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Financial Markets Outlook Federal Reserve of Chicago, Economic Outlook Symposium December 5, 2008
Long-Term Interest Rates - 1900 to 2007 How We Got Into The Problem - Bush
REMARKS BY THE PRESIDENT ON HOMEOWNERSHIP at the Department of Housing and Urban Development Washington, D.C. June 18, 2002, 10:30 A.M. EDT http://www.hud.gov/news/speeches/presremarks.cfm
[snip]
The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.
We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. (Applause.) Five- and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.
And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.
I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector.
And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)
Bianco Research, L.L.C December 5, 2008 2 How We Got Into The Problem - Mozilo
From an article about a speech Angelo Mozilo delivered in early 2003. It is from Inside Mortgage News, February 17, 2003. An excerpt:
Angelo Mozilo would eliminate downpayments to reach deeper into emerging housing markets. To eliminate what he calls "the enormous and very dangerous gap" between the housing have and have-nots, the chairman of Countrywide Financial Calabasas Calif. also would lower the bar on credit scores.
"The only way we can have a better society," he said at the America's Community Bankers National Real Estate Lending Conference here last week "is to make sure those who don't have a house the opportunity to get one.
Elaborating on points he made the previous week in Washington, Mr. Mozilo labeled downpayments as "nonsense" and said credit score requirements are "still much too high." He also said it was "wrong" to focus on delinquencies.
Rather than address the 19% of those subprime borrowers who are late, he said, the focus should be on the 81% who pay on time. And rather than worry about the 4% who lose their homes, concentrate on the 96% who won't let their homes go into foreclosure.
In what he said would be his last policy address before retiring in 2006, the outspoken leader called on his colleagues to "take a chance in making mistakes rather then foreclose on the opportunity" to put minorities and other underserved families into homes of their own. "For selfish reasons, we've got to share," Mr. Mozilo said. "If we don't, people will take it. We'll never solve any of our societal problems until we take care of" people's housing needs.
The Countrywide chairman said it is meaningless to require target borrowers to come to the closing table with 10% of the purchase price in cash, especially when money comes from a relative or some other third party.
"It's often not their money anyway, yet we out them through this torture, Mr. Mozilo said.
Bianco Research, L.L.C December 5, 2008 3 How We Got Into The Problem - Congress
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . . I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place. And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job.
Rep. Maxine Waters (D., Calif.): However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change. Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals.
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion.
Bianco Research, L.L.C December 5, 2008 4 Home Prices Historic Run Ends
Case-Shiller Nominal Home Price Index Annual Change Median Existing Sales Price of Houses Sold 40% 40% 6 month moving average 35% 35% 240 240
30% 30% 220 220
25% 25% 200 200
20% 1947 20% 19.47% 180 180 2004 15% 12.09% 15% 160 160
10% 10% 140 140
5% 5% Annual Change Annual Annual Change Annual 120 120 0% 0%
100 100 ThousandsDollars of -5% -5% ThousandsDollars of 80 80 -10% 1939 to 2007 Never A Yearly Loss! -10% 1900 2008 60 60 -9.79% 1914 -15% -10.75% -15% -12.78% 40 40 -20% -20% 1921 1932 -19.81% -22.02% 20 20
-25% -25%
1897 1903 1909 1915 1921 1927 1933 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 1891 0 0
Case-Shiller Real Home Price Index 16% 8/31/1979, 15.90% 11/30/2005 16% Annual Change 14.35% 40% 40% 14% 14%
35% 1894 35% 12% 12% 34.33%
30% 30% 10% 10%
8% 8% 25% 25% 1946 6% 6% 20% 21.37% 20% 4% 4% 15% 2005 15% 12.34% 2% 2%
10% 10% 0% 0% Annual Rate of Change of Rate Annual
Annual Rate of Change of Rate Annual 1/31/1991, 0.28%
Annual Change Annual Change Annual 5% 5% -2% -2%
0% 0% -4% -4%
-6% -6% -5% -5% 1991 10/31/2008 -8% -8% 1948 -8.04% -10% -10% -8.67% 1941 -7.42% -10% -10% -9.68% -15% -15% 1896 1905 2008
-14.60% -14.34% -14.38%
6/30/1973 6/30/1978 6/30/1983 6/30/1988 6/30/1993 6/30/1998 6/30/2003 6/30/2008
-20% -20% 6/30/1968
12/31/1970 12/31/1975 12/31/1980 12/31/1985 12/31/1990 12/31/1995 12/31/2000 12/31/2005
1891 1897 1903 1909 1915 1921 1927 1933 1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 Bianco Research, L.L.C December 5, 2008 5 How Big Is Real Estate?
