1. A Return To Normalcy in 2010?
30 Key Steps in the U.S. Response to the Economic, Real
Estate, Banking and Credit Crisis in 2010
January 2010
Tom Joyce Toby Cobb Francis Kelly Stefan Auer
(212)-250-8754 (212)-250-6842 (202)-626-7022 (212)-250-6386
Tom.joyce@db.com Tobin.cobb@db.com Francis.j.kelly@db.com Stefan.auer@db.com
Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and
securities activities in the United States.
2. A Return to “Normalcy” in 2010?
“To avert a panic, central banks should lend early and freely (and
without limit), to solvent firms, against good collateral, and at high
rates.”
~ Walter Bagehot (1826 – 1877), Editor-in-Chief of The Economist,
Renown businessman, essayist and journalist
“Normalcy is a term people use for ‘normal’ when they are no
longer taking it for granted.”
~ William Safire, The Economist magazine, 2009
2
3. Contents
Section
1 How Bad were the Financial Crisis Losses in 2008 - 2009?
2 30 Key Steps in the U.S. Response in 2010
A. Response to the Real Estate Crisis in 2010
B. Response to the Banking Crisis in 2010
C. Response to the Non-Bank Credit Crisis in 2010
D. Response to the Economic Crisis in 2010
Appendix
1. 2008 - 2009 FDIC Seized U.S. Banks
3
4. How Bad were the Financial Crisis
Losses in 2008 - 2009?
Section 1
5. Global Financial Asset Values: Over US$16 Trillion Decline
The current financial Global Financial Assets Fell by $16 Trillion in 2008
crisis interrupted a 3-
decade-long expansion
Global Financial Asset Values Comments
of global financial asset
values Global financial assets declined over $16 trillion in total in Total Financial Assets: Over $16
2008, although the decline in equities was nearly $30 trillion trillion total net decline in 2008
The 2008 decline was Equity and real estate: declines wiped
by far the largest on (US$ Trillions) out nearly $30 trillion of global wealth in
record $194 2008 and 1H 2009
$200
Global AUM: fell > $15 trillion in 2008
$178
$180 $174
Cross border capital flows: fell > 80%
2009 data not $62 Financial Institutions: Losses > $1.7
$160 $155 $34
yet available trillion from 2007 – 2009
$139 $54
$140 Government debt: will soar with post-
$126 $45 crisis fiscal deficits
$120 $112 $114 $113 $38 $51 Deposits: Increased > $5 trillion
$33 $48
$ trillion
$100 $33 $26 $42 Global Bank Deposits
$37
Return to Normalcy? $37 70
$34 $61.1
$80 $31 $32
Strong global equity 60 $56.1
$28 $29
$27 $9.7
market performance $24 $28 $50.7
$8.7
$60 $27 50 $46.3
since March 2009 $24 $7.8
$22
($ in trillion)
$6.8 $14.3
$20 $12.3
Non-government debt $17 $18 40
$40 $34.0 $10.4
$8.7
markets performing $61 30
$4.4
$11.5
$11.5
$51 $56 $4.5 $11.4
well $20 $38 $40 $43 $46 $11.5
$34 $36
20 $11.3 $13.1
Financial system $9.9 $10.8
$12.1
stabilized with strong $0 10 $6.9
$9.4 $10.3 $11.6 $12.5
earnings growth 2000 2001 2002 2003 2004 2005 2006 2007 2008 $7.0
0
forecast Bank deposits Government debt securities Private debt securities Equity securities 2000 2005 2006 2007 2008
United States Eurozone
Japan Emerging countries
Other mature countries
Source: McKinsey Global Institute (Sept 09), Bloomberg 5
6. Global Equity and Real Estate Losses: ~ US$30 Trillion
Declines in equity
