The Crash of 2008 and Its Aftermath

The Crash of 2008 and Its Aftermath

Jack Marco

Chairman/ Sr Consultant

Marco Consulting Group August 2010

Marco Consulting Group

Outline

Part 1: 2008 Year in Review

Part 2: 2009 Year in Review

Part 3: 2010 First Half Year in Review

Part 4: 2010 What Lies Ahead

Part 5: How Pension Funds Suffered After 2008

2008 Year in Review

Marco Consulting Group 4

S&P/Case-Shiller United States Home Price Index

0

50

100

150

200

250

300

350

Mar

-87

Mar

-88

Mar

-89

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Jump on the Housing Bandwagon

Source: Bloomberg, 1987 index level set to 100

+206%

(3-87 to 9-06)

-21%

(9-06 to 9-08)


Household Debt

-2,0004,0006,0008,000

10,00012,00014,00016,000

1980 Q1

1983 Q3

1987 Q1

1990 Q3

1994 Q1

1997 Q3

2001 Q1

2004 Q3

2008 Q1

To

tal D

eb

t O

uts

tan

din

g (

$B

)

15

16

17

18

19

20

De

bt P

aym

en

ts as %

of In

com

e

Debt $ Debt %

Homeowners…

…took on too much debt

Source: Federal Reserve


Types of Mortgages Issued

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Agency Jumbo Alt-A Subprime Other

Mortgage Lenders…

…issued risky mortgages and quickly sold them

Source: PIMCO, UBS (2000-2007), JPMorgan (2008)


Credit Freeze

First Half of 2008

– Overall lending slows

– Lending frozen in risky areas

(e.g., subprime, leveraged loans)

– Belief that government will step in

(Bear Stearns)

Second Half of 2008

– Lehman bankruptcy

– Paralyzed by headlines

– Lending frozen across the board

(prime mortgages, corporate bonds,

commercial paper, interbank lending)


Headlines #1: Bankruptcy

Bankruptcy or similar failure

– Lehman Brothers

– FDIC seized 25 failed banks (IndyMac, Washington Mutual)

– Retailers (Linens n’ Things, Sharper Image)

– Others (ATA Airlines, Icelandic banks)

Reaction: Stocks ↓. Bonds ↓.


Headlines #2: Government Assistance

Temporary government protection

– Bear Stearns: JPM purchase with Fed $30 billion guarantee

– Fannie Mae, Freddie Mac: conservatorship

– AIG: $152 billion rescue package (loans and investments)

– Dozens of major banks: accept $250 billion in government capital in exchange

for preferred shares

Reaction: Stocks ↓. Bonds stabilize or ↑.


Headlines #3: Private Assistance

Acquired or re-capitalized– Countrywide: acquired by Bank of America

– Merrill Lynch: acquired by Bank of America

– Morgan Stanley: $9 billion investment from Mitsubishi UFJ

– Goldman Sachs: $5 billion investment from Buffet/Berkshire

– GE: $3 billion investment from Buffet, $12 billion from others

– Wachovia: acquired by Wells Fargo

– National City: acquired by PNC Financial

Reaction: Stocks ↑. Bonds ↑.


