From Recession to RecoveryMonday, April 26, 2010

8:00 AM 9:15 AM8:00 AM - 9:15 AM

ModeratorMichael Klowden, President and CEO, Milken Institute

SpeakersMohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment

M t C (PIMCO)

1

Management Co. (PIMCO) Steve Forbes, Chairman and CEO, Forbes Media; Editor-in-Chief, Forbes

Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLCMarc Lasry, Chairman and CEO, Avenue Capital Group

A lost decadeThe U.S. economy had its worst decade since the 1930s

7Real GDP growth (%)

6.0%

4.2% 4.4%

3.3% 3.1% 3.2%

1.9%2

3

4

5

6

2

1.3%

0

1

2

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000sSource: The U.S. Bureau of Economic Analysis.

8.2 million total job losses

Average monthly change in employmentThousands of nonfarm workers

-31-191

-334-477

-261

-90

54

600

-400

-200

0

200

4008.2 million workers lost their jobs

December 2007- March 2010

3Source: U.S. Bureau of Labor Statistics.

-652-753

477

-1000

-800

-600

Q1: 2006 2007 2008 2009 Q1: 2010

Americans’ net worth is down by 12 trillion from its 2007 peak

70US$ trillions Household's net worth Pre-recession peak:

$65.9 trillion

30

40

50

60

Fourth quarter, 2009$54.2 trillion

4

Source: Federal Reserve.

20

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2007 2008 2009

Deep recession, strong recovery?

Average real GDP growth rates (%) in the four quartersfollowing each recession

2.6%

7.8%

6.2%

10.9%

1990-1991

1981-1982

1973-1975

1929-1933

following each recessionPeriods of Recession

Real GDP grew10.9% in 1934, the year after the Great

5

Sources: U.S. Bureau of Economic Analysis; the Milken Institute.

1.9%

0 2 4 6 8 10 12

2007-20XX

2001year after the Great Depression ended.

?

Large reductions in the world real GDP growth

10Real GDP (% change, year-to-year)

Emerging andProjected

-2

0

2

4

6

8 World

Advanced economies

Emerging and developing economies

6

-6

-4

1980 1985 1990 1995 2000 2005 2010

economies

2014

World stock market capitalization still 23% below its peak level (as of April 20, 2010)

70US$ trillions

30

40

50

60 Highest point: $62.6 trillion on October 31, 2007

$48 trillion as of April 20, 2010

Lowest point: $25.6 trillion

7Source: Bloomberg.

10

20

2004 2005 2006 2007 2008 2009 2010

on March 9, 2009

Forecasts of positive real GDP growth rates

Real GDP growth (%) (Quarterly percentage change, seasonally adjusted at an annual rate)

2.1

-0.7

1.5

-2.7-0.7

2.2

5.9

3.0 3.0 2.8 2.9 2.9 3.0 3.2 3.9

6-4-202468

( yp g g y j )

Composite forecasts

8

Note: Composite forecasts are average forecasts of 27 private organizations. Sources: U.S. Bureau of Economic Analysis; Bloomberg.

-5.4-6.4

-10-8-6

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42007 2008 2009 2010 2011

Decline in initial claims for unemployment insurance

700Thousands

6.6 million people receiving jobless b fit f J 2009

400

500

600 4.56 million(as of March 31, 2010)

benefits as of June, 2009

9Source: U.S. Bureau of Labor Statistics.

200

300

1980 1985 1990 1995 2000 2005 2010

Retail sales climbed in MarchA sign showing American consumers were beginning to spend more

400US$ billions Monthly total retail sales, seasonally adjusted

300

350

+1.6% in March

10Source: U.S. Department of Commerce.

2502000 2002 2004 2006 2008 2010

Shade area indicates recession

Turnaround stock markets

300015,000

Nasdaq9001,800

1500

2000

2500

7,500

10,000

12,500

Nasdaq (right scale)

D J400

500

600

700

800

800

1,000

1,200

1,400

1,600 Russell 2000 (right scale)

S&P 500(left scale)

11Source: DataStream.

