This is not research and is not intended as such. This has been prepared by individuals on the sales/trading desks of the Securities Division. This material does not represent a formal or official view of Goldman Sachs as the views expressed herein are solely those of the authors, which may differ from those of Global Investment Research.
PROPRIETARY AND CONFIDENTIAL
State of the Markets Best Long and Short Risk Strategies
August 2009 Hedge Fund Strategies Risk Factors – Please Read
CDS Risk Factors
No Claims on the Reference Entities. Participation in a Credit Default Swap does not constitute a purchase or other acquisition or assignment of any interest in any obligation of any Reference Entity. The parties to the Credit Default Swap will not have any recourse against any Reference Entity and will have no rights to enforce directly compliance by any Reference Entity with the terms of its obligations that are referred to in the Credit Default Swap, no rights of set-off against any Reference Entity, no voting rights with respect to any Reference Entity and no security interest in any Reference Obligation.
Limited Provision of Information about Reference Obligations/Reference Entities. No information will be provided to prospective counterparties with respect to any Reference Obligation or Reference Entity. Investors should conduct their own investigation and analysis with respect to the creditworthiness of each Reference Obligation and the likelihood of the occurrence of an event triggering payments under the Credit Default Swap occurring with respect to each Reference Entity and Reference Obligation.
Concentration Risk/Structural Risk. The concentration of the Reference Obligations in the Index in one particular type of structured product security subjects the Credit Defaults Swap to a greater degree of risk with respect to defaults within such type of structured product security. Prospective counterparties should review the list of Reference Obligations and conduct their own investigation and analysis with regard to each Reference Obligation, including the credit, market, interest rate, structural and legal risks associated with each Reference Obligation.
Evolving Nature of the Credit Default Swap Market. Credit default swaps (including credit default swaps on asset backed securities) are relatively new instruments in the market.While ISDA has published and supplemented the ISDA Credit Derivatives Definitions in order to facilitate transactions and promote uniformity in the credit default swap market, the credit default swap market is expected to change and the ISDA Credit Derivatives Definitions and terms applied to credit derivatives are subject to interpretation and further evolution. There can be no assurance that changes to the ISDA Credit Derivatives Definitions and other terms applicable to credit derivatives generally will be predictable. Amendments or supplements to the ISDA Credit Derivatives Definitions that are published by ISDA will only apply to the Credit Default Swap if the Credit Default Swap is amended. Therefore, in addition to the credit risk of Reference Obligations, Reference Entities and the credit risk of their counterparty, persons who enter into Credit Default Swaps are also subject to the risk that the ISDA Credit Derivatives Definitions could be interpreted in a manner that would be adverse to them or that the credit derivatives market generally may evolve in a manner that would be adverse to them.
Credit Ratings. Credit ratings represent the rating agencies’ opinions regarding credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and/or interest payments and do not evaluate the risks of fluctuations in market value. Accordingly, credit ratings may not fully reflect the true risks underlying any Credit Default Swap. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than a rating indicates.
Conflicts of Interest; No Reliance. Goldman Sachs does not provide investment, accounting, tax or legal advice in respect of the Credit Default Swaps and shall not have a fiduciary relationship with any counterparty to a Credit Default Swap. In particular, Goldman Sachs does not make any representations as to (a) the suitability of any Credit Default Swap, (b) the appropriate accounting treatment or possible tax consequences of any Credit Default Swap or (c) the future performance of any Credit Default Swap either in absolute terms or relative to competing investments. Prospective counterparties should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to ascertain the suitability of any Credit Default Swap, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with any Credit Default Swap as they deem appropriate to evaluate the merits and risks of any Credit Default Swap
Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Entities and/or the obligations of the Reference Entities (including the Reference Obligations) and has not undertaken, and does not intend, to disclose, such status or nonpublic information in connection with any Credit Default Swap. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of entering into any Credit Default Swap.
Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with a Credit Default Swap and accepts no responsibility or liability therefore. Goldman Sachs may from time be an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Reference Entity or any obligation of any Reference Entity. 2 Risk Factors – Please Read
Prospective Investors or Counterparties should read the final swap confirmation or Offering Circular, as the case may be, for a more complete description of risk factors relevant to the particular investment. Entering into the Default Swaps or purchasing the Securities involves certain risks. Prospective swap counterparties or Investors should carefully consider the following factors, as well as the risk factors included in the final swap confirmation or final Offering Circular, prior to entering into the Transaction. The following is not intended to be an exhaustive list of the risks involved in the Transaction.
The final Offering Circular for any funded transaction will include more complete descriptions of the risks described below as well as additional risks. Any decision to invest in the securities described herein should be made after reviewing the Offering Circular, conducting such investigations as the investor deems necessary and consulting the investor’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of an investment in the securities
Risks Associated with Management Rights. The exercise of management rights by the Investor, particularly in the form of Subordination Trades, can potentially (a) increase the risk of the investment by reducing the Credit Enhancement and hence increase the probability of suffering an actual “Incurred Loss” from a subsequent Credit Event (b) cause a rating downgrade of the Portfolio Notes, i.e. if trading results in a reduction in Credit Enhancement such that the Rating Agencies determine that the tranche can no longer maintain its rating or (c) increase the mark-to-market volatility of the Portfolio Notes.
Additional Credit Risks. In addition to the credit risk of the Reference Portfolio, the parties to the Default Swaps are exposed to the credit risk of receipt of payments from the other party, and the Investors in the Securities are exposed to the credit risk of the issuer of the collateral securing the Securities for the full notional amount of their investment
Limited Liquidity of the Transaction. There is currently no market for the Default Swaps or Securities. The Default Swaps represent bilateral contracts that cannot be transferred or terminated without the consent of the other party, which consent may be withheld or delayed for a number of reasons. Goldman Sachs may, but is not obligated to, unwind or terminate a Default Swap under terms acceptable to it in its sole discretion. There can be no assurance that a secondary market for the Securities will develop or, if a secondary market does develop, that it will provide the holder of the Securities with liquidity, or that it will continue for the life of the Securities. Moreover, the limited scope of information available to the swap counterparties and/or Investors regarding the Reference Entities and the nature of any Credit Event, including uncertainty as to the extent of any reduction to be applied to the notional of each class if a Credit Event has occurred but the amount of the relevant reduction in the notional amount has not been determined, may further affect the liquidity of the Default Swaps or Securities, especially the subordinated classes. Consequently, any swap counterparty under the Default Swaps or Investor in the Securities must be prepared to hold such Default Swaps or Securities for an indefinite period of time or until final maturity.
Mark-to-Market Risk. Investors and swap counterparties are exposed to considerable mark-to-market volatility following changes in any of the following: spreads of the credits in the reference portfolio, comparable CDO spreads, ratings migration in the reference portfolio, ratings migration of the Default Swaps or Securities, and credit events in the reference portfolio (and hence reduction of subordination). These will be reflected in mark-to-market valuations which are likely to be more volatile than an equivalently rated unleveraged investment
Additional Risk of Loss due to Definitions of Credit Events. The probability of occurrence of a Credit Event may be higher than the probability of what may be perceived as a “default” (for example, what is tracked by rating agencies in their default studies) because of their broader definitions. This is particularly true with respect to the inclusion of “Restructuring” as a Credit Event in all standard credit default swaps
Evolving Nature of the Credit Default Swap Market. Markets in different jurisdictions have also already adopted and may continue to adopt different practices with respect to the Credit Derivative Definitions, particularly, but not limited to, the definition of “Restructuring”. Past events (e.g. Conseco restructuring and Railtrack bankruptcy) exemplify the fact that the Credit Derivatives Definitions may contain ambiguous provisions that are subject to interpretation and may result in consequences that are adverse to the investor.
3 Risk Factors – Please Read
“Cheapest-to-Deliver” Risk. Given that Goldman Sachs, as buyer of protection, has discretion to choose the portfolio of valuation obligations used to calculate the severity of losses following a Credit Event, it is likely that the portfolio of valuation obligations selected will be obligations of the Reference Entity with the lowest market value that are permitted to be delivered pursuant to the relevant documentation. This could result in a lower recovery value and hence a larger loss amount
Credit Ratings. Credit ratings represent the rating agencies’ opinions regarding credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and/or interest payments and do not evaluate the risks of fluctuations in market value. Accordingly, the credit ratings may not fully reflect the true risks of the Transaction. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than a rating indicates
Interest Rates. Changes in the market conditions such as the interest rate environment may impact the valuation of structured credit products
Conflicts of interest; No reliance. Goldman Sachs does not provide investment, accounting, tax or legal advice in respect of the Transaction and shall not have a fiduciary relationship with any Default Swap counterparty or Investor. In particular, Goldman Sachs does not make any representations as to (a) the suitability of the Transaction, (b) the appropriate accounting treatment or possible tax consequences of the Transaction or (c) the future performance of the Transaction either in absolute terms or relative to competing investments. Prospective Default Swap counterparties and/or Investors should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to ascertain the suitability of the Transaction, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with the Transaction as they deem appropriate to evaluate the merits and risks of the Transaction
Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Collateral, the issuer(s) thereof, the Reference Entities and/or the obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of entering into the Transaction
Markets Risk
Emerging Markets: Political and economic structures in countries with emerging economies or stock markets may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristics of more developed countries including a significant risk of currency value fluctuation. Such instability may result from, among other things, authoritarian governments, or military involvement in political and economic decision-making, including changes or attempted changes in governments through extra-constitutional means; popular unrest associated with demands for improved political, economic or social conditions; internal insurgencies; hostile relations with neighbouring countries; and ethnic, religious and racial disaffections or conflict. Certain of such countries may have in the past failed to recognise private property rights and have at times nationalised or expropriated the assets of private companies. As a result, the risks from investing in those countries, including the risks of nationalisation or expropriation of assets, may be heightened.
Foreign Exchange: Foreign currency denominated Underlyers and Products are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the Products.
4 Risk Factors – Please Read
Risk Disclosure Regarding Equity Swaps or Similar Swap Transactions or Agreements
Prior to entering into an equity swap, contract for difference (CFD) or other similar swap transaction or agreement (hereinafter referred to as a "Swap Transaction"), Goldman Sachs believes you should be aware of the following general risks associated with Swap Transactions: (i) Liquidity Risk: There is no public market for Swap Transactions and, therefore, it may be difficult or impossible to liquidate an existing position on favorable terms; (ii) Transfer Restrictions: Swap Transactions entered into with Goldman Sachs cannot be assigned or otherwise transferred without its prior written consent and, therefore, it may be impossible for you to transfer any Swap Transaction to a third party; (iii) Credit Risk: Because Goldman Sachs, or one of its affiliates, may be obligated to make substantial payments to you during the term of a Swap Transaction, you must evaluate the credit risk of doing business with Goldman Sachs or its affiliates; (iv) Pricing and Valuation: The price of each Swap Transaction is individually negotiated between Goldman Sachs and each counterparty and Goldman Sachs does not represent of warrant that the prices for which it offers Swap Transactions are the best prices available, possibly making it difficult for you to establish what is a fair price for a particular Swap Transaction; (v) Early Termination Payments: The provisions of the Swap Transaction may allow for early termination and, in such cases, either you or Goldman Sachs may be required to make a potentially significant termination payment depending upon whether the Swap Transaction is in-the-money to Goldman Sachs or you at the time of termination; (vi) Proprietary Trading: Goldman Sachs engages in proprietary trading for its own account and the accounts of its affiliates in the same or similar instruments underlying Swap Transactions (including such trading as Goldman Sachs deems appropriate in its sole discretion to hedge its market risk in any Swap Transaction whether between Goldman Sachs and you or with third parties) and such trading may affect the value of a Swap Transaction; and (vii) Indexes: Goldman Sachs does not warrant, and takes no responsibility for, the structure, method of computation or publication of any currency exchange rates, interest rates, indexes of such rates, or equity indexes, unless Goldman Sachs specifically advises you otherwise.
To understand clearly the terms and conditions of any Swap Transactions you may enter into, you should carefully review the Master Agreement, including any related schedules, credit support documents, addenda and exhibits. You should not enter into Swap Transactions unless you understand the terms of the Swap Transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the Swap Transaction is appropriate for you in light of your circumstances and financial condition.
You should not construe this risk disclosure statement as legal, business, or tax advice, and you should consult your attorney, business advisor, and tax advisor as to legal, business, tax, and related matters concerning Swap Transactions.
Clients must be Eligible Contract Participants ("ECP") as defined in Section 1a(12) of the Commodity Exchange Act of 2000 in order to engage in swap transactions.
Generally, customers in either of the following categories are ECPs:
1. corporation, partnership, proprietorship, organization, trust, individual or other entity that has total assets exceeding $10mm.
2. ERISA plan, governmental employee benefit plan which has assets exceeding $5mm or has its investment decisions made by a CTA, financial institution or insurance company.
5 Risk Factors – Please Read
Variance Swap Risk Disclosures
Selling variance swaps: Investors who sell a variance swap risk unlimited losses if the realized volatility of the underlyer exceeds the reference strike of the swap at expiration.
Buying variance swaps: Investors who buy a variance swap risk a maximum loss equal to the square of the variance strike times the variance notional (variance units * variance strike2), if realized volatility goes to zero.
Prior to entering into a variance swap, dispersion swap or other similar swap transaction or agreement (hereinafter referred to as a "Swap Transaction"), Goldman Sachs believes you should be aware of the following general risks associated with Swap Transactions: (i) Liquidity Risk: There is no public market for Swap Transactions and, therefore, it may be difficult or impossible to liquidate an existing position on favorable terms; (ii) Transfer Restrictions: Swap Transactions entered into with Goldman Sachs cannot be assigned or otherwise transferred without its prior written consent and, therefore, it may be impossible for you to transfer any Swap Transaction to a third party; (iii) Credit Risk: Because Goldman Sachs, or one of its affiliates, may be obligated to make substantial payments to you during the term of a Swap Transaction, you must evaluate the credit risk of doing business with Goldman Sachs or its affiliates; (iv) Pricing and Valuation: The price of each Swap Transaction is individually negotiated between Goldman Sachs and each counterparty and Goldman Sachs does not represent of warrant that the prices for which it offers Swap Transactions are the best prices available, possibly making it difficult for you to establish what is a fair price for a particular Swap Transaction; (v) Early Termination Payments: The provisions of the Swap Transaction may allow for early termination and, in such cases, either you or Goldman Sachs may be required to make a potentially significant termination payment depending upon whether the Swap Transaction is in-the-money to Goldman Sachs or you at the time of termination; (vi) Proprietary Trading: Goldman Sachs engages in proprietary trading for its own account and the accounts of its affiliates in the same or similar instruments underlying Swap Transactions (including such trading as Goldman Sachs deems appropriate in its sole discretion to hedge its market risk in any Swap Transaction whether between Goldman Sachs and you or with third parties) and such trading may affect the value of a Swap Transaction; and (vii) Indexes: Goldman Sachs does not warrant, and takes no responsibility for, the structure, method of computation or publication of any currency exchange rates, interest rates, indexes of such rates, or equity indexes, unless Goldman Sachs specifically advises you otherwise.
Returns on variance and dispersion swaps are not linear. To understand clearly the terms and conditions of any Swap Transactions you may enter into, you should carefully review the Master Agreement, including any related schedules, credit support documents, addenda and exhibits. You should not enter into Swap Transactions unless you understand the terms of the Swap Transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the Swap Transaction is appropriate for you in light of your circumstances and financial condition. Clients must be Eligible Contract Participants ("ECP") as defined in Section 1a(12) of the Commodity Exchange Act of 2000 in order to engage in swap transactions. Generally, customers in either of the following categories are ECPs:
1. Corporation, partnership, proprietorship, organization, trust, individual or other entity that has total assets exceeding $10mm or
2. ERISA plan, governmental employee benefit plan which has assets exceeding $5mm or has its investment decisions made by a CTA, financial institution or insurance company.
6 Risk Factors – Please Read
Risk Disclosure Regarding OTC Options
OTC options may trade at a value other than that which may be inferred from the current levels of interest rates, dividends and the underlyer due to other factors including, but not limited to, expectations of future levels of interest rates, future levels of dividends and the volatility of the underlyer at any time prior to maturity.
Prior to entering into an OTC Option transaction you should be aware of the general risks associated with OTC Option transactions: Liquidity Risk: There is no public market for OTC Option transactions and, therefore, it may be difficult or impossible to liquidate an existing position on favorable terms; Transfer Restrictions: OTC Option transactions entered into with Goldman Sachs cannot be assigned or otherwise transferred without its prior written consent and, therefore, it may be impossible for you to transfer any OTC Option transaction to a third party; Counterparty Credit Risk: Because Goldman Sachs, or one of its affiliates, may be obligated to make substantial payments to you as a condition of an OTC option transaction, you must evaluate the credit risk of doing business with Goldman Sachs or its affiliates; Pricing and Valuation: The price of each OTC Option transaction is individually negotiated between Goldman Sachs and each counterparty and Goldman Sachs does not represent or warrant that the prices for which it offers OTC Option transactions are the best prices available, possibly making it difficult for you to establish what is a fair price for a particular OTC Option transaction; Proprietary Trading: Goldman Sachs engages in proprietary trading for its own account and the accounts of its affiliates in the same or similar instruments underlying OTC Option transactions (including such trading as Goldman Sachs deems appropriate in its sole discretion to hedge its market risk in any OTC Option transaction whether between Goldman Sachs and you or with third parties) and such trading may affect the value of an OTC Option transaction.