and real estate Global Equity and Real Estate Losses (2008 – 1H 2009)
values wiped out
nearly $30 Trillion Global equities lost nearly half of their value in 2008 and early 2009, wiping out $28.8 trillion of
of global wealth in value in 2008 and first half of 2009
2008 and the first Most severe market crash since the Great Depression
half of 2009 Every single major global equity market in the world lost value in 2008
Nearly all markets began rebounding in March 2009
Global residential real Shows the high auto-correlation of global markets, driven largely by investor flows
estate values
doubled from 2000 Residential and commercial real estate markets have had over $7.5 trillion in losses:
to 2007 and Residential Real Estate: Over $5 trillion of global losses
exceeded $90
Commercial Real Estate: Over $2 trillion of losses in the U.S. alone
trillion at their
peak… Global Stock Market Losses
Oct 1, 2007 - Mar 1, 2009 Mar 1, 2009 - Dec 18,2009
…but have lost over 100%
84.3%
$5 trillion during 71.9%
80%
the financial crisis 60.8%
57.3%
through June 2009 52.7%
60% 47.0% 48.7%
43.3%
39.4%
40%
Return to Normalcy? 20%
Since March 09, the 0%
Dow is up over 50%, -20%
and financial stocks
have doubled -40%
-38.8% -41.1%
Nearly all global -49.9%
-60% -52.5% -51.5% -53.2% -55.1% -54.6%
equity markets up -63.4%
significantly (auto -80%
correlation indicative Dow Jones S&P 500 Brazil FTSE 100 DAX CAC 40 Nikkai 225 Hang Seng Shanghai
Bovesta
of positive fund flows)
Americas Europe Asia
6
Source: Bloomberg, McKinsey Global Institute
7. Global Real Estate Losses: Over US$7.5 Trillion
Global residential real Global Residential Real Estate Values (2008 – 1st Half 2009)
estate values doubled
As of December 2009, property prices are still falling in more places
from 2000 to 2007 and Over $5 Trillion of Residential
globally than they are rising Real Estate Losses
exceeded $90 trillion at
their peak… $100 $88.3 $90.8 $87.3
$85.4
$82.3
$15.6 $12.6 $14.0
…but lost over $5 trillion $80 $74.5
$9.3
during the financial $67.4 $7.3 $8.5 $9.5 $9.3
$62.1 $9.6
crisis through June $56.6 $6.2 $8.8
$60 $53.9 $5.4
$ trillion
$10.2
2009 $3.5 $3.8
$10.8 $31.8 $30.0 $27.1
$11.3 $28.9 $31.0
$12.3
$40 $23.6
Nearly $2 trillion of U.S. $21.2
$17.5 $19.4
CRE equity has been
wiped out during the $20 $36.4 $38.6 $38.9
$27.3 $30.5 $31.4
$22.1 $24.7
crisis, and we expect $20.6
U.S. banks alone to $0
take $200 - $300 bn 2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009
Western Europe U.S. Japan Other
of total losses on
nearly $2 trillion of U.S. Commercial Real Estate Losses (June 2008 – November 2009)
outstanding CRE
debt June 2008 November 2009
Return to Normalcy? Nearly $2 Trillion of
CRE Equity Losses
Mostof the Equity Debt
residential real estate $1.4 trn $3.3 trn
losses have been Equity Debt
taken $3.2 trn $3.5 trn
Thebank CRE losses
ahead should not
result in failures
among the largest
U.S. banks
Total Value: $6.7 trn Total Value: $4.7 trn
Source: Richard Parkus, Head of DB Commercial Real Estate Research. Real Estate Roundtable. The Economist magazine. 2009 CRE data assumes
7
30% declines, 90% attributable to equity and 10% to debt. OECD, Haver Analytics. McKinsey Global Institute.
