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Economic and Financial Overview

Shareholders Services Association. October 23, 2008. Economic and Financial Overview. Presented by Bernard Schoenfeld. Housing Starts. Seasonally Adjusted Annual Rate. Mortgage Delinquency Rates. Existing Home Sales. Existing Home Sales Months Supply.

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Economic and Financial Overview

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  1. Shareholders Services Association October 23, 2008 Economic and Financial Overview Presented by Bernard Schoenfeld

  2. Housing Starts • Seasonally Adjusted Annual Rate

  3. Mortgage Delinquency Rates

  4. Existing Home Sales

  5. Existing Home SalesMonths Supply

  6. An Un-PC View of the Financial Crisis:How Did We Get Here? • 1977 – Community Reinvestment Act • Prohibits “redlining” • 1992 – Federal Housing Enterprises Financial Safety and Soundness Act • Required Fannie Mae and Freddie Mac to devote a percentage of their lending to affordable housing • 1994 – In response to a request from President Clinton, HUD Secretary Henry Cisneros met with leaders of housing industry to develop a National Homeownership Strategy • Sought to achieve an “all-time high level of homeownership” • Sought innovative approaches to mortgage financing to make homeownership more affordable • Advocated financing strategies to help homebuyers that lack cash to buy a home or income to make the payments • 1995 – Administrative changes instituted to encourage more CRA loans • Role of CRA lending in subprime crisis remains controversial

  7. The Financial Crisis: How Did We Get Here? • 2004 - SEC instituted change in Net Capital Rule • Created in 1975, rule required that broker dealers limit their debt-to-net capital ratio to 12-to-1. • Rule applied a “haircut” (discount) in valuing assets to allow for market risk. • In 2004, SEC changed the rule in response to changes in rules passed by European Union. • Consolidated Supervised Entities program • Enabled SEC to oversee both the broker dealers and their holding companies • Voluntary program for broker dealers with capital of at least $5 billion • Five firms qualified: Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs • Allowed greater leverage and allowed use of mathematical models that effectively reduced “haircut” • One result was a huge increase in leverage. • Merrill Lynch’s debt-to-net capital ratio reached 40-to-1. • On 9/26/2008, SEC Chairman Cox • Stated “…voluntary regulation does not work.” • Announced end of Consolidated Supervised Entities program

  8. The Financial Crisis: How Did We Get Here? • Reluctance to regulate • In a low interest rate environment, investors reached for yield and embraced “creative” solutions to raise returns. • Securitization – mortgage loan originators did not have to live with the consequences of their approvals. • Ratings agencies rated securities based on subprime mortgages as AAA. • Housing bubble burst; home prices declined. • In many cases with subprime mortgages, value of home became less than amount owed on mortgage. • Prices of securities based on subprime mortgages plummeted. • Capital base of financial institutions that invested in these securities was eroded, exacerbated by leverage. • Crisis of confidence; reluctance to lend

  9. Crude Oil • West Texas Intermediate Spot Price

  10. Real GDP • Quarter-to-Quarter Percent Change at an Annual Rate

  11. Business Cycle Contractions

  12. Institute For Supply ManagementPurchasing Managers' Index

  13. Unemployment Rate

  14. Change in Payroll Employment

  15. Consumer Price Index • Percent Change Year Over Year

  16. Commodity Research Bureau (CRB) / Reuters Futures Price Index

  17. Interest Rates 10-Year Treasury Note Federal Funds

  18. Interest Rates

  19. Euro & Yen Euro Yen

  20. Major Investment Benchmarks • Annualized Total Returns for Periods Ending September 2008

  21. S&P 500 Rolling 3-Year Returns

  22. Major Investment Benchmarks • Annualized Total Returns for Periods Ending September 2008

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