826 1877), Editor-in-Chief of The Economist, Renown businessman, essayist and journalist
A Return to Normalcy in 2010?
Normalcy is a term people use for normal when they are no longer taking it for granted.
~ William Safire, The Economist magazine, 2009
3Section
1 How Bad were the Financial Crisis Losses in 2008 - 2009?
2 30 Key Steps in the U.S. Response in 2010
A. Response to the Real Estate Crisis in 2010
B. Response to the Banking Crisis in 2010
C. Response to the Non-Bank Credit Crisis in 2010
D. Response to the Economic Crisis in 2010
Contents
Appendix
1. 2008 - 2009 FDIC Seized U.S. Banks
Section 1
How Bad were the Financial Crisis Losses in 2008 - 2009?
5Global Financial Asset Values: Over US$16 Trillion DeclineGlobal Financial Assets Fell by $16 Trillion in 2008
Global Financial Asset Values Comments
$34 $36 $38 $40$43 $46
$51 $56$61
$17 $18$20 $22
$24$27
$28$29
$32
$24$27
$28$31
$34$37
$42$48
$51
$37 $33$26
$33
$38
$45
$54
$62 $34
$112 $114 $113
$126
$139
$155
$174
$194
$178
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2000 2001 2002 2003 2004 2005 2006 2007 2008
$
t
r
i
l
l
i
o
n
Bank deposits Government debt securities Private debt securities Equity securities
$7.0 $9.4 $10.3 $11.6$12.5
$6.9$9.9 $10.8
$12.1 $13.1$11.3$11.5 $11.4
$11.5 $11.5$4.5
$8.7$10.4
$12.3$14.3
$4.4
$6.8$7.8
$8.7$9.7
$34.0
$46.3$50.7
$56.1$61.1
0
10
20
30
40
50
60
70
2000 2005 2006 2007 2008(
$
i
n
t
r
i
l
l
i
o
n
)
United States EurozoneJapan Emerging countriesOther mature countries
Source: McKinsey Global Institute (Sept 09), Bloomberg
The current financial crisis interrupted a 3-
decade-long expansion of global financial asset
values
The 2008 decline was by far the largest on
record
Total Financial Assets: Over $16 trillion total net decline in 2008
Equity and real estate: declines wiped out nearly $30 trillion of global wealth in 2008 and 1H 2009
Global AUM: fell > $15 trillion in 2008 Cross border capital flows: fell > 80% Financial Institutions: Losses > $1.7
trillion from 2007 2009 Government debt: will soar with post-
crisis fiscal deficits
Deposits: Increased > $5 trillion
2009 data not yet available
Return to Normalcy?Global Bank Deposits
(US$ Trillions)
Strong global equity market performance since March 2009
Non-government debt markets performing well
Financial system stabilized with strong earnings growth forecast
Global financial assets declined over $16 trillion in total in 2008, although the decline in equities was nearly $30 trillion
6Global Equity and Real Estate Losses: ~ US$30 TrillionGlobal Equity and Real Estate Losses (2008 1H 2009)
Declines in equity and real estate
values wiped out nearly $30 Trillion
of global wealth in 2008 and the first
half of 2009
Global residential real estate values
doubled from 2000 to 2007 and
exceeded $90 trillion at their
peak
but have lost over $5 trillion during
the financial crisis through June 2009
Global equities lost nearly half of their value in 2008 and early 2009, wiping out $28.8 trillion of value in 2008 and first half of 2009
Most severe market crash since the Great Depression Every single major global equity market in the world lost value in 2008 Nearly all markets began rebounding in March 2009 Shows the high auto-correlation of global markets, driven largely by investor flows
Residential and commercial real estate markets have had over $7.5 trillion in losses: Residential Real Estate: Over $5 trillion of global losses Commercial Real Estate: Over $2 trillion of losses in the U.S. alone
Source: Bloomberg, McKinsey Global Institute
-49.9% -52.5%-38.8% -41.1%
-51.5% -53.2% -55.1% -54.6%-63.4%
52.7% 57.3%
84.3%
43.3%
60.8%47.0%
39.4%
71.9%
48.7%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Dow Jones S&P 500 BrazilBovesta
FTSE 100 DAX CAC 40 Nikkai 225 Hang Seng Shanghai
Oct 1, 2007 - Mar 1, 2009 Mar 1, 2009 - Dec 18,2009
Global Stock Market Losses
Americas Europe Asia
Return to Normalcy?
Since March 09, the Dow is up over 50%, and financial stocks have doubled
Nearly all global equity markets up significantly (auto correlation indicative of positive fund flows)
7$20.6 $22.1 $24.7 $27.3$30.5 $31.4 $36.4
$38.6 $38.9
$17.5 $19.4$21.2
$23.6$28.9 $31.0
$31.8 $30.0 $27.1$12.3 $11.3
$10.8$10.2
$8.8 $9.6$8.5 $9.5 $9.3
$3.5 $3.8$5.4
$6.2$7.3
$9.3$15.6 $12.6 $14.0
$53.9 $56.6$62.1
$67.4$74.5
$82.3
$88.3 $90.8 $87.3$85.4
$0
$20
$40
$60
$80
$100
2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009
$
t
r
i
l
l
i
o
n
Western Europe U.S. Japan Other
Global Real Estate Losses: Over US$7.5 TrillionGlobal Residential Real Estate Values (2008 1st Half 2009)
U.S. Commercial Real Estate Losses (June 2008 November 2009)
Nearly $2 trillion of U.S. CRE equity has been
wiped out during the crisis, and we expect
U.S. banks alone to take $200 - $300 bn
of total losses on nearly $2 trillion of
outstanding CRE debt
Source: Richard Parkus, Head of DB Commercial Real Estate Research. Real Estate Roundtable. The Economist magazine. 2009 CRE data assumes 30% declines, 90% attributable to equity and 10% to debt. OECD, Haver Analytics. McKinsey Global Institute.
June 2008 November 2009
Equity$3.2 trn
Debt$3.5 trn
Equity$1.4 trn
Debt$3.3 trn
Total Value: $6.7 trn Total Value: $4.7 trn
Nearly $2 Trillion of CRE Equity Losses
Over $5 Trillion of Residential Real Estate Losses
Global residential real estate values doubled
from 2000 to 2007 and exceeded $90 trillion at
their peak
but lost over $5 trillion during the financial
crisis through June 2009
Return to Normalcy?
Most of the residential real estate losses have been taken
The bank CRE losses ahead should not result in failures among the largest U.S. banks
As of December 2009, property prices are still falling in more places globally than they are rising
8Global Financial Institution Losses: Over US$1.7 Trillion
8
U.S. Banking Crisis: 2 Phases
Source: Bloomberg, as of December 18, 2009.
Started: Mid 2007 Peak: Mid/ late 2008 Focus: sub-prime and mortgage backed securities
markets
Accounting: Largely fair value Result: Significant mark-to-market losses; liquidity
crunch; broker dealer failures; bank failures; Government bail-outs; loss of confidence
Status: Nearly over
Started: 2008-2009 (losses); still early stages Peak-defaults: 2009-2010 (varies by asset class) Focus: residential, CRE, credit card, auto and
consumer loans
Accounting: Hold-to-maturity Result: Significant reserving, loan losses and
charge-offs still to come
Status: possibly 2-3 additional years of high loan losses remain; economy is key variable
Phase 2: Bank Loan CrisisPhase 1: Securities Market Crisis
Return to Normalcy?
Stabilization of global banking system in 2009
U.S. and European stress test processes in 2009 augmented confidence
Significant private capital raises in 2009
Significant repayments of Government rescue capital in 2009
Global financial institutions have lost
over US$1.7 trillion since the beginning
of the current Financial Crisis
through December 2009
Most of the losses still to come in 2010 will
be from bank loan portfolios (see 2
phases of banking crisis below)
$1,230
$234 $249
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Banks Insurance GSEs
$
b
i
l
l
i
o
n
$1,108
$563
$43
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Americas Europe Asia
$
b
i
l
l
i
o
n
Write downs by Region and Financial Sector (as of December 2009)
Total: $1,713 Total: $1,713
By Region (As of Dec 09) By Sector (As of Dec 09)
9Global Assets Under Management Decline: Over $15 Trillion
Assets Under Management (2007 2008)
Global Financial Assets Comments
Source: McKinsey Quarterly: The New Financial Power Brokers. Crisis Update (Sept 2009)
$30.4
$26.2
$18.9
$5.1 $4.4
$1.9$0.9
$25.0
$18.8
$16.2
$5.0 $4.8
$1.4 $0.9
0
5
10
15
20
25
30
35
PensionFunds
Mutual Funds InsuranceAssets
PetrodollarForeign
Investors
Asian SWFs Hedge Funds PrivateEquity
$
t
r
i
l
l
i
o
n
2007 2008
% Change: (-18%) (-28%) (-14%) (-2%) +9% (-26%) 0%
2007 Global AUM: $87.8 trillion2008 Global AUM: $72.1 trillion
2009 data not yet available
Total Global AUM: declined from $88 trillion to $72 trillion in 2008
Pension funds: significant losses across broad scope of asset classes
Insurance: largely fixed income focused, but significant equity losses
Petrodollars: includes central banks, SWFs and individuals of major oil exporters (future size closely linked to price of oil)
Asian Sovereign: includes central banks and SWFs; Chinas reserves represent over 50%; growth will depend on global GDP
Hedge Funds: over 25% decline in 2008; investor withdrawals continued strongly in 1H 2009; recovery may be slow
Private equity: investment focus shifting from large leverage buyouts to distressed debt, infrastructure, distressed banks and real estate, and venture capital
(US$ Trillions)
Global assets under management
declined sharply during the crisis,
with declines in excess of $15
trillion in 2008 alone
Sharp declines continued in the
first half of 2009, although year-end
data is not yet available
Over the next 5 years, assets from oil
producing states and Asian
sovereigns are expected to grow
more rapidly than hedge funds and
private equity
Return to Normalcy?