Note: Options involve risk and are not suitable for all investors. Please ensure that you have read and understood the current options disclosure document before entering into any standardized options transactions. United States listed options disclosure documents are available from our sales representatives or at http://theocc.com/publications/risks/riskstoc.pdf. A secondary market may not be available for all options. Transaction costs may be a significant in option strategies calling for multiple purchases and sales of options, such as spreads. When purchasing long options an investor may loose their entire investment and when selling uncovered options the risk is potentially unlimited. Supporting documentation for any comparisons, recommendations, statistics, technical data, or other similar information will be supplied upon request.
To understand clearly the terms and conditions of any OTC Option transactions you may enter into, you should carefully review the Master Agreement, including any related schedules, credit support documents, addenda and exhibits. You should not enter into OTC Option transactions unless you understand the terms of the OTC Option transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC Option transaction is appropriate for you in light of your circumstances and financial condition. You may be requested to post margin or collateral to support written OTC options at levels consistent with the internal policies of Goldman Sachs.
7 Table of Contents
I. State of the Markets
II. Tradable Themes I. US Commercial Real Estate II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III. Other Market Opportunities I. Commodity Opportunities II. Event-Driven Market Neutral Investing
IV. Appendix V. Legal Disclosures
8 State of the Markets Overview Summary of Hedge Fund Strategies Group Views
If you believe this thesis, then…
Trading and Hedging Opportunities Consumer Debt Housing Bubble Repayment - Short REIT Equities - Buy AAA CMBS - Buy FX Options on Commodity- Higher Lower Wealth Linked Currencies Savings Consumer Destruction Rate Spending - Buy Equities of Non-US Commodity Produc ers Equity Market Prolonged - Sell Caps on the US Tax Index or Receive the SIFMA Ratio Decline Elevated Unemployment - Short JPY
- Buy Yen CMS Caps - Short US Consumer and Retail
companies via equity or CDS
- Sell Aluminum Caps
Government Risk Shifting to Public - Long Crude Oil vs Short Heating Credit Crunch Intervention Balance Sheet Oil (Short the Crack Spread)
- Engage in Event-Driven Market Neutral strategies
For Discussion Purposes Only. 9 State of the Markets
In 2009 Credit Spreads Have Tightened1,2 Equity Prices Are Up From March ’09 Lows1 1Jan2008 29Jul2009 1Jan2008 29Jul2009 9 6 1.2 8 1.1 5 7 1 0.9 6 4 0.8 5 0.7 4 3 0.6 3 2 0.5 2 0.4 1 1 0.3 2008 2009 2008 2009 Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul CDX Index CDXHY Index (RHS) LCDX Index (RHS) iTraxx Europe iTraxx Asia NASDAQ FTSE SX5E NIKKEI HANG SENG KOSPI BOVESPA
In 2009 Commercial Mortgages Up, Subprime Down1,2 In 2009 Commodities Markets Recovering1 1Jan2008 29Jul2009 1Jan2008 29Jul2009 1 1.6 0.9 1.4 0.8 1.2 0.7 1 0.6 0.8 0.5 0.6 0.4 0.4 0.3 0.2 2008 2009 2008 2009 Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul CMBX AAA OTR ABX AAA OTR GS Agriculture GS Precious Metals GS Industrial Metals GS Petroleum
1 Source: Goldman Sachs. Data as of July 29, 2009. Past performance is not indicative of future results. 2 All credit indices shown are for 5y OTR contracts 10 State of the Markets “Green Shoots” Are Sprouting But Look Less Lively Compared To Nominal Values
Economic Data May Have Stopped Their Decline1 US Production Could Be Bouncing2 22Jul2004 22Jul2009 22Jul1999 22Jul2009 700,000 120 80
600,000 100 70 60 500,000 80 ms Inde 50 ai 400,000 60 Cl x 40 w 300,000 40
Ne 30 200,000 20 2005 2006 2007 2008 2009 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul ISM's Purchasing Managers Index Initial Jobless Claims (LHS) Consumer Confidence (RHS) ISM's CUSTOMERS' INVENTORIES INDEX ISM New Orders Index Industrial Production Is Down Despite Small Bounce3 US Housing Starts Have Bounced But Are At All-Time Lows4
120 2,500 Germany Japan US 110 2,000 100 ) 90 1,500 "Green Shoots" nds 80 a Japan Industrial Production
70 Back to 1984 Levels hous 1,000 T ( "Green Shoots" 60 US Industrial Production Germany Industrial Production Back to 1998 Levels Back to 2000 Levels 500 50 n-91 n-92 n-93 n-94 n-95 n-96 n-97 n-98 n-99 n-00 n-01 n-02 n-03 n-04 n-05 n-06 n-07 n-08 n-09 0 a a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J J J 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 1 Source: Goldman Sachs. Data as of July 22, 2009. Past performance is not indicative of future results. 2 Source: Institute for Supply Management (ISM). Data as of July 22, 2009. Past performance is not indicative of future results. 3 Source: Haver Analytics, Japan Ministry of Economy, Trade & Industry; Statistisches Bundesamt. Data as of July 22, 2009. Past performance is not indicative of future returns 4 Source: US Department of Commerce, Bureau of the Census. Chart only shows data back to 1981 so that recent price movement will be recognizable. Full data history available upon request. Indicative Only. Past performance is not indicative of future results. Data as of July 22, 2009 11 State of the Markets China May Be Helping
China’s GDP growth has remained positive even through the financial crisis and Goldman Sachs Research projects that GDP growth will return to 12% in 20101 Industrial Profit growth also points to a rapid recovery in the Chinese economy2
China Industrial Production and Real GDP1 China Sequential Industrial Profit Growth2 % YoY 20%
18% GS 16% Proj. 14%
12%
10%
8%
6%
4%
2% China - Industrial Production (% chg yoy) China - Real GDP (% chg yoy) 0% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- an- J J J J J J J J J J J J J J J J
1 Source: Goldman Sachs Research ERIWN Economic Database. https://360.gs.com/gs/portal/research/econ/erwin/erwinforecasts/ Past performance is not indicative of future results. 2 Source: Goldman Sachs Research: Asia Economic Data Flash. June 26, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7391688&fn=/document.pdf. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 12 State of the Markets Government Intervention Has Been and May Continue To Be Substantial
Central Bank Lending Rates Have Plunged1 US Federal Debt Held by the Public (% of GDP)2 21Jul2006 23Jul2009 6%
5%
4%
3%
2%
1%
0% 2006 2007 2008 2009 Jan Jul Jan Jul Jan Jul US Fed Funds Target Rate US 3m T-Bill ECB Refinancing Tender Bounce May Have Been Driven By Intervention3,4 Impact on US GDP From Spending May be Large3
Avg PMI 4 60 )
% 3 (
55 t 2 50 pac m
h I 1 45 t ow 40 Eased r 0 G
Tightened P 35 D -1 G 30 -2 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4
1 Source: Goldman Sachs Research. Global Economics Weekly. May 6, 2009. https://360.gs.com/gs/portal?action=action.doc&d=7122754. Past performance is not indicative of future results. 2 Source: Congressional Budget Office “The Long Term Budget Outlook” June 2009. http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 3 Source: Goldman Sachs Research. “US Daily: Where We Stand on Fiscal Stimulus Implementation” May 6, 2009. https://360.gs.com/gs/portal/home/fdh/?st=1&d=7125758. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 4 Data updated by GS Research on July 23, 2009. Eased are those whose FCIs have eased since 8/1/08, including India, China, UK, Australia, and Sweden. Tightened include Japan, Switzerland, US, and Euroland. 13 State of the Markets Asset Bubbles May Still Be Deflating
Commercial and Residential Real Estate prices have declined from their peaks Continued home foreclosures should add to the supply of houses up for sale
Housing And Commercial RE Prices Large Housing Inventory Overhang2 Projected To Fall1 4May2000 22Jul2010 190
180
170
160
150
140
130
120
110
100
90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Housing Prices (CS) Commercial RE Prices (NCREIF)
1 Source: Graph Data from Goldman Sachs. Data as of May 15, 2009. Past performance is not indicative of future results 2 Source: Goldman Sachs Research. Americas: Technology: IT Services. "Foreclosures at record level in April; pullback in LPS presents a buying opportunity". May 13, 2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=7163957 14 State of the Markets Impact On Balance Sheets Still Ahead
Asset Price Growth Æ Mortgage Growth Æ Bank Growth1 Projected Loan Losses on Bank Balance Sheet2
(in percent of total loans) 6,000 17,000 6 ) n ) b n Total CRE & Resi Mortgages n b
i Outstanding increased $5.2 15,000 5 in
($ United States
5,000 $
e trillion 2003-2007 ( Estimates c s n e
a 13,000 g l
a 4 a Total CRE & Resi Mortgages g t B on Bank Balance Sheets r
4,000 o nk 11,000 a
increased $1.6 trillion 2003- M l
B Europe
3 ia
2007 t n
9,000 e bt on d
3,000 i e s 2 e D R
ge 7,000 & a
g E t r 2,000 R 1 o C l M 5,000
a l t ta o o T
T 0 1,000 3,000
6 5 9 0 9 0 1995 1 1997 1998 1999 2000 2001 2002 2003 2004 2 2006 2007 2008 -1 Total CRE & Residential Mortgages (RHS) 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Total Mortgage Debt on Bank Balance Sheet (LHS)
1 Source: Federal Reserve Flow of Funds Report. Past performance is not indicative of future results 2 Source: IMF Global Financial Stability Report, April 2009 http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm. Figure 1.30. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis 15 State of the Markets Credit Bubble Is Still Deflating
Banks Still Tightening Credit As Conditions Worsen1 Private Sector Credit Is Falling2
14 100 12
12 80 10 Commercial Delinquencies (LHS) Euro Area Bank Lending Conditions (RHS) 8 10 60
) 6
) Projected Æ % ) ( % s %
e 8 40 4 g ( i (
n United States g nc ni n
e 2 ue 6 20 t Ch nq gh i l
Ti 0 e D 4 0 -2
-4 2 -20 -6 0 -40 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10 1991 Q1 1993 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1
1 Source: Federal Reserve Bank Lending Conditions; Commercial Default Data from Federal Reserve. Sourced through IHS Global Insight. Past performance is not indicative of future results 2 Source: IMF Global Financial Stability Report, April 2009 http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm. Figure 1.5. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 16 State of the Markets A “V” or “L” Shaped Recovery? The Key May Be the Bursting of the Consumer Bubble
Personal Savings Rate Is Projected to Return to Nominal Private Consumption and GDP in the US2 Historical Norms1 23Jul1969 25Jul2011 350 13 1000 72% 325 12 800 70%
11 P 300 ) l D G bi
Savings Rate Projections 10 $ 275 ( 600 68% 9 ng/ 250 ng ndi U di n 8 S 400 66% pe 225 S pe S a r
s 7 S ving e e s l 200 s a 200 64% um 6 e s c R x il S 175 a ons 5 E t a C e t 0 62% 150 e R 4 ( %
125 ) Retail Sales (LHS) 3 -200 60% 100 2 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 196 196 196 196 196 197 197 197 197 197 198 198 198 198 198 199 199 199 199 199 200 200 200 200 200 75 1 Excess Spending (left axis) Consumer Spending / GDP (right axis) 50 Savings Rate (RHS) 0 25 -1 1976 1984 1992 2000 2008 Upper Savings Rate Forecast Lower Saving Rate Forecast Retail Sales (LHS) US Savings Rate (RHS)
1 Source: Goldman Sachs, U.S. Department of Commerce. Data as of July 23, 2009. Past performance is not indicative of future results. 2 Source: BEA, Goldman Sachs Analysis. Data as of December 11, 2008. Past performance is not indicative of future returns. Excess spending defined as the spending in excess of 62% Consumer Spending / GDP, which is approximately the historical average of the Consumer Spending / GDP Ratio. Consumer credit may decrease 10-20% due to decline of assets and sources of credit. 17 State of the Markets The Asset and Credit Bubble Led To A Wealth Bubble And…
Significant wealth has been accumulated due to housing prices, however, borrowing against these assets as a percentage of value has grown since 2005 (from ~40% in 2005 to ~50% at the end of 2008)1 Net worth of the US consumer dropped from its peak in mid-2007 of $64 trillion to $51 trillion1,2 Decrease in value from home equity1 Decrease in value from capital gains from corporate equity, mutual funds, and pensions1 The Current Wealth Shock is Three Times Worse Net Worth and Home Price Appreciation1,2 Than Any Previous Post-War Recession3 % GDP
Peak: $64 trillion 70,000 200 in net w orth
180 60,000 160
50,000 140
120 $51 trillion in net 40,000 w orth (Q408) 100
30,000 80 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Net Worth ($ in bn) (LHS) Case-Schiller National Composite Index (RHS)
1 Source: Federal Reserve Flow of Funds Report. Past performance is not indicative of future returns. 2 Source: Goldman Sachs Calculations. Assumptions: Home prices fall 15%, Stock prices fall additional 25% from Q3 2008 data. Past performance is not indicative of future returns. 3 Source: Goldman Sachs Research. Global Economics Weekly. April 1, 2009. https://360.gs.com/gs/portal?action=action.doc&d=6931401 18 State of the Markets Home Equity Values Have Declined Following the Decline in Housing Prices
Approximately 32% of US homes are mortgage free1, implying that the Loan-To-Value ratio on the balance of US homes may be near 95% given a 9% drop in housing prices as implied by the S&P Case Shiller Home Price IndexSM 2 The decline in home equity may push savings rates higher and reduce consumer discretionary spending
US Residential Housing Breakdown1 $ Trillion 25 120% 93% 85% 100% y
76% t 68% 69% 70% 69% 68% 67% e 20 64% 63% 64% 65% 64% 62% 80% qui lu E
60% e Va
15 28% 40% om me 17% 21% 21% o 16% 14% 6% 9% 20% l H 0% 1% 2% n on H ia t 10 (11%) 0% r n u t e e d (33%) i (20%) R s (43%) e & R 5 (60%) (40%)
(60%) LTV 0 (80%) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Value of Homes (no-mortgage) Value of Homes Mortgaged Value of Home Equity (on Mortgaged Home Value) Loan-to-Value of Homes with Mortgages Annual Return on Home Equity 1 Sources: Percentages of houses with mortgages from US Census. American Housing Survey 2007. (biannually released: 1995, 1997, 1999, 2001, 2003, 2005, 2007; interpolated between values). Table 3-15. http://www.census.gov/hhes/www/housing/ahs/ahs07/ahs07.html. Home values from Source: Federal Reserve Flow of Funds Report, Table B.100. Calculations: Goldman Sachs. 2009 is Hedge Fund Strategies estimate. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 2 Source: S&P Case-Shiller Home Price Values Index. http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html 19 State of the Markets Low Savings Rates Were Enabled By The Growth Of The Credit Markets
Savings and Mortgage Equity Withdrawal (MEW) appear to be inversely linked1 Declining home prices and equity valuation might drive savings higher2 Relationship Between Saving and Mortgage Equity ABS Issuance Has Come To A Halt1 Withdrawal1
1 Source: Goldman Sachs Research, US Economics Analyst. “Some Micro Evidence on Saving and MEW.” June 9, 2006. Past performance is not indicative of future results. https://360.gs.com/gs/portal/home/?action=action.doc&d=2239993 2 Source: Board of Governors of The Federal Research, Flow of Funds Report
The US consumer may realize that capital gains from real estate and equity are not permanent or persistent and that disposable income may decrease in this recession Thus, we expect savings rate to adjust upwards as the US consumer saves more money for his/her retirement and wealth, thus reducing consumer spending
Wealth Ratio vs Savings Rate1 Net Worth Growth Decomposition1
1 Source: Goldman Sachs. Retail-Consumer 2009 Outlook. January 2009. https://360.gs.com/gs/portal?action=action.doc&d=6486350. Past performance is not indicative of future returns 21 State of the Markets Baby Boomers May Need To Start Saving
The “Baby Boomer” generation (born 1945-1964) has generated higher earnings and created more economic growth than any generation before them. The recent losses in housing, equity markets, and small business value have had a significant impact ontheir wealth1 ● “approximately two-thirds of Early Boomer households, who are aged 54-63, are financially unprepared for retirement – that is, they have not accumulated enough savings to maintain their lifestyle as they age.” – McKinsey Global Institute: “Talkin’ ‘Bout My Generation: The economic impact of Aging US Baby Boomers
Entrance of a larger percentage of women in the workforce combined with higher education levels has contributed to this growth , but has leveled out in the past 10 years1 Boomers Have Not Saved as Much as Previous The “Boomer Era” from 1980 to 20191 Generations1
1 Source: McKinsey Global Institute: “Talkin’ ‘Bout My Generation: The economic impact of Aging US Baby Boomers". June 2008. 22 State of the Markets Where Has The Reduction In US Consumer Spending Gone?
Reduction in US household consumption may have been redirected towards repayment of consumer debt and increased savings in Bond funds/401K/IRA accounts.