8. Global Financial Institution Losses: Over US$1.7 Trillion
Global financial Write downs by Region and Financial Sector (as of December 2009)
institutions have lost
over US$1.7 trillion By Region (As of Dec 09) By Sector (As of Dec 09)
since the beginning
of the current Total: $1,713
Financial Crisis $1,400 $1,400
$1,230
Total: $1,713
through December $1,200 $1,108 $1,200
2009
$1,000 $1,000
Most of the losses still $800 $800
$ billion
$ billion
to come in 2010 will $563
$600 $600
be from bank loan
portfolios (see 2 $400 $400
$234 $249
phases of banking
$200 $200
crisis below) $43
$0 $0
Americas Europe Asia Banks Insurance GSEs
Return to Normalcy? U.S. Banking Crisis: 2 Phases
Stabilization
of global
Phase 1: Securities Market Crisis Phase 2: Bank Loan Crisis
banking system in 2009
U.S.and European Started: Mid 2007 Started: 2008-2009 (losses); still early stages
“stress test” processes Peak: Mid/ late 2008 Peak-defaults: 2009-2010 (varies by asset class)
in 2009 augmented
Focus: sub-prime and mortgage backed securities Focus: residential, CRE, credit card, auto and
confidence
markets consumer loans
Significantprivate Accounting: Largely fair value Accounting: Hold-to-maturity
capital raises in 2009
Result: Significant mark-to-market losses; liquidity Result: Significant reserving, loan losses and
Significant repayments crunch; broker dealer failures; bank failures; charge-offs still to come
of Government “rescue Government bail-outs; loss of confidence
Status: possibly 2-3 additional years of high
capital” in 2009 Status: Nearly over loan losses remain; economy is key variable
Source: Bloomberg, as of December 18, 2009. 8
9. Global Assets Under Management Decline: Over $15 Trillion
Global assets under
management Assets Under Management (2007 – 2008)
declined sharply
during the crisis,
Global Financial Assets Comments
with declines in
excess of $15 (US$ Trillions) Total Global AUM: declined from
trillion in 2008 35 $88 trillion to $72 trillion in 2008
alone Pension funds: significant losses
$30.4 2007 2008
across broad scope of asset classes
Sharp declines 30
continued in the Insurance: largely fixed income
$26.2
first half of 2009, $25.0 focused, but significant equity losses
although year-end 25 2007 Global AUM: $87.8 trillion Petrodollars: includes central
data is not yet 2008 Global AUM: $72.1 trillion banks, SWFs and individuals of
available major oil exporters (future size
20 $18.8 $18.9
closely linked to price of oil)
$ trillion
Over the next 5 years, $16.2
Asian Sovereign: includes central
assets from oil banks and SWFs; China’s reserves
15
producing states represent over 50%; growth will
and Asian Significant
growth expected depend on global GDP
sovereigns are
10 over next 5 years Hedge Funds: over 25% decline in
expected to grow
more rapidly than 2008; investor withdrawals
$5.1 $5.0
hedge funds and $4.4 $4.8 continued strongly in 1H 2009;
5
private equity recovery may be slow
$1.9 $1.4
$0.9 $0.9 Private equity: investment focus
Return to Normalcy? 0 shifting from large leverage buyouts
Pension Mutual Funds Insurance Petrodollar Asian SWFs Hedge Funds Private
to distressed debt, infrastructure,
Betterperforming distressed banks and real estate,
Funds Assets Foreign Equity
capital markets and venture capital
Investors
Improved liquidity
Riskappetite 2009 data not
% Change: (-18%) (-28%) (-14%) (-2%) +9% (-26%) 0% yet available
increasing
Source: McKinsey Quarterly: The New Financial Power Brokers. Crisis Update (Sept 2009) 9
10. Global GDP Contraction During the Crisis
The recession which Global Economic Growth (2009E – 2010E)
accompanied the
Financial Crisis DB’s economists 10
was the longest 9.0
see a 25% chance 8.5
and deepest since that the 2010 U.S. 2009 E 2010 E
7.7
the 1930s… economy could 8
either stall or even
…but in some sense, fall into a double-
6 5.4
was actually less dip recession
calamitous than
3.6 3.7
many had feared 4
as markets were
Real GDP Growth (%)
collapsing in late
2 1.5 1.5
2008 1.1
0
Return to Normalcy? Many of the
-2 developing world
“It
could have been
-2.5 -2.5
economies,
much worse” especially in Asia,
-4
Many of the large -3.9
showed strong
developing world resilience to the
-4.7
economies showed Financial Crisis
-6 -5.4
resilience to the
Financial Crisis
-8
Fiscalstimulus US UK Euroland LatAm Japan Asia (ex-Japan) China
packages should
boost GDP growth
through 2010 “2009 has become known as the “Great Recession,” but an equally apt name may be
the “Great Stabilization”…for 2009 was extraordinary not just for how output fell, but
for how a catastrophe was averted.”
~ The Economist magazine, December 2009
10
Source: DB Economics Research Team
11. Dramatic Credit Spread Widening
Credit spreads across
the ratings 10 Year Industrial Credit Spreads (1991 – 2009)
spectrum gapped 1,200
sharply wider
during the
Financial Crisis,
Change vs. Change vs.
with high yield
1,000 20-year historical 2-year local
credits and Dec 18
Current average average average average
leveraged loan
AAA +83 +63 +20 +118 (35)
spreads providing AA +100 +74 +26 +152 (52)
an early indicator A +124 +99 +24 +198 (74)
of the Crisis 800 BBB +203 +143 +60 +291 (88)
BB +436 +314 +121 +618 (182)
Spread to UST (bps)
Return to Normalcy? 600
Significantspread
tightening across all
ratings in 2009
400
Spreads now notably
tighter than 2 year
averages
Stronghigh yield new 200
issue markets
Non-guaranteed
financial debt
markets functioning 0
Liquidity
much Apr-91 Dec-93 Aug-96 Apr-99 Dec-01 Aug-04 Apr-07 Dec-09
improved AAA AA A BBB BB
Note: Data based on 10-year Bloomberg industrial indices.