Better performing capital markets
Improved liquidityRisk appetite
increasing
Significant growth expected
over next 5 years
10
-2.5
-4.7
-3.9
-2.5
-5.4
5.4
8.5
3.6
1.5 1.5
3.7
1.1
7.7
9.0
-8
-6
-4
-2
0
2
4
6
8
10
US UK Euroland LatAm Japan Asia (ex-Japan) China
R
e
a
l
G
D
P
G
r
o
w
t
h
(
%
)
2009 E 2010 E
Global GDP Contraction During the Crisis
Source: DB Economics Research Team
Global Economic Growth (2009E 2010E)The recession which accompanied the
Financial Crisis was the longest
and deepest since the 1930s
but in some sense, was actually less
calamitous than many had feared
as markets were collapsing in late
2008
Return to Normalcy?
It could have been much worse
Many of the large developing world economies showed resilience to the Financial Crisis
Fiscal stimulus packages should boost GDP growth through 2010 2009 has become known as the Great Recession, but an equally apt name may be
the Great Stabilizationfor 2009 was extraordinary not just for how output fell, but for how a catastrophe was averted.
~ The Economist magazine, December 2009
DBs economists see a 25% chance
that the 2010 U.S. economy could
either stall or even fall into a double-
dip recession
Many of the developing world
economies, especially in Asia,
showed strong resilience to the
Financial Crisis
11
Dramatic Credit Spread Widening
11
Note: Data based on 10-year Bloomberg industrial indices.
Source: Bloomberg as of December 18, 2009
Credit spreads across the ratings
spectrum gapped sharply wider
during the Financial Crisis,
with high yield credits and
leveraged loan spreads providing
an early indicatorof the Crisis
10 Year Industrial Credit Spreads (1991 2009)
Return to Normalcy?
Significant spread tightening across all ratings in 2009
Spreads now notably tighter than 2 year averages
Strong high yield new issue markets
Non-guaranteed financial debt markets functioning
Liquidity much improved
0
200
400
600
800
1,000
1,200
Apr-91 Dec-93 Aug-96 Apr-99 Dec-01 Aug-04 Apr-07 Dec-09
S
p
r
e
a
d
t
o
U
S
T
(
b
p
s
)
AAA AA A BBB BB
Change vs. Change vs.20-year historical 2-year local
Current average average average averageAAA +83 +63 +20 +118 (35)AA +100 +74 +26 +152 (52)A +124 +99 +24 +198 (74)BBB +203 +143 +60 +291 (88)BB +436 +314 +121 +618 (182)
Dec 18
12
0
10
20
30
40
50
60
70
80
90
J a n- 0 5
A pr - 0
5J u l
- 0 5O c
t - 0 5J a n
- 0 6A p
r - 06
J u l- 0 6
O ct - 0 6
J a n- 0 7
A pr - 0
7J u l
- 0 7O c
t - 0 7J a n
- 0 8A p
r - 08
J u l- 0 8
O ct - 0 8
J a n- 0 9
A pr - 0
9J u l
- 0 9O c
t - 0 9
Unprecedented Market VolatilityVIX Daily Closing Values (2005 2009)
Source: Bloomberg
High yield and leverage loan indices gap wider
Hedge fund implosions and fire sales
SIV unwinds Bear Stearns
Fannie/ Freddie Lehman Brothers AIG Reserve Primary fund
Bank Stress Tests Bank capital raises Bank earnings rebound PPIP announcement Fiscal stimulus MBS purchase program Legacy TALF announce
As the financial crisis accelerated,
liquidity virtually disappeared
across capital markets globally
and volatility spiked to historical
highs
As market confidence and visibility
improved in Q2 2009, investor cash
flows changed accordingly,
driving higher liquidity and
spread tightening in most markets
Return to Normalcy?
As visibility has improved, risk appetite has increased
Very positive fund flow implications
On December 22, 2009, the VIX Index dropped below 20, the lowest level since August 2008
13
Perspective: Cost of the U.S. Financial Crisis?
13
Source: David Wyss, Chief Economist, Standard & Poors. OECD, IMF, Global Insight.
0
5
10
15
20
25
30
35
South Korea1997 2002
Japan1991-Present
Spain1977 1985
Finland1991 1994
Norw ay1987 1993
Sw eden1991
U.S. S&L Crisis1984 1991
U.S. SubprimeCrisis
2007-Present
%
o
f
N
o
m
i
n
a
l
G
D
P
Although the absolute amount of
the losses in the current global
financial crisis were
unprecedented
the actual fiscal expenditure
required by the U.S. Government
to alleviate the crisis was not as
large (on a relative basis) as several
other recent banking crises in
recent decades
Fiscal Costs of Post-War Banking Crisis
Return to Normalcy?
Though daunting, the losses and debt burdens to date are manageable vis--vis the size of the U.S. economy
14
9.0%8.5%
9.0% 9.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2008 2009E 2010E 2011E
Perspective: Crisis in the West, or Rise of the East?
Key Question
When we look back 25 years from now,
will the real economic story of
the first decade of the 21st Century be
the Western market financial crisis
or will it be the rapid rise, and shift
East, of economic power to Asia?
0
5
10
15
20
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
m
i
l
l
i
o
n
US China
Forecast
Note: Vehicle sales under 6 tons gross weightSource: J.D. Power and Associates
U.S. & China New Vehicle Sales
0.0
0.5
1.0
1.5
2.0
2.5
U
S
D
t
r
i
l
l
i
o
n
s
Chinas FX Reserves
04 05 06 07 08 09
0
50
100
150
200
250
300
'01 '02 '03 '04 '05 '06 '07 '08
E
U
R
b
i
l
l
i
o
n
s
Exports to ChinaImports from China
Source: Eurostat. Wall Street Journal.
European Union Trade with China
Chinas Financial Crisis GDP Growth China had the largest (13% of GDP), earliest
implemented (Nov 08), and most effective fiscal stimulus plan globally during the financial crisis
Chinas GDP growth continues to be unmatched
New vehicle sales in China will exceed the U.S. for the first time ever in 2009
Chinas trade surplus with the worlds largest economies grew rapidly during the crisis
Chinas FX reserves increased 50% during the global financial crisis to $2.3 trillion
75% of Asias $5 trillion in reserve holdings are in US$
Source: DB Economics Research. Peoples Bank of China.
Section 2
Key Steps in the U.S. Response in 2010
16
Over $16 Trillion in U.S. Government ProgramsBreakdown of $16 Trillion U.S. Government Initiatives by Agency and Program
Federal Reserve ($7.4 trn, 45.1%)
FDIC ($2.7 trn, 16.3%)
Treasury ($6.3 trn, 38.6%)
Sources: Fed, FDIC and Treasury websites, WSJ and other public articles (as of 12/18/09).
History suggests that exiting too soon from policies to contain a financial crisis can significantly prolong an economic downturn.
~ U.S. Treasury Secretary, Timothy Geithner, December 2009
Max ($bn) Used ($bn)
Debt Guarantee Program (EXPIRED) 940.0 307.2Deposit Insurance Programs 1,384.0 22.0Asset Guarantee for Citi / BofA (TERMINATED) 346.5 0.0
Subtotal 2,670.5 329.2 % of combined $16.4 trn / % or utilization 16.3% 12.3%
Max ($bn) Used ($bn)
CP Funding Facility (CPFF) 1,800.0 9.4Term Auction Facility (TAF) 900.0 85.8Term ABS Loan Facility (TALF) 1,000.0 58.9Currency Swaps / Other Assets 602.0 108.8MM Inv. Funding Facility (MMIFF) (EXPIRED) 540.0 0.0MBS Purchase Program 1,250.0 1,086.6 U.S. Treasuries Purchase Program (EXPIRED) 300.0 300.0Term Securities Lending Facility (TSLF) 250.0 0.0AIG Credit Extensions (incl. ML LLC II + III) 103.3 57.5GSE Debt Purchase Program 200.0 159.9Primary Credit Discount 110.7 19.2Primary Dealer and Others (PDCF) 147.0 0.0Maiden Lane LLC (Bear Stearns) 29.5 26.6ABCP Money Market Fund Liquidity (AMLF) 152.1 0.0Securities Lending Overnight 13.1 8.3Secondary Credit 0.6 0.0
Subtotal 7,398.3 1,921.0 % of combined $16.4 trn / % or utilization 45.1% 26.0%
Max ($bn) Used ($bn)
Money Market Mutual Funds (EXPIRED) 3,000.0 0.0Public-Private Investment Fund (PPIF) 1,000.0 26.7Feb '09 Stimulus Package 787.0 194.5Troubled Asset Relief Program (TARP) 700.0 399.8Fannie Mae / Freddie Mac Bailout 400.0 110.6Student Loan Purchases 195.0 32.6Feb '08 Stimulus Package 168.0 168.0Treasury Exchange Stabilization Fund (ESF) 50.0 50.0Tax breaks for banks 29.0 29.0
Subtotal 6,329.0 1,011.2 % of combined $16.4 trn / % or utilization 38.6% 16.0%
($bn) Max Used PeakFed 7,398.3 1,921.0 3,827.3Treasury 6,329.0 1,011.2 1,011.2
FDIC 2,670.5 329.2 329.2Total 16,397.8 3,261.4 5,167.7
Section A
Response to the Real Estate Crisis in 2010
18
Step # 1: Address the Excess U.S. Housing Supply
U.S. Residential Real Estate Peak-to-Current Declines (As of Sep 09)
Rapid Rise in Serious Delinquencies U.S. Homeowners with Mortgage > Value
Source: Karen Weaver, Head of DB Securitization Research. Case Shiller data as of 9/09. First American. CoreLogic.
Core U.S. Problem:Excess Supply
35 mm excess units Rising inventories,
especially distressed Rising delinquencies,
especially prime High unemployment Tight credit 2-4 years to absorb
U.S. home price declines vary by
market and have been staggering
and remain vulnerable based
on fundamentals (which continue to
be daunting)
Return to Normalcy?
