the rise and fall of the u.s. mortgage and credit...

The Rise and Fall of the The Rise and Fall of the U.S. Mortgage and Credit MarketsU.S. Mortgage and Credit Markets

James R. BarthAuburn University and Milken Institute

11

Auburn University and Milken [email protected]

College of BusinessUniversity of Nevada, Las Vegas

March 19, 2009

“Any real estate investment is a good investment … ”

22

“Any real estate investment is a good investment … ”

33

… Really?!

Subprime mortgage meltdown timelineDecember 2006–October 2008

Oct. 12, 2008: 500

600

700

Dow Jones U.S. Financial Index Mar. 11, 2008: Fed offers troubled banks as much as $200 billion in loans; Fed introduces Term Securities Lending Facility.

Oct. 24, 2007: Merrill announces $7.9 billion in subprime write-downs, surpassing Citi’s $6.5 billion.

Feburary–March 2007: More than 25 subprime lenders declare bankruptcy.

Aug. 6, 2007: American Home Mortgage files for bankruptcy.

Sept. 30, 2007: NetBank goes bankrupt.

Dec. 2006: Apr. 2007: New Century, a

Dec. 12, 2007:

Mar. 18, 2008: Fed cuts discount rate to 2.5%; Fed funds rate to 2.25%.

Mar. 16, 2008: JP Morgan Chase offers to buy Bear Stearns; Fed introduces Primary Dealer Credit Facility.

April. 30, 2008: Fed cuts discount rate to 2.25%; Fed funds

Oct. 3, 2008: President Bush signs Emergency Economic Stabilization Act, authorizing bailout of $700 billion.Also, Citigroup sues after Wachovia agrees tie-up with Wells Fargo.

Sept. 16, 2008: Fed loans AIG $85 billion.

Sept. 23, 2008: Washington Mutual is seized by FDIC.

Sept. 29, 2008: Citigroup agrees to buy Wachovia.

44Sources: BusinessWeek, S&P, Global Insight, Milken Institute.

Oct. 12, 2008: Finance leaders endorse G7 plan to calm markets.

Oct. 27, 2008: Down Jones U.S. Financial Index=230

Oct. 31, 2008:Dow Jones U.S. Financial Index=269

200

300

400

500

12/2006 02/2007 04/2007 06/2007 08/2007 10/2007 12/2007 02/2008 04/2008 06/2008 08/2008 10/2008

June 9, 2008:Lehman announces a $2.8 billion loss.

July 11, 2008: IndyMac is seized by FDIC.

Aug. 1, 2008: First Priority Bank closes.

July 30, 2008: President Bush signs a housing rescue law.

Sept. 7, 2008: U.S. seizes Fannie Mae and Freddie Mac.

Ownit Mortgage, a subprime lender, files for bankruptcy.

New Century, a mortgage broker, files for bankruptcy.

Feb. 2007: HSBC sets aside $10.6 billion for bad loans, including subprime.

July 31, 2007: Two Bear Stearns hedge funds file for bankruptcy.

Aug. 17, 2007: Fed cuts discount rate to 5.75%; Fed introduces Term Discount W indow Program.

Jan. 11, 2008: Bank of America agrees to buy Countrywide.Jan. 30, 2008: Fed cuts discount rate to 3.5%.

Fed introduces Term Auction Facility.

Feb. 13, 2008: President Bush introduces tax rebate stimulus program of $168 billion.

Aug. 16, 2007: Countrywide gets emergency loan of $11 billion from a group of banks.

Sept. 14, 2008: Lehman files for bankruptcy.

2.25%; Fed funds rate to 2%.

Oct. 8, 2008: Fed cuts discount rate to 1.75%; Fed funds rate to 1.5%.

Overview

55

Home mortgages: Who borrows, how much has been borrowed, and who funds them?

Government-controlled

46%

Total value of housing stock = $19.3 trillion

Mortgage debt $10.6 trillion

Prime 91.6%

Subprime8.4% Securitized

58%

66

Note: total residential and commercial mortgages = $14.7 trillion; 5 percent = $700 billion

Privatesector-

controlled54%

Equity in housing stock$8.7 trillion

91.6%Non-securitized

42%

Sources: Federal Reserve, Milken Institute.

The mortgage problem in perspective

80 million houses27 million are paid off

53 million have mortgages 48 million are paying on time

77

48 million are paying on time

5 million are behind

This compares to 50% seriously delinquent in the 1930s.

(10% of 53 million with 3% in foreclosure)

Sources: U.S. Treasury, Milken Institute.

I. Low interest rates and a lending boom

88

Did the Fed lower interest rates too much and for t oo long?Federal funds rate vs. rates on FRMs and ARMs

5

6

7

8Percent

30-year FRM rate

January 30, 200930-year FRM rate: 5.1%1-year ARM rate: 4.9%

99Sources: Federal Reserve, Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.

Target federal funds rate

0

1

2

3

4

2001 2002 2003 2004 2005 2006 2007 2008 2009

Record low from June 25, 2003 to June 30, 2004: 1%

Apr. 30, 2008: 2%Oct. 8, 2008: 1.5%Oct. 29, 2008: 1%Dec. 16, 2008: 0-0.25%

1-year ARM rate

Home price bubble and credit boom

Low interest rates and credit boom

Index, January 2000 = 100

2.5

3.0

3.5

4.0

150

200

250

US$ trillionsUS$ trillions

2.5

3.0

3.5

4.0

5.0

5.5

6.0

Percent

1010Sources: Inside Mortgage Finance, Mortgage Bankers Association, Moody’s Economy.com, S&P/Case-Shiller, Milken Institute.

0.0

0.5

1.0

1.5

2.0

2001 2004 2007 Q3 2008

0

50

100

150

Home mortgage

originations (left axis)

S&P/Case-Shiller National Home

Price Index (right axis)

0.0

0.5

1.0

1.5

2.0

2001 2004 2007 Q3 2008

3.0

3.5

4.0

4.5

1-Year ARM mortgage rate

(right axis)

Home mortgage

originations (left axis)

Note: Data for Q1-Q3 2008 are annualized.

II. Homeownership, prices, starts and sales take off

1111

Credit boom pushes homeownership rate

to historic high

Home price bubblepeaks in 2006

California and national home prices reach

record highs

500

600

700US$ thousands

California m edian hom e price

California 280

330

380Index, January 1987 = 100

S&P/ Case-Shille r

National Hom e Price Index68

69

70Percent

Q2 2004: 69.2%

1212Sources: U.S. Census Bureau, OFHEO, Moody’s Economy.com, S&P/Case-Shiller, California Association of Realtors, Milken Institute.

0

100

200

300

400

500

1998 2000 2002 2004 2006 2008

U.S. m edianhom e price

U.S. ave rage, 1987-2008: $121,714

California ave rage1987-2008$230,599

80

130

180

230

280

1998 2000 2002 2004 2006 2008

OFHEO Hom e Pr ice Index

64

65

66

67

68

1998 2000 2002 2004 2006 2008

Q4 2008: 67.5%

Average , 1965–Q4 2008: 65.2%

4.2

5.6

7.0

0.9

1.2

1.5Millions Millions

Exis ting hom e sales (le ft axis )

3

4

0.6

0.8Millions

Existing homes for sale (left axis)

Millions

Homes for sale Homes sales reach a new high

Housing starts hit a record in 2005

1.5

2.0 January 2006: 1.8 m illion

Housing units, millions

1313

0.0

1.4

2.8

4.2

1998 2000 2002 2004 2006 20080.0

0.3

0.6

0.9

New hom e sales (r ight axis )

0

1

2

1998 2000 2002 2004 2006 20080.0

0.2

0.4

New homes for sale (right axis)

Sources: U.S. Census Bureau, OFHEO, Moody’s Economy.com, Milken Institute.

0.0

0.5

1.0

1998 2000 2002 2004 2006 2008

Oct. 2008: 536,000

Average s tarts , 1959–Oct. 2008: 1.1 m illion

III. Subprime borrowers and subprime mortgages

1414

National FICO scores display wide distribution What goes into a FICO score?

Who is a subprime borrower?

18

2730

40

Percentage of population

Subprime = 21%

Prime = 79%

Payment history

35%

New credit

10%

Types of credit in use

10%

1515Sources: myFICO.com, Milken Institute.

25

8

1215

18

13

0

10

20

up to499

500-549

550-599

600-649

650-699

700-749

750-799

800+

Subprime = 21%

Amounts owed

30%

35%

Length of

credit history

15%

Prime

Subprime12

16

20

Percent of total originations

FICO below 620 Prime: 6.6%

Subprime: 45.2%

FICO above 620 Prime: 93.4%

Subprime: 54.8%

Prime and subprime mortgage originations by FICO score reveal substantial overlaps

1616

0

4

8

0 - 459

460 -

479

480 -

499

500 -

519

520 -

539

540 -

559

560 -

579

580 -

599

600 -

619

620 -

639

640 -

659

660 -

679

680 -

699

700 -

719

720 -

739

740 -

759

760 -

779

780 -

799

800 -

900

FICO score

Sources: LoanPerformance, Milken Institute.

ARMs look attractive to many borrowers

6

7

8Percent

30-year FRM rate

January 30, 200930-year FRM rate: 5.1%1-year ARM rate: 4.9%

1717Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.