Source: Bloomberg as of December 18, 2009 11
12. Unprecedented Market Volatility
As the financial crisis VIX Daily Closing Values (2005 – 2009)
accelerated,
liquidity virtually Fannie/ Freddie
disappeared Lehman Brothers
across capital 90 AIG
markets globally… Reserve Primary fund
80
…and volatility
spiked to historical
highs 70 High yield and leverage Bank Stress Tests
loan indices gap wider Bank capital raises
As market confidence Hedge fund implosions Bank earnings rebound
60
and “visibility” and “fire sales” PPIP “announcement”
improved in Q2 SIV “unwinds” Fiscal stimulus
2009, investor cash 50 Bear Stearns MBS purchase program
flows changed Legacy TALF “announce”
accordingly,
driving higher 40
liquidity and
spread tightening 30
in most markets
20
Return to Normalcy?
As visibility has 10
improved, risk
appetite has
increased 0
5
6
7
8
9
05
06
07
08
09
Very positive fund
5
5
6
6
7
7
8
8
9
9
l -0
l -0
l -0
l -0
l -0
r- 0
t- 0
r- 0
t- 0
r- 0
t- 0
r- 0
t- 0
r- 0
t- 0
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Oc
Oc
Oc
Oc
Oc
Ap
Ap
Ap
Ap
Ap
Ja
Ja
Ja
Ja
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flow implications
On December 22, 2009, the VIX Index dropped below 20, the lowest level since August 2008
Source: Bloomberg 12
13. Perspective: Cost of the U.S. Financial Crisis?
Although the Fiscal Costs of Post-War Banking Crisis
absolute amount of
the losses in the
current global
financial crisis 35
were
unprecedented…
30
…the actual fiscal
expenditure
required by the 25
U.S. Government
to alleviate the
% of Nominal GDP
crisis was not as 20
large (on a relative
basis) as several
other recent 15
banking crises in
recent decades
10
5
Return to Normalcy?
Though daunting,
0
the losses and debt
South Korea Japan Spain Finland Norw ay Sw eden U.S. S&L Crisis U.S. Subprime
burdens to date are 1997 – 2002 1991-Present 1977 – 1985 1991 – 1994 1987 – 1993 1991 1984 – 1991 Crisis
manageable vis-à-vis 2007-Present
the size of the U.S.
economy
13
Source: David Wyss, Chief Economist, Standard & Poors. OECD, IMF, Global Insight. 13
14. Perspective: Crisis in the West, or Rise of the East?
China’s Financial Crisis GDP Growth China’s FX Reserves
China had the largest (13% of GDP), earliest China’s FX reserves increased 50% during the global
implemented (Nov ’08), and most effective fiscal financial crisis to $2.3 trillion
Key Question stimulus plan globally during the financial crisis 75% of Asia’s $5 trillion in reserve holdings are in US$
China’s GDP growth continues to be unmatched 2.5
When we look back
25 years from now, 2.0
10.0%
will the “real” 9.0% 9.0% 9.0%
9.0% 8.5%
economic story of
1.5
the first decade of 8.0%
USD trillions
the 21st Century be 7.0%
the Western market 1.0
6.0%
financial crisis…
5.0% 0.5
…or will it be the 2008 2009E 2010E 2011E
rapid rise, and shift Source: DB Economics Research. People’s Bank of China. 0.0
East, of economic ‘04 ‘05 ‘06 ‘07 ‘08 ‘09
power to Asia?
U.S. & China New Vehicle Sales European Union Trade with China
New vehicle sales in China will exceed the U.S. for the China’s trade surplus with the world’s largest
first time ever in 2009 economies grew rapidly during the crisis
300
20
US China
Exports to China
250
Imports from China
15 Forecast
200
EUR billions
million
10 150
100
5
50
0
0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
'01 '02 '03 '04 '05 '06 '07 '08
Note: Vehicle sales under 6 tons gross weight 14
Source: J.D. Power and Associates Source: Eurostat. Wall Street Journal.