Headlines #4: Bank Holding Companies

Applied for federal bank charter

– Morgan Stanley

– Goldman Sachs

– American Express

– GMAC

Benefits: collect retail deposits, FDIC guarantee on bank debt, access to

Fed’s discount window

Trade-Offs: bank regulators, higher capital requirements


Massive Sell-Offs

Source: Bloomberg

Cumulative Returns in 2008

-37.0%

-33.8%

-43.4%-53.3%

5.2%

-26.2%

-35.6%

-80%

-60%

-40%

-20%

0%

20%

40%

Jan-

08

Feb-

08

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov-

08

Dec-

08

Cum

ulat

ive R

etur

n

US Large Cap US Small Cap Intl Equity Emrg Mkt Equity

Aggregate Bond High Yield Bond Commodities


VIX Volatility Index

0

10

20

30

40

50

60

70

80

90

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

Expe

cted

30-

day

vola

tility

- S&

P 50

0

Credit Crunch

Record Highs for Volatility

Rus

sia/

LTC

M

Sep

t 11,

200

1E

nron

/Wor

ldco

m

Tech

Bub

ble

Source: CBOE


Flight to Quality

Safety in U.S. Government assets U.S. dollar

U.S. Treasuries

Risk assets Sell anything with any level of risk

Higher correlations across the board

Technical reaction, not fundamental


Nominal Dollar Broad Index

70

80

90

100

110

120

130

140

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Ind

ex L

evel

Strength of U.S. Dollar

Source: Federal Reserve’s trade-weighted US dollar index


1.43%

0.25%

0.08%0%

1%

2%

3%

4%

5%

6%

Jan-

08

Feb-

08

Mar

-08

Apr-0

8

May

-08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct

-08

Nov-

08

Dec-

08

3M LIBOR Fed Funds Target 3M TBILL

Treasury Yields Pushed to Zero

Source: Bloomberg


0

500

1000

1500

2000

2500Ja

n-08

Jan-

08

Jan-

08

Feb

-08

Feb

-08

Mar

-08

Mar

-08

Apr

-08

Apr

-08

May

-08

May

-08

Jun-

08

Jun-

08

Jul-0

8

Jul-0

8

Jul-0

8

Aug

-08

Aug

-08

Sep

-08

Sep

-08

Oct

-08

Oct

-08

Nov

-08

Nov

-08

Dec

-08

Dec

-08

Dec

-08

Demand Higher Yields from Risky Bonds

Source: Option-adjusted spreads on Merrill Lynch indexes through 12-31-08

12/31/2008 10y Avg

High Yield 1812 598

CMBS 990 141

ABS 967 136

Corporate 604 156

MBS 165 70

Agency 20 11

Exc

ess

yiel

d ov

er T

reas

urie

s (b

asis

poi

nts)


Imagine a World Where…

People can’t get mortgages

People can’t get car or student loans

Companies can’t raise funds for new

factories or new products

Companies have to stash more cash

to cover payroll or operating costs

Banks don’t want to lend to each other


Government Intervention

Buyer of last resort

Lender of last resort

U.S. Treasury

U.S. Federal Reserve

Foreign governments

Foreign central banks


U.S. Bail-Out: TARP

$700 billion Troubled Asset Relief Program (TARP)

Run by the U.S. Treasury

Waiting for Congress to release second installment of $350 billion

ProjectAmount

($ billions)

Purchase shares of healthy banks $250

Buy AIG preferred shares $40

Fed program to guarantee ABS $20

Citigroup investment $25

Auto industry (GM, Chrysler, GMAC) $23

Total $358


U.S. Bail-Out: Other Actions

Who ActionMonth

AnnouncedPurpose

Fed Lowered federal funds rate seven times All Year To encourage banks to lend

Fed Opened discount window to lend to investment banks March To provide source for emergency funds

Fed Currency swaps with 14 other central banks Sept To provide US dollars where supply is tight

Treasury Money market insurance program Sept To guarantee safety of money market deposits

SEC Banned short selling of select stocks Sept To temporarily ease downward price pressure

FDIC Guaranteed newly issued senior bank debt Oct To promote liquidity

Fed Buying 3-month commercial paper (highly rated, unsecured and asset-backed) Oct To provide funds to companies to

continue operations

Fed Buying $600 billion in agency debt and agency MBS (Ginnie, Fannie, Freddie) Nov To lower mortgage rates

FedLending up to $200 billion, taking ABS (auto, credit card, student, and small biz loans) as collateral