The U.S. Government response has been massive
Most markets near bottom on pricing
Affordability Momentum may limit
downside Low rate environment
29
58
12 1415
18 19 2022 23
27 28
38 39 39 4043
4752
55
0%
15%
30%
45%
60%
2
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19
Step # 2: Continue U.S. Government Housing Programs
Program Size DescriptionAgencyCategory
Lower Mortgage Rates
GSE Debt Purchases (Expired) Treasury $200 billion Purchase of GSE debt securities
GSE MBS Purchases (March 2010 Expiry)
Treasury $1,250 billion Purchase of MBS guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae
UST Purchases (Expired) Treasury $300 billion Purchase of U.S. Treasury Notes
Spending ProgramsHome Affordable Modification Program (HAMP)
FHFA / Treasury
$75 billion Payments to lenders and borrowers to modify primary and secondary mortgages
354,000 trial modifications as of Sept 2009
Guarantees through Fannie Mae / Freddie Mac
FHFA / Treasury
Unlimited On Dec 24, 2009, Treasury committed to an unlimited guarantee of GSE losses through 2012 (previously $400 billion)
Tax Savings
Mortgage Interest Deduction IRS $80 billion(2009 est.)
Allows homeowners to deduct mortgage interest payments from their taxable income
Deductibility of State and Local Property Taxes
IRS $16 billion(2009 est.)
Allows homeowners to deduct state or local taxes imposed on their homes
First-Time Homebuyer Credit(extended to April 2010)
IRS $14 billion $8,000 credit against federal income tax liability for first-time homebuyers and $6,500 for repeat homebuyers
Capital Gains Exclusion IRS $16 billion Allows homeowners to earn a tax free capital gain on the sale of their primary home
Today, the U.S. Government, directly or indirectly, underwrites 9 of every 10 new residential mortgages (twice the pre-financial crisis percentage)
On December 24, Treasury said it would cover unlimited losses at Fannie and Freddie through 2012
Return to Normalcy?
The U.S. Government response has been massive
Congress and White House very focused on this issue
Source: Congressional Budget Office (November, 2009); Wall Street Journal.
20
Step # 3: Address Massive 2010-2013 CRE Refinancing Wave
Over $2 trillion plus of U.S. commercial real estate equity has been wiped out Market values: Pre crisis (~ $6.7 Trillion); Dec 09 (~ $4.1 Trillion)
$3.3 trillion of debt outstanding Banks ($2 trn); CMBS market (~$1 trn); Insurance (~$300 bn) Smaller U.S. banks (i.e., # 30 100) have the largest and lowest quality loan
exposures (significant non-cash flow assets) Sharp price declines, highly levered properties, and lower LTV lending standards
have combined to create a significant refinancing risk issue for the market between 2010 2013 in particular
The 2010 2014 CRE Refinancing Wave will most negatively impact U.S. banks
Commercial Real Estate (CRE) Mortgage Maturities
$0
$50
$100
$150
$200
$250
$300
$350
1 98 0
1 98 2
1 98 4
1 98 6
1 98 8
1 99 0
1 99 2
1 99 4
1 99 6
1 99 8
2 00 0
2 00 2
2 00 4
2 00 6
2 00 8
2 01 0
2 01 2
2 01 4
2 01 6
2 01 8
2 02 0
Banks CMBS Life Cos Other
Source: Richard Parkus, Head of DB U.S. Commercial Real Estate research. Foresight Analytics. Wall Street Journal. Real Estate Roundtable.
Potential Impact: Consumer confidence Bank failures Pension losses State budget gaps Over 9 million jobs
130100
170
630
0
100
200
300
400
500
600
700
2008/2009 2010 2011 2012+
$
b
i
l
l
i
o
n
Est. Required Equity to Refinance
$ Cumulative: $130 $230 $400 $1,030
Return to Normalcy?
Not much! The top 20 U.S. banks (85%
of the system) have significantly less relative exposure than the smaller banks, thereby reducing systemic risk
Peak: 2010 - 2014
21
0
50
100
150
200
250
1 99 9
2 00 0
2 00 1
2 00 2
2 00 3
2 00 4
2 00 5
2 00 6
2 00 7
2 00 8
2 00 9
CMBS
Step # 4: Restart the CMBS New Issue Market
Return to Normalcy?
Expiry dates extended for TALF CMBS Program (to Mar and June 2010)
Small pick-up in new issuance activity in November and December 2009
U.S. CMBS Issuance
Includes cash volumes. Excludes 2nd derivative CDO and synthetics
$1.4
Secondary Trading Levels
2009 U.S. CMBS Issuance
2009 U.S. CMBS Issuance ($1.36 billion) Comment
0
250
500
750
1,000
1,250
1,500
J a n- 0 7
A pr - 0
7J u l
- 0 7O c
t - 0 7J a n
- 0 8A p
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J u l- 0 8
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10 yr CMBS (AAA)
Date Issuer Tranche WAL Ratings Size ($ mm) Pricing TALFNov-09 Developers A 4.69 AAA / Aaa / AAA 323.5 S + 140 yes
Diversified (DDR) B 4.69 AA / Aa2 / AA 41.5 5.75%C 4.69 A / A2 / A 35.0 6.25%
Total 400.0
Dec-09 Flager A 6.67 AAA / AAA 350.0 S + 225 noDevelopment B 7.11 AA / AA 30.0 S + 400
C 7.11 A / A 33.0 S + 450D 7.11 BBB / BBB 47.0 8.75%
Total 460.0
Dec-09 Inland Western A-1 5.62 AAA / AAA 58.3 S + 150 noA-2 9.95 AAA / AAA 330.6 S + 205
X N/A AAA / AAA N/A N/AB 9.95 AA / AA 24.1 S + 360
C 9.95 A / A 42.9 S + 420D 9.95 BBB / BBB 44.0 9.00%
Total 500.0Source: Deutsche Bank, Bloomberg
Strong 2009 CMBS spread tightening: Driven by PPIP announce, TALF,
improved liquidity and stronger economic data
Spreads still well above historical norms
Limited TALF impact on new issuance: Originators not prepared to take
aggregation risk of multi-billion pool for several months; complicated by lengthy underwriting process
TALF CMBS Expiry Dates: Legacy CMBS: March 31, 2010 New CMBS: June 30, 2010
Although TALF has had de minimus
impact on new CMBS issuance
strong investor appetite for 3 new
CMBS financings at the end of 2009 (2 non-
TALF) were important steps, albeit small,
toward a possible revival of the market in
2010
22
0
100
200
300
400
500
1 99 9
2 00 0
2 00 1
2 00 2
2 00 3
2 00 4
2 00 5
2 00 6
2 00 7
2 00 8
2 00 9
Prime
Alt-A
Subprime
Other
0
500
1,000
1,500
2,000
2,500
3,000
J a n- 0 7
A pr - 0
7J u l
- 0 7O c
t - 0 7J a n
- 0 8A p
r - 08
J u l- 0 8
O ct - 0 8
J a n- 0 9
A pr - 0
9J u l
- 0 9O c
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B
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p
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a
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.
S
w
a
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s
10yr Subprime RMBS (AAA)
Step # 5: Restart the Non-Agency RMBS MarketThe Fed did not
include new or legacy (non-
Agency) RMBS as a TALF-eligible
asset in 2009
and issuance volumes remain
down sharply from pre-Financial
Crisis levels
The only substantive issuance activity
today is taking place through the
GSEs
The GSEs will be under the microscope of Congress in 2010, but will nonetheless continue to dominate issuance in the year ahead
U.S. (Non-Agency) RMBS Issuance
Source: Deutsche Bank, Inside MBS&ABS, Thomson Financial & S&P
Secondary Trading Levels
Source: Thompson Financial; DB Global Markets Research
Return to Normalcy?
Not much!Market in 2010 will
continue to be dominated by Government Agency issuance
Status of the Non-Agency (Private Label) RMBS Market
New Issuance: Virtually no new non-agency (private label) RMBS issuance during the Financial Crisis in 2008 and 2009; significant change from pre-crisis market
No significant change in 2010 anticipated in this regard On August 17, 2009, the Federal Reserve indicated new or legacy RMBS will not be TALF eligible
Spreads: Significant tightening, and improved liquidity, since the announcement of Treasurys PPIP program in early 2009; modest economic recovery has also helped
Regulatory Reform: GSE restructuring will likely not be part of the final 2010 financial regulatory reform bill
Outlook for 2010: Virtually the entire market will continue to be supported by U.S. Government liquidity, directly or indirectly, in 2010; private label (non-Agency) market cannot really compete
Government Agency MBS will continue to dominate in 2010 (Fannie, Freddie, GNMA, and FHA)
Section B
Response to the Banking Crisis in 2010
24
0
100
200
300
400
500
600
1 9 34
1 9 37
1 9 40
1 9 43
1 9 46
1 9 49
1 9 52
1 9 55
1 9 58
1 9 61
1 9 64
1 9 67
1 9 70
1 9 73
1 9 76
1 9 79
1 9 82
1 9 85
1 9 88
1 9 91
1 9 94
1 9 97
2 0 00
2 0 03
2 0 06
2 0 09
#
o
f
F
a
i
l
e
d
B
a
n
k
s
Step # 6: Close Weak Banks that Hurt the System
# of Failed U.S. BanksThe # of small U.S. bank failures will
accelerate in 2010
Among the 8,099 banks in the U.S., the #
of failures has risen sharply as we
approach peak defaults in the
crisisthe 50 failures in Q3, 2009 was the
highest quarterly total since 1992, but will
likely be surpassed in 2010
The unfolding commercial real estate
crisis will be a critical driver
1930 1934: ~ 9,100 (estimated); 33% of U.S. banks 1934 1941: 373 1988 1992: 818 (4.9% of U.S. banks) 2008 - 2009: 164 (25 in 2008; 139 in 2009) 2010 FDIC Problem List: 552 (~ $350 bn assets) Current crisis estimated failures: 500 1,000 +
Credit Sights: estimates between 600 1,100 banks will fail in the current financial crisis (see below)
The Economist: notes that over 1,000 U.S. banks could fail, many in 2010-2011
Source: FDIC as of Friday, December 18. (CreditSights, November, 2009).