3

4

5

2001 2002 2003 2004 2005 2006 2007 2008 2009

1-year ARM rate

ARM share grows, following low interest rates

15

20

25Percent of all outstanding home mortgages

1818Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.

0

5

10

2001 2002 2003 2004 2005 2006 2007 2008

30

40

50

60FHA ARM Prime ARM Subprime ARM

Percent of mortgage type

Largest share of ARMs go to subprime borrowers

1919

0

10

20

30

2001 2002 2003 2004 2005 2006 2007 2008

Sources: Mortgage Bankers Association, Moody’s Economy.com, Milken Institute.

Subprimes take an increasing shareof all home mortgage originations

3.0

4.0 Subprime

Prime

US$ trillions

Subprime'sshare:7.8%

7.4%

8.4%

18.2%21.3%

20.1%

7.9%

2020Sources: Inside Mortgage Finance, Milken Institute.

0.0

1.0

2.0

2001 2002 2003 2004 2005 2006 2007 Q1-Q3 2008

7.8%

1.3%

540

625600

400

500

600

700

US$ billionsUS$ billions

699

973

1,200 1,240

940 895

800

1,000

1,200

1,400 Average annual growth rates1995–2006: 14%2006–Q1 2008: -23%

Subprime mortgages increase rapidly before big decl ineOriginations Outstandings

2121

160200

310

191

140

100

200

300

2001 2002 2003 2004 2005 2006 2007 Q22008

479574

699

0

200

400

600

2001 2002 2003 2004 2005 2006 2007 Q12008

Sources: Inside Mortgage Finance, Milken Institute.

H22008

IV. Mortgage product innovation

2222

Subprime and Alt-A shares quadruple between 2001 and 2006, then fall in 2007

2001, $2.2 trillion

2% 5%7.9%

7%

2006, $3.0 trillion

33.2%

13%

14%2.7%

2007, $2.4 trillion

11%

14%4.9%

Q1 2008, $480 billion

4% 9% 9.6%2%

8%

2323

FHA & VAConventional, conforming primeJumbo prime

Jumbo primeSubprimeAlt-A Home equity loans


57.1%20%

13%

20% 16% 47.3%

11%

8%

14% 67.2%

ARM hybrids dominate subprime originations (2006)

Other ARM7%

ARM hybrids

Other ARM7%

ARM hybrids

Other ARM7%

ARM hybrids

Other ARM 4%

Fixed 9%

30-year

Other ARM 4%

Fixed 9%

30-year

Other ARM 4%

Fixed 9%

30-year

SubprimePrime conventional Alt-A

Other ARM23%

Other ARM23%

2424

Fixed

23%

70%

hybrids

Fixed

23%

70%

hybrids

23%

70%

hybridsARM balloon

30-year

with 40- to 50-year

amortization26%

2- and 3-year hybrids 61%

ARM balloonARM balloon30-year

with 40- to 50-year

amortization26%


30-year

with 40- to 50-year

amortization26%


Sources: Freddie Mac, Milken Institute.

Fixed 31%

ARM hybrids46%

Fixed 31%

ARM hybrids46%

V. Securitization

2525

The mortgage model switches fromoriginate-to-hold to originate-to-distribute

Securitized15.6%

Residential mortgage loans1980: Total = $958 billion

Residential mortgage loansQ3 2008: Total = $11.3 trillion

11%

2626Sources: Federal Reserve, Milken Institute.

Held in portfolio

84.4%

15.6%Held in

portfolio41%

Securitized59%

11%

89%

4045 43 42 45 47

50

5762

6568 68 68

50

60

70

80Percent of all subprime mortgages securitized since 1994

Securitization becomes the dominant funding source for subprime mortgages

2727

31 2933

40

0

10

20

30

40

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

2004 2005 2006 2007 Q12008

Q22008


The rise and fall of private-label securitizers

New securities issuance

42%2%

21%

1985

20% 13%

2001

56%

4%

18%

2006

19%5%

Q1–Q3 2008

2828Sources: Inside Mortgage Finance, Milken Institute.

35%

1985Total = $110B

38%29%

2001Total = $1.4T

22%

2006Total = $2.0T

31%45%

Q1–Q3 2008Total = $1.0T

Ginnie Mae Freddie Mac Fannie Mae Private-label

The rise and fall of private-label securitizersOutstanding securities

13%

6%

55%

1985

14% 18%

2001

35%7%

25%

2006

30%7%

26%

First half 2008

2929

Ginnie Mae Freddie Mac Fannie Mae Private-label

26%

Total = $390B

39% 29%

Total = $3.3T

33%

Total = $5.9T

37%

First half 2008Total = $6.8T


Mortgage-backed securities issued by issuer

1,500

2,000

2,500

3,000

Private label

Ginnie Mae

Freddie Mac

Fannie Mae

US$ billions

3030Sources: Inside Mortgage Finance, Milken Institute.Note: 2008 data are annualized.

0

500

1,000

1,500

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Fannie Mae

VI. Affordability

3131

4.5

5.0

Median home price/median household income

2005: 4.69

Ratio of home price to household

income surges

Home mortgage share of household debts reaches

a new high in 2007

Debt-to-income ratio of households has increased rapidly

150

Home mortgage debt/disposable personal incomePercent Q4 2007: 139.5%

70

75Percent

Q2 2007: 73.7%

3232

2.5

3.0

3.5

4.0

1998 2001 2004 2007

Average, 1967–2007: 3.38

2007: 4.29

Sources: U.S. Census Bureau, OFHEO, Federal Reserve, Moody’s Economy.com, Milken Institute.

75

100

125

1998 2001 2004 2007

Average, 1957–2007: 79.7%

60

65

70

1998 2001 2004 2007

Q2 2008: 73.4%

Average, 1952–2008: 64.2%

VII. Collapse

3333

The recent run-up of home prices was extraordinary

150

200

250

WorldWar I

WorldWar II

1970’s 1980’s

Currentboom

Annualized growth rate of nominal home index, 1890– June 2008: 3.3%

Index, 2000 = 100

GreatDepression

3434Sources: Robert Shiller, Milken Institute.

0

50

100

150

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

War I War II boom boom

Long-term trend line

Home prices don’t go up foreverChange in home prices in 100-plus years

10

15

20

25

30 WorldWar I

GreatDepression

WorldWar II

1970’sBoom

1980’sBoom

CurrentBoom

Average, 1890–June 2008: 3.6%

Percentage change in nominal home price, year ago

3535Sources: Robert Shiller, Milken Institute.

-20

-15

-10

-5

0

5

10

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

+/- one standard deviation

2005: The collapse begins

5

10

15

20

25Home price indices, percent change on a year earlie r

OFHEO

S&P/Case-Shiller national

S&P/Case-Shiller 10-city

3636Sources: S&P/Case-Shiller, OFHEO, Moody’s Economy.com, Milken Institute.

-20

-15

-10

-5

0

5

1988 1992 1996 2000 2004 2008

Forty-six states had falling prices in the fourth quarter 2007

United States: - 9.3% (fourth-quarter annualized growth)

3737Source: Freddie Mac.

One year ago… Five years ago…

If you bought your house…

-2.7-2.8

-4.7-5.1

-6.6-6.9

-7.6-8.5-8.8

-9.8

DallasCharlotteBostonDenverClevelandNew YorkPortlandAtlantaSeattleChicago

43.843.3

24.424.3

22.820.7

18.317.916.9

15.0

SeattlePortlandTampaNew YorkWashingtonCharlotteMiamiPhoenixLos AngelesComposite-10

3838% change in price, August 07-08 % change in price, August 03-08

Sources: S&P/Case-Shiller, Milken Institute.

-9.8-13.8

-15.4-16.6

-17.2-17.7

-18.1-25.8

-26.7-27.3

-28.1-30.6-30.7

ChicagoMinneapolisWashingtonComposite-20 DetroitComposite-10TampaSan DiegoLos AngelesSan FranciscoMiamiLas VegasPhoenix

15.014.213.8

12.46.55.65.04.7

1.8-1.8-2.6

-4.3-21.9

Las VegasComposite-20 ChicagoDallasAtlantaBostonDenverSan FranciscoSan DiegoMinneapolisClevelandDetroit

Housing startssharply decline

Homes sit longeron the market …

… as home appreciation slows

8

10

12

Number of months that homes sit on the market

Existing homes

10

20 0

2

4

Percentage change from year ago in median home sales price (left axis)

Percent Months

0

15

30Percent change, year ago

3939Note: Shaded area represents fluctuation within one standard deviation from mean (1.15%)

Sources: Mortgage Bankers Association, OFHEO, Moody’s Economy.com, Milken Institute.

0

2

4

6

8

1998 2000 2002 2004 2006 2008

New homes

-20

-10

0

1999 2001 2003 2006 2008

6

8

10

12

Number of months homes stay on

market (right axis)

-60

-45

-30

-15

1998 2000 2002 2004 2006 2008

Sept. 2008: -41.2%Oct. 2008: -39.4%

VIII. Delinquencies and foreclosures

4040

1,150

1,400

1,650

1,900

2,150

Thousands of foreclosures per year

Average 661,362 annual foreclosures from Q2 1999 to Q2 2006

Foreclosures are nothing new, but …

4141

400

650

900

1,150

Q2 199

9Q4 1

999

Q2 200

0Q4 2

000

Q2 200

1Q4 2

001

Q2 200

2Q4 2

002

Q2 200

3Q4 2

003

Q2 200

4Q4 2

004

Q2 200

5Q4 2

005

Q2 200

6Q4 2

006

Q2 200

7Q4 2

007

Q2 200

8


Sources: Mortgage Bankers Association, Milken Institute.