Nov To encourage banks to continue creating these loans



Who ActionMonth

AnnouncedPurpose








continue operations





Central Banks Drop Rates

Source: Bloomberg

Central Bank Interbank Lending Rates

0

1

2

3

4

5

6

7

8

Jan-0

7

Feb-07Mar-

07Apr-

07

May-07

Jun-0

7Ju

l-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-0

8

Feb-08

Mar-08Apr-

08

May-08

Jun-0

8Ju

l-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

US England Canada Australia Europe Japan


Concern 1: Housing

Source: National Association of Realtors

$2

29,0

00

$1

81,3

00

11.2

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,0002

005

20

06

Fe

b-0

7

Ma

r-0

7

Apr

-07

Ma

y-0

7

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Fe

b-0

8

Ma

r-0

8

Apr

-08

Ma

y-0

8

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Me

dia

n P

rice

0

2

4

6

8

10

12

Mo

nth

s S

up

ply

Median Price Months Supply

Home Sales


126

25

177

46

162

107

5774 81

140

6041

-76 -83 -88-67

-47

-100-67

-127

-403-423

-584

-524

7.2

-700

-600

-500

-400

-300

-200

-100

0

100

200

300Ja

n-07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Ch

an

ge

in

No

nfa

rm P

ay

roll

s (

00

0s

)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Un

em

plo

ym

en

t R

ate

Change in Nonfarm PayrollsUnemployment Rate

Concern 2: Economy and Unemployment

Source: Bureau of Economic Analysis


Hopeful Sign 1: Historical Recessions

Peak Trough Months

Sept. 1902 Aug. 1904 23

May 1907 June 1908 13

Jan. 1910 Jan. 1912 24

Jan. 1913 Dec. 1914 23

Aug. 1918 March 1919 7

Jan. 1920 July 1921 18

May 1923 July 1924 14

Oct. 1926 Nov. 1927 13

Aug. 1929 March 1933 43

May 1937 June 1938 13

Feb. 1945 Oct. 1945 8

Peak Trough Months

Nov. 1948 Oct. 1949 11

July 1953 May 1954 10

Aug. 1957 April 1958 8

April 1960 Feb. 1961 10

Dec. 1969 Nov. 1970 11

Nov. 1973 March 1975 16

Jan. 1980 July 1980 6

July 1981 Nov. 1982 16

July 1990 March 1991 8

March 2001 Nov. 2001 8

December 2007

Average 14Source: NBER


Hopeful Sign 2: Average Drawdowns

Peak Bottom Duration Decline

11/29/1968 5/26/1970 18 months -36.1%

1/11/1973 10/3/1974 21 months -48.2%

11/28/1980 8/12/1982 20 months -27.1%

8/25/1987 12/4/1987 3 months -33.5%

7/16/1990 10/11/1990 3 months -19.9%

3/24/2000 10/9/2002 31 months -49.1%

Average decline for prior 7 events -35.7%

Peak Bottom Duration Decline

10/9/2007 11/20/08 13 months -50.7%

Average return for the 3 months following the bottom of a cycle: +13.9% Average return for the 12 months following the bottom of cycle: +34.9% Return from 11/20/08 to 12/31/08: +20.5%

S&P 500 Index Returns

Source: Attalus Capital, Morningstar


Hopeful Sign 3: Forecast

MSNBC Year-End Economic Roundtable

Forecast for GDP Growth

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009Scott Anderson, Senior Economist, Wells Fargo -5.6% -3.8% -0.5% 1.7% 2.2%

Nariman Behravesh, Chief Economist, IHS Global Insight -6.5% -4.0% -0.7% 0.7% 1.4%

Michael Englund, Chief Economist, Action Economics -6.5% -3.0% 1.0% 2.0% 2.5%

Ethan Harris, Co-head, U.S. economics research, Barclays Capital -4.5% -4.5% -1.0% 2.0% 3.0%

Jan Hatzius, Chief U.S. Economist, Goldman Sachs -5.0% -3.0% -1.0% 1.0% 1.0%

Ed Leamer, Forecast Director, UCLA Anderson Business School -4.1% -3.4% -0.8% 0.2% 1.0%

Mickey Levy, Chief Economist, Bank of America -5.7% -3.6% -0.8% 2.1% 2.9%

Joel Naroff, President, Naroff Economic Advisors -5.1% -0.6% 1.1% 2.0% 4.8%

David Rosenberg, Chief North American Economist, Merrill Lynch -4.5% -4.2% -3.3% -0.8% 0.0%

John Silvia, Chief Economist, Wachovia Corp. -5.9% -3.4% -1.8% 1.0% 1.9%

Diane Swonk, Chief Economist, Mesirow Financial -6.3% -3.0% -0.8% 1.4% 1.9%

Lawrence Yun, Chief Economist, National Association of Realtors -5.5% -2.0% -0.2% 1.4% 2.6%

