When Will It End?

Presented by:

Mark M. Zandi,Chief Economist

Presented by:

Mark M. Zandi,Chief Economist

September 23, 2008

2

How Did We Get Into This Mess?How Did We Get Into This Mess?

3

100

120

140

160

180

200

00 01 02 03 04 05 06 07 08

The Bursting Housing Bubble…

Fiserv Case Shiller National House Price Index, 2000Q1=100

-20.2%

4

500

1,000

1,500

2,000

2,500

3,000

00 01 02 03 04 05 06 07 08

Sources: Equifax, Moody's Economy.com

First mortgage loan defaults, ths, SAAR

…Ignites a Mortgage Crisis…

5

Projected losses on assets originated 2005Q1-2007Q4, $ bil

0

100

200

300

400

500

600

Banks Other financial Government

At risk mortgages15,000,000Foreclosure rate 40%

Foreclosed mortgages 6,000,000Loss rate 50%

Mortgage loss $600 bil

Residential mortgages

Consumer loans

Commercial mortgages

Corporate

…Undermining the Financial System…

6

0.00

0.50

1.00

1.50

2.00

2.50

3.00

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Difference between 3 month Libor and Treasury bill yields

…And Pushing It to the Precipice of Collapse

S&L crisis

Subprimefinancialshock

Peso crisis

LTCM

TechbustOrange

County

Thai baht

Y2K

7

Is the Policy Response Appropriate?Is the Policy Response Appropriate?

8

An Unprecedented Policy Response…

Potential CostTreasury Actions: Billions $

1) Troubled Asset Relief Program 700

2) Fannie/Freddie Takeover 200

3) AIG Takeover 85

4) Bear Stearns Resolution 29

5) Money Market Guarantee Fund 50

6) Puchase Fannie/Freddie MBS na

Total Cost 1,064

Federal Reserve Actions:

7) Non-Recourse Loans to Buy CP

8) Liberalize Liquidity Facilities

9) Supplementary Financing Program

10) Increase Swap Lines

11) Bank Charter for Goldman/Morgan

SEC Actions:

12) Restrictions on Short-Selling

9

…That Will Be Costly, But Not $1 Trillion

Firm Writedowns Capital Raised Firm Writedowns Capital Raised

Citigroup 55.1 49.1 E*Trade 3.6 2.4Merrill Lynch 51.8 29.9 Nomura Holdings 3.3 1.1UBS 44.2 28.3 Natixis 3.3 6.7HSBC 27.4 3.9 Bear Stearns 3.2 0.0Wachovia 22.5 11.0 HSH Nordbank 2.8 1.9Bank of America 21.2 20.7 Landesbank Sachsen 2.6 0.0IKB Deutshce 15.3 12.6 UniCredit 2.6 0.0Royal Bank of Scotland 14.9 24.3 Commerzbank 2.4 0.0Washington Mutual 14.8 12.1 ABN Amro 2.3 0.0Morgan Stanley 14.4 5.6 DZ Bank 2.0 0.0JPMorganChase 14.3 7.9 Bank of China 2.0 0.0Deutsche Bank 10.8 3.2 Fifth Third 1.9 2.6Credit Suisse 10.5 2.7 Rabobank 1.7 0.0Wells Fargo 10.0 4.1 Bank Hapoalim 1.7 2.4Barclays 9.1 18.6 Mitsubishi UFJ 1.6 1.5Lehman Brothers 8.2 13.9 Royal Bank of Canada 1.5 0.0Credit Agricole 8.0 8.9 Marchsall & Ilsley 1.4 0.0Foris 7.4 7.2 Alliane & Leicester 1.4 0.0HBOS 7.1 7.6 U.S. Bancorp 1.3 0.0Societe General 6.8 9.8 Dexia 1.2 0.0Bayerische Landesbank 6.4 0.0 Caisse d'Epargne 1.2 0.0Canadian Imperial 6.3 2.8 Keycorp 1.2 1.7Mizuho Financial Group 5.9 0.0 Soverign Bancorp 1.0 1.9ING Group 5.8 4.8 Hypo Real Etstae 1.0 0.0National City 5.4 8.9 Gulf International 1.0 1.0Lloyds TSB 5.0 4.9 Sumitomo Mitsui 0.9 4.9IndyMac 4.9 0.0 Sumitomo Trust 0.7 1.0WestLB 4.7 7.5 DBS Group 0.2 1.1Dresdner 4.1 0.0 Other European Banks 7.2 2.3BNP Paribas 4.0 0.0 Other Asian Banks 4.6 7.8LB Baden-Wuerttemberg 3.8 0.0 Other U.S. Banks 2.9 1.9Goldman Sachs 3.8 0.6 Other Canadian Banks 1.8 0.0

Total 501.4 351.2

Public Financial Writedowns as of Early September 2008

10

What Is the Economic Fallout?What Is the Economic Fallout?

