Shelter from the Global Economic Storm

1. Shelter from the Global Economic Storm Presented to the 28th General Assembly of the Association of Pacific Island Legislatures by Joseph P. Bradley Senior Vice President – Bank of Guam June 10, 2009

2. The Storm:WHAT HAPPENED??? • Fifty years of expansionary U.S. fiscal policy • “Fine tuning” of the business cycle with discretionary monetary policy • Depression-era protections of the U.S. banking system were gradually eroded • Artificially low interest rates post DotCom bubble, dropped further after 9/11, then kept too low for far too long • Stock market, consumer and commercial credit, and real estate booms resulted • Fifty years of growth above a sustainable trend

3. The Storm:WHAT HAPPENED??? • Former Federal Reserve Chairman Greenspan (who had refused to regulate derivatives markets) failed to see a housing bubble – only “a little froth” • Mid-2007, housing prices stopped rising and reversed course • The Federal Reserve dropped interest rates to prop up the economy and counteract skyrocketing oil prices • Despite that, defaults and foreclosures accelerated • The value of innumerable derivatives, especially mortgage-backed securities, became ambiguous and stopped trading – regulated owners were forced to write their book value down to “market value”

4. The Storm:WHAT HAPPENED??? • By March 2008, asset “write-downs” and rumors forced the sale of Bear Stearns to JP Morgan Chase at a little more than 3¢ on the Dollar • Countrywide, the mortgage giant, was sold to Bank of America on July 1, 2008 • IndyMac Bancorp was seized by the FDIC on July 11, 2008, after a “run” on the bank • Fannie Mae and Freddie Mac seized on September 7, 2008, due to illiquidity

5. The Storm:WHAT HAPPENED??? • Then came the weekend of financial terror: • Merrill Lynch was voluntarily sold to Bank of America for $50 billion on September 14th • Lehman Brothers was allowed to go bankrupt on September 15th, initiating the credit freeze • American International Group (AIG), the world’s largest insurer, borrowed $85 Billion from the Feds in exchange for 79.9% of its equity on September 16th • And another $37.8 Billion on October 9th • And another $20.9 Billion on October 30th • And another $24.5 Billion on November 10th

6. The Storm:WHAT HAPPENED??? • The financial community panicked • Inter-bank trust and confidence failed • The financial system went into gridlock • Credit became unavailable • Stock prices plummeted • The bond market collapsed • Commodities prices dropped • Bankruptcies spread

7. How Did It Happen??? • A misguided “free market” philosophy • “Free markets will resolve their own problems” • Fantasy and the suspension of disbelief • “Housing prices will always go up – forever!” • “The investments are backed by real property, so they’re safe” • Inadequate capitalization • “Highly leveraged” investment banks (and others) • Debt-to-equity ratios in excess of 40:1 • Inertia and “entitlement” played a role, too

8. THEN WHAT HAPPENED??? • By October 1, 2008, the financial crisis had gone global: • Britain recapitalized or nationalized major banks • Belgium and the Netherlands forced a bank merger • Germany bailed out a huge mortgage company • Iceland nationalized all three of its banks and approached national bankruptcy due to a failure to secure a loan from Russia • Taiwan and South Korea bailed out some of their banks • Japan provided a huge cash injection to devalue ¥en • Leaving the world in the mess we have today

9. Our Shelter from the Storm • 8,000 U.S. Marines are to relocate from Okinawa to Guam by 2014 • They will bring with them an estimated 9,000 dependents • Japan will provide more than $6 billion in support for the move, primarily in housing construction • The U.S. will spend nearly $10 billion in the process, but that includes transportation/relocation • Approximately $5 billion will be spent by the U.S. on construction, although this may increase to $9 billion • Twenty to thirty thousand construction workers and support staff will be needed for the project • ($787 million appropriated for MilCon in Guam in FY’10)

10. The Action (So Far) • Speculative real estate boom in 2007 has reversed itself • Investors did not take into account the timing of the Marines’ move • Several details of the Marines’ plans are different than what was expected • Prices have moderated (for now), but should start to rise again next year • Several informational conferences have taken place • Details of the buildup have been unfolding gradually • Local firms are encouraged to bid on federal contracts, and training sessions in how to succeed at that have been frequent • Innumerable consultants from the U.S. mainland have come to Guam • Environmental impact statement is being prepared • Facilities engineering work has already started • Numerous outside contracting firms have established a presence in Guam • Learning “the lay of the land,” who is who, what they need to know to do business in Guam and with the military (two distinct issues) • Keeping their eyes and ears open • Cultivating prospective “partners” for joint ventures • Some minor, preliminary construction has started; more is planned