Consensus -5.4% -3.2% -0.7% 1.2% 2.1%

Source: MSNBC.com


Hopeful Sign 4: Government Actions

Hooray! More jobs

More infrastructure

More stimulus checks

More tax breaks

Easier mortgages

Challenges Higher taxes later or spending cuts

elsewhere

Infrastructure projects take time to get

running

Mortgage modifications can hurt bond

investors

Government spending can lead to:

– weaker dollar

– higher inflation

– being more indebted to other nations

2009 Year in Review


Q2 to Q4

2009: a Tale of Two Markets

In early 2009, investors were still

shell-shocked from 2008

Credit markets still frozen

Fear prevailed as investors kept

money on the sidelines

“Green shoots” of economic recovery

Investors begin risk-seeking typical of

recoveries and market normalization

Bargain-hunting activity increase as

investors see oversold areas of

market

Q1


Early 2009 Headlines...


In January, Things Were Still Unraveling...

Characterized by:

Market uncertainty: indicated by high

volatility; search for market bottom

Declining consumer spending and

business investment

Home prices in free fall

Rising unemployment

Source: PIMCO

The Downward Economic Spiral

AssetPrices

ConsumptionSpending

Employment

Savings

Investments

Dire negative expectations and lack of credit

availability prevent a reset of the system despite much

lower asset prices

Profits


Equity Markets Continued Heading South…

Cumulative Returns 10/9/2007 - 12/31/2009

-60%

-50%

-40%

-30%

-20%

-10%

0%

10/07 12/07 02/08 04/08 06/08 08/08 10/08 12/08 02/09 04/09 06/09 08/09 10/09 12/09

2008 decline = -37.0% 1/1/09-3/9/09 decline = -24.6%

10/9/07-3/9/09 total decline from the market peak to the market trough: -54.9%


Consumer Confidence Went With the Markets

Consumer confidence bottomed in February

Source: The Conference Board (via Bloomberg). Consumer Confident Index through 2/28/2009.

2/28/09 level = 25.3

Consumer Confidence Index

0

20

40

60

80

100

120

140

160

Jul-00 Sep-01 Nov-02 Jan-04 Mar-05 May-06 Jul-07 Sep-08 Dec-09

Monthly Average 7/31/2000 – 2/28/09 = 94.7


Government Intervention in 2009

February 17: $787 billion government stimulus

package enacted

February 18: Obama announces plan to aid

homeowners with mortgage payments

March 18: Federal Reserve announces it will

increase its balance sheet to purchase

additional securities for the purpose of

increasing liquidity in credit markets

March 23: Treasury details Public Private

Investment Program

June 24: Bill with Cash for Clunkers provision

signed into law


“Green Shoots” Appeared in Late Q1

BusinessWeek cover, April 13, 2009. Bernanke photo from www.federalreserve.gov

“Green shoots” is a term used colloquially to indicate signs of economic recovery during an

economic downturn.

Federal Reserve Chairman, Ben Bernanke, made the first public use of the phrase by a Fed official in a March 15, 2009 interview with 60 Minutes


March 9th Market Turnaround


-60%

-50%

-40%

-30%

-20%

-10%

0%

10/07 12/07 02/08 04/08 06/08 08/08 10/08 12/08 02/09 04/09 06/09 08/09 10/09 12/09

Source: Bloomberg, through 12/09


S&P 500 Rebounded 66% Since March Bottom


-60%

-50%

-40%

-30%

-20%

-10%

0%

10/07 12/07 02/08 04/08 06/08 08/08 10/08 12/08 02/09 04/09 06/09 08/09 10/09 12/09

66.1% rally sinceMarch 9

Source: Bloomberg, through 12/09


Consumer Confidence Turned Up in March

Consumer confidence rebounded March through May; flat in the third quarter

Still well-below average

Source: The Conference Board (via Bloomberg). Consumer Confident Index through 9/30/2009.