15. Key Steps in the U.S. Response in 2010
Section 2
16. Over $16 Trillion in U.S. Government Programs
Breakdown of $16 Trillion U.S. Government Initiatives by Agency and Program
Federal Reserve ($7.4 trn, 45.1%) Treasury ($6.3 trn, 38.6%)
Max ($bn) Used ($bn) Max ($bn) Used ($bn)
CP Funding Facility (CPFF) 1,800.0 9.4 Money Market Mutual Funds (EXPIRED) 3,000.0 0.0
Term Auction Facility (TAF) 900.0 85.8 Public-Private Investment Fund (PPIF) 1,000.0 26.7
Term ABS Loan Facility (TALF) 1,000.0 58.9 Feb '09 Stimulus Package 787.0 194.5
Currency Swaps / Other Assets 602.0 108.8 Troubled Asset Relief Program (TARP) 700.0 399.8
MM Inv. Funding Facility (MMIFF) (EXPIRED) 540.0 0.0 Fannie Mae / Freddie Mac Bailout 400.0 110.6
MBS Purchase Program 1,250.0 1,086.6 Student Loan Purchases 195.0 32.6
U.S. Treasuries Purchase Program (EXPIRED) 300.0 300.0 Feb '08 Stimulus Package 168.0 168.0
Term Securities Lending Facility (TSLF) 250.0 0.0 Treasury Exchange Stabilization Fund (ESF) 50.0 50.0
AIG Credit Extensions (incl. ML LLC II + III) 103.3 57.5 Tax breaks for banks 29.0 29.0
GSE Debt Purchase Program 200.0 159.9 Subtotal 6,329.0 1,011.2
Primary Credit Discount 110.7 19.2 % of combined $16.4 trn / % or utilization 38.6% 16.0%
Primary Dealer and Others (PDCF) 147.0 0.0
Maiden Lane LLC (Bear Stearns) 29.5 26.6
FDIC ($2.7 trn, 16.3%)
ABCP Money Market Fund Liquidity (AMLF) 152.1 0.0
Securities Lending Overnight 13.1 8.3 Max ($bn) Used ($bn)
Secondary Credit 0.6 0.0 Debt Guarantee Program (EXPIRED) 940.0 307.2
Subtotal 7,398.3 1,921.0 Deposit Insurance Programs 1,384.0 22.0
% of combined $16.4 trn / % or utilization 45.1% 26.0% Asset Guarantee for Citi / BofA (TERMINATED) 346.5 0.0
Subtotal 2,670.5 329.2
% of combined $16.4 trn / % or utilization 16.3% 12.3%
($bn) Max Used Peak
“History suggests that exiting too soon from policies to contain a financial
Fed 7,398.3 1,921.0 3,827.3
crisis can significantly prolong an economic downturn.” Treasury 6,329.0 1,011.2 1,011.2
~ U.S. Treasury Secretary, Timothy Geithner, December 2009 FDIC 2,670.5 329.2 329.2
Total 16,397.8 3,261.4 5,167.7
Sources: Fed, FDIC and Treasury websites, WSJ and other public articles (as of 12/18/09). 16
18. Step # 1: Address the Excess U.S. Housing Supply
Core U.S. Problem: Rapid Rise in Serious Delinquencies U.S. Homeowners with Mortgage > Value
Excess Supply
3–5 mm excess units
Rising inventories,
especially distressed
Rising delinquencies,
especially prime
High unemployment
Tight credit
2-4 years to absorb
Return to Normalcy? U.S. Residential Real Estate Peak-to-Current Declines (As of Sep 09)
The U.S. Government U.S. home price 60% 55
response has been declines vary by 52
Home price decline since peak
massive 47
market and have 43
45%
Most markets near been staggering… 38 39 39 40
(Case-Shiller)
bottom on pricing 29
27 28
…and remain 30%
“Affordability” 22 23
vulnerable based 18 19 20
14 15
“Momentum” may limit on fundamentals 15% 12
8
downside (which continue to 5
Low rate environment be daunting) 0%
20-City Index
New York
Cleveland
Denver
Phoenix
Charlotte
Chicago
San Diego
Dallas
Boston
Atlanta
Portland
Seattle