5076
252
305
552
0
100
200
300
400
500
600
2006 2007 2008 3/09 9/09
#
o
f
P
r
o
b
l
e
m
I
n
s
t
i
t
u
t
i
o
n
s
FDIC Problem-Bank Watch List (2006 2009)
Bank failures tend to lag the crisis and will accelerate sharply over the next few yearsReturn to Normalcy?
Unlikely that any of the top 20 U.S. banks fail in the current crisis (85% of the system)
Unlikely to create a systemic risk issue
U.S. Bank Failures since 1934
552 banks currently on FDIC Problem Watch List
Credit Sights Estimated 2008 - 2011 U.S. Bank Failures
Severe Case: 1,090 failures (13.4% of U.S. banks) Adverse Case: 842 failures (10.4% of U.S. banks) Base Case: 622 failures (8.6% of U.S. banks)
Bank failures, on average, cost the FDIC ~25-35% of the failed institutions assets; tends to be on higher end for smaller banks who tend to have fewer debt, preferred and equity investors to absorb losses
25
Step # 7: Efficiently Distribute Assets of Failed U.S. BanksTop 20 U.S. Government Assisted Bank Transactions (2008 2009)
Source: FDIC. DB DCM and Investment Banking FDIC Coverage Teams
PPIP Legacy Loan Pilot Transactions Recent FDIC Participation / LLC Transactions Franklin Bank Residential Mtge Portfolio
FDIC sold $1.3 bn residential mortgage portfolio of failed Franklin Bank to newly created LLC
50% LLC equity stake auctioned off with 6-to-1 leverage through issuance of FDIC gtd notes
Corus Bank Construction Loans FDIC sold $4.5 bn portfolio of performing and
non-performing construction loans to LLC
40% LLC equity stake auctioned off with FDIC leverage in form of notes and advance facility
($ in millions) Failed bank financials1
Target name Buyer nameDate
seizedState of
targetBranches
assumed Assets DepositsDeposit
premium2
1 Washington Mutual, Inc. JPMorgan Chase & Co. 9/25/08 WA 2,207 307,000 188,000 NA2 Colonial Bank BB&T 8/14/09 AL 346 25,000 20,000 2.8%
3 IndyMac Bank, F.S.B. OneWest Bank4 7/11/08 CA 33 23,500 6,400 NA4 Guaranty Bank BBVA Compass 8/21/09 TX 162 13,000 12,000 0.0%
5 Downey Savings & Loan U.S. Bancorp 11/21/08 CA 213 12,800 9,700 5.2%6 BankUnited, FSB BankUnited (newly chartered) 5/21/09 FL 86 12,800 8,600 0.0%
7 United Commercial Bank East West Bank 11/6/09 MI 63 11,200 7,500 1.1%8 California National Bank (FBOP) U.S. Bancorp 10/30/09 CA 68 7,792 6,160 0.0%
9 Corus Bank MB Financial Bank 9/11/09 IL 11 7,000 6,600 0.2%10 Franklin Bank, SSB Prosperity Bancshares Inc. 11/7/08 TX 46 5,100 3,700 1.7%
11 Park National Bank (FBOP) U.S. Bancorp 10/30/09 IL 30 4,706 3,731 0.0%12 Silverton Bank N/A 5/1/09 GA N/A 4,100 3,300 NA
13 PFF Bank & Trust U.S. Bancorp 11/21/08 CA N/A 3 3,700 2,400 4.2%14 San Diego National Bank (FBOP) U.S. Bancorp 10/30/09 CA 29 3,608 2,892 0.0%
15 First National Bank of Nevada Mutual of Omaha 7/25/08 NV 28 3,400 3,000 4.4%16 Security Bank Corp (6 bank subs) State Bank and Trust Company 7/24/09 GA 20 2,800 2,400 0.0%
17 Irwin Union Bank & Trust First Financial Bank 9/18/09 IN 27 2,700 2,100 1.0%18 Orion Bank IBERIABANK 11/13/09 FL 23 2,700 2,100 (1.5%)
19 Pacific National Bank (FBOP) U.S. Bancorp 10/30/09 CA 18 2,335 1,763 0.0%20 Georgian Bank First Citizens Bank and Trust Company 9/25/09 GA 5 2,230 1,960 NA
Average 1.0%Median 0.2%
1) Last reported.2) As reported either in FDIC press release or subsequently available submitted bid form from acquiror.
3) Reported numbers are combined for multiple institutions acquired.4) Amounts shown as of sale of bridge bank, not from date of seizure.
FDIC SaleMSMC Venture
LLC FNBN I LLC ANB Venture LLC FNBN Rescon I LLCFNBN CMLCON I
LLC
Date 5/6/2008 12/29/2008 1/12/2009 2/5/2009 2/20/2009
Failed institution
NetBank First National Bank of NV
ANB Financial First National Bank of NV
First National Bank of NV
Winning bidder
Gulf Coast Bank and Trust
PennyMac Kingston Mgmt Services
Stearns Bank Diversified Bus. Strategies
SFR Construc & Lot
SFR Construction Res. Construction Comml Construction
$145.6 mm (UPB)
$560.5 mm (UPB)
$1,120.3 mm (UPB)
$732.7 mm (UPB) $701.6 mm (UPB)
$19.1 mm for 40% interest
$43.2 mm for 20% interest
$20.2 mm for 20% interest
$32.2 mm for 20% interest
$140.3 mm for 20% interest
32.8% price 38.6% price 9.0% price 22.0% price 29.2% price
Winning bid
amount
Assets in structure
Return to Normalcy?
FDIC receivership and distribution mechanisms are well established
S&L crisis provided a useful roadmap
We expect the FDIC to demand equity appreciation units from bidders in 2010
As of December 2009, the FDIC had
auctioned off the assets of > 100 failed
U.S. banks in the current financial crisis
26
Step # 8: Implement Global Financial Regulatory Reform
Systemic Financial
Stability
Robust Economic
Growth
Review of Proposed 2010 U.S. Financial Regulatory Reforms
Striking the Balance Focus of Reforms
Expected Timing
Balancing market stability and growth
will be the challenge of regulatory reform
in 2010
Unfortunately, the margin for error of
too much too soon is likely to be high (less
haste and more thought needed)
Return to Normalcy?
Significant progress already, especially in the House
Senate and House will hopefully strike right balance on remaining contentious issues in 2010
Required compromise to pass legislation likely to dampen more radical proposals
More appetite for compromise on both sides of aisle than initially apparent
We expect a final U.S. financial regulatory reform bill to become law sometime late in Q2, 2010
Bank capital requirements Limits on Federal Reserve (monetary policy, bank
supervision, consumer protection, emergency lending authority)
OTC derivatives reform Consumer protection agency Systemic regulator Bank supervision authority Too Big To Fail Resolution / unwind authority (including treatment
of bank creditors)
Executive compensation/ corporate governance Hedge fund registration Credit rating agencies Securitization reform Non-bank financial regulation (insurance, finance
companies, ILCs)
Red = More contentious pieces of regulatory reform
U.S. House: Passed landmark legislation on December 11, 2009 with 223 202 vote
U.S. Senate: Initial bi-partisan draft from Senate Banking
Committee (Senators Dodd and Shelby) expected in late January, early February
Senate floor vote in late Q1/ early Q2, 2010 Reconciliation of Senate/ House bills: expected
in Q2, 2010
Final Law: Late Q2, 2010 (DB estimate) Mid-term elections: November, 2010
27
Step # 9: Address Too Big to FailSpectrum of U.S. Government Strategies for Addressing Too Big to Fail Banks
The top 4 U.S. banks represent > 55% of industry assets (among 8,099 banks)
U.S. Banking Asset Concentration
Total Industry Assets estimated at $13.2 trillion (Q3, 2009)
As of Q3 '09
Company Name Assets ($ bn) Bank Cumulative
1 Bank of America 2,251.0 17.0% 17.0%2 JPMorgan Chase 2,041.0 15.4% 32.4%3 Citigroup 1,888.6 14.3% 46.7%4 Wells Fargo 1,228.6 9.3% 55.9%
5 Goldman Sachs 882.2 6.7% 62.6%6 Morgan Stanley 769.5 5.8% 68.4%7 MetLife 535.2 4.0% 72.4%8 PNC Financial 271.4 2.0% 74.5%9 U.S. Bancorp 265.1 2.0% 76.5%
10 Bank of NY Mellon 212.0 1.6% 78.1%
Total 10,344.6
% of Industry Assets
59% 61%65%
70%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
June 06 June 07 June 08 June 08
A
s
s
e
t
s
o
f
W
o
r
l
d
'
s
T
o
p
1
0
B
a
n
k
s
(
%
)
Source: Capital IQ; Bank for International Settlements, WSJ, OCC, Bloomberg, FDIC
Top 10 Global Bank Asset Concentration
The top 10 global banks represent a growing percentage of global banking assets
81.1 77.9
47.8
39.131.7
0
10
20
30
40
50
60
70
80
90
JP Morgan Bank ofAmerica
GoldmanSachs
MorganStanely
Citigroup
N
o
t
i
o
n
a
l
V
a
l
u
e
O
u
t
s
t
a
n
d
i
n
g
(
U
S
D
t
r
i
l
l
i
o
n
)
U.S. Banking Derivative Contracts
Share: 28% 27% 16% 13% 11%
5 of top 6 U.S. banks account for 95% of U.S. bank derivative contracts (~$300 trillion notional)
Higher capital levels More stringent liquidity
standards
Less Aggressive Approach
More Aggressive Approach
Caps on certain businesses Limitations and selected
divestitures
Break-up the biggest banks Re-enforce Glass Steagall
It is still too early to tell which approach
regulators will take in 2010, but early
indications suggest a less aggressive
approach with a focus on higher
capital levels
28
As of Q3 '09 Assets TotalCompany Name ($ bn) Projected Loss Required Capital TARP Asset Guarantee FDIC TLG Debt TALF ($ bn)
1 Bank of America 2,251.0 136.6 33.9 45.0 118.0 44.5 8.9 216.42 JPMorgan Chase 2,041.0 97.4 - 25.0 40.8 5.0 70.83 Citigroup 1,888.6 104.7 5.5 45.0 306.0 64.6 14.9 430.54 Wells Fargo 1,228.6 86.1 13.7 25.0 9.5 34.55 Goldman Sachs 882.2 17.8 - 10.0 22.0 32.06 Morgan Stanley 769.5 19.7 1.8 10.0 23.8 33.87 MetLife 535.2 9.6 - - 0.4 0.48 PNC Financial 271.4 18.8 0.6 7.6 3.9 11.59 U.S. Bancorp 265.1 15.7 - 6.6 2.7 9.3
10 Bank of NY Mellon 212.0 5.4 - 3.0 0.6 3.611 GMAC 178.3 9.2 11.5 12.5 7.4 19.912 SunTrust 172.7 11.8 2.2 4.9 3.6 8.513 Capital One 168.5 13.4 - 3.6 - 3.614 BB&T 165.3 8.7 - 3.1 - 3.115 State Street 163.3 8.2 - 2.0 4.0 6.016 Regions Financial 140.0 9.2 2.5 3.5 3.8 7.317 American Express 120.4 11.2 - 3.4 5.9 2.3 11.518 Fifth Third 110.7 9.1 1.1 3.4 - 3.419 KeyCorp 97.0 6.7 1.8 2.5 1.9 4.4
Total 11,660.8 599.3 74.6 216.0 424.0 239.4 31.0 910.4
Fed Stress Test Use of Government Programs ($bn)
Step # 10: Closely Monitor Systemically Significant BanksA critical part of the U.S. Governments strategy in 2009 was not allowing the top 19
U.S. banks to fail
Source: Treasury, FDIC, Fed, Bloomberg, Deutsche Bank
1) Cum loss projections for 2009 & 2010 based on 10.2% unemployment scenario2) Exchanged $25 bn in common stock and repaid $20 bn3) Asset guarantee was terminated
(3)
Top 19 U.S. Banks Use of U.S. Government Programs
Red = repaid TARP ($164 billion) or terminated asset guarantees, both of which we still include in subtotals.