500

1000

5,000

,

2002 2004 2006 2008 2010

Dow Jones(left scale)

200

300

400

600

2002 2004 2006 2008 2010

Narrowing risk spread Indicative of the reduced stress in the debt markets

5Percentage points

Oct 10, 2008

2

3

4 TED spread

BAA-AAA spread

12

Note: The TED spread is the difference between 3-month LIBOR rates and the yield on 3-month U.S. Treasury bills.The BAA-AAA spread is the difference between the interest rates on high-grade and medium-grade corporate bonds.

Sources: Bloomberg, Federal Reserve.

0

1

Unemployment rate near the highest level since Great Depression

12 Unemployment rate: 9.7%%

Unemployment rate: 10.8%

4

6

8

10

Unemployment rate: 9.7% in March, 2010

during the 1981-1982 recession

13Source: U.S. Bureau of Labor Statistics.

0

2

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Involuntary part-time or underemployed hits the highest level in 50 years

7 000

Thousands Part-time employment for economic reasons

2 000

3,000

4,000

5,000

6,000

7,000

Part-time due to slack work or business conditions

14Source: U.S. Bureau of Labor Statistics.

0

1,000

2,000

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Could only find part-time work

2010

One in four black, Hispanic workers is underemployed

26Underemployment rates by race(%)

Hispanic or Latino 23.2%

1012141618202224

White 13.7%

African American 23.1%

15

468

10

Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Nov-09

Note: the shown underemployment data are from November, 2009. Underemployed includes the unemployed, involuntary part-time, and discouraged workers.Source: The Economic Policy Institute.

8.5Percent

Job creation still a problemRate of job creation and destruction

8.0

7.5

7.0

6.5

6 0

Job destruction

20092008200720062005200420032002200120001999

6.0

5.5

5.0

Sources: Bureau of Labor Statistics, Moody’s Economy.com

Job creation

16

Small businesses account for nearly half the decline in job creation

Change between 2007 and Q1 2009

Total change in job

0-100 employees48.5%

>1000 employees27.1%

Total change in job creation = -1,648 ths.

100-1000 employees24.5%

Sources: Bureau of Labor Statistics, Moody’s Economy.com

17

60 percent of current decline in job creation stems from small businesses versus 26 percent in previous recession

60Percent

Job creation with <100 employees

50

40

30

20

Job creation with <100 employeesJob destruction with <100 employees

Sources: Bureau of Labor Statistics, Moody’s Economy.com

Q1 2008- Q2 2009Q1 2001- Q2 2002

10

0

18

Nearly 1 in 4 homeowners underwater

70States with negative equity share > 20%

as of Q4: 2009

% negative equity

23% 24%

0102030405060

Q

Q3, 2009

Q4, 2009

19

0

Note: The data only include properties with a mortgage.Source: First American CoreLogic .

Banks are still pulling back on lendingNo bank lending, no recovery

US$ trillionsLending by the U.S. commercial banks

fell by 7 5% in 2009

7

8$ fell by 7.5% in 2009

20Note: The data are loan balances (net loans and leases ) of all U.S. commercial banks.Source: Quarterly Banking Profile, Federal Deposit Insurance Corporation.

6Q1, 2008 Q2, 2008 Q3, 2008 Q4, 2008 Q1, 2009 Q2, 2009 Q3, 2009 Q4, 2009

Households are deleveraging U.S. households need to reduce their debt to more manageable level

U.S. household debt (% of disposable personal income)

50

100

150

Economists see 100% as a sustainable level

Total household debt stood at 123% as of the end of 2009

21Source: Federal Reserve.

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

123% as of the end of 2009

Upward trend of U.S. saving rate

14U.S. personal saving rate (% of disposable personal income)%

4

6

8

10

12

14

The saving rate has started to increase following a decades-

long decline.

22

0

2

Q1 1960 Q1 1970 Q1 1980 Q1 1990 Q1 2000 Q4 2009Source: U.S. Bureau of Economic Analysis.

Consumer borrowing still declined

8

% change of total consumer credit from a previous year, seasonally adjusted%

8-6-4-202468 +5.2% in

January

-5.6% in

23Source: Federal Reserve.

-14-12-10-8

Jan-08 Jul-08 Jan-09 Jul-09 Feb-10

5.6% in February

Growing personal bankruptcy filingsThe total number of bankruptcy filings = 1.47 million in 2009

800

Thousands The number of quarterly bankruptcy filings in the federal courts

200

400

600

800

Business bankruptcy filingsPersonal bankruptcy filingsTotal

24

Source: Administrative Office of the U.S. Courts.