Consumers Continue To De-Lever1 Retail Flows From Money Markets Into Risk Assets2
1800 S&P 500 3.5% 150 1000 Personal interest payments/Disposable Income (RHS) ) n
1600 b 100 950 $ ( t
3.0% e
s 50 1400 900 As
d 0 1200 n e u
850 u 2.5% l
(50) Va & F 1000 0 M
800 0 M (100) 800 n i
2.0% e 750 S&P 5 g
n (150)
600 a h
C 700
e (200)
400 v
1.5% ti Cum change in T/E Bond Fund Assets a l Cum change in Taxable Bond Fund Assets 650 u (250) 200 Cum change in Money Market Asset m
u S&P 500 C (300) 600 l l r 0 1.0% r r n n n y y b b u u pr p a a un u a a a a e e 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 J J A A J J - - - - 1-J 3- 8- r-7 r-7 r-7 r-7 r-7 r-8 r-8 r-8 r-8 r-8 r-9 r-9 r-9 r-9 r-9 r-0 r-0 r-0 r-0 r-0 15-J 6-M 17 22 14 28 11-F 25-F 11-M 25-M p p p p p p p p p p p p p p p p p p p p 20-M A A A A A A A A A A A A A A A A A A A A
1 Source: Bureau of Economic Analysis, Goldman Sachs. Data as of May 11, 2009. Past performance is not indicative of future results. 2 Source: AMG, Goldman Sachs. Data as of July 23, 2009. All data shown is for 2009. Past performance is not indicative of future results. Recent data shown rather than extended history to highlight recent trend. 23 State of the Markets The Bursting of the Consumer Bubble Creates Headwinds
The US savings rate has been around 1.6% this past decade, Savings Rate vs Consumer Credit1,3 but it is projected to climb to 6-10% in the near future1,4
The increase in the US savings rate may be a structural 14.0% Fo recasted change rather than a cyclical change 140% deleveraging of the 12.0% ● Savings may need to increase to replace the $13 trillion consumer decline ($63 trillion to $50 trillion) in US wealth since mid- 120% 10.0% 20072,3 8.0% 100% ● Savings may increase as baby boomers increase saving 6.0% rates as they age4 80% 4.0% ● Savings may increase because the credit markets will 60% Forecasted 2.0% constrain consumers as they try to spend out of future and increase in savings current wealth4 40% 0.0%
9 9 Savings could be used to deleverages consumer balance 9 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1 2002 2005 2008 sheets Consumer Credit / Disposable Income (%) (LHS) Personal Savings Rate (%) (Savings / Disposable Income) (RHS)
1 Source: BEA . Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. Past performance is not indicative of future returns 2 Source: GS Calculations. Assumptions: $10.6 trillion disposable income (2008). Savings rates increases from 1.8% to 10%. Home prices fall 15%; Stock prices fall additional 25% from Q3 2008 data 3 Source: Fed Flow of Funds. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. Past performance is not indicative of future returns 4 Source: Goldman Sachs. "The Day After Tomorrow: The changing face of the consumer." October 1, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=5955848 24 State of the Markets US Equity Valuations Driven By The Consumer
Equity values might have downside Peak earnings in the last cycle may be difficult to replicate given fundamental changes in the financial, energy, and, most importantly, the consumer sectors Combined, the financial and the consumer sectors accounted for over 50% of peak S&P income in mid-20072
S&P 500 Historical Earnings1 S&P 500 Earnings Contribution by Sector2 S&P 500 Earnings in 2009 Dollars 1May1954 28Jul2009 90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0 1963 1973 1983 1993 2003 S&P 500 Earnings in 2009 Dollars 10yr Rolling Average US Recession S&P 500 Earnings in 2009 Dollars
1 Source: Goldman Sachs. As of July 23, 2009. Past performance is not indicative of future returns 2 Source: Goldman Sachs Research. “Where We Stand Now: US Equity Market Outlook for Turbulent Times” November 10, 2008. p. 29. Data as of October 31, 2008. Past performance is not indicative of future returns. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6194686&fn=/document.pdf The chart shows Net Income, defined as “earnings before extraordinary items available to common shareholders.” Only positive data points are included. 25 State of the Markets Overview Summary of Strategies To Implement These Views If you believe this thesis, then… US Real Estate Public Balance Sheet US Retail and Market Neutral Section Japan Commodities Markets Conditions Consumer Opportunities Capitalize on the Economic fundamentals favor EM Position for a Position for lower Position for stronger crude Capitalize on event-driven divergence in CRE price balance sheets as developed weaker economy consumer spending oil demand, weaker USD situations to generate estimates between REITs economies increase public debt with slowing and a weaker and inflation attractive risk-adjusted equity and CMBS markets exports as well as economic outlook returns with low correlation to Strategy US faces high government increasing At the same time, broad market movements borrowing, unaddressed social government debt capitalize on the slack in liabilities, and the potential long-term refining capacity and high erosion of the USD as the global implied volatility on reserve currency aluminum options Short REIT Equity Short debt-laden developed Sell The Yen Buy 5y or 7y CDS Buy long-dated oil Merger / Risk Arbitrage economies/ long select emerging Protection on Retail Long CMBS through economies Buy CMS Caps and Consumer Short the crack spread Stubs/ Holding Companies buying AAA CMBS or on JPY Rates Related CDS selling protection on AAA Buy USD, JPY or EUR Puts vs. Calls Sell calls on aluminum Spin-offs CMBX on the currencies of commodity- Buy 6m or 1y Put Dual Share Class exporting countries (AUD, BRL, CAD, Spreads on the S&P NOK) Retail Select Index. Capital Structure Arbitrage Trade Ideas Consider selling a Call Buy the equities of non-US to cheapen the option commodity producers
Buy GS inflation Proxy Commodity index
Sell Caps on the US Tax Index/ Receive the SIFMA ratio Puts or put spreads may Buy FX currency forwards/FX options Sell the Yen The investor may Buy Knock-in or Knock-out Hedged purchases of be purchased on a REIT (to express a view on sovereign credit) outright, or buy choose to buy Call options on oil to take a target company shares equity index or a basket of JPY puts / USD protection on long-term constructive view individual names in the Buy CDS protection on low beta calls or JPY puts / individual names or on Create synthetic positions Retail and Office sectors developed countries/ Sell CDS KRW calls a broad basket Buy two contracts of to benefit from price-to-net- protection on select EM economies Crude Oil and Short one asset ratios Description Buy non-TALF eligible Buy an OTM Call Puts, put spreads, contract each of Gasoline CMBS AAA bonds of late Currency trades may be executed on option on JPY 10y and put spread collars and Heating Oil to take a Exploit inefficiencies in 2006 or early 2007 individual crosses, or as a basket rates struck at 3% may be purchased on bearish view on refining shares of newly listed entities Vintage A3/A4s or 4% the S&P Retail Select margins The US Tax Index tracks the US Relative value arbitrage of Index, a similar ETF, Federal Marginal Income Tax Rate share classes and capital Sell protection on the or a custom basket of Sells call options on structure CMBX 5 AAA tranche equities aluminum
For Discussion Purposes Only. All options mentioned are OTC options. Please see the Risk Factors section of this presentation as well as each section’s trade summary page for important risks and considerations to these products and trades 26 Table of Contents
I. State of the Markets
II. Tradable Themes I. US Commercial Real Estate II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III. Other Market Opportunities I. Commodity Opportunities II. Event-Driven Market Neutral Investing
IV. Appendix V. Legal Disclosures
27 US Commercial Real Estate Markets Residential Housing Market Continues to Weaken Agency Conforming Home Prices Appear to be Stabilizing
US Home Price Appreciation (YOY)1 60+ Day Delinquencies (%) 2 20% 50% 60+ Delinquency Rate (OTS) 5.0% 15% 40% 4.0% 10%
5% 30% 3.0% 0% 20% 2.0% -5% 90 92 94 96 98 00 02 04 06 08 -10% 10% 1.0% -15% 0% 0.0% OFHEO Home Price Index -20% 5/07 8/07 11/07 2/08 5/08 8/08 11/08 2/09 5/09 -25% National S&P Case-Schiller Home Price Index Subprime Option ARM Alt A Pr ime ( R ) Year Over Year HPI 1Q 20093 1st Lien Loss Severity2
80% 80% WA 1st Lien Loss Severity MT ND ME 70% 70% VT OR MN NH ID SD WI NY MA 60% 60% CT WY MI RI IA PA 50% 50% NE NJ NV OH IL IN DE UT 40% 40% CO WV MD CA KS MO VA KY DC 30% 30% NC TN AZ OK > 0% 20% 20% NM AR SC GA MS AL (4)% – 0% 10% 10% TX LA 0% 0% (8)% – (4)% AK FL 5/07 8/07 11/07 2/08 5/08 8/08 11/08 2/09 5/09 HI < (8)% Subprime Option ARM Alt A Pr ime 1 Source: Office of Housing Enterprise Oversight (OFHEO), CSW 2 Source: LoanPerformance. Data shown for recent years to show recent trend. 3 Source: FHFA. http://www.fhfa.gov/Default.aspx?Page=87 Data accessed July 21, 2009 29 Commercial Real Estate Beginning To Take Center Stage
Commercial Prices Are Falling And Trailing Residential 1 Historic And Expected Cap Rates Relative to CRE Values2
300.00
250.00
200.00
150.00
100.00
50.00 Commercial Real Estate (MIT) Residential Real Estate (CS) 0.00 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Vacancies Are Increasing (Retail Most Rapidly) 2 Cumulative life-time losses, by vintage (%)3
1 Source: Goldman Sachs, MIT Center for Real Estate, Moodys/REAL Commercial Property Price Index, S&P/Case-Shiller. Data as of July 28, 2009. Past performance is not indicative of future returns. 2 Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf 3 Source: Goldman Sachs Research. “Stress-testing losses for higher cap rates and financing costs” October 31, 2008. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6135768&fn=/document.pdf 30 CRE Historic Default Rates Shed Some Light…
From the period between 1978-1990, 10-yr default rates peaked as commercial real estate appreciation was at the lowest in eight years From the period between 1995-2006, historical and projected life defaults declined significantly as commercial real estate appreciated in value
Default Rates and Property Values 1978 – 19901,2 All Property2,3
30% 6% 14% 20%
18% 4% 12% 25% ) ) )
% 16% % ( (% (
2% n² s¹ t o 10% on²
l 14% i ) i
20% t a at au i (%
c ¹ ef e 0% eci 12% te r
D 8% a r ppr pp Y 15% A
A 10%
l -2% ult R al 10- a
f 6%
e 8% nu cal nnua D i 10% n A or A
-4% 6% E E 4% st R i R C H C 4% 5% -6% 2% 2%
0% -8% 0% 0% 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Vintage Vintage
Historical 10-Yr Defaults¹ (left) CRE Annual Appreciation² (right) Historical Default¹ (left) Projected 10-Yr Defaults¹ (left) CRE 10-Yr Annual Appreciation² (right)
1 Source: Esaki et. al. Please note that this data is for the period 1978-1990 only. Past performance is not indicative of future results. 2 Source: National Council of Real Estate Investment Fiduciaries (NCREIF). Please note that this data is for the period. Past performance is not indicative of future results. 3 Source: Commercial Mortgage Securities Association 31 CRE Equity May Have Further to Fall… Or May Be Completely Wiped Out…
CRE values are estimated to have declined approximately 26% from the peak1, and could potentially decline a further 20-30%2 according to S&P's rating stress for CMBS A handful of recent transactions have sold in the market 60-65% down from peak February 2007 prices (e.g. Worldwide Plaza in New York which sold on July 9, 2009 for $600mm after a previous sale of $1.74bn in February 2007)4 Secured financing markets remain closed and government programs seem to be doing little to help
Sources of Acquisition Financing3 CMBS Securitization Has Effectively Stopped3
As of March, 2009 As of April, 2009
1 Source: MIT Transactions-Based Index. http://web.mit.edu/cre/research/credl/tbi.html. Data as of July 12, 2009. Past performance is not indicative of future results 2 Standard and Poors "US CMBS Rating Methodology and Assumptions for Conduit/Fusion Pools". June 26, 2009. 3 Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf 4 Source: Wall Street Journal. “Deutsche Bank to Sell New York Skyscraper”. July 7, 2009. http://online.wsj.com/article/SB124692321690102803.html 32 Retail May Consolidate To Correct Accelerated Growth Store Closings May Hurt Commercial Real Estate Property Owners
US REITS have raised $13bn YTD in capital1, however they may still need $40-60bn1 more, even without further reduction in values Vacancy rates have begun to rise geometrically in specific CRE sectors, with Retail and Suburban Office nearing 17%2. Goldman Sachs Research expects 15% obsolescence with roughly 200 regional malls closing in the next 5-10 years3 ● Retail square footage per capita has increased but retail sales have fallen ● Regional Mall construction peaked from the late 60s – early 80s averaging almost 13% annual growth and retail stocks grew by about 2% per year, while the population only grew by about 1% per year3
Retail Stock Square Footage Per Capita3 Retail Growth Has Outpaced Population Growth3
1 Source: Goldman Sachs Research. “Americas: Real Estate” May 11, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7147135&fn=/document.pdf 2 Source: Goldman Sachs Research. “Americas: Retail: Broadlines: Retail REITs: Final Four a Destination, but still a few rounds away”. July 14, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7480830&fn=/document.pdf 3 Source: Goldman Sachs Research. “Americas: Real Estate” July 21, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7508032&fn=/document.pdf Paste performance is not indicative of future returns 33 REIT Equity Prices Have Risen… …But Property Values Have Continued to Fall
REITs as a broad Index (DJUSRE Index GP
100 95 250
90 90 200 80 85 150 l
e 70 80 v Pric 100
Le 60 75 x e 50 50 70 Inde 40 65 0 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 30 60 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 20 55 4 2007 2008 2009 CMBS Implied Losses Tranche Avg Attch Avg Exhst Markit AAA Implied Collat Implied Price** Spread** WAL* Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Name Point* Point* PV01*** Loss** Loss** CMBX 1 AAA 29.76% 100.00% 89.25 211 5.34 6.01 12.38% 26.65% CMBX AAA On-The-Run (RHS) CMBX 5 AAA 29.76% 100.00% 75.50 433 6.15 7.99 30.21% 45.97% Dow Jones Real Estate Index (DJUSRE) (LHS: Jan 1 2007 = 100) 1 Source: Goldman Sachs. Data as of July 20, 2009. Past performance is not indicative of future results 2 Source: MIT Transactions-Based Index. http://web.mit.edu/cre/research/credl/tbi.html . Data as of July 12, 2009. Past performance is not indicative of future results 3 Source: Goldman Sachs Analysis. As of July 10, 2009 4 Source: * = Intex; ** = GS; *** = Markit 34 REIT Equities and CMBS May Imply Different CRE Losses There May Be A 25% Mis-pricing In Loss Expectations For CRE
Real Estate Structures ( February 2007) 1 Market Prices and Implied Losses (Current) 2 REIT CRE Loan CMBS REIT CRE Loan CMBS Implied Market Price Chg Pricing
Commercial Debt CMBS Debt Debt CRE Loan Commercial Property 40% Recovery Pool AAA Debt AAA Property 40% (Asset) 53% (Debt) (Asset) Commercial Commercial 70% CRE Loan 70% 75.5 Property Property Pool Equity (Asset) (Asset) (Debt) -32% Equity Market Market -17% Market Change 60% Equity Mezz Change 27% Change -65% -62% -30% -27% 30% -47% 3% -38% -3% Impact of CRE Price Decline On REIT Equity and AAA CMBS3 Structure As Implied By Market Prices2 REIT Equity Performance: -64% CMBS AAA Price: 75.5 0% REIT Equity AAA CMBS Orig. Debt Value 40,000,000 CRE Debt Orig. Value 70,000,000 Orig. Equity Value 60,000,000 CRE Equity Orig. Value 30,000,000
7 -20% 0 0 2 y
r Debt Value 40,000,000 Loss on CMBS 47% -40% ua Equity Value 21,620,000 br Fe
.
s -60%
v Equity Loss 38,380,000 CRE Debt Loss 33,005,000 ue l Debt Loss 0 CRE Debt Value 36,995,000 a -80% V Debt Recovery 100.0% Equity Value 0 nt e r
ur -100% C CRE Property CRE Property 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% Original CRE Value 100,000,000 Original CRE Value 100,000,000 -120% Current CRE Value 61,620,000 Current CRE Value 36,995,000 CRE Implied Loss Change in CRE Value -38% Change in CRE Value -63% Structures are hypothetical and used for illustrative purposes only. All levels (prices) are indicative and there is no representation that any transaction can or could have been effected at such level (price). Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 1 Source: Goldman Sachs. REIT Structure based on average LTV of 75 REITs as of February 2, 2007. CRE / CMBS structure illustrative assuming 70% LTV and 30% Subordination for CMBS. 2 Source: Goldman Sachs. Data as of July 20, 2009. Equity REIT performance based on US REIT Index performance 2/2/2007 – 7/20/2009. CMBS performance based on price of 75.5 for CMBS 07-2 AAA 3 Source: Goldman Sachs as of July 20, 2009. Assumptions: REIT LTV 40%, CRE Loan LTV 70%, AAA Subordination 30% 35 US Commercial Real Estate Market Implementation
If you believe this thesis, then: Description Puts can be purchased on a REIT equity index or on a basket of individual names in S the Retail and Office sectors H Buy a put outright or cheapen the cost by selling a further out of the money put to O Buy 1-2yr Puts or Put create a put spread R Spreads on REITs Loss is limited to premium paid T Risk: The Investor stands to lost the entire option premium if REIT equities decline less than anticipated
Buy non-TALF eligible CMBS AAA Bonds of late 2006 or early 2007 Vintage A3/A4s Collect a regular stream of cash flows and potentially benefit from price appreciation Buy AAA CMBS Goldman Sachs trading desks maintain an inventory of bonds L Risk: the underlying loans may cease to pay their mortgage payments which O could impair the value of the bond price and impact cash flows N G Sell protection on the CMBX 5 AAA tranche Sell Protection on AAA CMBX Risk: CMBX spreads may widen exposing the investor to a loss
Note: For discussion purposes only. 36 Public Balance Sheet Conditions Currencies And Sovereign CDS May Present Unusual Opportunities…
Foreign Exchange markets may be driven by a number of factors, including: ● Interest rates, terms of trade, labor productivity, perceived safety of the country/currency Foreign Exchange spot markets are sensitive to short term catalysts while forwards and implied volatility project slower moving trends Developed economies credit spreads may suffer relative to emerging countries
Currency, Credit, and Commodity Production Road Map1 USD Generally Trending Weaker?2
14Jul2005 14Jul2009 1.35 70% Norway Size of bubble = GDP 1.3 Return 60% to Germany 1.25 trend?