… their numbers have doubled

1,150

1,400

1,650

1,900

2,150

2,400

Thousands of foreclosures per year


Average 1,412,656 annual forclosures from Q3 2006 t o Q3 2008

4242Sources: Mortgage Bankers Association, Milken Institute.

400

650

900

1,150

Q2 199

9Q4 1

999

Q2 200

0Q4 2

000

Q2 200

1Q4 2

001

Q2 200

2Q4 2

002

Q2 200

3Q4 2

003

Q2 200

4Q4 2

004

Q2 200

5Q4 2

005

Q2 200

6Q4 2

006

Q2 200

7Q4 2

007

Q2 200

8

Subprime mortgages accounted for half or more of foreclosures since 2006

1,500

2,000

2,500SubprimeFHA and VAPrime (includes Alt-A)

Number of home mortgage loan foreclosures started ( annualized rate in thousands)

Q3 2008Subprime: 12% of loans serv iced


0

500

1,000

Q12003

Q32003

Q12004

Q32004

Q12005

Q32005

Q12006

Q32006

Q12007

Q32007

Q12008

Q32008

Subprime ARMs have the worst default recordHome mortgage loans delinquent or in foreclosure (p ercent of number)

20

25

30

35

40Q3 2008, Subprime ARM: 35.3%

Subprime FRM: 13.5%

Prime: 3.5%

FHA and VA: 6.3%


0

5

10

15

20

Q21998

Q11999

Q41999

Q32000

Q22001

Q12002

Q42002

Q32003

Q22004

Q12005

Q42005

Q32006

Q22007

Q12008

Prime: 3.5%

Percentage of homes purchased between Q2 2001 and Q2 2006 that now have negative equity

United States = 44.8%

4545

< 20%>= 20% and < 35%>= 35% and < 50%>= 50%

Sources: Zillow.com, Milken Institute.

Percentage of homes sold for a loss (Q2 2008) United States = 32.7%

4646

< 15%>= 15% and < 30%>= 30% and < 45%>= 45%


Percentage of homes sold that were in foreclosure (Q2 2008)

United States = 18.6%

4747

< 1%>= 1% and < 25%>= 25% and < 40%>= 40%


IX. Damages scorecard

4848

Losses/write-downs, capital raised, and jobs cut by financial institutions worldwide

240

300

360

420

480

60

75

90

105

120Number of jobs cut (thousands) US$ billions

Capital raised(left axis)

Jobs cut (right axis)

4949Sources: Bloomberg, Milken Institute.

0

60

120

180

240

Priorquarters

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 ThroughFeb. 4,2009

0

15

30

45

60Losses/write-downs

(left axis)

What is the cumulative damage?Cumulative losses/write-downs, capital raised, and jobs cut by financial institutions worldwide

800

1,000

1,200

200,000

250,000

300,000Number of jobs cut US$ billions

Capital raised (left axis)February 4, 2009: $969.2 billion

Jobs cut (right axis)February 4, 2009: 269.1 thousand


0

200

400

600

Priorquarters

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 ThroughFeb. 4,2009

0

50,000

100,000

150,000

Losses/write-downs (left axis)February 4, 2009: $1068.4 billion

February 4, 2009: $969.2 billion

Recent losses/write-downs and capital raised by selected financial institutions

US$ billions, through February 4, 2009 Losses /write -downs Capital raised

Wachovia, United States 97.9 11

Citigroup, United States 85.4 109.3

AIG, United States 60.9 65.7

Freddie Mac, United States 58.4 20.8

Fannie Mae, United States 56.0 15.6


Fannie Mae, United States 56.0 15.6

Merrill Lynch, United States 55.9 29.9

UBS, Switzerland 48.6 32.0

Washington Mutual, United States 45.6 12.1

Bank of America, United States 40.2 78.5

HSBC, United Kingdom 33.1 4.9

Others 486.4 589.4

Grand total (US$ billions) 1,068.40 969.2

Worldwide capital raised by sourceJuly 2007–July 2008

Other institutional

investors28%

July 2007–December 2007Total = $56 billion

Other institutional

investors

Sovereign wealth funds

7%

January 2008–July 2008Total = $300 billion

5252

Sovereign wealth funds

60%Public

investors12%

Public investors

69%

investors24%

7%

Source: International Monetary Fund.

Percentage change in stock price, December 2006–Jan uary 2009

-99.1-99.0-98.2

-94.3-90.3

-99.9-99.9

Lehman BrothersWashington mutualFreddie MacFannie MaeAIGBear StearnsWachovia

Financial stock prices take big hits

-90.3-90.0

-87.7

-77.8-70.1

-59.5-47.2-46.9

-87.5

WachoviaCountrywideBank of AmericaMerrill LynchUBS EquityMorgan StanleyGoldman SachsJP Morgan & ChaseWells Fargo

5353

Note: Bear Stearns stock price is to May 2008. Countrywide stock price is to June 2008. Merrill Lynch stock price is to December 2008. Wachovia stock price is to December 2008. Sources: Bloomberg, Milken Institute.

-64.1-72.3

-96.6-112.9

-169.2-197.9

Merrill LynchJP Morgan & ChaseWachoviaUBS EquityAIGBank of America

Total loss in market value: $1,094 billion, Decembe r 2006–January 2009

Financial market capitalization takes big hit

-21.4-23.9

-40.1-41.4-42.9

-45.1-47.9

-54.7-63.7

Bear StearnsCountrywideWells FargoLehman BrothersWashington mutualFreddie MacGoldman SachsFannie MaeMorgan Stanley

US$ billions

5454Note: Bear Stearns stock price is to May 2008. Countrywide stock price is to June 2008. Merrill Lynch stock price is to December 2008. Wachovia stock price is to December 2008. Sources: Bloomberg, Milken Institute.

X. Credit crunch and liquidity freeze

5555

Tightened standards for real estate loans

40

60

80

100

Net percentage of domestic respondents tightening s tandards for commercial real estate loans

LTCM Dotcom SubprimeThe end of S&L crisis


-40

-20

0

20

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Widening spreads betweenmortgage-backed and high-yield bonds

3,000

3,500

4,000

4,500

5,000Basis points, spread over 10-year Treasury bond

Merrill Lynch Mortgage-Backed Securities IndexAverage, 2004–Januray 30, 2009: 503 bps

Merrill Lynch High-Yield Bond Index

Maximum spread: 01/30/2009: 3,647 bps

5757Sources: Merrill Lynch, Bloomberg, Milken Institute.

0

500

1,000

1,500

2,000

2,500

01/2004 07/2004 01/2005 07/2005 01/2006 07/2006 01/2007 07/2007 01/2008 07/2008 01/2009

Merrill Lynch High-Yield Bond IndexAverage, 2004–Januray 30, 2009: 426 bps

Liquidity freezeSpread between 3-month LIBOR and

overnight index swap rateSpread between 3-month LIBOR

and T-bill rate

300

350

400

October 10, 2008: 364 bps

Basis points

Average since 350

400

450

500

August 20, 2007: 240 bps

Basis points

October 10, 2008: 463.6 bps


0

50

100

150

200

250

2006 2007 2008 2009

Average since December 2001: 29 bps

Average since August 2007: 97 bps

0

50

100

150

200

250

300

350

2006 2007 2008 2009

Average since 1985: 92 bps

Average since August 2007: 150 bps

Counterparty risk increases

300

400

500

600

700Average CDS spread, basis points

Government announces support for Fannie Mae and Freddie Mac

Lehman Brother files for bankruptcy and Merrill Lynch acquired

AIG rescued

Citigroup agreed to buy Wachovia

October 10, 2008: 607 bps

January 30, 2009: 422 bps

5959

Note: Counterparty Risk index averages the market spreads of the credit default swaps (CDS) of fifteen major credit derivatives dealers, including ABN Amro, Bank of America, BNP Paribas, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, HSBC, Lehman Brothers, JPMorgan Chase, Merrill Lynch, Morgan Stanley, UBS, and Wachovia. Sources: Datastream, Milken Institute.

0

100

200

300

07/2007 09/2007 11/2007 01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009

Bear Stearns acquired

Fannie Mae and Freddie Mac

Rising risk: The credit default swap market nearly doubled each year from June 2001 through October 20 08

34.4

45.5

62.2

54.6

47.0

40

50

60

70Notional amount of credit default swaps outstanding , US$ trillions

Annualized growth rateH1 2001–H2 2007: 102%H1 2001–H1 2008: 89%

6060Sources: International Swaps and Derivatives Association, Milken Institute.

0.6 0.9 1.6 2.2 2.7 3.8 5.48.4

12.417.1

26.0

34.4

0

10

20

30

40

June2001

Dec.2001

June2002

Dec.2002

June2003

Dec.2003

June2004

Dec.2004

June2005

Dec.2005

June2006

Dec.2006

June2007

Dec.2007

June2008

Oct.2008

Commercial paper issuance dries up

0

50

100

150Quarterly change in outstanding amount, US$ billion s


-200

-150

-100

-50

Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008

Issuers of asset-backed securities

Other issuers

Federal Reserve responds by cutting Fed funds rate, but mortgage rates remain relatively flat

6

8

10

4

5

6

30-year FRM rate (left axis)

Percent Percent

6262Sources: Freddie Mac, Federal Reserve, Moody’s Economy.com, Milken Institute.