0

200

Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009

Global economic forecastsEmerging market economies will lead the world growth

8 08.59

% Real GDP growth forecasts by key countries/regions (average 2010-2014)

1 42.1

3.94.6 4.8 4.9

8.0

2345678

(average 2010 2014)

25Source: Economist Intelligence Unit.

1.4 1.1

012

Western Europe

Japan United States

Latin America

MENA Brazil Asia India China

The U.S. dollar

0 9120

Trade weight exchange index (January 1997 = 100) Euro/US$

0 6

0.7

0.8

0.9

100

105

110

115

120Euro/US$ (right axis)

26Source: Federal Reserve.

0.5

0.6

90

95

2006 2007 2008 2009 2010

Trade weighted (left axis)

U.S. current account deficit

50US$ billions U.S. current account, seasonally adjusted

-150

-100

-50

0

27

-250

-200

1970 1975 1980 1985 1990 1995 2000 2005 2009Source: The U.S. Bureau of Economic Analysis.

Parallel relationship between stock marketperformance and the unemployment rate

12

14000

16000 Dow Jones hits 11,000; unemployment rate nears 10%U l t t (%)

4

6

8

10

4000

6000

8000

10000

12000

14000 p yUnemployment rate (%)(right- axis)

Dow Jones (left- axis)

28Sources: U.S. Bureau of Labor Statistics; DataStream.

0

2

0

2000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

(left- axis)

U.S. fiscal position is in a free fall

400Federal surplus [+] or deficit [-], fiscal yearUS$ billions

-1,000-800-600-400-200

0200

29Source: The Office of Management and Budget, White House.

-1,600-1,400-1,200

,

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Shade area indicates recession

President Obama's budget will generate nearly $10 trillion in budget deficits over the next 10 yearsFederal Budget (US$ billions)

US$9.761 trillion total deficit from 2011 to 2020

-1,000

-800-600-400-200

0( $ )

30Source: Congressional Budget Office (CBO).

-1,600-1,400-1,200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Actual CBO's estimate of federal budget for fiscal year 2011

National debt will reach 90% of GDP in the next decade

100% of GDP Federal debt held by public

30405060708090

201063% of GDP, or$9.2 trillion

202090% of GDP, or$20.3 trillion

31Source: Congressional Budget Office (CBO).

01020

1980 1985 1990 1995 2000 2005 2010 2015 2020

CBO's estimate

Change in the world economic power China and India are larger in the world economy

Real GDP (PPP dollars), share of world total20091991

United States20%

China12%

Rest of the world

47%

2009United States22%

China4%

Japan

Rest of the world

48%

1991

32Sources: International Monetary Fund, The Milken Institute.

Japan6%

India5%Germany

4%

U.K.3%

France3%

Japan9%

India3%

Germany6%

U.K.4%

France4%

Kenneth Griffin’s Slides

33

Residential real estate loan delinquency rate

34

Personal transfer payments

35

Household’s net worth (as a % of disposable personal income)

36

Unemployment and underemployment

37

Continuing claims and insured unemployment

38

Federal outlays: interest

39

Entitlements and interest

40

Federal on-budget surplus/deficit [-]

41

Share of individual income tax liabilities:top 10 percent

42

Share of income: highest 5 percent of families

43

Share of individual income tax liabilities:middle income quintile

44

Median income of households

45

Establishment survey of employment

46

Wage and salary disbursements

47

Nonfarm business productivity: Output per person

48

Nonfarm business: output per person

49

Consumer loans:credit cards and other revolving plans

50

ICSC-Goldman Sachs weekly retail chain store sales

51

Home equity withdrawal: mortgages less residential construction

52

When will Americans’ total net worth return to the peak it saw in the middle of 2007? Your choices are:peak it saw in the middle of 2007? Your choices are:

A. By the end of 2010B. First 2011C Second Half 2011C. Second Half 2011D. 2012E. 2013 or Later

53

In the 79 years from 1930 to 2008, how many years did the U S Government have a budget surplus?did the U.S. Government have a budget surplus?

A. 2B. 9C. 13C. 13D. 22E. 36

54