February 9, 2010

1. 2010 and Beyond – Navigating the New Economy Real Estate Investment Society February 9, 2010

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3. What happened? The Panic of 1907 by Robert F. Bruner and Sean D. Carr • System Complexity – interconnectivity • Buoyant Growth – insatiable demand for capital and liquidity • Inadequate Safety Buffers – capital and regulatory • Adverse Leadership – conflicting goals • Cognitive Bias – that can’t happen • Real Economic Shock – asset devaluation • Failure of Collective Action “History may not repeat itself, but it rhymes.” -Mark Twain

4. What happened? Asset Inflation Asset Deflation 1. Rising Asset Prices 1. Declining Asset Prices • Low Core Inflation • Strong Growth • Low Unemployment • Large Write Downs • Declining Growth • Higher Unemployment 5. Increased Leverage 2. Declining Risk Premium 2. Increasing Risk Premium 5. Reduced Leverage 4. Greater Risk Taking 3. Reach for More Yield 3. Need for Liquidity 4. Flight to Safety Federal Funds Rate Source: Bloomberg.

5. Who’s to blame? • Chronic Budget Shortfalls • 46 of the last 50 years • Freddie Mac / FNMA • Affordable Housing • Regulators • SarbOx, SEC, FDIC • Wall Street / Banks • Political Scapegoats • Rating Agencies • Consumers – over-leveraged • Why not part of the discussion?

6. Who’s to blame? U.S. Household Debt as a Percent of GDP ? The Great Depression Source: U.S. Census, U.S. Federal Reserve Flow of Funds. Please note non-corporate net private debt is used as a proxy for household debt (going back to 1918) as the Federal Reserve did not begin tracking U.S. household debt until 1950

7. Who’s to blame? • The 2009 Gross Federal Debt is $11.9 trillion, which represents a 29.9% increase since 2007 • $40,000 per person - $5,000 increase this fiscal year ~7.5% of Total Gross Federal Debt ~85% of Total Source: Congressional Budget Office; U.S. Department of the Treasury. These figures represent federal debt that is subject to limitations only.

8. Government’s role? • Financial System “Bailout”: if we all agree financial system stability is the goal, did we market the solution effectively and did we take the correct steps? • Bear Stearns / Washington Mutual / AIG / Lehman / Money Markets / Merrill Lynch / Fannie Mae and Freddie Mac / Wachovia

9. Government’s role? 2. But did the government’s role in preserving the financial system give them the “opportunity” to take a larger role in the economy? • Stimulus I and II • Additional Regulation – FDIC Bankruptcy • Chrysler, General Motors, GMAC • Federal Reserve involvement in the debt markets • Tax Policy – Job Creation

10. What lies ahead – is September 2007 a policy initiative? Are we bucking reality – has the world economy changed and our efforts to date are pretending that change did not occur?

11. What lies ahead – is September 2007 a policy initiative? • The Bureau of Labor Statistics reported an unemployment rate of 10.2% for October 2009 – how did jobs get lost and the unemployment rate go down? • The total number of unemployed was approximately 15.7 million. • Over $20 million people received unemployment benefits in 2009. U.S. Unemployment Rate and Number of Workers Unemployed Source: U.S. Department of Labor; Bureau of Labor Statistics

12. What lies ahead – is September 2007 a policy initiative? Historical Index Performance Source: FactSet, data as of 1/04/10

13. What lies ahead – is September 2007 a policy initiative? Housing Prices New – down 17.2% from March 2007 peak Existing – down 25.6% from July 2006 peak Source: U.S. Census Bureau, National Association of Realtors

14. What lies ahead – is September 2007 a policy initiative? Home Sales New – down 74.4% from July 2005 peak Existing – down 10.0% from June 2005 peak Source: U.S. Census Bureau, National Association of Realtors

15. Ancillary musings • Can we pay our bills – municipal, state, federal? • Will any of our economy work in a deflationary environment – who has the most to lose from deflation? • Have we put the fiscal stimulus in place to create runaway inflation – who has the most to gain from inflation? • Have we saved the financial system or is there work to be done?

16. Ancillary musings • Can the government function as a profit center, and if so how do they get out (and what about Freddie and Fannie)? • Can we long-term de-lever the economy, and do we want to de-lever the economy? • Can we structure and regulate the banking system in a manner which minimizes risk but maximizes growth and opportunity – or does it remain a whipping boy?

17. Final thoughts • Course of Action • This has happened before, and it will happen again - if the financial system is sound and the capitalist system is allowed to work we will recover. • We have to avoid the inclination to over-regulate and to over-manage – very hard for the politicians. • The folks who react rationally to the new circumstances are already the winners.

18. Final Thoughts Asset Inflation Asset Deflation 1. Rising Asset Prices 1. Declining Asset Prices • Low Core Inflation • Strong Growth • Low Unemployment • Large Write Downs • Declining Growth • Higher Unemployment 5. Increased Leverage 2. Declining Risk Premium 2. Increasing Risk Premium 5. Reduced Leverage 4. Greater Risk Taking 3. Reach for More Yield 3. Need for Liquidity 4. Flight to Safety • Consumer Leverage / Government Leverage • Economic Growth – Tax Increases • Unemployment – Job Creation • Asset Bubble – all assets or just stocks and housing Source: Bloomberg.