San Francisco
Tampa
Los Angeles
Las Vegas
Minneapolis
Detroit
Miami
Washington
Source: Karen Weaver, Head of DB Securitization Research. Case Shiller data as of 9/09. First American. CoreLogic. 18
19. Step # 2: Continue U.S. Government Housing Programs
Category Program Agency Size Description
Lower Mortgage GSE Debt Purchases (Expired) Treasury $200 billion Purchase of GSE debt securities
Rates
GSE MBS Purchases (March 2010 Treasury $1,250 billion Purchase of MBS guaranteed by Fannie Mae,
Expiry) Freddie Mac, Ginnie Mae
UST Purchases (Expired) Treasury $300 billion Purchase of U.S. Treasury Notes
Home Affordable Modification FHFA / $75 billion Payments to lenders and borrowers to modify
Spending Programs Program (HAMP) Treasury primary and secondary mortgages
354,000 “trial” modifications as of Sept 2009
Guarantees through Fannie Mae / FHFA / Unlimited On Dec 24, 2009, Treasury committed to
Freddie Mac Treasury an “unlimited” guarantee of GSE losses
through 2012 (previously $400 billion)
First-Time Homebuyer Credit IRS $14 billion $8,000 credit against federal income tax
Tax Savings liability for first-time homebuyers and $6,500
(extended to April 2010)
for repeat homebuyers
Capital Gains Exclusion IRS $16 billion Allows homeowners to earn a tax free capital
gain on the sale of their primary home
Return to Normalcy?
TheU.S. Government Mortgage Interest Deduction IRS $80 billion Allows homeowners to deduct mortgage
response has been (2009 est.) interest payments from their taxable income
massive
Congress and White Deductibility of State and Local IRS $16 billion Allows homeowners to deduct state or local
House very focused Property Taxes (2009 est.) taxes imposed on their homes
on this issue
Today, the U.S. Government, directly or indirectly, underwrites 9 of every 10 new residential mortgages
(twice the pre-financial crisis percentage)
On December 24, Treasury said it would cover “unlimited” losses at Fannie and Freddie through 2012
Source: Congressional Budget Office (November, 2009); Wall Street Journal. 19
20. Step # 3: Address Massive 2010-2013 CRE Refinancing Wave
The 2010 – 2014 CRE Refinancing Wave will most negatively impact U.S. banks Est. Required Equity to Refinance
Over $2 trillion plus of U.S. commercial real estate equity has been wiped out 700 630
Market values: Pre crisis (~ $6.7 Trillion); Dec 09 (~ $4.1 Trillion) 600
$3.3 trillion of debt outstanding 500
Banks ($2 trn); CMBS market (~$1 trn); Insurance (~$300 bn) 400
$ billion
“Smaller” U.S. banks (i.e., # 30 – 100) have the largest and lowest quality loan 300
exposures (significant non-cash flow assets) 170
200 130
Sharp price declines, highly levered properties, and lower LTV lending standards 100
100
have combined to create a significant refinancing risk issue for the market
between 2010 – 2013 in particular 0
2008/2009 2010 2011 2012+
Potential Impact:
$ Cumulative: $130 $230 $400 $1,030
Consumer confidence
Bank failures
Commercial Real Estate (CRE) Mortgage Maturities
Pension losses
$350
State budget gaps Peak: 2010 - 2014
Over 9 million jobs $300
Banks CMBS Lif e Cos Other
$250
Return to Normalcy?
$200
Not much!