11. More Action is Needed • The government of Guam estimates it needs $2.6 billion for infrastructure improvements related to the buildup • ROADWAYS!!! • Power transmission • Water production and distribution • Wastewater treatment • Port facilities (already partially funded through a grant from the U.S. government) • Airport facilities • Hospital and medical clinic capacity • Schools (temporary – during the construction phase) • Labor force training • Law enforcement personnel and capabilities • Closer coordination among the military, the government of Guam and the private sector (the Joint Guam Program Office (JGPO) is fine, as far as it goes, but most decisions are being made at the Pentagon) • Government revenue enforcement and collection is seriously in need of being supplemented

12. Construction Employment in Guam – 1983 to Present

13. Coming Soon . . . • Construction of housing facilities for the incoming construction workers • Nearly 20,000 units in the planning stage already • More will be needed • It’s not just construction workers, but ancillary staff that will need accommodations • Hopefully, the design will meet affordable housing needs post-construction • Warehousing will be built, both near the Port and near the principal construction sites • Materials storage will be required; some materials may be “pre-positioned” • Equipment will require security and maintenance • New businesses will be established, existing businesses will be expanded • Specialty materials suppliers • Retail, service and entertainment outlets to accommodate the surge in transient population • Professional services (i.e., legal and accounting) to support contractors Most of this should start later this year!

14. Construction Employment in Guam – The Military Buildup

15. Opportunities Abound! • There is room for new businesses in almost every category • Retail • Wholesale • Manufacturing and fabrication • Transportation • Personal services • Professional services • Restaurants and bars • Entertainment • There are plenty of profits to be made • There will be HUGE amounts of money flowing through Guam • Much of it will be passing through the hands of transient construction workers • There is a strong potential for professional skills development • A chance to build work experience • A chance to acquire specialized skills, particularly in construction and fabrication • Pacific Area Trade School • Guam Contractors Association Trades Academy • Etcetera • On-the-job, hands-on training at the side of experienced workers

16. JOBS! JOBS!! JOBS!!! • Twenty to thirty thousand construction jobs to last four years (or longer) • BUT that’s not all: • Stevedores • Warehousemen • Truck drivers • Materials handlers • Testing laboratory specialists • Accountants • Law enforcement personnel • Medical technicians • Waiters, waitresses and cooks • Stock clerks and cashiers • Mechanics • Etcetera • Etcetera • Etcetera Training should start NOW!

17. Who Will Do the Work? • U.S. citizens will have first priority: • Guam • CNMI • Hawaii • American Samoa • Mainland U.S. (a construction unemployment rate of 19+%) • Friendly nations: • Japan (a foregone conclusion – they’re paying for the housing) • Philippines • Taiwan • South Korea • Pacific islands • It will NOT be Chinese or Russian workers, for reasons of national security

18. WARNINGS: • When the construction is over, most of those jobs will disappear • A few will remain because of the population increase • The Marines will need about only about 500 additional civilian workers, mostly military spouses and local residents • The surge in incomes and property values will be quickly thrown into reverse • Remittances will fall off • Government revenues will drop, except §30 for Guam • Unemployment and its associated problems will rise • Skilled workers will relocate for better job opportunities • Excess capacity will persist for years

19. Construction Employment in Guam – The Aftermath

20. MORE WARNINGS: • The workers who relocate to Guam will not be available to work on their home islands • These are likely to be the best and brightest • It is possible they will never return • The remittances will stop once the buildup projects are completed • Those workers who do return will have changed and will have new expectations • Guam will change – everywhere else, too

21. THE GOOD NEWS • The buildup will generate HUGE amounts of income for the Pacific islands • Once the buildup is complete, there will be a larger transient population interested in travel and exploring the islands • Opportunities will persist • The region will be more (or less) secure • The geopolitical environment will find a new balance

22. IT WILL BE GOOD, BUT NOT ALL GOOD • Questions? • Comments? • Criticisms? • Suggestions? • Complaints? • Thank you for your time and attention! • Now, it’s time for lunch