(1)
Return to Normalcy?
CitiGroup, WellsFargo and Bank of America repaid $115 billion of TARP in December, 2009
$245 billion of FY2009 TARP capital in U.S. banks, initially projected to cost $76 billion, will now earn a profit
(3)(2)
The top 19 U.S. banks were stress tested in 2009 and represent > 80% of U.S. bank industry assets
Nearly 700 U.S. banks received $245 billion of TARP capital
12 of the top 19 repaid by Dec 2009 ($164 billion)
52 of the 69 banks who received > $100 million of TARP have not repaid
(as of Dec 09)
29
Step # 11: Rebuild Capital and Increase Lending
Source: FDIC, Treasury, Company Filings, Bloomberg, Deutsche Bank
2009 U.S. Bank Capital Raises (U.S. Banks Only)
2009 Non-Guaranteed Debt Issuance
2009 Total: $90.4 billion
2009 Equity Capital Markets Issuance
Return to Normalcy?
Very difficult to mandate lending in size across the system
The most effective path to more lending is already underway:
Rebuild capital Stabilize economy
2009 Total: $134.3 billion
-250
-200
-150
-100
-50
0
50
100
150
200
250
300
$
b
i
l
l
i
o
n
Qrtly Change of Bank Loans Outstanding
2006 2007 2008 2009
Banks Choosing Treasuries over Loans
Commercial banks:
0
300
600
900
1200
1500
1800
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
$ bln
0
300
600
900
1200
1500
1800
$ bln
Commercial and industrial loans
Treasury and agency securities holdings
Savings and loans crisis
2001 dotcom bubble burst
Current crisis
2009 Patterns in U.S. Bank Lending
$0.1
$61.2
$8.3
$64.8
010203040506070
Q1 '09 Q2 '09 Q3 '09 Q4 '09
$
b
i
l
l
i
o
n
$5.3
$38.0$28.0
$19.1
010203040506070
Q1 '09 Q2 '09 Q3 '09 Q4 '09
$
b
i
l
l
i
o
n
We expect the 2009 re-opening of the
debt and equity capital markets for
U.S. banks to continue in 2010
In December 2009 alone, Citi, Wells and
BofA raised over $50 billion of equity
Only after banks continue to earn, and
rebuild their capital base, will lending in
size return
30
Step # 12: More Financial Statement Transparency
Return to Normalcy?
New FAS 166/ 167 standards effective as of 2010 The U.S. bank stress tests in Feb May 2009
already factored this impact in conclusions FDIC has provided a potential 1 year (2 x 2Qs)
extension on risk-based capital impact (but leverage ratio impact would be immediate)
$121$100
$48
$154
0
25
50
75
100
125
150
175
CITI BAC JPM WFC
$
b
i
l
l
i
o
n
Expected Impact of FAS 166/ 167 Effective Date: 2010 Increase in Assets: ~ US$ 500 billion
The vast majority of On-Balance Sheet asset consolidation will come from the top 4 U.S. banks
Some banks may explore the sale of certain off-balance sheet interests to mitigate consolidation
Higher risk-weighted assets: ~ $75 100 billion Possible Reduction to Retained Earnings: from
possible new loan loss reserves, and reversal of residual interests held; could also limit future credit creation
Reduction to regulatory capital levels: from both higher RWA, and lower Retained Earnings (if applicable)
Will increase regulatory leverage ratios
FAS 166/ 167
Changes to Accounting Rules Closely Tied to Proposed Financial Reform Efforts
Amendments to FAS 140 and FIN 46(R) All existing QSPEs evaluated for consolidation
Consolidation methodology: based on qualitative determination of both who has the
power and exposure to benefits and losses
Valuation methodology: some flexibility on whether to use (i) carrying, or (ii) fair value
Banks to lose Sales Treatment for certain assets previously sold to QSPEs
Entities likely included: credit card securitizations, bank administered ABCP, non-conforming RMBS
Loan-loss Provisioning
Fair Value Accounting Rules
More forward-looking loan loss provisioning under consideration
Changes to financial reporting with improved fair value information and greater transparency under consideration
New Accounting Rules in 2010
Estimated On-Balance Sheet Asset Increase
Same issuer may choose different valuation methods for different assets
Source: FASB; DB Research. Barclays Research (November, 2009).
Accounting transparency will
be a key focus in 2010
31
Step # 13: Halt Current Reversal in Financial GlobalizationImpact of Financial Crisis on Financial Globalization
Return to Normalcy?
Government response to bank sector globally was massive in late 2008 and 2009
Record bank capital raises in 2009
Modest economic recovery underway
Risk appetite has begun to improve
$1.5 $1.0 $0.9 $1.2$2.1 $2.8 $3.1
$4.9
($1.3)
$1.0$1.0 $1.0
$1.4
$2.0$2.4 $2.7
$2.6
$0.9$0.7 $0.9
$0.7
$0.8
$1.2$1.1
$0.6
$1.6
$1.9$1.0 $0.2
$0.5
$0.6
$1.2$1.5
$2.1
$1.8
$5.3
$3.8$3.0
$3.7
$5.4
$7.6$8.3
$10.5
$1.9
($0.2)
($4)
($2)
$0
$2
$4
$6
$8
$10
$12
2000 2001 2002 2003 2004 2005 2006 2007 2008
(
$
i
n
t
r
i
l
l
i
o
n
)
Lending and deposits Debt securities Equity securities FDI
Source: McKinsey Global Institute
One of the most striking
consequences of the Financial Crisis was
the steep drop-off in cross-border capital
flows
Financial Globalization Impact of Financial Crisis
The Foreign Sector accounts for 16%, or $7.7 trillion, of the $50 trillion of outstanding non-
Government credit in the U.S. economy Over 50% of U.S. GDP
Primary components of cross border capital flows:
Foreign direct investment (FDI) Purchases of foreign securities (debt/ equity) Cross-border lending Deposits
Nearly 3 decade expansion in global financial assets abruptly halted
Peaked pre-crisis in 2007 The sharp decline was driven primarily by a
sharp decline in cross border-lending Fell from $4.9 trillion in 2007 to minus $1.3
trillion in 2008 (a $6.2 trillion swing in one year) Geographic reorientation domestically driven
by Government pressure and reduced risk appetite
Global Capital Flows (2000 2008)
2009 data not yet available
32
0
100
200
300
400
500
600
> $100bn $10bn -$100bn
$1bn - $10bn $100mm -$1bn
$0 - $100mm
Bank Size (Total Assets)
C
R
E
E
x
p
o
s
u
r
e
(
$
b
i
l
l
i
o
n
)
Step # 14: Address Bad Real Estate Loans of U.S. Banks
Overview
The 2 largest U.S. bank assets are still not yet at peak default levels:
Residential RE Loans: $2.59 Trillion(concentrated in top 4 banks)
Commercial RE Loans: $1.96 Trillion(concentrated in smaller banks)
There is No U.S. Government plan to address the toxic loans of going-concern banks
Source: SNL (as of Q3 09)
All U.S. Banks by Assets: Mortgage Asset Composition ($ mm)
U.S. Banks CRE Exposure (2Q 2009)
Will impact banks of all sizes; especially small banks JPM has only 3% of its $650 billion portfolio in CRE,
versus over 20% for a number of regional banks
Bad real estate loans on U.S. bank
balance sheets will create a drag on
new bank lending in 2010
Return to Normalcy?