P Sweden D 1.2 50%
G USD Gradual
% 1.15 Decline s t r 40% Canada Australia
po 1.1 x
E France South Korea 1.05 od 30% Italy m Russia 1 om New Zealand Mexico
C Japan 20% 0.95 China 0.9 Indonesia Argentina 10% United States Turkey Financial United Kingdom Brazil (CDS = 2,233bp) 0.85 2005 2006 2007 2008 Crisis 2009 0% Jan Jul Jan Jul Jan Jul Jan Jul 0 100bp 200bp 300bp 400bp EURUSD USD Index Commodity Currency Basket vs USD Credit Spread 1 Sources: Sovereign Credit Spreads from Goldman Sachs as of July 13, 2009. Commodity Exports from the UN (http://comtrade.un.org/db/default.aspx), GDP data from CIA world factbook (www.cia.gov). Chart represents countries in the G20 for which Goldman Sachs trades and tracks sovereign CDS levels and the country’s currency. In addition to G20, the chart also includes New Zealand, and Norway which are not in the G20 but which are in the Commodity Currency basket highlighted in this presentation. 2 Source: Goldman Sachs. Data as of July 13, 2009. Past performance is not indicative of future returns. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 38 Global GDP Growth Attributable to Current Accounts The Balance Is Shifting
The current account balance summarizes the flow of goods, services, income and transfer payments into and out of a country Persistent current account deficits may lead to a natural depreciation of a currency, as importing, and making income and transfer payments usually reflect that one’s currency is leaving the country to make payments in a foreign currency Significant GDP growth has been attributed to the increasing imbalance in US account deficits
Cumulative Current Account Balance (1980- 2008)1
1 Source: IMF: World Economics Outlook Database, data shown in USD billions. Note that some countries do not report its data to the IMF or have not reported such data from 1980 39 Trade Resulted In Skewed Current Account Balances Driving Tremendous Growth in World GDP Current Account positions as a percent of GDP have shifted more in Asia versus developed economies Aggregation of International Reserves have outpaced current account shifts in emerging economies Real GDP Growth (% Chg YoY)1 Contribution to Total GDP Growth (PPP Basis, %, 3y Avg)1
10 6 Other Developing China 8 5 United States Other Advanced 6 4 4 3 2 2 0 1 -2 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 0 -4 Advanced economies 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 -6 Emerging and developing economies -1 197 197 197 197 197 198 198 198 198 198 199 199 199 199 199 200 200 200 200 200 Current Account Positions (% of GDP)1 International Reserves (2000 = 100, 3m Moving Avg)1 Latin America Emerging Europe Middle East Asia US Latin America Emerging Europe Middle East Asia US 25 1200
20 1000 15 800 10 600 5
0 400
-5 200
-10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 20002001 2002 2003 2004 20052006 2007 2008 2009
1 Source for all graphs: IMF World Economic Outlook, April 2009 http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm. Past performance is not indicative of future results. 40 Developed Economies Have Become Debt Laden, and Deployed Massive Liquidity With Record Velocity…
While IP and Employment has diverged favoring emerging balance sheets
Central Bank Total Assets (2007 = 100)1 Quantitative Liquidity Measures (% GDP) 1 400 12 Euro area Base money plus reserves 350 UK 10 Reserves US 300 Japan 8 Base money 250 6 200 150 4 100 2 50 0 0 -2 1 4 3 2 1 4 3 2 1 4 3 2 6 7 7 7 7 7 7 8 8 8 8 8 8 9 200 200 200 200 200 200 200 200 200 200 200 200 200 200 2000Q 2000Q 2001Q 2002Q 2003Q 2003Q 2004Q 2005Q 2006Q 2006Q 2007Q 2008Q Industrial Production (% Chg YoY)1 Employment (% Chg YoY)1,2 20 4 15 3 10 2 5 1 0 0 -5 -1 World -10 -2 Advanced economies (2) United States Euro area -15 -3 Emerging economies (1) Japan Brazil * -20 -4 0 1 2 3 4 5 6 7 8 9 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200 200 200 200 200 200 200 200 200 200 1 Source for graphs: IMF World Economic Outlook, April 2009 http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm. Past performance is not indicative of future results. (1) Emerging Economies: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Estonia, Hungary, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, Slovak Republic, South Africa, Thailand, Turkey, Ukraine, and Venezue la. (2) Advanced Ecomonies: Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States. World Trade 2 Brazil employment data from Haver 41 Foreign Demand for US Treasuries May Dictate Rates And USD “...The ability to float large amounts [of debt] in the short to …medium-term depends on the credibility of a longer term plan that brings the deficits down. If market don’t think that you’re on a sustainable path, then they will bring forward in time their concern about the future deficits”1 Federal Reserve Chairman Ben Bernanke “Bond markets in general, and US government bonds in particular, are staring at the prospect of a lower allocation of sovereign investments. The declining share will reflect a natural diversification in the asset allocations of SWFs”2 Mohamed El-Erian
Foreign economies are becoming increasingly less dependent on US Chinese Exports4 demand because of growth in domestic consumption in the emerging markets and Europe ● From 1995 to 2007, US share of Chinese exports declined from 31% to 23%2 ● Changes in composition of trade may lead to concomitant changes in reserve accumulation Foreign investors are developing more sophisticated approaches to investing and asset allocation, as evidenced by the growth of sovereign wealth funds (SWF’s) ● Surplus countries have increasingly begun to direct reserves towards investments with higher expected long term real returns than treasuries4 Foreign in vestors would not need to sell their existing reserves to have an impact on the US’ ability to finance its deficit – all they would need to do is slow their rate of accumulation5 ● According to House Budget Committee testimony, if, over the course of one year, foreign investors maintained their current amount of US government bonds holdings but did not accumulate additional holdings, long rates could rise by at least 100 basis points6
1 Source: Ben Bernanke Testimony before House Financial Services Committee. July 21, 2009. 2 Source: When Markets Collide, 2008, Mohamed El-Erian, p. 138 3 Source: Financial Times, Fears for level of interest as US gears up for huge Treasury bond issuance, 28-Oct-08 4 Source: Goldman Sachs, Global Economics Paper: BRICs Monthly, 22-Jul-08 5 Source: Goldman Sachs, Global Economics Paper: In defense of Sovereign Wealth Funds, 21-May-08 6 Source: Testimony of Brad Setser Before House Budget Committee, 26-Jun-07 42 The Combination of Increasing US Debt and Budget Deficit May Force a Continued Devaluation of the US Dollar
US Balance of payments has increased (less negative) substantially in the past 6 months, while the USD and Treasury bonds became a store of wealth during the financial crisis. Meanwhile, the US has begun running a current budget deficit of ≈ $1.2 trillion, equal to nearly 75% of its annual revenues (excluding Social Security tax collections) Large projected social services expenditures may put continued pressure on deficits – causing dollar devaluation/higher US taxes
US FX / Budget / Balance Of Payments Calculation1 Projected Social Security and Medicare Costs2
Billions of 2009 Dollars 1,500 1.80 $100 1.60 1,000 $0 1.40 ($100) 500 1.20 te ) ($200)
1.00 a n Medicare HI cash deficit
b 0 0.80 R ($ ($300) Fx Social Security cash deficit (2016) (500) 0.60 ($400) 0.40 (1,000) 0.20 ($500) (1,500) 0.00 ($600) 0 2 4 6 8 0 2 4 6 8
9 9 9 9 9 0 0 0 0 0 ($700) Social Security Cash Flow Medicare HI Cash Flow an- an- an- an- an- an- an- an- an- an-
J J J J J J J J J J ($800) 2009 2014 2019 2024 2029 2034 US Balance of Payments US Annual Deficit/Surplus (-) EURUSD AUDUSD
1 Source: Congressional Budget Office, Goldman Sachs. Past performance is not indicative of future returns 2 Source: Goldman Sachs analysis of data from the Office of the Chief Actuary, Social Security Administration and Office of the Actuary, Centers for Medicare and Medicaid Services. Note: Projections based on the “intermediate” assumptions of the 2009 Trustees’ Reports. The CPI is used to adjust from current to constant 2009 dollars. Data accessed July 28, 2009. Analysis methodology from Government Accountability Office. http://www.gao.gov/cghome/d08446cg.pdf, slide 10. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 43 Trade 1: Short the USD vs. Currencies of Commodity Producers
6 If you believe in this thesis, consider going long a basket of AUD, FX Basket v. GSCI – Regression of 6m Returns: 2003-2009 CAD, NOK and BRL against the USD 20%
10% Commodity-linked currencies have demonstrated a positive correlation to s n commodity prices1, fundamentals in the commodity market may point to r
tu 0% upside risk in commodity prices2, and commodity prices may rise in periods of USD inflation Re -10% m - 6
t -20%
We choose an equally weighted basket of AUD, CAD, NOK, and BRL due e k to their sensitivity to commodities and relative lack of EM currency risk: s
a -30% Eq: -0.010+0.343X B
Rsquare: 68.077
X AUD: The Australian Bureau of Agricultural and Resource Economics -40% estimates that Australia will export ~$150bn of commodities in fiscal F -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 year 2009 (July08-July09)3 GSCI - 6m Returns CAD: Canada is second to Saudi Arabia in oil reserves and exported FX Spot: (CAD, AUD, NOK, BRL) Basket v. Fair Value7 ~2.4 mm bbl/day to the US in 2007, the highest share (19%) of US 28Jul1999 28Jan2010 petroleum imports in 20074 1.2 NOK: Norway is the world’s third largest gas exporter. Petroleum 1.1 exports account for half of all exports and 30% of state revenue5 1 BRL: Brazil has run current account surpluses since 1992 (with exports of $200mm in 2008 and is a significant producer of iron ore 0.9 and soybeans)5 0.8 Though USD already begun to weaken as investors re-risk, relative 0.7 to recent past and fair value, entry points may be attractive 0.6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 FX Basket Spot FX Basket Fair Value 1 Source: Goldman Sachs, as of 13-Apr-09. GS Commodity Research, “Commodities, Asset Returns and Inflation,” 25-Jun-07. https://360.gs.com/gs/portal/home/?action=action.doc&d=3719244 2 Source: Goldman Sachs Commodity Research, “2009 Outlook: Pricing Supply Destruction”, 11-Dec-08 https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6384255&fn=/document.pdf 3 Source: http://www.abare.gov.au; 4 Source: http://www.eia.doe.gov/cabs/Canada/Oil.html 5 Source: CIA world factbook: https://www.cia.gov/library/publications/the-world-factbook/countrylisting.html 6 Source: Goldman Sachs Sales and Trading. Indicative as of 20-Apr-09. Regression of rolling 6 month returns for the GSCI index and FX Basket from Oct-03 to Apr-09 7 Source: Goldman Sachs. Indicative as of 28-Jul-09. Fair value data is derived from the Goldman Sachs Dynamic Equilibrium Exchange Rate (GSDEER) model, a purchasing power parity model that incorporates productivity, terms of trade and trends in the current and capital accounts - Global Viewpoint Jan 07 - The Evolving GSDEER Currency Model https://portal.gs.com/gs/portal?st=1&action=action.binary&d=2971163&fn=/document.pdf . Past Performance is not a reliable indicator of future performance. The above is based upon simulated historical analysis of the Basket. GS provides no assurance or guarantee that the Basket would have operated in the past in a manner consistent with the above analysis. GSDEER levels are not intended as forecasts, and the FX basket may or may not perform in-line with the fair value estimates produced by GSDEER 44 Note: For Discussion Purposes Only. Trade 2: Long Non-US Commodity Producing Equities
If commodity prices rally in a cyclical recovery or following inflation 2 or a devaluation of the dollar, equities of commodity producers may Historical Performance of GSGLCPXU vs. S&P 500 rally 3.5
Goldman Sachs has created a basket of 95 such commodity and 3 basic material producers. The basket constituents are available on Bloomberg by entering GSGLCPXU
Risks to this trade: Global macro-economic conditions continue to deteriorate and demand for commodities weakens or stagnates. For Discussion Purposes Only. All options mentioned are OTC options. 1 Pricing indicative only as of July 29, 2009. 2 Source: Bloomberg. Data as of July 28, 2009. Past performance is not indicative of future results. GSGLCPXU GIC Sectors: Construction & Engineering; Construction & Farm Machinery & Heavy Trucks; Diversified Chemicals; Diversified Metals & Mining; Electrical Components & Equipment; Fertilizers & Agricultural Chemicals Forest Products; Gas Utilities; Gold; Heavy Electrical Equipment; Highways & Railtracks; Industrial Conglomerates; Industrial Gases; Industrial Machinery; Integrated Oil & Gas; Oil & Gas Equipment & Services; Oil & Gas Exploration & Production; Paper Products; Precious Metals & Minerals; Steel 45 Trade 3: Commodities Based Approach Goldman Sachs Inflation Proxy Commodity Index
The Inflation Proxy Commodity Index has been created as a hedge Inflation Proxy Commodity Index (Dollar Weightings) against both rising inflation and unanticipated inflation Corn, 10% Gold, 20% The index is made up of S&P GSCI Enhanced Strategies in Energy Soybeans, (50%), Industrial Metals (10%), Agriculture (20%) and Gold1 (20%) 10% ● Based on historical data, the basket would have been a good proxy for both US CPI and unanticipated US inflation with an Copper, 5% average annual correlation over the past 10 years of 76% and 73% respec tively Aluminum, 5% Based on historical data, the Inflation Proxy Commodity Index has a high R-square of over 73.5% with US CPI, and over 57% with unanticipated US inflation2 Heating Oil, 10% Gasoline, 40%
Inflation Proxy Commodity Index v. Unexpected Inflation2 Inflation Proxy Commodity Index v. Actual Inflation3
2% 140% 103% 140% 1.5% 130% 102.5% 130% 1% 102% 120% 120% 101.5% 0.5% 110% 101% 110% 0% 100% 100.5% 100% -0.5% 100% 90% 90% -1% 99.5% 80% 80% -1.5% 99% 98.5% -2% 70% 70% 98% -2.5% 60% 60% 97.5% 50% -3% 97% 50% -3.5% 40% 96.5% 40% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 High Low Avg. Last High Low Avg. Last Quarterly change in Unexpected Inflation (LHS) 1.8068% -3.4791% -0.151% 0.5018% Quarterly change in US CPI (LHS) 102.6343%96.7541% 100.6421%100.5374% Quarterly change in Inflation Proxy Commodity Index (RHS) 130.7708%44.5202% 103.9905%104.644% Quarterly change in Inflation Proxy Commodity Index (RHS) 130.7708%44.5202% 103.9905%104.644% 1 Gold underlier is the S&P GSCI Gold Index, not an enhanced strategy. 2 Over a 3 month horizon. Source: Goldman Sachs. Past performance not indicative of future results. Unanticipated inflation = US Consumer Price Index Change – US Treasury Bill Return. Past performance is not indicative of future return 3 Source: Goldman Sachs. Indicative only as of 01-May-09 Source: NYMEX, CBOT, CME, COMEX, LME 46 Tax Rates In The US May Increase
In addition to a substantial unaddressed social benefits liability, the Marginal Tax Brackets in the US: Historical Snapshot1 current borrowing might lead to substantially higher US tax levels 1980 1974 1968 2009 During the 1970’s, the highest Marginal Tax Rate (income over 80% $200,000) was at 70% 70% 60% e Post the ’81 and ’86 Tax reforms by Reagan, the major lever for t 50% 40%
Congress to control Deficit and debt levels was increased taxes x Ra 30%
(Bush I & Clinton) Ta 20% Relative to the rest of the world US Federal taxes remain low (although 10% State taxes take us near the top rates) 0% 0 100 200 300 400 500 600 700 800 900 Brackets ($000s) 1000 1100 Budget Deficit / Surplus / Highest Marginal Tax Rate2 Highest Marginal Tax Rate By Country3 60% 80% Reagan (ERTA: Aug81) 70% 50% Bush (OBRA: Nov90) 60% Bush II (EGTRRA: Jun01) 40% 50% 30% 40%
30% 20%
20% Reagan (TRA: Oct86) 10% 10% Bush II (JGTRRA: May03) Clinton (RRA: Aug93) 0% 0%
y y y k g e a a a n e l y i d i c r lic m co l m e es i c ri
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 a l a t ar re k any ar gal pan e nds xi ada den and iu wa It b ra at r l land s r t t u a e e r anc aland u eland la nland t o m lg bou Sp r i elan s Ko J an e r nm e p c w e r Tu ngdo epub S Me P Au I F ung F i I z er o Gr e No C S B Z it her Au em H P R t D G
Highest Marginal Income Tax Rates Total Federal Debt less Government Held as % of GDP ed Re x w w k e it h e a S n ed K N c Lu it N U e ov n l U S Cz 1 Source: Tax Foundation. http://www.taxfoundation.org/taxdata/show/151.html. Data accessed July 27, 2009. Pre-2009 tax brackets were converted to 2009 dollars using the Consumer Price Index (CPI) for All Urban Consumers. Source for CPI data: Bureau of Labor Statistics. Past performance is not indicative of future returns. 2 Source: TaxPolicyCenter.Org Data accessed July 21, 2009. http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=199&Topic2id=20&Topic3id=23, http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213 3Source: OECD 47 US Debt as a Percentage of Tax Revenues Has Climbed
In addition to potential taxes associated with the Obama healthcare reform, an automatic increase of 4.6% to the highest tax bracket will occur in 2011 In July the US Congress passed “Pay As You Go” legislation which mandates a reduction in expenditure or increase in revenue for any new project Currently, to return Federal Debt to its 30 year average to annual revenues would take approximately a doubling of those revenues
US Federal Debt and Reserves1 US Tax Revenue By Type (2008)1 1% 1% 2% 10,000.0 350% 3% 9,000.0 300% 8,000.0 45% 7,000.0 250% Individual Income Tax 6,000.0 200% Corporate Income Taxes 5,000.0 Social Insurance Taxes 4,000.0 150% 36% Excise Taxes 3,000.0 100% 2,000.0 Estate and Gift Taxes 50% 1,000.0 Customs Duties 0.0 0% Miscellaneous Receipts 969 971 973 975 977 979 981 983 985 987 989 991 993 995 997 999 001 003 005 007 009 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2
Total Federal Revenues (Income Tax) Total Federal Revenues (All Other) 12% Total Publicly Held Debt % Debt/Revenues (rt)
1 Source: Congressional Budget Office 48 Taxes May Need to Look Like 1970’s to Normalize the Ratio of Debt to Revenues…
Since 1969, the average ratio of debt to Revenues has been 196%, given total publicly held debt of $8.7 trillion by year end, we would need to raise revenues from $2.4 trillion to $4.4 trillion Doubling the income tax would only raise $1.1 trillion The highest earning 15% of households pay over 60%of all taxes collected Federal Non-Discretionary spending as a % of total spending has continued climbing leaving much less flexibility for adjustments. Interest cost on debt may reach 15% of expenditure by the year end2
Taxes Paid By Household Income1 Discretionary/Non-Discretionary Spending2
Percent of Total Outlays 35,000,000 30.00% 100% 30,000,000 25.00% Net Interest
25,000,000 80% 20.00% Discrectionary 20,000,000 60% 15.00% 15,000,000 10.00% 40% 10,000,000 Proj. 20% Mandatory 5,000,000 5.00%
0 0.00% 0% 0 - 25,000 - 50,000 - 75,000 -100,000 -150,000 -200,000 -250,000 1962 1970 1978 1986 1994 2002 2010 2018 25,000 50,000 75,000 100,000 150,000 200,000 250,000 and Greater
Number of Households % of Taxes paid Estimated Effective Tax Rate 1 Source: Census Bureau, Internal Revenue Service 2 Source: Congressional Budget Office. Historical Data from: "A Preliminary Analysis of the President's Budget and an Update of CBO's Budget and Economic Outlook" March 20, 2009, Table F-5. http://www.cbo.gov/budget/historical.shtml. Projections: “ An Analysis of the President's Budgetary Proposals for Fiscal Year 2010. June 16, 2009, Tab 1-5. http://www.cbo.gov/budget/budproj.shtml. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 49 Trade 4a: US Tax Index Cap Strategy – Sell Caps
USD-US Tax Index – [BBG – MUNRMSLR Index] The Index is the daily inverse of the 90 day weighted average yield on high-grade tax-exempt bonds divided by the previous Description: 90 day reset yield of taxable bonds. The tax-exempt and taxable yields are represented by the SIFMA Municipal Swap Index and the 3 month LIBOR, respectively.