Current level = 52.9

Monthly Average7/31/2000 – 12/31/2009 = 90.5

0

20

40

60

80

100

120

140

160

Jul-00 Feb-02 Sep-03 Apr-05 Nov-06 Jun-08 Dec-09


End of the Recession

Economists indicate recession officially over in mid-year 2009

– Bernanke: “From a technical perspective the recession is likely over”

– Former Fed staffer: “June was mostly likely the trough”

– 41 of 51 economists surveyed by WSJ believe recession is over

But things are still tentative…

– Unemployment

– Consumer spending

– Credit creation

– Housing prices

– Government programs

Where are we today and where are we going?


Yield Curve Steepening Process Began

Beginning of Year and End of Year Difference

Treasury Yield Curve

1.55

2.68

0.34

2.21

2.68

4.64

0.44

3.84

3 mos 1 yr 5 yrs 10 yrs 30 yrs

Time to Maturity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Yie

ld t

o M

atu

rity

(%)

12/31/2008 12/31/2009


In the U.S., GDP Growth Was Positive in Second Half but Negative for Full Year

Source: Morgan Stanley

U.S. GDP Growth

6.4

2.11.2

-1.4

1.6

2.7

0.2

1.2

3.5

7.5

32.5

32.6

3.8

1.3

4.8

2.7

0.81.5

0.1

-0.2

0.9

2.8

-0.5

2.2

5.7

3.5 3.6

2.7

1.0

2.42.2

-6.1-6.3

-1.0

4.8 4.8

-0.5-0.5

-8

-6

-4

-2

0

2

4

6

8

10

Per

cent

Cha

nge

from

Prio

r Q

uart

er

2009200820072006200520042003200220012000

Real GDP Growth, % change q/q at an annualized rate

Full year 2009 GDP declined by 2.4%

Full year 2009 GDP declined by 2.4%


Potential Shapes of the Economic Recovery

Economic Alphabet Soup

– V Shaped Recovery

– U Shaped Recovery

– W Shaped Recovery

– L Shaped Recovery


GDP Growth 1952-1955

-10%

-5%

0%

5%

10%

15%

1952 1953 1954 1955

V-Shaped Recovery Example

U.S. Recession of 1953

– GDP growth for this recession forms a classic v-shape


U-Shaped Recovery Example

U.S. Recession of 1973-1975

– Recession is longer than a V-shaped recession with a less clearly-defined trough

– GDP may shrink for several quarters and only slowly return to trend growth


1973 1974 1975 1976

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

S&P 500 Index 1973-1976

0

20

40

60

80

100

120

140

1973 1974 1975 1976


-4

-2

0

2

4

6

8

1978 1979 1980 1981 1982 1983 1984

W-Shaped Recovery Example

Early 1980s Recession in the U.S.

– Also called a “Double Dip” recession



GDP Growth in Japan 1987-2007

-4%

-2%

0%

2%

4%

6%

8%

10%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

L-Shaped Recovery Example

Asset Price Bubble in Japan 1980s-1990s

Source: finance.yahoo.com. Penn World Tables

NIKKEI 225 (1984-2009)

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

85 87 89 91 93 95 97 99 01 03 05 07 09


Key Themes in 2009

Unemployment

Credit Creation

Consumer Spending

HomesHomesHomesHousing Government Actions


10%

Unemployment

Source: Bureau of Labor Statistics

Unemployment Rate2000-2009

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

50-year average: 5.9%


Unemployment

Change in Nonfarm Payrolls

7.2 million total jobs lost since Jan 2008

-900

-700

-500

-300

-100

100

300

500

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mon

thly

Cha

nge

in N

onfa

rm P

ayro

lls (

000s

)


Unemployment

Second highest rate over last 60 years

Source: Bureau of Labor Statistics

Historical Peaks in Unemployment

10.0%

7.0%6.3%

7.7%

10.8%

9.0%

7.5%7.9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2009

Un

em

plo

yme

nt

Ra

te

50-year Average: 5.9%



0

20

40

60

80

100

120

140

160

Jul-00 Feb-02 Sep-03 Apr-05 Nov-06 Jun-08 Dec-09

Consumer Spending

Consumer confidence bottomed in March

A reading above 90 means the economy is on solid footing. Above 100 signals

strong growth

Source: The Conference Board (via Bloomberg). Consumer Confident Index through10/31/2009.