0

2

4

01/2007 03/2007 06/2007 09/2007 12/2007 02/2008 05/2008 08/2008 11/2008 01/2009

0

1

2

3

Federal funds rate (left axis) Spread (right axis)

Increasing spreads between corporate bonds, mortgage securities, and target federal funds rate

16

20

24

High yield corporate bonds yield

Percent

6363Sources: Federal Reserve, Freddie Mac, Merrill Lynch, Bloomberg, Milken Institute.

0

4

8

12

01/2007 04/2007 07/2007 10/2007 01/2008 04/2008 07/2008 10/2008 01/2009

Freddie Mac 30-year fixed mortgage rate

Federal intented funds rateAAA corporate bonds yield

Federal Reserve assets increased but asset quality deteriorated

1,600

2,000

2,400US$ billions

Total assets of Federal Reserve banks

U.S. Treasury securities held outright

11/12/2008: $2.21 trillion

12/17/2008: $2.31 trillion

1/28/2009: $1.93 trillion


0

400

800

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1/28/2009: $1.93 trillion

1/28/2009: $475 billion

Federal Reserve has little maneuvering room

2

3Effective federal funds rate

Percent

Target federal funds rateApr. 30, 2008: 2%Oct. 8, 2008: 1.5%Oct. 29, 2008: 1%Dec. 16, 2008: 0-0.25%


0

1

06/01/08 07/01/08 07/31/08 08/30/08 09/29/08 10/29/08 11/28/08 12/28/08 01/27/09

Federal Government Comes to the Rescue of Main Street and Wall Street

Federal Reserve 5,365

Congress and White House 2,436

Federal Deposit Insurance Corporation 1,465

Treasury, Federal Deposit Insurance Corporation and

6666

Upper limit to total funds provided/cost under thes e Upper limit to total funds provided/cost under thes e programs…$9.6 trillion plus ?programs…$9.6 trillion plus ?

Treasury, Federal Deposit Insurance Corporation and Federal Reserve 362

Total amount committed (US$ billions) 9,628

Federal Reserve programsProgram

Amount committed (US$ billions)

Description

Term Discount Window Program (TDWP)

62.898Announced on 10/17/2007. Extends the term of discount window loans from overnight to up to 90 days.

Term Auction Facility (TAF) 416.031

Announced on 12/12/2007. The Fed auctions off loans under the TAF every Thursday for a term of 28 days. Outstanding TAF credit may potentially be expanded up to $900 billion.Need to Update details

6767

expanded up to $900 billion.

Term Securities Lending Facility (TSLF)

133.1

Announced on 3/11/2008. Establishes term swaps between the Fed and primary dealers. Collateral can be Treasury securities, federal agency securities, and other highly rated debt securities. On December 2, 2008, TSLF was extended through April 30, 2009.

Bear Stearns 29

Announced on 3/14/2008. The Fed acquired $29 billion in mortgage backed securities from JPMorgan Chase to fund its purchase of Bear Stearns. As of January 21, 2009, the market value o f these mortgage-backed securities is $27.2 billion.

Need to Update details to be $9.6 trillion

Slides 67-81

Federal Reserve programs

ProgramAmount

committed (US$ billions)

Description

Primary Dealer Credit Facility (PDCF)

58

Announced on 3/16/2008. Extends overnight borrowing from the Federal Reserve to primary dealers. On December 2, 2008, PDCF was extended through April 30, 2009. As of January 21, 2009, credit extended under PDCF was less than $33.3 billion.

First announced on 9/16/2008. AIG received an $85 b illion, two-year secured loan on September 16, 2008, in exchange for warrants for a

6868

AIG 173.4

secured loan on September 16, 2008, in exchange for warrants for a 79.9 percent equity stake in the firm. It was given an additional $37.8 billion on October 8, and another $20.9 billi on credit line under CPFF on October 30, 2008. On November 10, Tre asury purchased $40 billion of newly issued AIG preferred stock under the TARP (potentially reducing the original loan fr om $85 billion to $60 billion), terminated the $37.8 billion lending facility previously established, created a new lending facility to purc hase up to $22.5 billion MBS from AIG, and another facility to lend up to $30 billion to purchase CDOs on which AIG had written CDSs. As of January 21, 2009, $79.6 billion of credit was extended to A IG, $19.8 billion was extended to purchase MBSs, and $26.9 billion wa s extended to purchase CDOs.



Description

Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

53

Announced on 9/19/2008. Loans to banks so that they can buy asset-backed commercial paper from money market funds. On December 2, 2008, AMLF was extended through April 30, 2009. As of January 21, 2009, credit extended under AMLF was $14.8 billion.

Announced on 9/29/2008. The Federal

6969

Expansion of the Federal Open Market's temporary reciprocal currency arrangements (swap lines)

620

Announced on 9/29/2008. The Federal Open Market Committee authorized a $330 billion expansion of its swap lines for U.S. dollar liquidity operations by other central banks, raising the total cap to $620 billion (up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Sveriges Riksbank, and $60 billion by the Swiss National Bank).



Description

Announced on 10/7/2008. The CPFF is a credit facili ty to a special purpose vehicle (SPV). The SPV purchases fr om eligible issuers three-month U.S. dollar-denominate d commercial paper through the New York Fed's primary dealers. Eligible issuers are U.S. issuers of comme rcial paper, including U.S. issuers with a foreign parent company. The SPV only purchases U.S. dollar-denomin ated commercial paper (including asset -backed commercial

7070

Commercial Paper Funding Facility (CPFF)

1777.2

commercial paper (including asset -backed commercial paper (ABCP)) that is rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organizati on (NRSRO) and, if rated by multiple major NRSROs, is rated at least A-1/P-1/F1 by two or more major NRSROs. The maximum amount of a single issuer's commercial pape r the SPV may own at any time is greatest amount of U.S. dollar-denominated commercial paper the issuer had outstan ding on any day between January 1 and August 31, 2008. T he SPV does not purchase additional commercial paper f rom an issuer whose total commercial paper outstanding to all investors (including the SPV) equals or exceeds the issuer's limit. As of 1/21/2009, $350 billion was outstandin g.



Description

Money Market Investor Funding 540

Announced on 10/21/2008. The MMIFF provides assurance that money market mutual funds can liquidate their investments if cash is needed to cover withdrawals from customers. On 1/7/2009, the set of eligible institutions was expanded to also include a number of other money market investors, including U.S. based securities -lending cash -

7171

Money Market Investor Funding Facility (MMIFF)

540 including U.S. based securities -lending cash -collateral reinvestment funds, portfolios, and accounts; and U.S. –based investment funds that operate in a manner similar to money market mutual funds such as certain local government investment pools, common trust funds, and collective investment funds. As of 1/21/2009, outstanding amount was zero.



Description

Announced on 11/25/2008. TALF loans will have a one -year term, will be non-recourse to the borrower, and will be fully secured by eligible ABS. Treasury will provide $20 billion of credit pr otection to the Fed in connection with the TALF. Eligible collateral wi ll include U.S. dollar-denominated cash (that is, not synthetic) AB S that have a long-term credit rating in the highest investment-g rade rating category (for example, AAA) from two or more major nationally recognized statistical rating organizations (NRSROs ) and do not

7272

Term Asset-Backed Securities Loan Facility (TALF)

200

recognized statistical rating organizations (NRSROs ) and do not have a long-term credit rating of below the highest investment-grade rating category from a major NRSRO. The underlying credit exposures of eligible ABS initially must be auto lo ans, student loans, credit card loans, or small business loans guarante ed by the U.S. Small Business Administration. All U.S. persons tha t own eligible collateral may participate in the TALF. Collateral haircuts will be established by the FRBNY for each class of eligible collateral. Haircuts will be determined based on the price vola tility of each class of eligible collateral. On December 19, 2008, it was announced that TALF loan maturity was extended from one to th ree years, and TALF loans would be provided to all eligible borrow ers with eligible collateral rather than distributed through an aucti on.

Federal Reserve programs

Program Amount committed(US$ billions)

Description

Announced on 11/25/2008. The Fed will purchase the directobligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and th e Federal Home Loan Banks--and mortgage-backed securi ties (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Purchases of up to $100 billion in GSE direct oblig ations

Purchase of GSE direct obligations and MBS

600

Purchases of up to $100 billion in GSE direct oblig ations under the program will be conducted with the Fed's primary dealers through a series of competitive auctions an d will begin in the first week of December. Purchases of u p to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end 2008. Purchases of both direct obligations and MBS are expected to take place over several quarters.

Congress and White HouseProgram


Description

FHA Secure 50 Announced on 8/31/2007. Guarantees $50 billion in mortgages.

Economic Stimulus Act

124

Announced on 2/13/2008. Provided tax rebates in 200 8. Most taxpayers below the income limit received rebates o f $300-$600. Also gave businesses a one-time depreciation tax de duction on specific new investment and raised the limits on th e value of new productive capital that may be classified as busine ss expenses during 2008. The Congressional Budget Office (CBO) estimates

7474

during 2008. The Congressional Budget Office (CBO) estimates the net cost of the stimulus to be $124 billion.