The USD-US Tax Index represents the value of tax-exempt income to investors in the short-term market, expressed as a percentage. There is no restriction on the Index falling below zero. Historically, the Index has tracked the US Federal Marginal Income tax rate, with three other major forces: Index Value: Absolute level of U SD interest rates Trading supply and demand US Federal Tax Rate for individuals and corporations
USD-US Tax Index Historic Pricing and Statistics1
Statistic 1994-YTD Area1 Ex Area1 140.00% Min 25.88% 53.84% 25.88% 7.00
x Max 115.02% 96.25% 115.02% e
d 120.00% Average 68.07% 80.59% 64.40% 6.00 Stdev 11.58% 7.35% 9.91% ) In % x
100.00% 5.00 ( a e t T a d 80.00% 4.00 n R s a d te
60.00% 3.00 n a Area 1 R Fu x 40.00% 2.00 d a Fe T
S 20.00% 1.00 U 0.00% 0.00 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1 - US Federal Tax Rate USD-US Tax Index Fed Funds Rate
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns. 50 Trade 4b: Receive the SIFMA Ratio
Market Dynamic Commentary Ratio Curve1
The long end of the SIFMA Basis swap market moves relative to Term Bid Offer Ratio Delta Interest Rates (inversely), Municipal Cash Bond supply and demand (asset swap players), structured note issuance and the relative ratio 2 76.625% 77.625% 0.03% of the 1 week Index to LIBOR. 5 78.375% 79.375% 0.14% While the correlation broke down during the crisis, bonds and swaps, 10 80.250% 81.250% 0.33% as well as interest rates volatility in the markets remains high, and 15 82.625% 83.625% 0.49% correlation has returned. 20 84.000% 85.000% 0.61% 25 85.250% 86.250% 0.70% 30 86.125% 87.125% 0.78%
10y BMA Ratios vs US 10y Swap (10y History)1 Historic Ratios (5yr, 10yr)1 8% 105% SIFMA Ratio (5y) 7% 100% SIFMA Ratio (10y) 95% 6% o i
t 90%
85% 5% A Ra M F I 80% 4% S 75%
3% 70% 65% 9 8 7 6 5 4 3 2 1 0 9 0 0 0 0 0 0 0 0 0 0 2% 9 ------n n n n n n n n n n 65% 70% 75% 80% 85% 90% 95% 100% 105% n Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju USD 10y BMA Ratios ussw10/100 Ju
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns. 51 Public Balance Sheet Conditions Implementation
If you believe this thesis, then: Description
Buy currency forwards or FX Sovereigns with a burden of debt or perceived credit risk may see their currency depreciate, and the F options to express a view about investor can position to capitalize on this possibility X sovereign credit
Trade can be implemented through: Buy equities of non-US E One-delta purchase of GSGLCPXU commodity producers Q One-delta purchase of the constituents of GSGLPXU Purchase of calls or call spreads on GSGLCPXU
C The Inflation Proxy Commodity Index may be a hedge against both rising inflation and unanticipated O inflation M Buy the GS Inflation Proxy M Commodity Index O D
Express a view on higher taxes by selling a proxy for put options on the tax rate M Sell Caps on the US Tax Index or U Receive the SIFMA Ratio View can also be expressed by receiving a fixed percentage of 3M Libor in exchange for paying the N SIFMA Municipal Swap rate. The ratio between the two would be expected to decrease in an era of I higher taxes
C Pricing on developed sovereign CDS may be too cheap as it may underestimate the risks to developed R Buy CDS of developed countries who have recently issued large amounts of debt E Sovereigns, Sell CDS on select D Emerging economies may be in a stronger fiscal position than their sovereign CDS levels imply I Emerging Economies T
Note: For discussion purposes only. 52 How Did the Various Asset Classes Respond in the 70s? Case Study
Interest Rates1 Currencies1 Commodities1 1Jan1972 1Jan1982 1Jan1972 1Jan1982 1Jan1972 1Jan1982 17% 15% 120 15% 900 15% 16% 14% 14% 14% 115 800 15% 13% 13% 13% 700 12% 14% 12% 110 12% 11% 11% 11% 13% 600 10% 105 10% 10% 12% 500 9% 9% 9% 11% 100 8% 8% 400 8% 10% 7% 7% 95 7% 9% 300 6% 6% 6% 5% 8% 5% 90 5% 200 4% 7% 4% 4% 100 85 3% 6% 3% 3% 0 2% 5% 2% 80 2% 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 GSCI Agricultural Excess Return Index (LHS) 5y Treasury (LHS) US YOY CPI (%) (RHS) US$ Trade Weighted Index (LHS) US YOY CPI (%) (RHS) GSCI Livestock Excess Return Index (LHS) GSCI Precious Metals Excess Return Index (LHS) US YOY CPI (%) (RHS)
Equities1 Credit1 US Taxes2 1Jan1972 1Jan1982 150 15% bps Spread % Growth 14% 400 7 80% 140 13% 350 6 70% 130 12% 5 11% 120 300 60% 10% 4 250 110 9% 3 50% 100 8% 200 2 7% 40% 90 1 6% 150 0 Tax Rate 30% 80 5% 100 4% -1 1980 70 20% 3% 50 1974 -2 1968 60 2% 10% 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 0 -3 2009 S&P 500 Index (LHS) US YOY CPI (%) (RHS) Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 0% 0 Moody BAA Long-Term Credit Spreads vs. Treasuries 0 0 0 0 0 0 0 0 0 00 00 20 30 40 50 60 70 80 90 10 11 Real GDP Growth 10 Brackets ($000s)
1 Source: Goldman Sachs. Data as of July 21, 2009. Past performance is not indicative of future returns 53 Japan Japan: Government Debt and GDP Forecasts
Japanese government debt maturing in a year is 47.3% of 2009 estimated GDP1 Given Japan’s reliance on exports, falling exports may lead to a chain of events that may lead to increased credit risk in its government debt Falling exports may lead to Æ Decreased corporate revenues Æ Rising unemployment Æ Lower consumer spending and income Æ Less tax revenues Æ Higher budget deficit Æ Rising debt to GDP Æ Ratings pressure Æ Wider sovereign spreads
Japanese Government Debt Maturity1,2,3 2009 GDP Forecasts4
Japan Government Debt Maturity ($ in mn) 2009 GDP 2009 GDP Forecasts GS less < 1Yr 2,273,775 Country Forecasts less 10-yr average consensus 1-2Yr 1 894,142 2-3Yr 717,711 Japan -5.8 -8.4 0.4 3-4Yr 651,424 4-5Yr 657,533 US -2.5 -3.8 0.1 5-6Yr 449,967 Euroland -4.4 -6.5 0.0 6-7Yr 441,568 UK -4.0 -6.6 0.0 7-8Yr 434,041 Norway 1.6 -0.4 2.9 8-9Yr 390,374 Sweden -4.7 -7.6 0.1 9-10Yr 332,701 Switzerland -1.8 -3.8 0.7 10-15Yr 511,987 Canada -1.9 -4.9 0.4 15-20Yr 519,794 Brazil -1.0 -4.4 - 20-25Yr 56, 710 Mex ico - 8.5 -11.5 - 25-30Yr 129,728 Australia 0.3 -3.0 0.4 > 30Yr 10, 274 New Zealand -1.3 -4.6 0.9 Total Government Debt Issuance China 8.3 -1.5 0.6 ($ in mm) 1 8,471,729 India 5.8 -1.3 -0.5 2009E GDP ($ in bn) 4,809 2 Korea -1.7 -7.2 0.4 2009E Government Revenue ($ in bn) 1,486 3 Malaysia -3.5 -8.9 0.0 Debt Maturing <1 Year / 2009E GDP 47.3% Singapore -6.0 -11.5 -0.4 Debt Maturing < 1 Year / 2009E Government Revenue 153.0% Taiwan -7.0 -10.8 -1.9 Total Go vern ment Debt Issu an ce / 2009E GDP 176.2% Thailand -4.0 -8.8 -0.1 To tal Govern ment D eb t Issuan ce / 2009E Governmen t Indonesia 4.2 -0.5 0.3 Revenue 570.2% Philippines -0.5 -5.4 -1.1
1 Source: Reuters 2 Source: GS ERWIN forecasts. 3 Source: Moody’s 4 Source: GS ERWIN for updated GDP Forecasts. GS Global Economics. Asia Economics Flash. A Macro Look at the Yen Crosses. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=6906086&fn=/document.pdf for 10yr average calculations. GS Global Investment Research Asia for consensus figures. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 55 Japan The Yen: Vulnerable To an Export Slowdown Driven by a Slowing US Consumer
Possible factors for yen depreciation ● Realization that Japan may not be the safe haven in this global slowdown > GS forecasts GDP to fall 7.5% and exports to fall an estimated 32.1% in 2Q 2009, with limited improvement in 3Q 20091 > Debt / GDP = 171% (US: 66%, UK: 50%)2 > T he government unveiled a stimulus package of ¥56.8trn (12% of GDP); GS projects government debt to reach 215.4% in 20103 ● Declining export revenue; trade deficit increasing4 > Relationsh ip between Japan’s trade balance and USDJPY (graph below)4 ● Yen carry trade subsiding5 ● Reversal of USD hedges – Exporters have hedged their overseas USD revenue by selling USD forward, but as USDJPY moves higher (yen weaker), the y may unwind their hedges, adding additional downward pressure on the yen (and upward pressure on the USD)5
Public Debt/GDP 2 Yen Carry Trade Unwinding Has Subsided4 15May1984 15May2011 200 1600 -80 180 1400 Japan -100 160 1200 1000 -120 140 800 120 -140 Italy 600 100 400 -160 80 US 200 France 60 Germany 0 -180 Canada UK -200 40 -200 -400 20 -600 -220 0 1988 1993 1998 2003 2008 5 9 1 2 8 9 9 98 9 00 0 0 03 04 05 06 07 0 0 9 9 0 0 0 0 - JPY/USD (1-year Lagged) (RHS) 19 1996 1997 1 1 20 2 2 20 20 20 20 20 2 2 Trade Balance (3m Moving Average, billion yen) (LHS)
1Source: GS ERWIN 2 Source: Japanese Ministry of Finance 2008. Current Japanese Fiscal Conditions and Issues to be considered. http://www.mof.go.jp/english/budget/pamphlet/cjfc2008.pdf 3 Source: GS Research. “Japan Economics Analyst.” April 14,2009. https://360.gs.com/gs/portal/home/atx/?st=1&d=6985902&r=3 4 Source: Goldman Sachs. As of July 28.2009. (Pricing shown is indicative.) Past performance is not indicative of future results. 5 Source: Goldman Sachs Research. “The Yen as Safe Haven.” February 19, 2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=6698556 56 Japan Sell JPY, buy USD Investors may consider buying a call on USDJPY (i.e. a call on USD / put on JPY) Investors benefit if JPY depreciates above the call strike ● JPY is trading at 95.22, i.e. 1 USD is equivalent to 95.22 JPY.1 At maturity, the 105-strike call will have intrinsic value if the JPY depreciates such that 1 USD is equivalent to more than 105 JPY1 ● An investor will breakeven once JPY appreciates to approximately 106.70 JPY per USD, given that the cost of a 105 strike
1y expiry option is 1.57%1 The short yen, long dollar cross has positive carry of 0.6% over 1y, 2.6% over 2y, and 5.6% over 3y3
GS Research forecasts that USDJPY will be at 105 in 12 months.2 The GSDEER estimates a fair value of JPY of 117 in April 20104
USDJPY – spot, forward, and fair value4 Indicative pricing1 140 Strike Offer Option Tenor 130 Dollar appreciation / (JPY per USD) (% of notional) JPY depreciation Call 1y 105 1.57%
l Call 2y 105 2.53%
e 120
v Call 3y 105 2.77% e
L 110 Call 1y 110 0.80% Y Call 2y 110 1.53% P Call 3y 110 1.82%
DJ 100 US 90
80 7Jul99 1Jan03 1Jan05 1Jan07 1Jan09 Spot GSDEER Spot Fair Value Estimate Forward 105 Call Strike
1. Source: Goldman Sachs. Indicative only as of 28-Jul-09. Spot reference = 95.22; 1y forward reference = 94.62; 2y forward reference = 92.79; 3y forward reference = 89.93. Carry is defined as the forward exchange rate minus the spot exchange rate, as a percent of the spot rate. Positive carry implies that should the exchange rate remain at the spot level instead of rolling to the forward, investors will earn money. 2. Source: Goldman Sachs. “FX Monthly Analyst”. As of 10-June-09. Available: https://360.gs.com/gs/portal/home/?action=action.doc&d=7313442 3. Source: Goldman Sachs. Indicative only as of 28-Jul-09. Carry is defined as: (Spot Level – Forward Level) / Spot Level 4. Source: Goldman Sachs. Indicative as of 6-Jul-09. Fair value is derived from the Goldman Sachs Dynamic Equilibrium Exchange Rate (GSDEER) model, a purchasing power parity model that incorporates productivity, terms of trade and trends in the current and capital accounts. Global Viewpoint Jan 07. Available: https://portal.gs.com/gs/portal?st=1&action=action.binary&d=2971163&fn=/document.pdf. Past 57 performance is not indicative of future results.