25.3

52.9


Consumer Spending

Source: Commerce Department Source: BEA and JP Morgan Asset Management

-4%

-2%

0%

2%

4%

6%

8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

LT Average3.5%

Personal Consumption Expenditures Growth from 2000-2009

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Components of GDPBillions, USD

-2.8% Net Exports

71.1%Consumption

20.8%Gov’t Spending

8.4% Investment Ex-Housing

2.5% Housing/Construction


Consumer Savings

Consumer Spending Data Source: U.S. Department of Commerce Data as of 8/31/2009 Personal Savings Rate Data Source: St. Louis Federal Reserve Bank as of 11/30.2009)

U.S. Personal Savings Rate(1959-2009)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1959 1963 1968 1972 1977 1981 1986 1991 1995 2000 2004 2009

Long Term Average = 6.4%


Credit Card Loans Other LoansU.S. Consumer Credit Conditions

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

% o

f B

anks

Tig

hten

ing

Cre

dit

Sta

nda

rds

Credit Creation

Credit officers are still tightening their standards

Source: Federal Reserve - Senior Loan Officer Survey


NAR Median Home Price

$178

,300$2

28,6

00

$164

,800

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

2006 Aug-07 Mar-08 Oct-08 May-09 Dec-09

Med

ian

Pric

e

Housing Market

Source: National Association of Realtors, data through December 2009. Standard & Poor’s Case Schiller Composite 10 Index, data October 2009

Case-Schiller Home Price Index

0

50

100

150

200

250

2006 2007 2008 2009

Inde

x Le

vel

May: Case Schiller index bottomed

Up8%

Home prices may be stabilizing…

HomesHomesHomesHomesHomesHomes


Government Actions

…but is the stabilization permanent?

Programs Primary Sponsor Impact

Home Buyer Tax Credit Congress $11 billion in Tax Credits due to the extension

Increase in Conforming Balance Limits Congress Expands pool of borrowers eligible for GSE mortgages and reduces strain on jumbo non-conforming mortgage market

TARP funded HAMP modifications Treasury Monthly payment reductions and incentive payments will provide aprox $70 billion to borrowers over the next 5 years.

Agency Conduit Initiative FHFA Facilitate greater mortgage creation by smaller banks and non-bank loan originators

Easing of tax consequences relating to CMBS loan models IRS Makes it easier for operators of troubled properties to lower debt service

payments

Easing of capital treatment related to bank CRE loan models Regulators Allows banks to refinance high LTV borrowers who can stay current on

payments without a capital charge

CMBS TALF new issue Federal Reserve Lowers spreads on existing qualifying CMBS, helps channel money for new securitized Commercial Real Estate deals.

Support of State Housing Authorities Treasury/ FHFA Provides $35 billion of financing to State Housing Authorities

Expansion of FHA mortgage book (via GNMA) HUD GNMA now provides 45% of new net issuance and over 50% of mortgages

for new home purchasers

Expanded Tax Loss Carry Forward Congress $33 billion in cash tax refunds

Bridgewater Daily Observations 11/24/2009

2010 First Half Year in Review


GDP Increased 2.7% in the 1st Quarter of 2010

Source: BEA, annualized seasonally-adjusted quarter-to-quarter growth rates. Data through 3/31/2010.

Real GDP Growth

2.7%

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cen

t C

han

ge

fro

m P

rio

r Q

uar

ter


Consumer Price Index

Core inflation is well below the Fed’s comfort zone of 1.5-2.0%. Some economists are concerned

about the threat of disinflation or deflation, a result of declining prices and spending.

Source: Bureau of Labor Statistics. Data through 6/30/2010.

Headline CPI Core CPI

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

6

Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Jun-10

Infla

tion

Ra

te

Fed comfort zone (core)

1.5 to 2.0%

Consumer Price Index (y/y change)


Consumer Confidence

Despite the index reaching 63.3 in May, it quickly relapsed to 52.9 in June.

A reading over 90 indicates that the economy is on solid footing. Above 100 signals strong growth.

Source: The Conference Board. Consumer Confidence Index through 6/30/2010.