Strong earnings power of many banks
Significant 2009 capital raises
Likely to finally reach peak defaults in 2010 for most asset classes
Dollar Amt Dollar Amt % of Assets Dollar Amt % of Assets Dollar Amt % of AssetsTotal Assets (TA) 14,156,067 7,411,047 52.4% 2,977,190 21.0% 1,103,795 7.8%
% of Assets % of Total Loans % of Total Loans % of Total LoansTotal RE & Non-RE Loans 7,333,096 51.8% 3,126,989 42.6% 1,691,589 23.1% 701,024 9.6%
Residential RE Loans % of Loans % of Loans % of Loans % of LoansResi 1-4 Family 2,595,607 35.4% 1,270,749 40.6% 563,714 33.3% 223,420 31.9%
Comm RE & Farm 1,155,806 15.8% 181,869 5.8% 254,262 15.0% 157,425 22.5%Constr & Land Dev 503,974 6.9% 86,542 2.8% 125,233 7.4% 73,771 10.5%Multifamily 217,730 3.0% 60,543 1.9% 41,686 2.5% 40,337 5.8%Foreign Office R/E 85,085 1.2% 73,688 2.4% 6,540 0.4% 4,791 0.7%Total Commercial RE Loans 1,962,594 26.8% 402,643 12.9% 427,721 25.3% 276,324 39.4%
Total Real Estate Loans 4,558,201 62.2% 1,673,392 53.5% 991,435 58.6% 499,744 71.3%
All Banks Top 4 5-30 31-100
33
AllianceBernstein Angelo, Gordon & Co / GE Capital Real Estate
BlackRock
Invesco
Marathon Asset Management
Step # 15: Continue PPIP for Toxic U.S. Bank Securities
9 PPIP U.S. Fund Managers Were Pre-Selected
After an especially long build-up, the
PPIP Securities program will finally
be up and running in 2010
Its anticipation has already been
successful in driving liquidity and
significant tightening in the secondary
markets
Oaktree Capital Management
RLJ Western Asset Management
Wellington Management Company
The TCW Group (selection subsequently halted by Treasury)
2009 PPIP Securities Program Investments with U.S. Treasury
Source: U.S. Department of Treasury; Office of Financial Stability; Transaction Report for Period Ending December 16, 2009.
Return to Normalcy?
Designated manager capital raises were successful
RMBS and CMBS have rallied sharply since the programs announcement
TALF and modest economic recovery signs have also been helpful
Liquidity already much improved compared to peak crisis levels
1) The equity amount may be incrementally funded. Investment amount represents Treasury's maximum obligation if the limited partners other than Treasury fund their maximum equity capital obligations.
2) The loan may be incrementally funded. Investment amount represents Treasury's maximum obligation if Treasury and the limited partners other than Treasury fund 100% of their maximum equity obligations.
$ billion
Date Institution / FundFund
Equity Treasury
Equity (1)Treasury Contingent
Debt Obligation (2)
9/30/2009 UST/TCW Senior Mortgage Securities Fund, L.P. 1.1 1.1 2.2 9/30/2009 Invesco Legacy Securities Master Fund, L.P. 1.1 1.1 2.2 10/1/2009 Wellington Management Legacy Securities PPIF Master Fund, LP 1.1 1.1 2.2 10/2/2009 AllianceBernstein Legacy Securities Master Fund, L.P. 1.1 1.1 2.2 10/2/2009 Blackrock PPIF, L.P. 1.1 1.1 2.2 10/30/2009 AG GECC PPIF Master Fund, L.P. 1.1 1.1 2.2 11/4/2009 RLJ Western Asset Public/Private Master Fund, L.P. 1.1 1.1 2.2 11/25/2009 Marathon Legacy Securities Public-Private Investment Partnership, L.P. 1.1 1.1 2.2
Total $8.9 $8.9 $17.6
GRAND TOTAL $35.4
Treasury Participation
34
0
50
100
150
200
250
300
350
400
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
3
M
L
i
b
o
r
-
O
I
S
S
p
r
e
a
d
(
b
p
s
)
111.0119.5
35.223.4
5.4
020
4060
80100
120140
Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09
U
S
D
b
i
l
l
i
o
n
Fed Balance Sheet Expansion
Step #16: Continue to Guarantee Bank Liabilities as NeededFDIC Guaranteed Debt Issuance (Nov 2008 Oct 2009)
Source: FDIC; Bloomberg and DB Global Markets Research
Dramatic Easing of Stress in the System (September 2008 December 2009)
November 5th: FDIC announces TLG Debt Guarantee program
May 7th: Fed and regulators complete Top 19 Bank stress tests
May 19th: Congress extends $250k deposit insurance to 2013
The U.S. Government will continue to guarantee the liabilities of its banks in 2010 as follows: Retail deposits up
to $250K
Transaction account deposits (unlimited)
~ $300 bn of unsecured debt < 3.5 yrs issued between Nov 2008 and Oct 2009
(expired for new issues on 10/31/09)
Top 10 2008 - 2009 FDIC Guaranteed Debt Issuers Total FDIC Guaranteed Issuance
Return to Normalcy?
Government able to expire debt guarantee program
Non-guaranteed debt issuance market functioning
Depositor confidence restored
Inter-bank lending restored
Minimal costs for U.S. Government and significant fees
64.6 60.2
44.5 40.8
23.8 22.0
9.5 7.4 5.9 4.0
0
10
20
3040
50
60
70
Citi GECC BAC JPM MS GS WFC GMAC AXP STT
U
S
D
b
i
l
l
i
o
n
s
Section C
Response to the Non-Bank Credit Crisis in 2010
36
FinanceCompanies Loans
3%Corporate Bonds10%
CommercialBanks
18%
Securitization24%
Other14%
Thrift Loans2%
Foreign Sector16%
Non-FinancialSector
13%
Step # 17: Restart the Flow of Credit in the U.S. Economy
Providers of U.S. Non-Government Credit
With credit not flowing near pre-Financial Crisis levels, there will be significant pressure on an already strained consumer to drive the economic recovery in 2010
Source: Federal Reserve Board, FDIC, DB Research
Total: $50 TrillionPink shades of the pie represent those sources of credit that will be most directly impacted by the proposed regulatory reforms
($6.6 trillion)
($7.1 trillion)
($5.1 trillion)
($9 trillion)
($11.7 trillion)($7.7 trillion)
($1 trillion)
($1.6 trillion)
Comments
Return to Normalcy?
Cross-border capital flows should improve as the recovery progresses in 2010
Securitization markets have taken several small steps forward in Q4, 2009
Significant bank equity capital raised in 2009 should help
Strong investor demand in bond market will continue in 2010
Most of the key providers of credit in the U.S. economy are still not functioning properly
Foreign sector (16%): Cross-border lending activity came to a halt during the Crisis; geographic re-orientation domestically
Securitization (24%): Still not functioning in size without U.S. Government support
Bank lending (18%): Still very low by historic standards, especially where not supported by GSEs
Bond Market (10%): Re-opened with significant non-guaranteed issuance levels since Q2, 2009; however, only represents ~ 10% of total U.S. credit
As we enter 2010, many of the key
providers of credit in the U.S. economy are
still not functioning properly
37
Step # 18: Develop a Long-Term Strategy for the GSEs
The U.S. Governments nearly
$2 trillion of support to the GSEs since the
financial crisis began, and unlimited
commitment on 12/24/09, will be a
massive political issue in 2010
Return to Normalcy?
Congress has made this a 2010 priority!
U.S. Treasury & HUD are required to produce formal recommendations on a long-term strategy for the GSEs by Feb 2010:
Full nationalization?
Privatization? Hybrid model?
UnlimitedSupport
On December 24th, 2009, Treasury announced it would cover unlimited losses at Fannie Mae and Freddie Mac through 2012
Done just ahead of the Dec 31, 2009 deadline to avoid Congressional approval Entailed suspending prior bailout cap of $400 billion (combined) to ensure confidence Also involved an easing on Fannie/ Freddies $1.5 trillion (combined) portfolio cap on
securities holdings to $810 billion each in 2010, and 10% lower each year thereafter
U.S. Government Support for the GSEs during the Financial Crisis
Today, the U.S. Government, directly or indirectly, underwrites 9 of every 10 new residential mortgages (twice the pre-Financial Crisis percentage)
Fannie or Freddie currently own, or guarantee, 50% of the United States $11 trillion in home mortgages On December 24, Treasury said it would cover unlimited losses at Fannie / Freddie through 2012 Also eased their $1.5 trillion (combined) portfolio cap to $810 billion each in 2010, and 10% lower
each year thereafter (as of Dec 09, each company had portfolios in the high $700 billion range)
Capital Injections
$111 billion in Treasury capital injections; 79.9% equity stake (as of Dec 2009) $60 billion in Fannie Mae; $51 billion in Freddie Mac Per above, the combined $400 billion cap was raised to unlimited on 12/24/09
GSE MBS Purchase Program
Fed to purchase exactly $1.25 billion of MBS guaranteed by Fannie, Freddie or Ginnie Purchases as of Dec 2009: $1.086 billion Program expiry: March 31, 2010 (entails ~13-15 billion each week through 3/31/10) Some suggesting that the easing of GSE position limits on 12/24/09 may be intended to
have GSEs fill part of the void once Fed MBS purchase program expires in March 2010 (and therefore help keep mortgage rates low in 2010)
GSE Debt Purchase Program
Fed to purchase up to $200 billion of debt from Fannie, Freddie and FHLBs Purchases as of Dec 2009: $160 billion Program expiry: March 31, 2010
Source: Federal Reserve, Treasury, WSJ.