Japan An Intra-Regional Trade: sell JPY, buy KRW 2 Korea may be better positioned than Japan within the region Debt to GDP ● GS forecasts Korea GDP to decrease 2.3% compared to a 200% decrease of 5.9% in Japan in 2Q2009 180% > A rebound to positive GDP growth is expected in 3Q2009 in 160% Ko rea with continued strength throughout 2010, compared to 140% Japan a more modest recovery in Japan 120% South Korea ● Debt / GD P = 171% for Japan vs. 29% for Korea2 100% ● Demographics favor Korea: By 2020, approximately 1 in 3 80% Japanese is expected to be age 65 or over vs. 1 in 6 in Korea 3 60% > T he old-age/ working age dependency ratio data is even 40% mo re challenging for Japan, highlighting the strain on the 20% 3 working population of an aging demographic 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Real GDP (% change YoY)1 Aging Population: Japan vs. Korea Dependency Ratio3 8 60
6 50 4 40 2
0 30 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 -2 Japan 20 -4 Japan South Korea South Korea -6 10
-8 0
-10 70 20 1950 1955 1960 1965 19 1975 1980 1985 1990 1995 2000 2005 2010 2015 20 Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 1. Source: Goldman Sachs ERWIN. Trade Balance figures shown in 10 billions of USD. 2. Source: OECD. http://webnet.oecd.org/nawwe/factbook09/default.html 3. Source: UN World Population Prospects. The old-age dependency ratio is the ratio of the population aged 65 years or over to the population aged 15-64. All ratios are presented as number of dependants per 100 persons of working age (15-64) 58 Japan An Intra-Regional Trade: sell JPY, buy KRW 3 Trade balance is forecasted to remain on a positive trajectory for JPYKRW Korea. This compares to a negative trajectory for Japan through our 22Jul2004 22Jul2010 forecast period, with the exception of 4Q20091 18 Korea’s exports decline was relatively moderate compared to other 16 countries in the region2 14 An investor may consider buying a put on JPYKRW (i.e. a put on JPY / call on KRW) 12 ● Investors benefit if JPY depreciates against the KRW, and the 10 cross falls lower than the put strike ● A 1y JPYput / KRWcall struck 10% OTM costs 3.04% JPY.3 8
● Should the JPYKRW exchange rate revert back to 2007 levels, 6 payouts could exceed 16x. 3,4 2005 2006 2007 2008 2009 2010 ● GS Research’s 12-month forecast for JPYKRW is 11.434 Spot and Forward 1yr GS Forecast
Exports Growth2 Trade Balance (in $10bn)1 % yoy Exports Growth 40 40 Japan 35 South Korea 30 China Japan 30 20 Korea India 25 Taiwan 10 20
0 15
-10 10 5 -20 0 -30 -5
-40 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -10 -50 -15 May-08 Aug-08 Nov-08 Feb-09 May-09 1. Source: Goldman Sachs Research ERWIN. Trade Balance figures shown in 10 billions of USD. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 2. Source: Goldman Sachs Research Asia Economics Analyst , July 8, 2009. https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7454249&fn=/document.pdf 3. Source: Goldman Sachs indicative pricing as of July 17,2009. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 4. Source: Goldman Sachs. GS FX Forecast taken from Global FX Monthly Analyst July 2009. Pricing shown is indicative as of July 21, 2009. 59 Japan Vulnerable to an Export Slowdown & Rising Leverage
The Japanese government’s attempt to bail out the financial system / economy may result in a solvency issue, weaker currency, or higher rates Debt issuance grew as Japanese deficit increased to finance its way out of its problems that were driven by the bursting of its asset bubble ● Public Debt/GDP ballooned from 69% to 170% over the past 20 years1 Japanese interest rates may rise as Japanese debt issuance increases because Japanese individuals may not be able to meet the marginal demand, as they did during the 1990s
● High individual savings rates (10 to 15%) were used to absorb the high rate of government debt issuance in the 1990s ● Demand from individuals may not be sufficient given their low savings rates, which has fallen to 2.7% in 2008 as Japan’s population continues to age and enters retirement2
Japan Public Debt / GDP and Savings Rate vs.
Public Debt / Capita1 JGB Individuals’ holding2 16% 4.0 200% 70,000 180% 14% 3.5 60,000 160% 12% 3.0 140% Public Debt/GDP (lhs) 50,000 10% 2.5 120% 40,000 Savings rate (lhs) JGB Holdings - 100% 8% 2.0 USD trn (rhs) 30,000 80% Public debt per capita 6% 1.5 60% 20,000 4% 1.0 40% 10,000 20% 2% 0.5
0% 0 0% 0.0 19901992199419961998200020022004200620082010 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1 Source: Goldman Sachs Economic Research. IMF. Past performance is not indicative of future results. 2009-2010 figures are estimates. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 2 Source: Goldman Sachs Research, OECD Economic Outlook. Holdings include JGBs held indirectly through insurance, pension, investment trusts, brokers and social security fund. Past performance is not indicative of future results. 2009 data are estimates. 60 Japan Vulnerable to an Aging Population
As the Japanese age and enter retirement, other fiscal problems may arise as well Expenditures have contributed ¥150 trn to the increase in JGBs outstanding of ¥390 trn since 19901 ● More recently, expenditures’ contribution to growing debt issuance are mostly attributable to social security-related expenditures resulting from the aging Japanese society. These expenditures have contributed ¥110 trn to the cumulative increase in outstanding general bonds. (28.2% of increase)1 ● Presently, nearly one in five Japanese is age 65 or older. This figure will rise to more than one in three in the next 3 decades2
● This may lead to increasing issuances of JGBs to fund rising social security expenditures
Ratio of People Aged 65 and 1 1 Contribution of Expenditures Over to Total Population
40 Japan 35 Gemany France 30 UK US 25 20 15 10 5 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
1 Source: Japanese Ministry of Finance 2008. Current Japanese Fiscal Conditions and Issues to be considered. http://www.mof.go.jp/english/budget/pamphlet/cjfc2008.pdf. Past performance is not indicative of future results. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 2 Source: UN World Population Prospects. http://esa.un.org/unpp/index.asp?panel=1 61 Japan Vulnerable to an Aging Population
Demand from individuals for JGBs may not be sufficient given their low savings rates, which has fallen as Japan’s population continues to age and enters retirement Retired couples must dissave to finance consumption in excess of disposable income and thus have a significantly negative savings rate1 ● To finance this excess consumption they have to draw down on their financial wealth and make use of their deposits and insurance/pension reserves1
1 Since consu mption exceeds disposable income by nearly 25%, the gap must be financed by dissaving from accumulated assets
Consumption and Savings by Household Type1 Net Acquisition of Financial Assets by Households2
1 Source: NLI Research Institute: On the Financial Situation of Elderly Households http://www.nli-research.co.jp/english/economics/2009/eco090317.pdf. Past performance is not indicative of future results. 2 Source: McKinsey&Company: Japan: The World’s Savers Retire. Past performance is not indicative of future results. 62 JPY CMS Caps Trade Mechanics
JPY ATM 3y10y and 5y10y swaption vol is less than half comparable USD swaption vol Low absolute prices for CMS caps - i.e. 3y expiry caps/calls on 10y JPY CMS struck at 3% (e.g. ~110bps OTM) cost ~25bps, which could make these potentially low cost/highly asymmetric "tail" options1 Payouts may reach up to 19x the option premium if rates return to 1991 levels1 In addition, given our view of fundamental weakness in the region, the FX component of the trade can be hedged as well - through quanto CMS caps or vanilla JPY put / USD calls
US vs. JPY ATM Swaption Vol2 JPY 10yr Swap Rate2
28Jul1999 28Jul2009 28Jul1989 28Jul2009 10 9
9 8
8 7 6 7 5 6 4 5 3 4 2 3 1
2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1992 1995 1998 2001 2004 2007 USD 3y10y JPY 3y10y JPY 10yr Swap Rate 1 Source: Goldman Sachs. Indicative as of July 28, 2009. Risk: investor stands to lose entire premium paid if the interest rate fails to move past strike price at expiration. 2 Source: Goldman Sachs. As of July 28, 2009. Volatility shown in basis points per day. Past performance is not indicative of future returns. 63 Japan
If you believe this thesis, then: If you believe this thesis, then: Description
Sell the Yen Buy JPY puts / USD calls, Buy KRW calls / JPY puts
Sell JPY CMS rates Buy a JPY CMS rate cap
For discussion purposes only. All options are OTC options. Risk: With all options mentioned above, the investor risks losing the entire option premium in the event that the spot price does not move beyond the strike price at expiration. Macroeconomic conditions in Japan may improve. International trade environment may be better than expected and financing conditions might ease. 64 US Consumer and Retail Retail and Consumer CDS Lower Consumer Spending May Be a Structural, Rather Than Cyclical, Change
The US Household has lost 23% or $14.3 trillion in net wealth over the past 18 months1 and doubled their outstanding debt over last 8 years to $13.8 trillion2 US consumer spending and savings rates have been out of line: The US Savings rate was 1.6% in the past decade, and fell to 0.5% in the first quarter of 2008, compared to a 7% post-war average.3 At the same time, the ratio of household debt to disposable income increased from 101% to 138% fueled by a low interest rate environment.2 Goldman Sachs Economists expect the consumer savings rate to rise to 6-10% by the end of 2010 to bring savings in line with the historical average.4,5 Further, to bring the household debt/income ratio back to historical average may require $2.8 trillion of consumer deleverageing2 Personal Savings Rates are Predicted to Increase4 Household Leverage is 27% Above Trend2
$2.8 tr
1 Source: Federal Reserve Flow of Funds Report (Z-1). March 11, 2009. 2 Source: McKinsey Global Institute. "Will US Consumer Debt Reduction Cripple the Recovery?". March 2009. 3 Source: Goldman Sachs. "The Day After Tomorrow: The changing face of the consumer." October 1, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=595584 4 Source: Goldman Sachs. US Economics Analyst: “9 Questions for 2009.”December 31, 2008. https://360.gs.com/gs/portal/home/?action=action.doc&d=6466617. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 5 Source: Goldman Sachs. US Economics Analyst: “The Return of the Frugal Consumer.”February 27, 2009. https://360.gs.com/gs/portal/?action=action.doc&d=6751711 66 Retail and Consumer CDS Spread Tightening Despite Weak Fundamentals
US Consumer-linked and Retail CDS spreads have tightened an average of 60% from their respective 52-week wides1 despite continued macro-economic weakness, GS Credit Research notes that “CDS shorts on consumer cyclicals have never looked better”2 The US Consumer Confidence Index remains near all-time lows. While the most recent level beat analyst expectations, the US consumer’s “perceptions of the present remained very low”3 Housing prices continue to decline, albeit at a slowing rate, contributing to further consumer wealth destruction4 Consensus forecasts for macro economic indicators are worse than they were the last time CDS spreads were at comparable levels1,5
Spreads Have Returned to the Levels of Jan 08…1 …But The Economic Outlook Seems Worse5
600 Comparison of Economic Forecasts Jan 2008 vs. April 2009 US Consumer and Retail Basket Europe Consumer and Retail Basket Forecasts for Current and Upcoming Year CDX Index 500
Jan 08 Apr 09 400 2008 2009 2009 2010 bp)
( GDP Forecast 2.20% 2.70% -2.60% 1.80% 300 ead
r Disposable Personal Income 2.40% 3.10% 1.90% 1.80% p S Personal Consumption Expenditure 2.10% 2.40% -1.10% 1.70% 200 Corporate Profits 1.80% 4.00% -16.60% 7.00% Unemployment Rate 5.00% 5.00% 8.90% 9.40% 100 Values represent forecast Y/Y change from previous year Unemployment Rate represents forecast avg for year 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009
1 Source: Goldman Sachs. Data for 5y CDS as of July 24, 2009. Past performance is not indicative of future returns. Indicative Baskets represent retail and consumer CDS traded by GS; exclude names rated Outperform by GS Research Sachs Credit Research and desk analysts. The Indicative Baskets each have 33 constituents. Indicative basket constituents can be furnished upon request and are subject to change. 2 Source: Goldman Sachs Credit Strategy. “IG Bonds: Still a source of risk-adjusted value vs. equity”. 1-May-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7099503 3 Source: Conference Board, Goldman Sachs Global ECS US Research. “USA: Consumer Confidence – Out of the Depths, Mostly in Expectations”. As of 28-Apr-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7070093 4 Source: Goldman Sachs Global ECS US Research. “USA: S&P Case Shiller Home Price Index - Only a Small Easing in the Rate of Decline”. As of 28-Apr-09. https://360.gs.com/gs/portal/home/?action=action.doc&d=7069631 5 Source: Source: Aspen Publishers, "Blue Chip Economic Indicators". Wolters Kluwer. Jan 10, 2008 and April 10, 2009. Goldman Sachs provides no assurance or guarantee that future results will be consistent with the projected analysis. 67 Similarly, Retail and Consumer Equity Have Risen But The Fundamentals May Not Support The Price Movement
US Consumer-linked and Retail Equity prices are up an average of 99% from their respective 52-week lows1 Unemployment continues to rise2 which may impact the decision of consumers to spend as they may be less secure in their long term income prospects A survey of senior loan officers shows that banks have continued to tighten lending standards for consumer loans3, which may also impact consumers’ ability to spend
Job Losses Continue to Rise…2 …Yet Retail Equities Have Risen4 Unemployment Measures Indicative Historical Equity Performance 1Jan2007 24Jul2009 18% 1.2 U-3 U-6 June 09 16% 1.1 16.50% 14% 1 9.50% 12% 0.9
10% 0.8
8% 0.7 0.6 6% 0.5 4% 0.4 2% 0.3 0% 2007 2008 2009 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul
n-94 n-95 n-96 n-97 n-98 n-99 n-00 n-01 n-02 n-03 n-04 n-05 n-06 n-07 n-08 n-09 S&P Retail Select Index (Jan 1 2007 = 1) S&P 500 Index (Jan 1 2007 = 1) a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J
1 Source: Goldman Sachs. Data for Equity performance as of close on May 12, 2009. Past performance is not indicative of future returns. Indicative Baskets represents 33 retail and consumer names as consistent with the CDS basket referenced above. Indicative basket constituents can be furnished upon request and are subject to change. The S&P Retail Seclect Industry Sector which is a broad measure or retailers is up 76% from its lows as of May 12, 2009. 2 Source: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.t12.htm . Data accessed May 11, 2009. Data last updated for April, 2009. Past performance is not indicative of future results. 3 Source: Federal Reserve Board. http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200905/chartdata.htm 4 Source: Goldman Sachs. Data as of May 12, 2009. Past performance is not indicative of future returns. 68 Retail and Consumer CDS Trade Implementation
If you believe this thesis, then: If you believe this thesis, then: Description Buy 5y or 7y CDS protection on retail and consumer names which may be Buy CDS Protection on Retail and poised to widen in an extended consumer slowdown Consumer related CDS The investor may choose to buy protection on individual names or on a broad basket Buy put spreads on the S&P Retail Select Index, a similar ETF, or a custom basket of equities Buy Put Spreads on the S&P Retail Select Index In addition to the put spread, the investor may choose to sell a call to defray the cost of the put spread, and thereby initiate a short position with no upfront premium outlay
For Discussion Purposes Only. All options mentioned are OTC options.