52.9


0

20

40

60

80

100

120

140

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10


Unemployment

Source: Bureau of Labor Statistics. Data through 6/30/2010.

-900

-700

-500

-300

-100

100

300

500

700

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Mo

nth

ly C

ha

ng

e in

No

nfa

rm P

ayro

lls

(00

0s)

0%

2%

4%

6%

8%

10%

12%

Un

em

plo

ym

ent

Ra

te

Change in Nonfarm Payrolls Unemployment Rate

9.5%


Direction of Home Prices Remains Uncertain

Although there has been a slight uptick in home prices we have yet to see a

strong, consistent price rebound

Source: National Association of Realtors, data through May 2010.Standard & Poor’s Case Shiller Composite 10 Index, data through May 2010.

Case-Shiller Home Price Index

0

50

100

150

200

250

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Ind

ex L

evel

NAR Median Home Price

$1

79

,60

0

$2

28

,60

0

$1

64

,80

0

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

2006

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Med

ian

Pri

ce


Direction of Home Sales Remains Uncertain

Mortgage Bankers’ Association Purchase Index, which measures the volume of mortgage

loan applications, rose 34.5% during Q2

Index rose despite the tax credit program expiring in April for the second time (the first

deadline was in October 2009)

Source: Bloomberg. Data through 6/30/2010.

0

1

2

3

4

5

6

7

Sep-08 Sep-09

Existing Home Sales

0

1

2

3

4

5

6

7

Sep-08 Sep-09

Existing Home Sales

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

MBA Purchase Index


VIX Volatility Index

0

10

20

30

40

50

60

70

80

90

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Exp

ect

ed

30

-day

vo

latil

ity -

S&

P 5

00

Close LT Average

Equity Market Volatility Peaks

In May, the VIX, which shows the market’s expectation of 30-day volatility, rose to

heights not seen since the financial crisis.

VIX spiked to 45.8 on May 20th

Source: VIX Index, Data through 6/30/2010.


S&P Posts Worst Performance Since 4Q08

After showing signs of recovery in 1Q10, stocks retreated in the 2nd quarter with

the S&P 500 falling 12%

May performance was the worst drawdown since the depths of the financial crisis

Source: Bloomberg, through 6/30/2010.

-10.7% -8.0%

S&P 500 Monthly Returns, January 2009 - June 2010

-15%

-10%

-5%

0%

5%

10%

15%

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-0

9

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

De

c-0

9

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10


Returns Since the Peak, 10/9/07 – 6/30/10

Equity market lost some of its gains from 1Q10 during the second quarter

Source: Bloomberg, through 6/30/2010.

Cumulative Returns 10/9/07- 6/30/10

-60%

-50%

-40%

-30%

-20%

-10%

0%

Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Ret

urn

s S

ince

10/

9/07


0

500

1000

1500

2000

2500

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10

Bond Spreads in 2Q10

Spreads widened in the second quarter, particularly in high yield, reflecting

investors’ aversion to risky assets

Source: Bloomberg (Monthly data). Data through 6/30/2010.

6/30/10 Peak LT AvgHigh Yield 713 2182 654

Corporate 209 656 181

Agency 4 42 14


Source: NCREIF Open-End Diversified Core (ODCE). Data through 6/30/2010*.*Q2 preliminary data

Real Estate in Q2

NCREIF ODCE

-16.00

-11.00

-6.00

-1.00

4.00

9.00

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Ra

te o

f R

etu

rn (

%)

Income Appreciation

2010 What Lies Ahead


What is the “New Normal”?

The world is being transformed by “DDR”

– D: Old model for encouraging home ownership is dead

– D: Global leadership has changed with China growing faster than others

– R: The invisible hand of free enterprise is being replaced by government

Source: PIMCO – William Gross Investment Outlook September 2009

Re-RegulationDe-GlobalizationDe-Leveraging


What is the “New Normal”?