Housing and Economic Recovery Act of 2008

24.9Announced on 7/30/2008. The CBO estimates that the Act will increase budget deficits by about $24.9 billion ove r the 2008 to 2018 period.

Purchase of GSE Debt and Equity

25Announced on 7/30/2008. Designed to shore up Fannie Mae and Freddie Mac.

HOPE for Homeowners 300

Announced on 7/30/2008. This voluntary program enco urages lenders to write down the loan balances of borrower s in exchange for FHA-guaranteed loans up to 90 percent of the ne wly appraised home value. Program runs through September 2011.



Description

Conservatorship of Fannie

Announced on 9/7/2008. Treasury and FHFA established contractual agreements to ensure that each company maintains a positive net worth. They are indefinite in duration and have a capacity of $100 billion each. Treasury also established a new secured lending credit facility, available to Fanni e Mae, Freddie Mac, and the Federal Home Loan Banks. Funding is provided directly by Treasury in

7575

Conservatorship of Fannie Mae and Freddie Mac

200Banks. Funding is provided directly by Treasury in exchange for eligible collateral from the GSEs (guaranteed mortgage backed securities issued by Freddie Mac and Fannie Mae, as well as advances made by the Federal Home Loan Banks). To further support the availability of mortgage financing, Treasury is initiating a temporary program to purchase GSE MBS, with the size and timing subject to the discretion of the Treasury Secretary.

Guaranty Program for Money Market Funds

50Announced on 9/19/2008. To restore confidence in money market funds, Treasury made available up to $50 billion from the Exchange Stabilization Fund.



Description

IRS Notice 2008-83 ?

Announced on 9/30/2008. Allows banks to offset thei r profits with losses from the loan portfolio of banks they acquir e. Initial media reports indicate that Wells Fargo alone may be able to claim more than $70 billion in losses from its acquisition of Wachovia, obtaining tax savings that exceed the market value of Wachovia as of November 7, 2008.

Emergency Announced on 10/3/2008. Empowers Treasury to use up to $700

7676

Emergency Economic Stabilization Act

700

Announced on 10/3/2008. Empowers Treasury to use up to $700 billion to inject capital into financial institutio ns, to purchase or insure mortgage assets, and to purchase any other t roubled assets necessary to promote financial market stability.

Troubled Assets Relief Program (TARP)

272.9

Announced on 10/14/2008 as part of the EESA. On Nov ember 25, Treasury purchased $40 billion of preferred shares from AIG. As of December 31, 2008, there are four programs under th e TARP: Capital Purchase Program (CPP), Automobile Industry Financing Program (AIFP), Targeted Investment Program (TIP), and Asset Guarantee Program (AGP). TARP also includes on init iative: providing $20 billion to support the Fed's Term Ass et-Backed Securities Loan Facility



Description

Capital Purchase Program (CPP)

192

Under CPP, Treasury was allowed to purchase up to $ 250 billion of senior preferred shares in selected banks. The first $125 billion was allocated to nine of the nation's largest financial institution s on October 28, 2008. As of January 23, 2009, $192 billion has been distribu ted to 296 institutions.

On 12/19/2008,Treasury announced a plan to make eme rgency loans available to General Motors and Chrysler. GM was pr ovided with up to a total of $13.4 billion in short-term financing. Tre asury funded $4 billion of

Automotive Industry Financing Program (AIFP)

20.9

this loan immediately, and an additional $5.4 billo n on 1/16/2009. Treasury will provide an additional $4 billion on 2/17/2009. On 12/29/2008, Treasury also purchased $5 billion of senior preferred equit y from GMAC. Additionally, Treasury agreed to lend up to $1 bill ion of TARP funds to GM so that GM can participate in a rights offering by GMAC in support of GMAC’s reorganization as a bank holding company. On 1/2/2009, Treasury provided a 3-year $4 billion loan to Chrysler, secu red by various collateral, including parts inventory, real estate, and certain equity interests. On 1/19/2008, Treasury announced that a $1.5 billion loan to a SPV created by Chrysler Financial to finance the extension of n ew consumer auto loans as part of a broader program to assist the do mestic automotive industry in becoming financially viable.



Description

Targeted Investment 20

Treasury may invest in any financial instrument, in cluding debt, equity, or warrants, that the Secretary of the Trea sury determines to be a troubled asset, after consultati on with the Chairman of the Board of Governors of the Federal R eserve System and notice to Congress. Institutions partici pating in this program are required to provide Treasury with warra nts or alternative consideration as necessary. They also n eed to Investment

Program (TIP)20 alternative consideration as necessary. They also n eed to

adhere to rigorous executive compensation standards . In addition, Treasury will consider other measures, in cluding limitations on the institution's expenditures, or o ther corporate governance requirements. The $20 billion investment in Citigroup that was announced on Nov. 23 was made un der the TIP.

Asset Guarantee Program (AGP)

?

On 12/31/ 2008, Treasury transmitted to Congress a report that describes the Asset Guarantee Program (AGP). This p rogram provides guarantees for assets held by systemically significant financial institutions that face a risk of losing m arket confidence due in large part to a portfolio of distressed or i lliquid assets.

Federal Deposit Insurance CorporationProgram


Description

Increase FDIC insurance coverage

?Announced on 10/3/2008. A provision of EESA tempora rily raised the basic limit on federal deposit insurance coverage from $1 00,000 to $250,000 per depositor. Limits are scheduled to return to $100,0 00 after December 31, 2009.

Announced on 10/14/2008. Temporarily guarantees the senior debt of all FDIC-insured institutions and their holding companies, a s well as deposits in non-interest bearing deposit transaction accounts. Cert ain newly issued senior unsecured debt issued on or before June 30, 2009, w ould be fully protected in

7979

Temporary Liquidity Guarantee Program (TLGP)

1465

unsecured debt issued on or before June 30, 2009, w ould be fully protected in the event the issuing institution subsequently fail s, or its holding company files for bankruptcy. This includes promissory note s, commercial paper, interbank funding, and any unsecured portion of sec ured debt. Coverage would be limited to June 30, 2012. On November 21, 2008, FDIC strengthened TLGP. Chief among the changes is that the debt guar antee will be triggered by payment default rather than bankruptcy or receivers hip. Another change is that short-term debt issued for one month or less w ill not be included in the TLGP. Eligible entities will have until December 5, 2008 to opt out of TLGP. The other part of the program provides for a temporary unlimited guarantee of funds in noninterest-bearing transactions accounts (the Transaction Account Guarantee Program, or TAG)

Treasury, Federal Deposit Insurance Corporation and Federal Reserve

ProgramAmount committed

(US$ billions)Description

Announced on 11/23/2008. Up to $306 billion of Citigroup's assets are guaranteed. Citigroup takes the first loss up to $29 billion, and any loss in excess of

8080

Guarantee a portion of an asset pool of loans and securities backed by residential and commercial real estate and other such assets on Citigroup's balance sheet

249.3

up to $29 billion, and any loss in excess of that amount is shared by the government (90%) and Citigroup (10%). Treasury (via TARP) takes the second loss up to $5 billion, while FDIC takes the third loss up to $10 billion. The Federal Reserve funds the remaining pool of assets with a non-recourse loan, subject to Citigroup's 10 percent loss sharing, at a floating rate of overnight interest swap plus 300 basis points.

Treasury, Federal Deposit Insurance Corporation and Federal Reserve

Program Amount committed (US$ billions)

Description

Provide a package of guarantees, liquidity

Announced on 1/16/2009. Treasury and FDIC will prov ide protection against the possibility of unusually large losses o n an asset pool of approximately $118 billion of loans, securities bac ked by residential and commercial real estate loans, and other such assets , all of which have been marked to market value. The large majority of these assets were assumed by BOA as a result of its acquisition of Me rrill Lynch. The

guarantees, liquidity access, and capital to the Bank of America

138

assumed by BOA as a result of its acquisition of Me rrill Lynch. The assets will remain on BOA’s balance sheet. As a fee for this arrangement, BOA will issue preferred shares to the Treasury and FDIC. In addition and if necessary, The Federal Reserve stands ready to b ackstop residual risk in the asset pool through a non-recourse loan.In addition, Treasury will invest $20 billion in BO A from the TARP program in exchange for preferred stock with an 8 p ercent dividend to the Treasury. The investment was made under the Tar geted Investment Program.

Loans, guarantees and investments committed (US$ billions)

7524.929 The final tab for taxpayers will only become known once the crisis is over.

XI. When will we hit bottom?

8282

Looking for a bottom?Economists say the economy isn’t at its low point y et, and house prices likely won’t get there until 2009

Does this feel like the bottom to a downturn?

Yes 27%

When will home prices hit bottom?

6%

2nd half

1st half2010

8383

No 73%

4%

17%

38%

29%

1st half2008

2nd half2008

1st half2009

2nd half2009

Source: Wall Street Journal.

How far do home prices have to fall?

5.0

5.5

6.0

6.5 Q2 1971: 6.08%Annual rents as percent of home prices

8484Sources: Davisa, Lehnertb, Martin (2007), Milken Institute.