Risks to these trades: Buying CDS: CDS Spreads may tighten exposing the investor to a loss Buying puts or put spreads: Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price at expiration. Investors who buy put spreads (buy a put and sell a further OTM put) also have a maximum loss of the upfront premium paid. The maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid. Selling calls: Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the strike price plus the upfront premium received and may have their security called away if the security price exceeds the strike price of the short call. Additionally, the investor has full downside participation that is only partially offset by the upfront premium taken in. Investors short naked calls (i.e. sold calls but don’t hold underlying security) risk unlimited losses of security price less strike price. Investors who sell naked call spreads (i.e. sell a call and buy a farther out- of-the-money call with no underlying security position) have a maximum loss of the difference between the long call strike and the short call strike, less the upfront premium taken in, if the underlying security finishes abo ve the long call strike at expiration. The maximum gain is the upfront premium taken in, if the security finishes below the short call strike at expiration. 69 Retail and Consumer CDS Portfolio
Indicative Portfolio Characteristics1 Historical Indicative Mid Spread Average (bps)1 500 Portfolio Size [$5-20mm] on each name 450 Terms 5yr – 7yr (terminating 20 Sep 2014/2016) 400 350 Weighting Equal Weighted 300 Average Portfolio CDS Spread1 5yr [172]bps (ti ghtened from 460 highs) 250 200 Premium Payment Frequency Quarterly (20th of each Mar, Jun, Sep, Dec) 150 100 Confirmation Individual confirmation for each credit 50
Collateral Terms As per ISDA Master Agreement and Credit 0
Support Annex 9 07 07 07 08 08 08 09 0 0 0 007 0 0 0 008 00 0 /2 2 2 2 /2 2 /2 /2 2 2 2 2/ 2/ 2/ /2 2/ /2 /2 2/ 2/ 1/ 4/ 7/ 1 4/ 7 1/ 4/ 10/ 10 Moody’s Rating Distribution1 Moody’s Industry Distribution1
50% Textiles and Leather 6.1% 45% Retail Stores 39.4% 40% Personal, Food and Miscellaneous Services 12.1% 35% Leisure, Amusement and Entertainment 6.1% 30% Hotels, Motels, Inns and Gaming 6.1% 25% Home and Office Furnishings, Housewares 6.1% 20% Grocery 3.0% 15% Cargo Transport 10% 3.0% 5% Broadcasting and Entertainment 3.0% 0% Beverage, Food and Tobacco 15.2% 1 2 3 B2 A1 A2 A3 aa1 WR Ba Ba Ba C Baa1 Baa2 Baa3
This material has been prepared for illustrative purposes only. The analysis or information provided is based on certain assumptions which may not be assumptions that Goldman Sachs normally employs. Past performance is not indicative of future results which may vary. Charts are intended only to facilitate discussion. Rating, industry and CDS spreads data are based on indicative portfolio of 33 names. Basket is subject to change. Constituents are available upon request 1 Source: Goldman Sachs, indicative only as of July 24, 2009. Ratings/industry information are Moody’s ratings. 70 Retail and Consumer Equity
For clients wishing to express a short view on the retail sector via Indicative Historical Prices and Option Strike Prices1 equities: 1Jan2008 24Jul2009 .SPSIRE is an equal-weighted index that draws constituents from the 1900 GICs sub-industries that contain companies involved in retail-related activities. Among these are mid- and small- cap names which may be 1800 more sensitive to the consumer slowdown. 1700 1600 1500 (Indicative Only as of July 24, 2009) 1400 Spot Ref: 1537.74 1300 Trade 1 1200 Buy a 1yr 90% / 75% Put Spread 1100 Cost: 4.9% 1000 Potential Gross Payout Ratio 3.06x 900 800 700 Trade 2 2008 2009 Buy a put spread collar with zero upfront premium Jan Apr Jul Oct Jan Apr Jul 121.5% Strike (Jul 10) 113.5% Strike (Jan 10) 108.5% Strike (Oct 09) (Buy a put, sell a put, and sell a call to fund) .SPSIRE - S&P Retail Select Index 90% Strike 75% Strike Jul 2010: Buy a 90%/75% Put Spread, Short the 121% Call Jan 2010: Buy a 90%/75% Put Spread, Short the 113.5% Call Oct 2009: Buy a 90%/75% Put Spread, Short the 108.5% Call
All options mentioned are OTC options
For Discussion Purposes Only. 1 Source: Goldman Sachs. Data as of July 24, 2009. Indicative Only. Past performance is not indicative of future returns which may vary. 71 Table of Contents
I. State of the Markets
II. Tradable Themes I. US Commercial Real Estate II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III. Other Market Opportunities I. Commodity Opportunities II. Event-Driven Market Neutral Investing
IV. Appendix V. Legal Disclosures
72 Commodity Opportunities WTI Crude Prices May Decline Further in the Near Term Fundamental Weakness May Lead to Attractive Entry Point for the Long Term
Oil prices have risen since the lows in February1, but the market may continue to decline in the near term The gains in commodity prices since mid-February may have been driven by growing optimism about the global financial outlook as well as production cuts1 However, oil demand has declined both year over year and sequentially, while inventories have continued to rise2,3 US oil demand has fallen to the lowest level since 1999 and US total oil inventories rose to record high levels for this time of year3 The near term supply / demand imbalance balance may indicate that oil price recovery is overdone and prices may be poised to decline as low as $45/bbl in the near term as excess supply becomes increasingly difficult and costly to store at high inventory levels4
Total Demand for Refined Products3 Crude Oil Price and Y/Y Supply and Demand3 28Jul1999 28Jul2009 28Jul2004 28Jul2009 22000 160 1250 140 1000 21500 750 120 500 100 21000 250 80 0 20500 60 -250 40 -500 20000 20 -750 -1000 19500 0 -1250 -20 -1500 19000 -40 -1750 -60 -2000 18500 -80 -2250 2004 2005 2006 2007 2008 2009 18000 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 WTI Crude Nearby Price ($bbl) Demand for Crude Oil and Petroleum Products (four week avg, thousands bbl / day) Y/Y Chg in Petroleum Inventory (bbl millions) Y/Y Chg in Oil Demand (bbl thousands, RHS) 1 Source: Goldman Sachs Research. Commodity Watch “Expected near-term pullback provides good buying opportunity”. April 26, 2009 https://360.gs.com/gs/portal/?action=action.doc&d=7056346 2 Source: Goldman Sachs Research. Energy Weekly “Diesel needs to rebalance before the complex can go higher”. April 28, 2009. https://360.gs.com/gs/portal/?action=action.doc&d=7069035 3 Source: Goldman Sachs, US Dept of Energy. Data as of July 28, 2009. Demand for Refined Products is "Disposition - Products Supplied - Oil and Petroleum” 4 Source: Goldman Sachs Research. Commodity Watch: “Bridging the gap between a weak today and a strong tomorrow”. May 8, 2008. https://360.gs.com/gs/portal/?action=action.doc&d=7139647 74 Note: For all notes above, Past performance is not indicative of future results. In The Long Term, Commodity Prices May Increase Constraints in the Commodity Supply Chain, Combined with Growing Demand
Structural supply constraints in the oil markets have been exacerbated by the economic downturn as oil companies choose to inve st less, yet resurgent demand from developing countries could cause commodity prices to rise Low oil prices and constrained credit conditions forced a decline in maintenance which may result in higher depletion rates on existing oil fields1 GS economic research estimates current global oil production capacity of ~88mmb/d, and current production of ~83.4mmb/d;2 This implies current capacity utilization of ~95%. The market was last at full capacity in the summer of 2008 “We would expect the annual excess returns to the S&P GSCITM commodity index to fall by 51.5% in 2009 before increasing by 67.1% in 2010 and 22.7% in 2011….While the magnitude of these returns may seem quite large, they are not without historical precedent”3
Global Oil Production and Capacity (MM B/D)4 Global Refining Capacity (MM B/D)4
90 Global Refining Global production 90 Capacity capacity 80
80 70 World Petroleum Demand 70
60 60 Global output 50 50
40 40 World Petroleum Supply
30 30
20 20 6769 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 0305 07 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
1 Source: Goldman Sachs Research. “2009 Outlook: Pricing Supply Destruction”, December 11,2009. https://360.gs.com/gs/portal/home/?action=action.doc&d=6384255 p. 17 2 Source: GS Estimates, 83.4mmb/day production in March 2009 3 Source: GS Research: “Commodity Returns, The Next Five Years” https://360.gs.com/gs/portal/?st=1&action=action.binary&d=7056127&fn=/document.pdf, pp.7, 8 4 Source: International Energy Agency (IEA), DOE and GS Global ECS Research. 2008 Note: For all notes above, Past performance is not indicative of future results. 75
Constructive on Oil In the Long-Term Higher Demand, Possible Inflation or a Weaker Dollar May Send Oil Prices Up
The anticipated pullback in short-term oil prices due to fundamental supply/demand weakness may present a compelling buying opportunity as oil supply constraints may remain tight even as demand picks up1 Despite continued economic contraction, the industrial cycle may be stabilizing which might bring higher WTI crude oil prices1 Chinese demand for oil shows an increasing trend while oil demand in the rest of the world and the US remains stagnant3; the Hedge Fund Strategy group believes that the prospect of continued growth in China may lend support to oil prices over the next severalyears A long position in oil may also provide a hedge against inflation as the value of real assets may be expected to appreciate in an inflationary environment
ISM Purchasing Managers Index Shows Improvement4 Crude Oil Price and Y/Y Supply and Demand3
1Jan2000 28Jul2009 (May 2001 = 1) 100 2.00 Total World United States China 90 1.80 80 1.60 Above 50 implies Expansion 70 1.40 60 1.20 50 1.00
40 Despite signaling a contraction in economic 0.80 30 activity, the ISM manufacturing survey shows that the industrial cycle may be stabilizing 0.60 20 0.40 10 0.20 0 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ISM Purchasing Managers Index 50 2001 2002 2003 2004 2005 2006 2007 2008 1 Source: Goldman Sachs Research. Commodity Watch: “Bridging the gap between a weak today and a strong tomorrow”. May 8, 2008. https://360.gs.com/gs/portal/?action=action.doc&d=7139647 2 Source: Goldman Sachs Research. Energy Weekly “It’s always darkest before the dawn”. May 5, 2009 https://360.gs.com/gs/portal/?action=action.doc&d=7111585 3 Source: IHS Global Insight. Data as of May 11, 2009 4 Source: Institute for Supply Management. Data as of May 11, 2009 76 Note: For all notes above, Past performance is not indicative of future results. For Discussion Purposes Only. Call Options on Long-Dated WTI Crude Implementation
To play longer-term bullish oil fundamentals at a discount, an investor may consider trades for 2010/2011 recovery which would capitalize on moderate Steep Near-Term Contango in WTI1 prices through the remainder of 2009. 28Jul2009 28Jul2014 88 86 (Indicative only as of July 28, 2009) 84 Trade Idea # 1: Knock-In Call 100-strike call on Dec12 WTI Crude Oil (Forward ref. 81.98) 82 Knocks-In if 1st Nearby WTI Futures contract settles at or below $55/bbl between 80 now and 17Nov2009 (spot ref 71.37)
Offer price $4.00/barrel (vanilla call option $8.75 savings of 67% ) 78 76
Trade Idea # 2: Knock-Out Call 74 80-strike call on Dec11 WTI Crude Oil (Forward ref. 79.83) Knocks-Out if 1st Nearby WTI Futures contract settles at or above $75/bbl 72 between now and 16Dec2009 (spot ref 71.37) 70 Offer price $3.50/barrel (vanilla call option $7.00, savings of )
68 2009 2010 2011 2012 2013 2014
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
Trade Idea # 3: Knock-Out Call NYMEX Light Sweet Crude Forward Curve A slight variation to trade idea #1, this trade Knocks Out instead of Knocking In 100-strike call on Dec12 WTI Crude Oil (Forward ref. 81.98) Knocks-Out if 1st Nearby WTI Futures contract settles at or above $80/bbl Above: Steep near-term contango. The forward curve prices oil at mid-Feb between now and 17Nov2009 (spot ref 71.37) almost $6 over spot, and oil at mid-Dec almost $7 over. This raises the implied Offer price $3.70/barrel (vanilla call option $8.75, savings of ) probability of upward knock-out, and lowers the implied probability of downward knock-in, cheapening all three trades.
1 Source: Goldman Sachs. Data as of July 28, 2009. For Discussion Purposes Only. 77 Bearish Refining Margins US Petroleum Stocks and Refining Capacity
US Refinery Capacity is at ~85% US Refinery Capacity is at ~85% Both gasoline and distillate (heating oil) stocks are growing Distillate stocks in particular are significantly higher than seasonal ranges
Crude Stocks are Higher Than Normal… ….As Are Distillate Stocks… …And Gasoline Stocks are Rising
1 Source: Energy Information Administration. http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html. Data accessed July 28th, 2009 78 Short US Refinery Margins
While US Crude stocks have been dropping, US gasoline has WTI 2:1:1 Crack (in USD/BBL) begun to rise and heating oil stocks, starting in January have 1Jan2006 28Jul2009 risen very significantly 26 24 At the same time there is plenty of slack in refining capacity: the 22 upside for refining margins is not there 20 We believe that US petroleum products, in particular heating oil, 18 has yet to adjust to the current economic environment, and that a 16 downside adjustment is warranted, given in particular the growth 14 in heating oil inventories 12 10 8 6 4 2 0 -2 2006 2007 2008 2009 Jan Jul Jan Jul Jan Jul Jan Jul 2:1:1 WTI Crack
1 Source: Goldman Sachs. Pricing is Indicative Only as of July 28, 2009. 79 Sell the Aluminum Upside
China Aluminum Imports Not Rising1 Both aluminum and US steel prices, often substitutable, have more than halved over the past year, as demand has abated and inventories built While China still imports plenty of copper, keeping its price elevated, China has built aluminum smelter capacity powered uneconomically by local generation. This may keep a cap on world aluminum prices for a long time to come
LME Aluminum Cash Price ($/MT)2 US Steel Hot Rolled Price ($ / MT)3 14Jul2005 14Jul2009 3400 4.5m $1,200 3200 4m 3000 $1,000 3.5m 2800 3m 2600 $800 2400 2.5m 2200 2m $600 2000 1.5m 1800 $400 1m 1600 1400 500000 $200 1200 0 2005 2006 2007 2008 2009 $0 Jan Jul Jan Jul Jan Jul Jan Jul Aug-04Feb-05Aug-05Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09 Stocks, London Metal Exchange, Aluminum (RHS) Aluminum Long Term Combined High and Low Grade Price (LHS) 1 Source: Bloomberg. Data as of July 14, 2009. Past performance is not indicative of future returns 2 Source: Goldman Sachs. Data as of July 14, 2009. Past performance is not indicative of future returns 3 Source: Dow Jones US Hot-Rolled (HR) & Cold-Rolled (CR) Coils Index. Data as of July 14, 2009. Past performance is not indicative of future returns 80 Aluminum Volatility May Be Too High Sell Aluminum Calls
Today’s aluminum volatility is consistent with one fifth of LME Aluminum 1y ATMF Volatility – 15 years1 current inventory levels 45.0% Conversely, with today’s price and inventories, on a historical 40.0% basis, volatility should be about one half its current level 35.0%
) 30.0% % (
ty 25.0% ili t la o
V 20.0%
15.0%
10.0% 0 500000 1m 1.5m 2m 2.5m 3m 3.5m 4m 4.5m 5m LME InventoryMT STOCKS, LONDON METAL EXCHANGE, ALUMINUM Aluminum 1y ATMF Vol Implementation and Indicative Pricing: Indicative Call Pricing2 With growing inventory and a China imposed cap, sell both 3m ALM Reference Price: $1825 price and volatility with a short call strategy: Strike 2,200 / MT 3,000 / MT Sell Calls 1,000 MT per month for CY’10 - CY’11 at a strike of Period 2,200 for $165 / MT 2y $165 / MT $50 / MT Alternatively, those who are more risk averse may prefer a put spread ratio: 3y $205 / MT $75 / MT 1 x 2, 1800/1500 put ratio spread, either 2y or 3y. Cost is $50/mt for either 2y or 3y, starting 1/1/10 2
1 Source: Goldman Sachs. Data as of July 28, 2009. Past performance is not indicative of future returns 2 Source: Goldman Sachs. Pricing is Indicative Only as of July 28, 2009. 81 Commodity Opportunities Implementation
If you believe this thesis, then: If you believe this thesis, then: Description Buy Long-Dated Oil Buy Knock-in or Knock-out Call options on oil to take a long-term constructive view and benefit from cost savings based on market expectation
Short the Crack Spread Short December Refinery Cracks Buy two contracts of Crude Oil and Short one contract each of Gasoline and Heating Oil to take a bearish view on refining margins
Sell Caps on Aluminum Sells call options on aluminum to capture high volatility and express or buy a Put Spread ratio the view that trading will be range-bound For a more risk-averse approach, buy a put option and sell two put options at a lower strike
For Discussion Purposes Only. All options mentioned are OTC options.