De-Leveraging: Global interest rates will remain low for

extended periods of time

De-Globalization: Asia and Asian-connected economies

(Australia, Brazil) will dominate future global growth

Re-Regulation: Investors should continue to anticipate

government policies

Source: PIMCO – William Gross Investment Outlook September 2009


Summary of U.S. GDP Forecasts For 2010

Economist / Institution Forecast

Goldman Sachs 2.7%

Blackstone 3%

JP Morgan 3.5%

IMF 1.5%

Mesirow Financial 2-4%

Schroeders recovery of an “L” or “W” shape

Fed Governors Survey 2.5-3.5%

Average GDP growth following a recession: 6 - 8%Average GDP growth following a recession: 6 - 8%

Average Estimate

2.7%

Average Estimate

2.7%


Key Themes to Watch in 2010

Inflation

Unemployment Credit CreationConsumer Spending

HomesHomesHomes

Housing Government Actions


Unemployment: Some Improvement Expected

Unemployment forecasts

– Federal Reserve 2010: 9.3%-9.7%

2011: 8.2%-8.6%

2012: 6.8%-7.5%

For a significant decline in unemployment rate, the U.S. needs real GDP

growth of over 5% in 2010

While official unemployment is 10%, if you add the “underemployed” (part

time workers who would like to have full time jobs), the number is closer

to 17.5%

Sources: Okun’s Law; Blackstone


Consumer: Still Needs to De-Lever

Percentage of U.S. households that are underwater on their mortgages

– High debt levels and debt service payments, coupled with rising unemployment and the

legacy of the housing collapse, mean that a very large number of households are in no

condition to buy homes or to increase spending through borrowing

25%

Source: American CoreLogic


Housing: Recovery Needs to Take Place

5.3 million Number of US households tied to mortgages that are at least 20% higher than

their home’s value

Source: American CoreLogic

2011 Year that JP Morgan expects US home prices to hit rock bottom

HomesHomesHomesHomesHomesHomes


Government Actions

Fed to maintain low interest rates

Federal Funds Percentage

3.2%

5.0%

0.3%0.2%0.2%0.2%0.2%

1.9%

5.0%

0%

1%

2%

3%

4%

5%

6%

2005 2006 2007 2008 2009e 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Source: Federal Reserve Board / Mesirow Financial Estimates


Credit Creation

Access to credit is primary risk to growth

– Lending by banks remains constrained

– Retailers are feeling the squeeze, as

regulators are curtailing their issuance of

“pre-approved” lines of credit at the cash

register

– Small business owners have had

difficulty in securing credit to run their

businesses


Inflation

Inflation Expectations

-4

-2

0

2

4

6

Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09

5y Breakeven 10y Breakeven MI Survey

Core Inflation Is Expected To Remain Muted In 2010– High unemployment will likely hold nominal wages in check

– Overhang of vacant homes will keep rents from rising, which will hold the housing component of the Consumer Price Index in check

– Inflation remains more of a medium-term (3-5 year) than near-term threat

Source: Federal Reserve


Summary

Recovery has started

Economy is on a path to growth: path is still uncertain

Key factors to watch include:

Re-RegulationDe-GlobalizationDe-Leveraging

How Pension Funds Suffered After 2008


Results of the NCCMP 2009 Survey of the Funded Status of Multiemployer Defined Benefit Plans


Results of the NCCMP 2009 Survey of the Funded Status of Multiemployer Defined Benefit Plans

Green: Healthy plans

Yellow: Endangered plans

Red: Critical plans

Zone Status

9%

42%15%

38%76%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009

2008Over 75% of the plans that responded to the survey reported their 2008 PPA zone status as green reflecting the relative health of these plans and the seriousness with which the bargaining parties addressed the funding disruption caused by the first historic market contraction which occurred from 2000 – 2002.

2008Over 75% of the plans that responded to the survey reported their 2008 PPA zone status as green reflecting the relative health of these plans and the seriousness with which the bargaining parties addressed the funding disruption caused by the first historic market contraction which occurred from 2000 – 2002.

2009A striking decline in green zone plans from 2008 to 2009, with only 20% of plans reporting their 2009 zone status as green, and more than 40% of the plans reporting their zone status as red.

2009A striking decline in green zone plans from 2008 to 2009, with only 20% of plans reporting their 2009 zone status as green, and more than 40% of the plans reporting their zone status as red.

The Crash of 2008 and Its Aftermath

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