This Christmas Eve 2009 development will become very contentious in 2010
38
Step # 19: Continued Support for Consumer ABS Markets
U.S. Consumer ABS Markets
78%19%37%
39%58%
58%
97% 70%
45% 82%
$3.9$5.9$6.6
$16.9
$8.4
$12.1
$16.4
$11.0
$2.9
$8.2
02468
101214161820
March April May June July August September October November December
U
S
D
B
i
l
l
i
o
n
s
TALF Eligible TransactionsTALF Loans
$68 $70 $67 $53 $65 $66$94
$57 $44
$76 $84 $83$80
$107 $89$75
$34 $61
$6 $13$11
$19$18
$15
$3$10
$19$37
$42
$54$67 $57
$28$18
$163$179
$199$187
$245 $239 $241
$123 $132$8$10
$0
$50
$100
$150
$200
$250
2001 2002 2003 2004 2005 2006 2007 2008 2009
$
b
i
l
l
i
o
n
Credit Card Automobile Equipment Student LoanReturn to Normalcy?
Strongest performing securitization market in 2009
Strong new issue volumes and pricing
Will improve with economic recovery
TALF expiry in March 2010
U.S. ABS Issuance (2001 2009)
Unlike for the CMBS and RMBS
markets, the 2009 success of TALF
for consumer ABS has created
optimism for the viability of this
market after the program expires in
March 2010
TALF Issuance and Loan Requests (2009)
($ million)
Source: Deutsche Bank, NY Fed
Comment
New Issuance: Has not returned to pre-crisis levels but much improved going into 2010
Spreads: Significant tightening in 2009 due to PPIP announce, impact of TALF, improved liquidity and modest improvements in economic
recovery Auto: > $61 billion of new issuance in 2009 (one of
only segments to exceed 2008 volumes) Credit Card: >$44 billion of new issuance in 2009;
positive impact of improved Dec 09 unemployment Student Loan: > $18 billion of new issuance in
2009
TALF ABS Expiry:March 31, 2010
39
Step # 20: Create a U.S. Covered Bond MarketThe Potential Creation of a U.S. Covered Bond Market in 2010
EUR Covered Bond Spreads vs. Other Markets EUR Covered Bonds vs Other Bonds Outstanding
175
8962
2211
-50
0
50
100
150
200
250
300
350
400
450
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
EUR AAA RMBSCorporate Financials (AA)Covered BondsSub-SovereignsSovereigns
May09 ECB announces CB purchase plan
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
O
u
t
s
t
a
n
d
i
n
g
s
E
U
R
(
b
n
)
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%High YieldOther CollateralizedCorporate Non-FinancialCorporate FinancialSub-SovereignCovered BondsSovereign Share of the Covered Bond Market
Note: iBoxx Covered Bond Index is the avg of different CBs including German Pfandbrief, Spanish Cedulas, UK covered bonds, French OFs and others.
Recent bi-partisan support has
created momentum around the
possible creation of a U.S. covered
bond market in 2010
To successfully build a U.S. market,
certain legislative changes in our
legal system will be needed to
provide investors with more certainty
on recourse in the event of an
Issuers insolvency
What? Secured senior debt obligation issued by a bank or financial company that provides the
investor with recourse to the Issuer AND to an asset pool Preferential recourse to assets: upon Issuer insolvency, asset pool repays bonds like ABS Recourse to Issuer: any shortfall on assets recuperated through claim on Issuer
Why? Attractive alternative funding source for U.S. banks and potentially other financials
Potentially important source of credit in U.S. economy, especially given post-Financial Crisis changes in the securitization markets
Well established and deep, liquid covered bond market already in Europe (see below)
When? Some good momentum in 2009 (legislation introduced in House in June 2009; key amendment
filed in Nov 09 to establish legal framework: hearings held by House FSC)
Optimism around further legislative and regulatory progress in 2010
Return to Normalcy?
Significant momentum in 2H 2009
House Financial Services Committee committed to pick-up in 2010
40
ILC State Parent Name
Total Assets
($ mm) ILC State Parent Name
Total Assets
($ mm)
1 Merrill Lynch Bank USA UT Bank of America $65,240 23 Transportation Alliance Bank UT Flying J 517
2 UBS Bank USA UT UBS AG 33,958 24 Medallion Bank UT Medallion Financial 440
3 American Express Centurion UT American Express 24,470 25 Community Commerce Bank CA Telacu Industries 404
4 GE Capital Financial UT General Electric 11,512 26 First Security Business Bank CA First American 362
5 Capmark Bank CA Capmark 10,242 27 World Financial Capital Bank UT Alliance Data Systems 303
6 USAA Savings Bank NV USAA 6,473 28 Circle Bank CA Circle Bancorp 244
7 CapitalSource Bank CA CapitalSource 5,834 29 Celtic Bank UT Celtic Investment 214
8 BMW Bank of North America UT BMW of North America 5,144 30 Balboa Thrift and Loan CA 205
9 Sallie Mae Bank UT SLM Corporation 4,851 31 EnerBank USA UT CMS Energy 195
10 Woodlands Commercial Bank UT Lehman Brothers 4,841 32 ARCUS Financial Bank UT WellPoint 186
11 Beal Bank Nevada NV Beal Financial 4,184 33 Golden Security Bank CA 185
12 Advanta Bank Corp UT Advanta 2,962 34 5Star Bank CO Armed Forces Benefit 157
13 Fireside Bank CA Unitrin 1,310 35 Finance & Thrift Company CA F&T Financial Services 112
14 Merrick Bank UT CardWorks 1,109 36 Target Bank UT Target 103
15 OptumHealth Bank UT UnitedHealth 1,054 37 Rancho Santa Fe Thrift CA Semperverde 70
16 Trust Industrial Bank CO Fiserv 933 38 Morris Plan Company IN First Financial 57
17 Centennial Bank CA LandAmerica Financial 890 39 ADB Bank UT Leavitt Group 57
18 Finance Factors HI Finance Enterprises 705 40 WebBank UT WebFinancial 42
19 Pitney Bowes Bank UT Pitney Bowes 701 41 Eaglemark Savings Bank NV Harley-Davidson 36
20 Wright Express Financial UT Wright Express 670 42 LCA Bank Corporation UT Lease Corporation 34
21 Toyota Financial Savings Bank NV Toyota Motor 656 43 Minnesota First Credit & Savings MN Minnesota Thrift Co 27
22 Republic Bank UT 554 44 First Electronic Bank UT Fry's Electronics 18
Total $192,261
Step # 21: Support Active Role by ILCs in U.S. EconomyThe Important Role of Industrial Loan Companies (ILCs) in the U.S. Economy
Source: SNL.
Based largely in Utah, California, Colorado and Nevada, the $200 billion of Industrial Loan Companies (ILCs) play an important non-bank credit function in the U.S. economy
Comment
Industry Size: $200 billion in Assets
Function: Important non-bank credit provider in U.S. economy
The viability of Industrial Loan Companies (ILCs) had been brought into question during the Financial Crisis:
Funding model Reliance on securitization FDIC pushback on assets supporting
deposits Initial proposed regulatory reforms
The ILCs do not appear to be a direct focus of the proposed U.S. financial regulatory reforms (at least for now)
Would have required 5 year transition to BHC charter, possible separation from industrial parent, and sharply higher capital levels
41
Step # 22: Monitor Risk of Sovereign Credit Events
Return to Normalcy?
Economic recovery underway will hopefully mitigate the risk
Implicit backing by EU for relevant member risks will be important in containing any systemic impact
Source: Deutsche Bank research, Moodys
Sovereign risk differential will remain high
Debt burdens are expected to rise
The Sovereign misery index
EU Sovereign issuance % will be large
0 5 10 15 20 25 30
SpainLatvia
LithuaniaIreland
GreeceUK
IcelandUS
FranceEstonia
PortugalHungary
GermanyItaly
Czech Republic
%Fiscal Deficit (2010F) Unemployment Rate (2010F)
5305580
105130155180205230255280
P or t u
g al
I t al y
G re e
c e
S pa i n
A us t r
i a
F r an c
e U K
F i nl a n
d
5
y
S
e
n
i
o
r
C
D
S
(
B
p
s
)
12/31/2007 12/31/2008 12/22/2009
2007 avg.: 19bps
2008 avg.: 127bps
2009 avg.: 105bps
0
20
40
60
80
100
120
140
G re e
c e I t al y
B el g i
u mI r e
l a nd
P or t u
g al
F r an c
eG e
r ma n
yA u
s t ri a
S pa i n
N et h e
r l an d
sF i n
l a nd
D
e
b
t
/
G
D
P
r
a
t
i
o
2007 Debt/GDP ratio 2011E Debt/GDP ratio
A sovereign credit event remains one
of the highest risk scenarios for an
exogenous shock to the
global financial system in 2010
and should be closely monitored
42
Step # 23: Monitor Global Capital Flows More Closely
Record Asian FX Reserves
Global capital flows will have to be
monitored more closely in 2010 in order
to prevent asset bubbles that may pose
a systemic risk
The global imbalance between Trade and
Capital Flows was a significant contributor
to the Housing bubble
The problem was not the significant excess
savings themselves, but the magnitude and
speed of their accumulation
Sharp rise in Asian foreign-exchange holdings in the wake of the 1997 1998 Asian crisis
Many emerging market countries generated significant account surpluses in recent years
Following the mid 90s Asia economic crisis, a build-up in large FX reserves was intended to shield currencies from devaluations
Record Petrodollar Accumulation
Petrodollars accumulated significantly, with oil prices skyrocketing from ~ $25/barrel in 2000 to a peak of ~ $150/barrel in mid-2008
Most notably, oil-producing countries included the Persian Gulf states, Russia, Nigeria and Venezuela
Excess Global Savings Helped Fuel the Developed Market Housing Bubble
U.S. and International Housing Market
Investments of excess savings
needed a place to go
Developed-economy housing markets were among the few global markets large and liquid enough to absorb such a significant and rapid accumulation of capital
Domestic economies could not absorb these enormous surpluses Size of capital markets, scarcity of sizeable investment opportunities, political constraints, protectionist
policies, etc.