11

(1)

0

1

2

3

4

5

08 09 10

Pre-panicPost-panic

Real GDP growth, annualized % change

The Negative Economic Fallout Is Significant…

12

…Very Significant…

Pre-Financial Post-FinancialPanic Panic

2008q4 Real GDP Growth 1.30% -0.23%

2009 Real GDP Growth 1.75% 1.33%

Peak Unemployment Rate 6.5% (2009q3) 7% (2010q1)

Peak-to-Trough Decline in 800000 (2009q1) 1250000 (2009q3)Payroll Employment

Peak-to-Trough % Decline in 26% (2009q2) 30% (2009q3)House Prices

Federal Funds Rate Trough 2.0% 1.5%

Cumulative Budget Deficit 2.24 2.81 FY 2009 - FY 2013Billions $

Source: Moody's Economy.com

13

Bond issuance, $ bil, annualized, Source: Thompson

0

200

400

600

800

1,000

01 02 03 04 05 06 07H1 07H2 08 ytd

JumboAlt-ASubprime

…As Credit Markets Remain Frozen…

14

100

200

300

400

500

600

700

800

900

1,000

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08

Difference with 10-yr Treasury rate, basis points

…Credit Spreads Have Ballooned…

Junk corporate

Emerging market

15

Net % tightening standards

-30

-20

-10

0

10

20

30

40

50

60

70

80

90 92 94 96 98 00 02 04 06 08

C&ICommercial mortgageCredit card

…And Banks Will Continue to Tighten

Source: Federal Reserve Board

16

44

54

64

74

84

94

104

114

124

134

144

98 99 00 01 02 03 04 05 06 07 0894

98

102

106

110

114

118

122

Consumers (L)

Small business (R)

Confidence Is Rock Bottom…

Sources: Conference Board, NFIB

17

-10

-5

0

5

10

15

20

05 06 07 081

2

3

4

5

6

7

8

9

House-price growth 6 mo. lead (L)

Core retail sales growth 3 mo. MA (R)

…And the Wealth Effect Is Kicking In

Sources: Census, Realtors

18

When Will It End?When Will It End?

19

Another 10% to Go...

% change from peak, Sources: Fiserv Lending Solutions, Census, Moody's Economy.com

-60

-50

-40

-30

-20

-10

0

Early 1990s

House price Home sales Housing starts

Current downturn to date

Early 1980s

Current downturn forecast

20

...With Big Differences Across the Country

Projected peak-to-trough house price decline

Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO

-10 to -20%

0 to -10%No decline

-20 to -30%

< -30%

21

12

14

16

18

20

22

24

26

86 88 90 92 94 96 98 00 02 04 06 081.8

2.0

2.2

2.4

Housing Is Becoming More Affordable…

Sources: BEA, Census, PPR, Realtors

Price-income ratio (R)

Price-rentratio (L)

22

Number of vacant homes for sale, ths, Source: Census

1,000

1,250

1,500

1,750

2,000

2,250

00 01 02 03 04 05 06 07 08

…Inventories Are Peaking…

Housing supply 1,000,000Single 625,000Multi 300,000Manufactured 75,000

Housing demand 1,500,000Households 975,000Obsolescence 400,000Second homes 125,000

23

5.6

5.8

6.0

6.2

6.4

6.6

July August September

Source: Bankrate.com

30-year fixed mortgage rate

…And Nationalization Is A Plus

24

A Timeline to Recovery

’08q1 ’08q2 ’08q3 ’08q4 ’09q1 ’09q2 ’09q3 ’09q4 ’10q1 ’10q2 ’10q3 ’10q4

Stock MarketBottoms

Oil PricesPeak

Home SalesBottom

Housing StartsBottom

EmploymentBottoms

House PricesBottoms

ForeclosuresPeak

Jobless RatePeaks

House PricesResume Rising

Financial FailuresAbate

Self-SustainingEconomic ExpansionBegins

Fed TightensExtraordinary WritedownsEnd

$ Rises

25

Serious Threats Remain.Serious Threats Remain.

26

5,000

6,000

7,000

8,000

9,000

10,000

07 08

The Financial System Remains Very Fragile…

Financial stock index, Source: NYSE

Financial shock strikes

Bear Stearns fails

Panic

27

Number of underwater homeowners, ths

0

2,000

4,000

6,000

8,000

10,000

06 07 08

Sources: Equifax, Moody's Economy.com

…and House Price Declines Threaten to Overshoot

28

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