3.0

3.5

4.0

4.5

5.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Q4 2006: 3.48%

Q1 2008: 3.93%Average, 1960–Q1 2008: 5.04%

Average, 2000–Q1 2008: 4.06%

Declines in home prices and the time it takes to ge t the rent-to-price ratio to a targeted value

(5.04 is the longer-run average ratio)

Annual home price decline

-2.0% -5.0% -10.0% -15.0% -20.0%

3.80% 2010 Q3 2008 Q4 2008 Q2 2008 Q2 2008 Q2

rat

io

Annual home price decline required

8585

4.00% 2013 Q1 2009 Q4 2008 Q3 2008 Q2 2008 Q2

5.00% 2024 Q1 2014 Q1 2010 Q4 2009 Q3 2009 Q1

5.04% average 2024 Q3 2014 Q2 2010 Q4 2009 Q3 2009 Q1

Ren

t-to

-pric

e r

atio

6.00% 2026 Q4 2017 Q3 2012 Q3 2010 Q4 2009 Q4

Sources: Davisa, Lehnertb, Martin (2007), Milken Institute.

2,500

3,000

3,500

4,000

US$/month

Payment with 100% LTVPayment with 90% LTVPayment with 80% LTV

Mortgage payment assumptions: Every month, a home i s purchased at median price, buyer takes out a 30-year conforming, fixed-rate loan with 80% LTV. Payment also includes 1% property tax per year , 0.1% property insurance.

Alternative measures of the affordability of mortgage debt for California

8686

0

500

1,000

1,500

2,000

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Maximum affortablility limit is 38% of median household

insurance.

Sources: Moody’s Economy.com, Milken Institute.

XII. What went wrong

8787

2,443

879

1,410

2,067

944886 1,000

1,500

2,000

2,500

3,000US$ billions

The importance of Fannie Mae and Freddie Mac

8888

879886

0

500

1,000

Fannie Mae:total assets

Fannie Mae:total MBS

outstanding

Freddie Mac:total assets

Freddie Mac:total MBS

outstanding

Commercialbanks: total

residential realestate assets

Savingsinstitutions:

totalresidential realestate assets

Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.

Fannie Mae and Freddie Mac: Too big with too little capital?

1,778

2,278

1,459

2,000

2,500

3,000US$ billions

Fannie Mae Freddie Mac

8989Sources: Freddie Mac, Fannie Mae, Milken Institute.

133

1,022844 897

41

803 805 804

288

1,301

316

752

1,459

1,123

0

500

1,000

1,500

1990 2003 2006 Q3 2008 1990 2003 2006 Q3 2008Total assets Total MBS outstanding

Fannie Mae and Freddie Mac are highly leveraged

167x185x

203x

150

200

250

300

Mortgage book of business over capital measures

Fannie Mae Freddie Mac

9090Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.

60x 56x 48x 55x60x 58x 52x 57x64x81x

56x

-66x -52x-100

-50

0

50

100

Core capital Fair value Core capital Fair value

2005 2006 2007 Q3 2008

Freddie Mac’s and Fannie Mae's retained private-label portfolios

Fannie Mae, Q3 2008

Fannie Mae, 2007

Fannie Mae, 2006

Subprime Alt-A All others

33.8% 34.3% 32.0%

46.4% 36.1% 17.5%$97.3 billion

$94.8 billion 30.3% 33.4% 36.4%

$85.7 billion

9191Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.

Fannie Mae, 2005

Freddie Mac, Q3 2008

Freddie Mac, 2007

Freddie Mac, 2006 46.3% 23.4% 30.3%

46.4% 36.1% 17.5%

32.1% 37.4% 30.5%

41.7% 24.0% 34.3%

54.4% 25.0% 20.6%$224.6 billion

$218.9 billion

$86.9 billion

$191.5 billion

23.7

21.5

67.9

Federal Home Loan Banks

Fannie Mae

Freddie Mac

Leverage ratio, total assets/common equtity

Leverage ratios of different types of financial firms (June 2008)

9292

9.1

9.8

9.4

31.6

Credit unions

Commercial banks

Savings institutions

Brokers/hedge funds

Sources: Federal Deposit Insurance Corporation, Office of Federal Housing Enterprise Oversight, National Credit Union Administration, Bloomberg, Google Finance, Milken Institute.

Too much dependence on debt?Leverage ratios at biggest investment banks

28

1922

2627

19

31

2423

3432

3331

2223

2824

2225

30

35

40 2000 2005 2007 Sept. 2008Total assets/total shareholder equity


1918

19

0

5

10

15

20

Bear Stearns Merrill Lynch Morgan Stanley Lehman Broth ers Goldman Sachs

n.a

June 2008

Debt dependenceLeverage ratios at bank holding companies

13

17

13

19

1516

15

20

252000 2005 2007 Sept. 2008

Total assets/total shareholder equity


13 1313 131112

1311

0

5

10

15

Citigroup Bank of America JP Morgan Chase

Leverage vs. issuer rating

22

23

24

Fitch long term issuer default rating

Citigroup

Bank of America

Morgan StanleyMorgan Stanley

Merrill Lynch

Merrill Lynch

● 2000 ● 2005 ● 2007AAA

AA+

AA


18

19

20

21

10 15 20 25 30 35

Total assets/total equity capital

JP Morgan

Lehman BrothersBear Stearns

Merrill Lynch

Goldman Sachs

Merrill LynchAA-

A+

A

A-

Leverage vs. issuer rating

Total assets/total shareholder equity


2000 2005 2007 2000 2005 2007

Bear Stearns 27.8 26.6 33.5 A+ A+ A+

Merrill Lynch 19.4 19.1 31.9 AA AA- A+


Morgan Stanley 21.6 30.7 33.4 AA AA- AA-

Lehman Brothers 26.0 24.4 30.7 A A+ AA-

Goldman Sachs 17.5 22.7 22.4 AA- AA- AA-

Citigroup 12.7 13.3 19.3 AA AA+ AA

Bank of America 13.5 12.7 11.7 AA- AA- AA

JP Morgan Chase 16.7 11.2 12.7 AA- A+ AA-

AAA

AA+

AA

CDS premiums vs. issuer rating


Citigroup

Bank of America

Morgan Stanley

Merrill Lynch

● 2004 ● 2005 ● 2007

Lehman Brothers

9797

AA-

A+

A

A-

Sources: Datastream, Milken Institute.

0 10 20 30 40 50 60 70 80 90Average CDS premium, basis points

JPMorgan

Lehman BrothersBear Stearns

Goldman SachsMerrill Lynch

Credit default swap premiumsbasis points

2004 2005 2006 2007 2008

Bear Stearns 35.97 29.65 23.48 79.62 155.64

Merrill Lynch 33.37 27.19 20.34 57.62 231.03

Morgan Stanley 33.39 27.81 22.42 52.20 289.61

9898Sources:Datastream, Milken Institute.

Lehman Brothers 35.91 29.88 23.53 68.95 936.23

Goldman Sachs 34.04 27.53 22.58 46.25 189.79

Citigroup 22.17 17.01 10.69 30.05 165.20

Bank of America 22.52 17.27 11.06 26.11 113.09

JP Morgan Chase 31.23 27.30 16.83 31.11 105.75

Leverage vs. CDS premiums

60

80

100

Average CDS premium, basis points

JP Morgan

Bear Stearns

Merrill LynchGoldman Sachs

● 2004 ● 2005 ● 2007

Lehman Brothers

Morgan Stanley

Sources: Datastream, Bloomberg, Milken Institute.

0

20

40

10 15 20 25 30 35

Total assets/total equity capital

JP Morgan

Bank of America

Morgan Stanley

Bear StearnsLehman Brothers

Merrill Lynch

Citigroup

Morgan Stanley

Leverage vs. CDS premiumTotal assets/

total shareholder equityAverage CDS premium

basis points

2004 2005 2007 2004 2005 2007

Bear Stearns 28.4678 26.6 33.5 35.97 29.65 79.62

Merrill Lynch 20.0223 19.1 31.9 33.37 27.19 57.62

Sources: Datastream, Bloomberg, Milken Institute.

Morgan Stanley 26.4337 30.7 33.4 33.39 27.81 52.2

Lehman Brothers 23.9389 24.4 30.7 35.91 29.88 68.95

Goldman Sachs 19.7627 22.7 22.4 34.04 27.53 46.25

Citigroup 13.5794 13.3 19.3 22.17 17.01 30.05

Bank of America 11.0783 12.7 11.7 22.52 17.27 26.11

JP Morgan Chase 10.9533 11.2 12.7 31.23 27.3 31.11

Credit default swap premiums for large banks

300

400

500JP Morgan Chase

Wells Fargo

Bank of America

Citigroup

Credit default swap premium, basis points

101101Sources: Datastream, Milken Institute.

0

100

200

12/2005 04/2006 08/2006 12/2006 04/2007 08/2007 12/2007 04/2008 08/2008 12/2008

Standard & Poor’s ratingsNew issues: 1/1/2000 to 9/30/2008

Investment-grade securities

AAA 16,907

AA+ 240

AA 2,098

AA- 3,414

Non-investment-grade securities

BB+ 238

BB 313

BB- 331

B+ 339


AA- 3,414

A+ 2,623

A 2,602

A- 2,027

BBB+ 903

BBB 1,371

BBB- 1,359

B 330

B- 1,189

CCC+ 293

CCC 214

CCC- 104

CC 36

C 11

D 303

56 percent of MBS issued from 2005 to 2007 were eventually downgraded

S&P Total DowngradedDowngraded as

a percentage of total

AAA 1,032 156 15.1%

AA(+/-) 3,495 1,330 38.1%

A(+/-) 2,983 1,886 63.2%

103103

A(+/-) 2,983 1,886 63.2%

BBB(+/-) 2,954 2,248 76.1%

BB(+/-) 789 683 86.6%

B(+/-) 8 7 87.5%

Total 11,261 6,310 56.0%

Sources: Inside Mortgage Finance, Milken Institute.Note: A bond is considered investment grade if its credit rating is BBB- or higher by S&P.