Risks to these trades: Buying puts or put spreads: Investors who buy put options risk loss of the entire premium paid if the underlying security finishes above the strike price at expiration. Investors who buy put spreads (buy a put and sell a further OTM put) also have a maximum loss of the upfront premium paid. The maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid. Selling calls: Investors who sell covered calls (own the underlying security and sell a call) risk limiting their upside to the strike price plus the upfront premium received and may have their security called away if the security price exceeds the strike price of the short call. Additionally, the investor has full downside participation that is only partially offset by the upfront premium taken in. Investors short naked calls (i.e. sold calls but don’t hold underlying security) risk unlimited losses of security price less strike price. Investors who sell naked call spreads (i.e. sell a call and buy a farther out- of-the-money call with no underlying security position) have a maximum loss of the difference between the long call strike and the short call strike, less the upfront premium taken in, if the underlying security finishes abo ve the long call strike at expiration. The maximum gain is the upfront premium taken in, if the security finishes below the short call strike at expiration. 82 Event-Driven Market Neutral Investing Event-Driven Market Neutral Investing Alternatives for a Challenging Market Environment
Extreme market volatility has posed significant challenges to traditional investing and trading approaches Market-neutral strategies around event-driven situations offer the potential for clients to generate attractive risk-adjusted returns with a low correlation to market movements Opportunities exist in the following types of corporate events / structures:
Strategy Description Merger / Risk Arbitrage Involves hedged purchases of target company shares trading at discounts to acquisition value due to transaction and timing risk as well as cost of capital Stubs / Holding Companies Corporate structures characterized by cross-holdings of publicly-listed securities Trading strategies generally seek to create synthetic positions in assets within a holding company or benefit from fluctuations in price to net asset value ratios Spin-offs Creation of newly-listed entities via distribution of shares in a subsidiary to existing shareholders Often give rise to technical trading patterns and inefficiencies that can be exploited using a variety of strategies Dual Share Class Seeks to take advantage of movements in the relative valuation of high-vote and low-vote shares
For Discussion Purposes Only. 84 Event-Driven Market Neutral Investing Merger Arbitrage
Due to drawdowns, redemptions and fund closures, the pool of dedicated capital pursuing merger arbitrage opportunities has shrunk … … and gross spreads for pending strategic transactions have widened considerably relative to historical comparable transactions
US Merger Gross Spreads – Then and Now…1 Illustrative Merger Arbitrage Spread Calculation2 Acquirer stock price $20.00 A) 1 Target Value Gross Target stock price $42.00 B) Target Acquirer 2 ($mn) Spread Expected closing date 09/30/09 185 4/10/2007 Expected time to closing in years 0.51 C) #REF! BK MEL $30,804 1.4% Cash offered per Target share 30.00 D) CBSS BBV $9,336 2.8% Acquirer share offered per target share 0.7500 E) Deal price $45.00 F) = D + (E * A) FRK VMC $4,610 2.5% Current gross spread $3.00 G) IFIN STT $3,976 1.8% LI FGP LN $3,103 3.0% Net spread calculation Gross spread $3.00 NVL HNDL IN $3,325 1.0% Dividend effect 0.12 KSE NG/ LN $7,321 4.1% Rebate earned on Acquirer short @ 1% 0.08 H) = E * A * C * 1% RDN MTG $4,312 5.4% $3.20 I) Median 2.7% Gross percentage return 7.6% J) = I / A Average 2.8% Annualized return as a % of Target price 15.0% = J / C 7/16/2009 JAVA ORCL $7,078 3.6% PCZ SU $18,204 1.1% Historical Strategic Transaction Timeline3 SGP MRK $43,194 3.9% WYE PFE $64,693 4.1% Between 120 < 120 days > 180 days Median 3.7% and 180 days Average 3.2% 48% 30% 21%
For in-depth analyses of these situations and to discuss specific opportunities contact Goldman Sachs Hedge Fund Strategies
1 Source: Company reports, SEC filings, Goldman Sachs. List represents announced public pending transactions with a target market cap of greater than $3 billion 2 Source: Goldman Sachs. 3 Source: Company reports, Goldman Sachs. Distribution based on 66 strategic transactions (excluding Utility deals) completed since 6/1/07 with a target market cap greater than $3bn 85 Event-Driven Market Neutral Investing Stubs / Holding Companies
Stubs are a unique asset class that allow investors to isolate businesses within a company that do not trade publicly, or express a viewpoint on the value of a holding company relative to the price of its underlying assets Stubs can be created from any public company with publicly-traded cross-holdings. Investors create long positions in a “stub” synthetically by purchasing shares in the parent company and selling short the appropriate ratios of shares in the publicly traded subsidiaries Stubs can be traded in anticipation of a corporate action such as a spin-off, split-off, IPO or sale of non-public (stub) assets. Completion of the corporate action can result in significantly increased valuation of the stub as the parent company’s discount to its Net Asset Value (NAV) narrows
Example Stub / HoldCo Structure and Trade Implementation Selected US Stubs / Holding Companies1
Holding Company (ABC) - 100mm shares outstanding @ $10.00/sh % of Stub % Market Cap (mm) Co. Stub Stub of Parent Cross Holdings Owned Ratio Pr ice Parent Parent Stub Altria Group SAB Miller 27.4% 0.208 $12.31 73.1% 34,840 25,461
Public Subsidiary #1 (XYZ) EMC Corp VMWare 83.3% 0.162 8.61 64.4% 26,894 17,327 50mm shares held by News Corp BSkyB 39.1% 0.262 6.56 74.0% 23,180 17,160 ABC @ $5.00/sh Net "Stub" or Non-Public Assets Sky Network TV 43.6% 0.065 Yahoo! Inc Alibaba.com 39.0% 1.409 8.78 55.9% 21,914 12,249 (Implied Market Value of $650mm or Yahoo! Japan 34.8% 0.014 $6.50 per ABC share) PNC Financial BlackRock Inc. 92.0% 0.094 21.91 56.4% 17,896 10,086
Public Subsidiary #2 (UVW) Loews Corp. CNA Financial 90.1% 0.557 (1.54) -5.6% 11,959 (669) 25mm shares held by Boardwalk Pipeline 77.1% 0.315 ABC @ $4.00/sh Diamond Offshore 50.4% 0.161 Li ber ty DirecTV Group 51.4% 1.000 1.75 6.6% 13,725 907 Entertai nment Consol Energy CNX Gas 81.7% 0.682 13.46 42.3% 5,744 2,431 To establish a position in the ABC HoldCo “stub” assets, investor would buy shares of ABC and hedge public holdings by selling short XYZ and UVW Leucadia National Fortescue Metals 9.0% 1.166 9.64 47.2% 4,865 2,298 Corp Jefferies Group 28.4% 0.204 Hedge ratios can be calculated by dividing subsidiary shares held by ABC by AmeriCredit Corp 24.8% 0.138 total shares of ABC outstanding Inmet Mining 10.0% 0.023 In this example, for each share of ABC purchased, investor would short 0.5 Liberty Global Jupiter Telecom 57.5% 0.014 (0.61) -3.7% 4,613 (169) XYZ and 0.25 UVW to create ABC “stub” for $6.50 Telenet Group 50.4% 0.201 Austar United 54.8% 2.490 1 Source: Bloomberg and Company Filings. Represents US stubs where stub value < 80% of parent value and parent market cap > $3 billion. Stub prices and market caps as of July 15, 2009 86 Event-Driven Market Neutral Investing Spin-offs
Spin-offs involve the creation of newly-listed and / or fully-floated entities via distribution of shares in a subsidiary to existing shareholders The nature of these transactions frequently give rise to technical trading patterns and inefficiencies that can be exploited Factors such as forced selling by parent company shareholders and a lack of analyst coverage of the newly spun-off entity drive the inefficiencies
Historical Performance of Carve-Out IPOs Spun-off1 Historical Performance of 100% Spin-offs3
Carve-out IPOs tend to underperform in advance of the spin-off and immediately post- 100% spin-offs have historically underperformed in the weeks / months post-spin and spin but outperform peers over the long-term tend to revert and outperform peers over longer time periods Relative Performance of Carve-outs Subsequently Spun-off Relative Performance of 100% Spin-Offs Post Ex-Date 3 Months 2 Weeks 1 Week 1 Month 3 Months 1 Year 1 Week 1 Month 2 Months 3 Months 6 Months 1 Year Pre-Spin Post-Spin +10.8%
+11.0%
+3.6% +2.5%
-0.9% -0.1% -2.0% -2.6% -2.3% -6.4% -4.0%
-11.5%
Historical Performance of ParentCo “Stubs” Around Carve-Spins2 2009 US Spin-off Pipeline4
“Stubs" (parent company ex-spinco) generally outperform peers and the broader Parent SpinCo Date Spin-off Type market over various time periods that straddle the spin-off ex-date Cardinal Health CareFusion (Clinical and August 31, 2009 100% Spin-off Parent (Stub) Cumulative Relative Performance Around Spin-off Dates Medical Products Business) Measured as Pre-Spin to Post-Spin Equal Time Period Liberty Entertainment Liberty Starz Group September 2009 Spin-Merge + Tracker (Est.) Spin-off 2 Months 1 Month 2 Weeks 1 Week Pride International Seahawk Drilling Q3 2009 100% Spin-off Median Outperformance % +8.0% +6.0% +6.1% +5.7% Ocwen Financ ial Altis our ce Portfoli o Soluti ons Q3 2009 100% Spin-off % of Stubs Outperforming 79% 68% 77% 77% Entergy Corp Enexus Energy Corp "Late 2009 / Early 100% Spin-off 2010" Time Warner AOL "By Year End" 100% Spin-off
1 Source: Bloomberg, Company press releases and Goldman Sachs. Data represents median relative performance (vs. relevant subsectors) of US carve-out IPOs subsequently spun-off 2001-2008 with market cap >$100 million at time of spin 2 Source: Bloomberg, Company press releases and Goldman Sachs. Data represents median relative performance (vs. relevant subsectors) of US Parent Company “stubs” (excluding stakes in spun-off entities) from 1998-2008 3 Source: Bloomberg, Company press releases and Goldman Sachs. Median relative performance data for US 100% spin-offs > $500mm market cap at time of spin-off from 1995-2008 4 Source: Company filings, conference call transcripts and press releases 87 Event-Driven Market Neutral Investing Dual Share Class
Several US companies have dual share class structures where each class possesses different liquidity, voting and index membership attributes Percentage spreads between share classes of a given company tend to fluctuate over time based on various market factors These movements can be exploited by buying the undervalued class and shorting the overvalued class if one expects spread convergence or reversing the trade (buying overvalued / selling undervalued) to play for spread divergence / widening Share class consolidations triggered by the expiration of post-spin-off / split off waiting periods can also provide trading opportunities
Selected US Dual Class Share Structures1
More Liquid / Less Liquid Current Spread Market Cap More Less Avg. Trd Shares Short In As a TTM Avg. Company Name ($mm) Liquid Tkr Price Liquid Tkr Price Volume Out Interest Dollars % Spread % Difference Central Garden $772 CENTA $10.71 CENT $11.89 1.1 2.5 0.4 (1.18) -11.0% -4.8% -6.3% Comcast 40,256 CMCSA 14.10 CMCSK 13.61 3.1 2.5 1.9 0.49 3.5% 3.7% -0.2% Chipotle 2,387 CMG 81.90 CMG/B 69.05 4.8 0.8 35.3 12.85 15.7% 11.2% 4.5% Discovery Comm 6,356 DISCA 23.57 DISCK 21.60 4.0 1.0 10.8 1.97 8.4% 5.4% 2.9% HEICO 865 HEI 37.90 HEI/A 30.05 4.4 0.7 18.7 7.85 20.7% 20.1% 0.6% Lennar 1,535 LEN 9.15 LEN/B 6.95 148.0 4.6 96.3 2.20 24.0% 22.6% 1.5% Liberty Global 4,594 LBTYA 16.74 LBTYK 16.66 4.9 1.0 2.8 0.08 0.5% 3.0% -2.6% Molex 2,722 MOLX 16.15 MOLXA 15.16 9.6 1.2 18.6 0.99 6.1% 8.2% -2.0% News Corp 1,818 NWSA 8.86 NWS 10.42 3.2 2.3 0.7 (1.56) -17.6% -8.1% -9.5% SunPower 2,158 SPWRA 23.69 SPWRB 20.65 4.0 1.3 8.6 3.04 12.8% 15.2% -2.4% Telephone & Data 3,004 TDS 28.00 TDS/S 25.80 4.3 1.0 28.9 2.20 7.9% 7.0% 0.8% Viacom 13,462 VIA/B 22.07 VIA 23.43 37.3 9.6 2.2 (1.36) -6.2% -5.8% -0.3% Average 19.1x 2.4x 18.8x 5.4% 6.5% -1.1% Median 4.4 1.3 9.7 7.0% 6.2% -0.3%
1 Source: Bloomberg and Company Filings. Price and spread data as of July 15, 2009 88 Table of Contents
I. State of the Markets
II. Tradable Themes I. US Commercial Real Estate II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III. Other Market Opportunities I. Commodity Opportunities II. Event-Driven Market Neutral Investing
IV. Appendix V. Legal Disclosures
89 Appendix
Over the past decade, both mezzanine subordination level and tranche thickness have consistently decreased (decreasing credit enhancement and increasing leverage) Between 1995 and 20071: ● AA-rated subordination declined from 26.8% to 9.5% while tranche thickness decreased from 6.7% to 2.5% ● A-rated subordination declined from 21.2% to 7.2% while tranche thickness decreased from 5.6% to 2.3% CMBS Capital Structure Evolution2
40%
35%
30% e r tu
c 25% u tr S l 20% ta i p AAA & Super Senior Ca 15%
BS AA M
C 10% A BBB 5% BB Equity 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
AA Subordination (%) 26.8 27.2 24.6 23.4 21.5 18.7 17.9 16.6 14.7 12.2 10.1 10.0 9.5 AA Thickness (%) 6.7 6.0 6.2 5.4 5.2 4.1 3.8 4.3 5.0 4.1 3.1 2.6 2.5
A Subordination (%) 21.2 20.6 18.3 17.8 16.7 14.5 13.9 12.4 10.3 8.4 7.2 7.4 7.2 A Thickness (%) 5.6 6.6 6.3 5.6 4.8 4.2 4.0 4.2 4.4 3.8 2.9 2.6 2.3 1 Please note that this data is for 1995-2007 only. Past performance is not indicative of future results. 2 Source: Goldman Sachs analysis and Commercial Mortgage Alert. 90 Appendix
CMBX1 CMBX2 CBMX3 CMBX4 CMBX5
Tranche Subordination (%) AAA 29.76 29.88 29.88 29.88 29.76 AJ 12.50 12.20 11.42 12.33 12.70 AA 10.45 10.15 9.46 10.23 10.63 A 7.71 7.60 7.14 7.77 8.00 BBB 4.49 4.29 3.91 4.44 4.72 BBB- 3.32 3.15 2.77 3.36 3.68 BB 2.40 2.15 2.50 2.69
Tranche Width (%) AAA 70.24 70.12 70.12 70.12 70.24 AJ 7.26 7.68 8.46 7.55 7.06 AA 1.65 1.85 1.65 1.43 1.18 A 1.46 1.40 1.21 0.98 0.91 BBB 1.01 1.09 1.05 1.11 1.07 BBB- 1.16 1.14 1.14 1.07 1.04 BB 0.34 0.30 0.31 0.38
CMSA Property Type (Balance %) MultiFamily 15.30 13.16 17.07 16.89 11.82 Co-op Housing 0.54 0.59 0.32 0.06 0.06 Retail 30.78 31.86 28.89 27.08 33.81 Office 32.33 32.38 30.62 31.58 25.86 Lodging 8.80 10.44 8.61 11.54 12.63 Industrial 3.78 5.52 6.39 5.28 6.45 Warehouse 0.00 0.00 0.00 0.00 0.00 Health Care 0.00 0.05 0.59 0.45 0.20 Mobile Home 2.06 1.08 1.16 1.76 1.98 Self Storage 3.35 1.75 1.69 1.90 1.98 Mixed Use 1.56 1.86 3.57 2.93 3.70 Other 1.50 1.29 1.10 0.53 1.50 N/A 0.00 0.00 0.00 0.00 0.00
1 Source: Trepp, LLC. Stratifications for CMBX vintages are indicative only. Data as of July 21, 2009 91 Appendix
LTV (Balance %)1 Occupancy (Balance %)
CMBX1 CMBX2 CBMX3 CMBX4 CMBX5 CMBX1 CMBX2 CBMX3 CMBX4 CMBX5
LTV (Balance %)¹ Occupancy (Balance %) Up to 49.9 9.83 9.37 9.64 6.04 8.17 Up to 50 0.71 1.37 0.94 0.99 1.30 50.0 - 54.9 4.33 2.94 5.24 2.38 4.38 50 - 54.9 0.50 0.87 0.68 0.58 0.67 55.0 - 59.9 7.11 5.66 5.56 3.79 6.14 55 - 59.9 1.07 1.35 1.21 0.92 1.05 60.0 - 64.9 9.92 10.16 8.11 12.18 11.09 60 - 64.9 1.66 1.46 2.08 2.44 2.73 65.0 - 69.9 12.84 14.74 13.11 15.79 19.25 65 - 69.9 3.58 3.16 3.24 3.10 5.23 70.0 - 74.9 20.43 23.67 19.55 19.07 23.04 70 - 74.9 4.43 4.73 4.04 6.35 5.39 75.0 - 79.9 34.55 32.07 35.79 37.45 25.71 75 - 79.9 5.34 4.26 5.57 5.37 5.36 80.0 - 84.9 0.92 1.12 2.30 2.80 1.80 80 - 84.9 6.89 6.67 8.10 6.65 7.24 85.0 - 89.9 0.08 0.16 0.65 0.42 0.37 85 - 89.9 12.35 11.41 13.37 12.86 8.66 90.0 - 94.9 0.00 0.11 0.05 0.06 0.03 90 - 94.9 21.50 21.22 20.02 19.95 17.77 95.0 - 99.9 0.00 0.00 0.00 0.00 0.00 95 - 99.9 41.98 43.50 40.74 40.79 44.60 100.0 and up 0.00 0.00 0.00 0.02 0.02 100 and up 0.00 0.00 0.00 0.00 0.00
DSCR (Balance %)2 Delinquency Status (Balance %)
CMBX1 CMBX2 CBMX3 CMBX4 CMBX5 CMBX1 CMBX2 CBMX3 CMBX4 CMBX5
DSCR (Balance %)² Delinquency Status Up to 0.89 0.00 0.00 0.00 0.04 0.00 30 Days 1.20 0.70 1.85 0.72 0.58 0.90 - 0.99 0.00 0.00 0.99 0.58 0.49 60 Days 0.69 0.81 0.14 0.64 0.96 1.00 - 1.09 0.39 3.64 2.34 5.64 6.92 90+ Days 1.27 2.56 2.62 2.40 2.32 1.10 - 1.19 7.24 17.31 16.89 22.64 25.27 < 1 Month 4.99 4.36 3.24 6.00 3.76 1.20 - 1.29 26.41 31.08 25.55 27.01 23.38 Current 83.66 85.11 85.26 86.78 87.38 1.30 - 1.39 14.45 14.08 17.24 16.18 15.29 Foreclosure 0.00 0.00 0.00 0.00 0.00 1.40 - 1.49 11.39 10.03 12.42 9.88 11.13 Grace Period 7.97 6.46 6.89 3.50 5.02 1.50 - 1.59 9.57 7.31 5.78 6.14 4.69 NonPerf Mat Balloon 0.04 0.00 0.00 0.00 0.00 1.60 - 1.69 6.40 3.23 3.20 2.53 2.70 Perf Mat Balloon 0.05 0.00 0.00 0.00 0.00 1.70 - 1.79 4.68 3.07 2.80 2.35 2.48 REO 0.00 0.00 0.00 0.00 0.00 1.80 - 1.89 3.74 2.91 2.70 1.76 2.09 1.89 - 1.99 2.60 2.32 2.18 0.90 2.33 2.00 and up 13.12 5.00 7.91 4.35 3.24 Source: Trepp, LLC. Stratifications for all CMBX vintages indicative only. Data as of July 21, 2009. 1 LTV's are calculated using appraisals that were performed at loan origination in most instances 2 DSCRs are updated as of latest monthly data where available 92 Table of Contents
I. State of the Markets
II. Tradable Themes I. US Commercial Real Estate II. Public Balance Sheet Conditions
III. Japan
IV. US Consumer and Retail
III. Other Market Opportunities I. Commodity Opportunities II. Event-Driven Market Neutral Investing
IV. Appendix V. Legal Disclosures
93 Legal Disclosures – Please Read
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94 Legal Disclosures – Please Read
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95 Legal Disclosures – Please Read
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96 Legal Disclosures – Please Read
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97 Legal Disclosures – Please Read
Residential Property Index SM and RPX SM are service marks of Radar Logic Incorporated ("Radar Logic") and have been licensed for use for certain purposes by The Goldman Sachs Group, Inc. and its affiliates ("Goldman Sachs"). Radar Logic does not make any, and disclaims all, representations and warranties regarding the underlying third party data on which the Residential Property Index SM and RPX SM are based. Goldman Sachs' products based on the Residential Property Index SM and RPX SM are not sponsored, endorsed, sold or promoted by Radar Logic, and Radar Logic makes no representation regarding the advisability of investing in such products.
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DJ Euro Stoxx - The Dow Jones Euro STOXX 50® is the intellectual property of (including registered trademarks) Stoxx Limited, Zurich, Switzerland and/or Dow Jones & Company, Inc., a Delaware corporation, New York, USA, (the "Licensors"), which is used under license. The information contained herein in no way sponsored, endorsed, sold or promoted by the Licensors and neither of the Licensors shall have any liability with respect thereto.
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98 Hedge Fund Strategies Group Contact Information
Contact Email Phone Alan Brazil [email protected] (212) 902-4822
Richard Barnett [email protected] (212) 902-9108
Patrick Boulva [email protected] (212) 902-8735
Sheree Chiou [email protected] (212) 902-3812
Isaac Dayan [email protected] (212) 934-2805
Anthony Nardi [email protected] (212) 357-6544
Jethro Sorra [email protected] (212) 902-1730
Tom Stelmach [email protected] (212) 357-1595
Jeff Ziglar [email protected] (212) 357-8231
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