The top 20 U.S. banks (85% $150
of the system) have
$100
significantly less “relative”
exposure than the smaller
$50
banks, thereby reducing
systemic risk
$0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
16
18
20
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
Source: Richard Parkus, Head of DB U.S. Commercial Real Estate research. Foresight Analytics. Wall Street Journal. Real Estate Roundtable. 20
21. Step # 4: Restart the CMBS New Issue Market
Although TALF has U.S. CMBS Issuance Secondary Trading Levels
had de minimus
impact on new CMBS 1,500
250
issuance…
1,250
200 CMBS 10 yr CMBS (AAA)
MBS Spread vs. Swaps
…strong investor 1,000
appetite for 3 new 150
CMBS financings at 750
100
the end of 2009 (2 non- 500
TALF) were important 50
steps, albeit small, $1.4 250
toward a possible 0
0
revival of the market in
99
00
01
02
03
04
05
06
07
08
09
2010
19
20
20
20
20
20
20
20
20
20
20
7
8
9
Ap 7
08
09
7
7
8
8
9
9
l -0
l -0
l -0
0
r- 0
t- 0
r- 0
t- 0
r- 0
t- 0
n-
n-
n-
Ju
Ju
Ju
Oc
Oc
Oc
Ap
Ap
Ja
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Includes cash volumes. Excludes 2nd derivative CDO and synthetics
2009 U.S. CMBS Issuance
2009 U.S. CMBS Issuance ($1.36 billion) Comment
Date Issuer Tranche WAL Ratings Size ($ mm) Pricing TALF Strong 2009 CMBS spread tightening:
Nov-09 Developers A 4.69 AAA / Aaa / AAA 323.5 S + 140 yes
Return to Normalcy? Driven by PPIP announce, TALF,
Diversified (DDR) B 4.69 AA / Aa2 / AA 41.5 5.75%
C 4.69 A / A2 / A 35.0 6.25% improved liquidity and stronger
Expiry
dates
Total 400.0 economic data
extended for TALF
CMBS Program (to Dec-09 Flager A 6.67 AAA / AAA 350.0 S + 225 no Spreads still well above historical
Mar and June 2010) Development B 7.11 AA / AA 30.0 S + 400 norms
C 7.11 A/A 33.0 S + 450 Limited TALF impact on new issuance:
Small pick-up in D 7.11 BBB / BBB 47.0 8.75%
new issuance Total 460.0 Originators not prepared to take
activity in aggregation risk of multi-billion pool
Dec-09 Inland Western A-1 5.62 AAA / AAA 58.3 S + 150 no
November and A-2 9.95 AAA / AAA 330.6 S + 205
for several months; complicated by
December 2009 X N/A AAA / AAA N/A N/A lengthy underwriting process
B 9.95 AA / AA 24.1 S + 360 TALF CMBS Expiry Dates:
C 9.95 A/A 42.9 S + 420
D 9.95 BBB / BBB 44.0 9.00% Legacy CMBS: March 31, 2010
Total 500.0 New CMBS: June 30, 2010 21
Source: Deutsche Bank, Bloomberg
22. Step # 5: Restart the Non-Agency RMBS Market
The Fed did not
include new or Status of the Non-Agency (Private Label) RMBS Market
legacy (non- New Issuance: Virtually no new non-agency (private label) RMBS issuance during the Financial Crisis in 2008
Agency) RMBS as and 2009; significant change from pre-crisis market
a TALF-eligible
No significant change in 2010 anticipated in this regard
asset in 2009…
On August 17, 2009, the Federal Reserve indicated new or legacy RMBS will not be TALF eligible
…and issuance Spreads: Significant tightening, and improved liquidity, since the “announcement” of Treasury’s PPIP program
volumes remain in early 2009; modest economic recovery has also helped
down sharply from
Regulatory Reform: GSE restructuring will likely not be part of the final 2010 financial regulatory reform bill
pre-Financial
Crisis levels
Outlook for 2010: Virtually the entire market will continue to be supported by U.S. Government liquidity,
directly or indirectly, in 2010; private label (non-Agency) market cannot really compete
The only substantive
issuance activity Government Agency MBS will continue to dominate in 2010 (Fannie, Freddie, GNMA, and FHA)
today is taking
place through the
U.S. (Non-Agency) RMBS Issuance Secondary Trading Levels
GSEs
500 3,000
Prime
Return to Normalcy? 400 Alt-A 2,500
10yr Subprime RMBS (AAA)
MBS Spread vs. Swaps
Subprime 2,000
Not much! 300
Other
Marketin 2010 will 1,500
200
continue to be 1,000
dominated by
100
Government 500
Agency issuance 0 0
99
00
01
02
03
04
05
06
07
08
09
7
8
9
Ap 7
08
Ap 9
7
7
8
8
9
9
l -0
l -0
l -0
19
20
20
20
20
20
20
20
20
20
20
0
r- 0
t- 0
r- 0
t- 0
0
r- 0
t- 0
n-
n-
n-
Ju
Ju
Ju
Oc
Oc
Oc
Ap
Ja
Ja
Ja
Source: Deutsche Bank, Inside MBS&ABS, Thomson Financial & S&P
Source: Thompson Financial;
DB Global Markets Research
The GSEs will be under the microscope of Congress in 2010,
but will nonetheless continue to dominate issuance in the year ahead 22