63

7671

84

66

8794

60

70

80

90

100S&P

Moody’s

Fitch

Percent downgraded

Subprime mortgage-backed securities downgrades

2005–2007 issuance

S&P Rating

Number of companies

CDS spread

Highest Lowest Average

AAA 3 56 15 41

AA+ 1 95 95 95

AA 5 86 49 74

Investment grade S&P 500 companies’ credit ratings and

associated CDS spreads

104104

15

38

17

50

24

0

10

20

30

40

50

60

AAA AA(+/-) A(+/-) BBB(+/-)

AA 5 86 49 74

AA- 9 265 54 118

A+ 17 2,999 12 346

A 36 1,040 38 151

A- 34 2,557 51 427

BBB+ 43 1,114 38 222

BBB 41 1,210 61 271

BBB- 17 1,235 89 359

Note: As of October 17, 2008.

Sources: S&P, Datastream, Milken Institute.

Credit ratings of selected S&P 500 companies and associated CDS spreads as of October 17, 2008

S&P'sNumber of companies

CDS spreads (basis points)S&P's

Number of companies

CDS spreads (basis points)

Highest Lowest Average Highest Lowest Average

AAA 3 56 15 41 BB+ 12 795 130 419

AA+ 1 95 95 95 BB 14 938 168 522

AA 5 86 49 74 BB- 8 1,352 337 713

Speculative gradeInvestment grade

105105

AA 5 86 49 74 BB- 8 1,352 337 713

AA- 9 265 54 118 B+ 4 3,925 418 1,612

A+ 17 2,999 12 346 B 3 2,686 894 1,523

A 36 1,040 38 151 B- 2 4,718 3,701 4,209

A- 34 2,557 51 427

BBB+ 43 1,114 38 222

BBB 41 1,210 61 271

BBB- 17 1,235 89 359

Sources: S&P, Bloomberg, Datastream, Milken Institute.Note: Credit ratings of S&P 500 companies and the associated CDS spreads for those firms for which both ratings and CDS spreads are available.

When is a AAA not a AAA?Multilayered mortgage products

Origination ofmortgage loans High-grade CDO

Senior AAA 88%Junior AAA 5%

Pool of mortgage AA 3%loans: prime or subprime A 2%

BBB 1%Unrated 1%

106106Sources: International Monetary Fund, Milken Institute.

Mortgage bonds

AAA 80%AA 11%A 4% Mezzanine CDO

BBB 3% CDO-squaredBB-unrated 2% Senior AAA 62%

Junior AAA 14% Senior AAA 60%AA 8% Junior AAA 27%A 6% AA 4% CDO-cubed…

BBB 6% A 3%Unrated 4% BBB 3%

Unrated 2%

Dollar losses in reported cases of mortgage fraud

US$ millions

1,014946

813800

1,000

1,200

Mortgage loan fraud surges

37.3

52.9

40

50

60Number of cases reported, thousands

37.3

52.9

40

50

60Number of cases reported, thousands

107107

293225

429

0

200

400

600

2002 2003 2004 2005 2006 2007

Sources: Financial Crimes Enforcement Network, Federal Bureau of Investigation, Milken Institute.

1.7

2.3 2.9 3.5 4.7 5.49.5

18.4

26.0

0

10

20

30

1997 1999 2001 2003 2005 2007

1.7

2.3 2.9 3.5 4.7 5.49.5

18.4

26.0

0

10

20

30

1997 1999 2001 2003 2005 2007

Is adequate information disclosed to consumers?

5168

7479

8487

95

Loan amountPresence of prepayment penalty for refinance in two years

Presence of charges for optional credit insuranceReason why the interest rate and APR sometimes diff erProperty tax and homeowner’s insurance cost amount

Total up-front cost amountPrepayment penalty amount

Percent of respondents who could not correctly iden tify various loan costs using current disclosure fo rms

108108Sources: Federal Trade Commission, Milken Institute.

20202123

303233

3751

APR amountCash due at closing amount

Monthly payment (including whether it includes taxe s and insurance)Settlement charges amount

Balloon payment (presence and amount)Interest rate amount

Whether loan amount included finances settlement ch argesWhich loan was less expensive

Loan amount

Drivers of foreclosures:Strong appreciation or weak economies?

15

20

25

Detroit

Bakersfield

Riverside

Fort Lauderdale

Las Vegas

Stockton

SacramentoToledoCleveland

Weak economies Housing bubbles

Foreclosures per 1,000 homes

109109Sources: U.S. Treasury Department, RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.

0

5

10

-20 0 20 40 60 80 100 120 140

Five-year price gain, Q3 2002–Q3 2007 (percent)

Miami

Bakersfield

Fresno

Fort Lauderdale

Orlando

Phoenix

Palm Beach

TampaSan Diego

Oakland

Sacramento

Atlanta

MemphisColumbus

Indianapolis

ToledoDaytonDenver

Cleveland

Akron

Warren

National average

After housing bubble burst in 2007: Foreclosures highest for areas with biggest price declines

25

30

35

40

45Weak

economies strengthen

Stockton

Bakersfield

RiversideLas Vegas

Fort Lauderdale

SacramentoOakland

Denver

Foreclosures per 1,000 homes

National average

Collaping housing bubbles

110110Sources: RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.

0

5

10

15

20

25

-30 -25 -20 -15 -10 -5 0 5

Price change, 2007–June 2008 (percent, annualized)

Miami

Orlando

Phoenix

Fresno

Sacramento

San Diego

Detroit

Warren ClevelandDayton

Columbus Indianapolis

Palm BeachTampa

Toledo

Akron Atlanta

Memphis

XIII. Policy lessons from the current crisis and proposals for reform in

regulatory oversight

111111

regulatory oversight

Balance sheet information on FDIC-insured institutions

Borrowed funds-to-asset ratio (left axis)

Deposits-to-asset ratio (right axis)

Insured deposits-to-asset ratio (right axis)12

14

16

18

20

50

60

70

80

90Percent Percent

112112Sources: FDIC, Milken Institute.

Cash-to-asset ratio (left axis)

ratio (right axis)

Equity capital-to-asset ratio (right axis)

0

2

4

6

8

10

1992 1994 1996 1998 2000 2002 2004 2006 Q3 20080

10

20

30

40

50

U.S. regulatory capital requirements and prompt corrective action categories

Tier 1leverage

Tier 1 risk-based

Total risk-based

Well capitalized >= 5% and >= 6% and >= 10%

Adequately capitalized >= 4% and >= 4% and >= 8%

113113

Adequately capitalized >= 4% and >= 4% and >= 8%

Undercapitalized < 4% or < 4% or < 8%

Significantly undercapitalized

< 3% or < 3% or < 6%

Critically undercapitalized

Tangible equity capital ratio that is <= 2%

Source: FDIC.

Selected information for U.S. banks December 31, 2008

$US billions Percent

NameTotal

assetsTotal equity

Market capitalization

(Jan. 30, 2009)

Deposits to total assets

Long-term borrowing

to total assets

Short-term borrowing to total assets

Cash/total assets

JP Morgan Chase 2,175 167 95 46.4 12.9 18.8 1.2

Citigroup 1,945 151 21 39.8 18.5 29.3 1.5

Bank of America 1,818 177 43 48.6 14.8 23.2 1.8

114114

Bank of America 1,818 177 43 48.6 14.8 23.2 1.8

Wells Fargo 1,310 99 79 59.7 20.4 8.3 1.8

US Bancorp 266 26 26 59.9 14.4 12.8 2.6

SunTrust Banks 189 22 5 59.9 14.2 5.0 3.0

BB&T Corp 152 16 11 64.9 11.9 7.1 1.1

Regions Financial 146 17 3 62.2 13.1 10.8 1.8

Fifth Third Bancorp 120 12 2 65.6 11.3 8.6 2.3

KeyCorp 105 10 4 62.4 14.3 9.6 1.2

Sources: Bloomberg, Milken Institute.

Selected information for U.S. banksDecember 31, 2008

Regulatory capital ratios Alternative capital adequa cy assessment

Name

Total risk-based capital ratio

Tier 1 risk-based

capital ratio

Tangible equity capital ratio

Equity to total

assets ratio

Tangible common

equity ratio

Credit rating

Moody's issuer

S&P issuer

JP Morgan Chase 14.7 10.8 6.9 7.7 3.4 Aa3 A+

Citigroup 15.6 11.8 6.0 7.8 1.5 N.A. A

115115

Bank of America 13.0 9.2 6.4 9.7 2.8 A1 A+

Wells Fargo 11.9 7.9 n.a. 7.6 3.5 Aa3 AA

US Bancorp 14.3 10.6 9.8 9.9 2.7 Aa2 AA

SunTrust Banks 14.0 10.9 10.4 11.8 5.0 A1 A

BB&T Corp 17.1 12.0 9.7 10.5 6.9 Aa3 A+

Regions Financial n.a. n.a. n.a. 11.5 5.2 A2 A

Fifth Third Bancorp 14.8 10.6 10.3 10.1 7.9 A2 A-

KeyCorp 14.7 10.8 11.0 10.0 5.9 A2 A-Sources: Bloomberg, Milken Institute.