0
500
1,000
1,500
2,000
2,500
2 0 00
2 0 02
2 0 04
2 0 06
2 0 08
C
h
i
n
a
'
s
F
X
R
e
s
e
r
v
e
s
(
U
S
D
b
n
0
25
50
75
100
125
150
J a n- 0 0
J a n- 0 2
J a n- 0 4
J a n- 0 6
J a n- 0 8
O
i
l
P
r
i
c
e
(
U
S
D
)
Return to Normalcy?
Financial regulatory reforms focused on addressing systemic risk issues in 2010
Global Central Banks now more closely monitoring this issue
Section D
Response to the Economic Crisis in 2010
44
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Step # 24: Aggressive Tightening when the Time is RightConsiderations Regarding 2010 Federal Reserve Monetary Policy
U.S. Fed Funds Rate (1982 2009)
The Fed does not currently believe that inflation poses a significant risk to the U.S. economy over the next few Quarters, but this can change quickly
Rates likely to remain the same for at least the first 2-3 Quarters of 2010 Central Banks in smaller economies (Australia, Israel and Norway) have already begun to raise rates A number of key variables to watch in 2010:
Resource utilization: slack in the economy, such as unused factory capacity (lowers inflation risk) Stressed Consumer: > 70% of GDP (high debt levels, housing burdens, unemployment, wages) Double-dip risk: DBs economists see a 25% chance that the 2010 U.S. economy could either stall or
even fall into a double-dip recession
Unemployment: Even if falling, likely still to remain very high in 2010 (lowers inflation risk) Wage growth: continues to be very low (lowers inflation risk) Liquidity: Massive liquidity has been pumped into the system and must be closely monitored in 2010
Source: Bloomberg. DB Research.
Return to Normalcy?
Feds exit from Quantitative Easing programs already well underway
Rates likely to remain same for at least 2 - 3 more quarters in 2010
Good blueprints exist for aggressive Fed tightening, if needed
The Fed will likely exit most of its quantitative easing programs before raising rates in 2010 The behavior of financial markets will be a much bigger factor in Fed decisions this time around The pace of the expected 2010 tightening will likely be more aggressive than the slow and
methodical tightening cycle from 2004 to 2006
DB Interest rate forecasts
We expect the Fed to commence
tightening in Q3 2010, and to do so
more aggressively than the slow and
methodical tightening cycle of
2004 - 2006
FF2y
Tsy5y
Tsy10y
Tsy30y
Tsy4Q 09 0.00 0.75 2.50 3.50 4.501Q 10 0.00 0.75 2.50 3.50 4.502Q 10 0.00 1.00 2.75 3.75 4.753Q 10 0.75 1.75 3.00 4.00 5.004Q 10 1.25 2.25 3.50 4.50 5.25
45
0
500
1,000
1,500
2,000
2,500
9/08 10/08 11/08 12/08 1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09
U
S
D
B
i
l
l
i
o
n
T reasury securities Repo OtherLiquidity for Banks & Dealers Swaps with foreign CB CP FacilitiesSupport for Critical Institutions MBS+GSE+TALF
Step # 25 : Wind-down Quantitative Easing ProgramsU.S. Federal Reserve Balance Sheet Expansion
Cumulative Fed Purchases of Treasuries, Agencies and MBS (Sept 1, 2008 Nov 12, 2009)
Treasuries ($ bn) Agencies ($ bn) MBS ($ bn)
Source: Treasury, Bloomberg, Deutsche Bank
Nov 08: 5.97%(Program announced)
Mar 09: 4.82%(Program upsized)
Dec 1, 09: 4.71%
Avg 30 Yr Mtg Rate
Whatever it takes! (Fed Chairman, Ben Bernanke)
(Expired) (Mar 2010 expiry)(March 2010 expiry)
Sep 2007: $800 billionDec 2009: $2.3 trillionEst. Peak: $2.5 trillion
0
200
400
600
800
1,000
1,200
1 / 7/ 0 9
2 / 7/ 0 9
3 / 7/ 0 9
4 / 7/ 0 9
5 / 7/ 0 9
6 / 7/ 0 9
7 / 7/ 0 9
8 / 7/ 0 9
9 / 7/ 0 9
1 0 /7 / 0
91 1 /
7 / 09
0
50
100
150
200
250
300
3 / 25 / 0
9
4 / 25 / 0
9
5 / 25 / 0
9
6 / 25 / 0
9
7 / 25 / 0
9
8 / 25 / 0
9
9 / 25 / 0
91 0 /
2 5 /0 9
020406080
100120140160
1 2 /5 / 0
8
2 / 5/ 0 9
4 / 5/ 0 9
6 / 5/ 0 9
8 / 5/ 0 9
1 0 /5 / 0
9
1 2 /5 / 0
9
The Fed appears poised to cautiously
continue the unwind of its quantitative
easing programs in 2010
knowing that a disorderly exit could
lead to unexpectedly high market rates,
and increase the chances of a double-
dip recession
46
0
2
4
6
8
10
12
14
China USA AUS CAN GER JPN UK FRA
%
o
f
G
D
P
Step # 26 : Implement Remaining Fiscal StimulusU.S. Fiscal Stimulus Compared to Other Selected G-20 Countries
Breakdown of $787 Billion U.S. Fiscal Stimulus
Approx 25% Implemented by Dec 2009 Commentary
Japans fiscal and monetary policies in the lost decade (1990s) were initially too slow and timid.
Japans fiscal stimulus to GDP: 1991 (0%); 1995 (3.6%); 1998 (8%); 2009 (2%)
83.856.3 76.3
204.2218.7
147.7
0
50
100
150
200
250
300
Tax Benefits Contracts, Grants,Loans
Entitlements
$
b
i
l
l
i
o
n
UnpaidPaid Out
$288$275
$224
Sources: OECD, DB Global Markets Research, IMF and www.recovery.gov
The U.S. will implement the rest
of its $787 billion fiscal stimulus
package in 2010, one of the largest
programs among advanced G-20
economies
While fiscal stimulus was clearly needed
and will positively impact 2009/ 2010
GDP growth, some economists have
argued it came too late and was not
optimally designed
Chinas fiscal stimulus plan during the Financial Crisis was the largest, the earliest implemented (Nov 08) and the most effective among major global economies
Return to Normalcy?
The U.S. and most other major global economies began to expand in the second half of 2009
Significant positive impact on first half 2010 GDP growth expected
How much growth does the stimulus represent? Assuming normalized U.S. GDP growth of ~2.5%, the $787 billion of U.S. fiscal stimulus represents approximately 2 years of GDP growth
What will be the impact in 2010? Several Wall Street economists have noted that U.S. fiscal stimulus will boost annualized GDP growth by 2% in the first half of 2010, with little to no impact expected in the second half
Critical Question: How will businesses and consumers respond once government support fades?
47
5.7 5.8 6.26.8 7.4
7.9 8.5 9.010.0
11.4
20.4
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2019E
U
S
D
T
r
i
l
l
i
o
n
Step # 27: Dampen the Impact of Rapidly Rising DeficitsThe U.S. national debt
will continue its sharp rise in 2010,
and will become a front and center
political issue
The $1.4 trillion budget deficit for
FY2009 has now pushed U.S. debt
held by the public above 50% of
GDP
Gross U.S. Federal Debt is Rising Sharply $1.4 trillion in Fiscal 2009 and $1.5 trillion projected in Fiscal 2010, adding $9
trillion to the Federal debt by 2019 (CBO projects $7 bn) Beyond 2013, much of the deficit growth comes from the demographics of an
ageing population (Medicare, Medicaid and Social Security) Interest on U.S. debt cost $182 billion in FY 2009; as rates rise, it could rival
defense in the U.S. budget (> $600 billion annually)
U.S. Government Debt Topped 50% of GDP in FY 2009, and on Path to 100%
Source: CBO, WSJ, IMF, Deutsche Bank
US Federal Debt Held by the Public
0
20
40
60
80
100
120
1900 1915 1930 1945 1960 1975 1990 2005
% of GDP
0
20
40
60
80
100
120
% of GDP
WW II
The Great Depression
WW I
Estimate for FY2009 and 2010
Return to Normalcy?
Not much! The national debt
has become an increasingly politically sensitive issue and is receiving more focus than it had previously
Largest Holders of U.S. Treasuries (9/30/09)
China: $799 bnJapan: 752U.K. 249OPEC 185Hong Kong 132Russia 121
The IMF estimates that U.S. Government debt will swell to 108% of GDP by 2014, from approximately 55-60% today
A record $118 billion of U.S. Treasuries auctioned the week of Dec 28, 2009, with demand dominated by foreign bidders
Net U.S. Treasury supply in 2010 may hit a new record of $1.8 trillion
48
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
S e p 0 8
O ct 0 8
N ov 0
8
D ec 0
8
J a n 0 9
F e b 0 9
M ar 0 9 A p r
0 9M a
y 09
J u n 0 9
J u l 0 9
A u g 0 9
S e p 0 9
O ct 0 9
N ov 0
9
D ec 0
9
U
n
e
m
p
l
o
y
m
e
n
t
R
a
t
e
Step # 28: Reduce UnemploymentRightly or wrongly, a
U.S. Jobs Bill will be at the very top of U.S.
legislative spending agendas in early 2010
The U.S. has led the world in both the
growth and absolute level of unemployment
during the crisis
..with over 7.5 million jobs lost since the
crisis began
Global Unemployment Rates
U.S. Unemployment Rates (2008 2009)
Source: Bloomberg, BLS, Federal Reserve, Deutsche Bank Economics Research.
Employment Declines from Recession Start
-6
-5
-4
-3
-2
-1
0
1
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28
%
-6
-5
-4
-3
-2
-1
0
1
%
1981-832008-09
Number of months after peak employment
Recession era employment declines
10.0% 9.8%
7.9%
5.1%
0%
2%
4%
6%
8%
10%
12%
US Euro Area UK Japan
U
n
e
m
p
l
o
y
m
e
n
t
R
a
t
e
Return to Normalcy?
U.S. unemployment rate declined in December from 10.2% to 10.0%
Positive GDP growth projections for 2010