Equity capital-asset ratio for commercial banks

15

20

25

30Equity capital/asset ratio, percent

1932: 16.2% Q3 2008: 9.7%

1896: 28.1%

116116Sources: Historical Statistics of the United States, FDIC, Milken Institute.

0

5

10

15

1896 1905 1914 1923 1932 1941 1950 1959 1968 1977 1986 1995 2004

Average, 1896 - Q3 2008: 10.9%

1945: 5.5% 1979: 5.8%

Leverage ratio for commercial banks

10

12

14

16

18

20Asset/equity capital ratio

1945: 18.2x 1979: 17.4x

117117Sources: Historical Statistics of the United States, FDIC, Milken Institute.Note: The leverage ratio is the reciprocal of the capital-asset ratio.

0

2

4

6

8

10

1896 1905 1914 1923 1932 1941 1950 1959 1968 1977 1986 1995 2004

Average, 1896 - Q3 2008: 11.0x

1932: 6.2xQ3 2008: 10.3x

1896: 3.6x

Reserve coverage ratio ofall FDIC-insured institutions

120

140

160

180

200

120

140

160

180

200US$ billions Percent

Loan-loss reserves (left axis)

Coverage ratio (right axis)

Sources: Quarterly Banking Profile, FDIC, Milken Institute .

0

20

40

60

80

100

03/2005 09/2005 03/2006 09/2006 03/2007 09/2007 03/2008 09/2008

0

20

40

60

80

100

Noncurrent loans (left axis)

The U.S. regulatory regime: In need of reform?

National banks State commercial and savings banks

Federal savings banks

Insurance companies

Securities brokers/dealers

Other financial companies, including mortgage

companies and brokers

• Fed• OTS

Fed is the umbrella or consolidated regulator

• Federal Housing Finance Agency

Fannie Mae, Freddie Mac, and Federal Home Loan Banks

Financial, bank and thrift holding companies

Justice Department• Assesses effects of mergers and acquisitions on competition

Federal courts• Ultimate decider of banking, securities, and insurance products

119119Sources: Financial Services Roundtable (2007), Milken Institute.

• OCC• FDIC

• State bank regulators• FDIC• Fed--state member commerical banks

• OTS• FDIC

• 50 State insurance regulators plus District of Columbia and Puerto Rico

• FINRA• SEC• CFTC• State securities regulators

• Fed• State licensing (if needed)• U.S. Treasury for some products

• OCC• Host county regulator

• Fed• Host county regulator

• OTS• Host county regulator

Federal branch

Foreign branch

Limited foreign branch

Primary/secondaryfunctionalregulator

Notes:Justice Department: Assesses effects of mergers and acquisitions on competitionFederal Courts: Ultimate decider of banking, securities, and insurance productsCFTC: Commodity Futures Trading CommissionFDIC: Federal Deposit Insurance CorporationFed: Federal ReserveFINRA: Financial Industry Regulatory Authority GSEs: Government Sponsored Enterprises OCC: Comptroller of the CurrencyOTS: Office of Thrift SupervisionSEC: Securities and Exchange Commission

Countries with the Central Bank as a supervisory au thority

Income level

Central bank only (75 countries)

Central bank among multiple

supervisors (7 countries)

Central bank not a supervisory authority

(52 countries)

Anguilla Estonia Israel Montserrat Slovenia Netherl ands South Korea Australia Denmark Isle of Man Norway

Antigua and

Barbuda Germany Italy New

Zealand Spain Saudi Arabia United States Bahrain Finland Japan Sweden

Austria Greece Kuwait Portugal Taiwan, China Belg ium France Luxembourg Switzerland

Cyprus Hong Kong, China Liechtenstein Singapore Trinidad &

Tobago Canada Iceland Macau, China United Kingdom

High income

Czech Republic Cayman

Islands Ireland Malta

Argentina Bulgaria Lithuania Russia St. Kitts and Nevis Malaysia Chile Gabon Latvia Panama

120120

Nevis Belize Croatia Mauritius Seychelles St. Lucia Cos ta Rica Hungary Lebanon Poland

Botswana Dominica Oman Slovak Republic

St. Vincent and the

Grenadines Equatorial

Guinea Kazakhstan Mexico

Brazil Grenada Romania South Africa Uruguay

Upper middle income

Algeria

Angola Egypt Jamaica Maldives Sri Lanka Bolivia C hina Dominican Republic Honduras

Armenia Fiji Jordan Moldova Suriname Bosnia and Herzegovina Colombia El Salvador Nicaragua

Belarus Guyana Lesotho Morocco Syrian Cameroon Co ngo Guatemala Peru

Lower middle income

Bhutan Indonesia Macedonia, FYR Philippines Thailand

Bangladesh Ghana Kyrgyz Republic Tajikistan Pakistan Nigeria Zimbabwe Benin Chad Mal i Senegal

Burundi India Malawi Tanzania Uganda Burkina Faso Côte d'Ivoire Niger Togo Low income

Ethiopia Kenya Mozambique Central African Republic

Guinea-Bissau

Countries with single vs. multiple supervisory auth orities Income

level Single supervisor

(127 countries) Multiple supervisors

(7 countries) Anguilla Cyprus Hong Kong,

China Liechtenstein Singapore Netherlands Saudi Arabia

Antigua and Barbuda Czech Republic Iceland Luxembou rg Slovenia South Korea United States Australia Denmark Ireland Macau, China Spain Austria Estonia Isle of Man Malta Switzerland Bahrain Finland Israel Montserrat Taiwan, China Belgium France Italy New Zealand Trinidad & Tobago Canada Germany Japan Norway United Kingdom

High income

Cayman Islands Greece Kuwait Portugal Sweden Argentina Costa Rica Grenada Lithuania Seychelles M alaysia

Belize Croatia Hungary Mauritius Slovak Republic Botswana Dominica Kazakhstan Mexico St. Kitts and Nevis Upper

121121

Botswana Dominica Kazakhstan Mexico St. Kitts and Nevis Brazil Equatorial Guinea Latvia Oman St. Lucia

Bulgaria Romania Lebanon Poland St. Vincent and the Grenadines Chile Gabon South Africa Russia Uruguay

Upper middle income

Panama

Guatemala Bosnia and Herzegovina Egypt Lesotho Peru

Algeria Cameroon El Salvador Macedonia, FYR Philippines

Angola China Fiji Maldives Sri Lanka Armenia Colombia Guyana Moldova Suriname Belarus Jordan Honduras Morocco Syrian Bhutan Congo Indonesia Nicaragua Thailand

Lower middle income

Bolivia Dominican Republic Jamaica

Bangladesh Chad India Pakistan Togo Nigeria Zimbabw e Benin Côte d'Ivoire Kenya Senegal Uganda

Burkina Faso Ethiopia Kyrgyz Republic Tajikistan Ma li Burundi Ghana Malawi Tanzania Niger

Low income

Central African Republic Guinea-Bissau Mozambique

Scope of supervisory authority for countries Income

level Only banks

(96 countries) All of the main financial institutions

(38 countries) Anguilla Greece Luxembourg Slovenia Australia Denma rk Japan Singapore

Antigua and Barbuda Hong Kong, China Montserrat South Korea Austria Estonia Liechtenstei n Sweden

Canada Isle of Man Netherlands Spain Bahrain German y Macau, China Taiwan, China

Cyprus Israel New Zealand Switzerland Belgium Icela nd Malta Trinidad & Tobago

Finland Italy Portugal United States Cayman Islands Ireland Norway United Kingdom

High income

France Kuwait Saudi Arabia Czech Republic Argentina Croatia Mauritius Seychelles Hungary Kaza khstan Latvia Malaysia

Belize Dominica Mexico Slovak Republic Uruguay Botswana Equatorial Guinea Oman South Africa

Brazil Gabon Panama St. Kitts and Nevis Bulgaria Grenada Poland St. Lucia

St. Vincent and the

Upper middle income

122122

Chile Lebanon Romania St. Vincent and the Grenadines

income

Costa Rica Lithuania Russia Algeria Congo Jamaica Sri Lanka Armenia Colombia Ho nduras Nicaragua

Angola Dominican Republic Jordan Suriname Bhutan Fiji Lesotho Peru

Belarus Egypt Macedonia, FYR Syrian Bosnia and

Herzegovina Guatemala Maldives

Bolivia El Salvador Moldova Thailand Cameroon Guyana Morocco

Lower middle income

China Indonesia Philippines

Bangladesh Côte d'Ivoire Kyrgyz Republic Senegal Malawi

Benin Ethiopia Mali Tajikistan Burkina Faso Ghana Mozambique Tanzania

Burundi Guinea-Bissau Niger Togo Central African

Republic India Nigeria Uganda

Low income

Chad Kenya Pakistan Zimbabwe

Conservatorship of Fannie Mae and Freddie Mac…

Bailing out AIG…

Capital Purchase Program under the TARP…

Automotive Industry Financing Program…

Targeted Investment Program and Asset Guaranty Program…

And Still……

the rise and fall of the u.s. mortgage and credit...

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