Total Value Of Real Estate In The U.S. Aggregate Market Size Value of Households, Nonfarm Nonfinacial Business, and Nonfarm Noncorporate Business Value of Residential Real Estate, Commercial Real Estate and Equities 40 40 25 25 38.01 Current Through Q2 2008 Current Through Q2 2008 35 35 21.78
20 20 19.36 30 30
Stock Market Capitalization 16.23 25 25 (Green Line) 15 15
20 20
Total Value of U.S. Real Estate
Trillionsof Dollars Trillionsof Dollars Trillionsof Dollars Trillionsof Dollars 10 10 15 15 Residential Real Estate (Red Line)
10 10 Commercial Real Estate 5 (Blue Line) 5
5 5
0 0 0 0 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Total Value Of Real Estate In The U.S. As A Percentage Of GDP Market Size Value of Households, Nonfarm Nonfinacial Business, and Nonfarm Noncorporate Business Value of Residential Real Estate, Commercial Real Estate And Equties As A Percentage Of GDP 290% 290% 230% 230%
Current Through Q2 2008 Current Through Q2 2008 280% 280% 210% 210%
270% 270% 190% 190% 266.63% 260% 260% 170% 170%
250% 250% 152.78% 150% 150% Value of Residential Real Estate 240% 240% as a Percentage of GDP 135.82% 130% Value of Commercial Real Estate 130% Total Value of U.S. Real Estate as as a Percentage of GDP 230% a Percentage of GDP 230% 113.86% 110% 110% 220% 220% 90% 90% 210% 210%
70% 70% 200% 200% Value of U.S. Equities as a Percentage of GDP 50% 50% 190% 190%
30% 30% 180% 180% 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Bianco Research, L.L.C December 5, 2008 6 Almost $1 Trillion In Losses
Worldwide Financial System Losses and Capital Raised As of December 3, 2008 In Billions of Dollars Total Q4 2008 Q3 2008 Q2 2008 Q1 2008 Prior Losses Capital Losses Capital Losses Capital Losses Capital Losses Capital Losses Capital Banks/Brokers 714.7 757.2 66.9 368.8 168.9 94.0 122.1 157.4 151.4 84.0 205.4 53.0 Insurance Cos 143.2 91.7 0.0 51.9 36.4 1.6 13.3 27.5 42.0 3.2 51.5 7.5 GSEs 114.5 22.6 0.0 0.0 38.3 0.0 29.0 7.1 24.6 0.0 22.6 15.5 Wordwide 972.4 871.5 66.9 420.7 243.6 95.6 164.4 192.0 218.0 87.2 279.5 76.0 Source: Bloomberg
Worldwide Financial System Losses And Capital Raised 450 420.7 450
400 Red = Losses 400 Blue = Capital Raised 350 350
300 279.5 300
243.6 250 250 212.7 218.0 192.0 200 200
164.4 Billionsof Dollars Billionsof Dollars 150 150 95.6 100 76.0 87.2 100 66.9 58.6 62.2 50 50 8.9 0 0 Prior Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
Bianco Research, L.L.C December 5, 2008 7 Moves Before Labor Day
August 2007 *Cut the discount rate premium to the funds rate * Allow the effective rate to diverge from the funds rate * Remove the stigma of borrowing from the window * Extend the term to 30 days September 2007 *Fed cuts 50 basis points * FHA Secure to help homeowners October 2007 *Treasury proposes bailing out SIVs * Fed cuts the funds rate 25 bps November 2007 “Teaser Freezer” Plan December 2007 *Fed cuts 25 basis points * Fed Announces the TAF auction January 2008 *Fed cuts 75 bps before open * Fed cuts 50 bps 8 days later * NY State insurance commissioner orchestrates “monoline talks” February 2008 *Fed increases the size of the TAF auctions * Treasury arranges a 30-day freeze on foreclosures * Conforming loan limits increased March 2008 *Fed changes the discount window rules, allows the dealers access and increases the term to 90 days for the banks * Fed increases the size of the TAF auctions * Fed orchestrates a bailout of Bear Stearns July 2008 * Treasury given a “Bazooka” to backstop Fannie/Freddie Bianco Research, L.L.C December 5, 2008 8 Moves Since Labor Day
Major Financial/Economic Events Since Labor Day Major Financial/Economic Events Since Labor Day - cont.
7-Sep *Fannie Mae, Freddie Mac put into conservatorship *Stock markets complete their worst week since 1933 *Bank of America buys Merrill 10-Oct *The G-7 holds emergency meeting in Washington 14-Sep *Lehman files for bankruptcy *Corporate spreads reach widest levels since the Great Depression *AIG Bailout *EU countries agree to capital injections into banks 17-Sep *Lloyds buys HBOS in UK government-engineered deal 12-Oct *Guarantee deposits and inter-bank loans *FSA announces short selling restrictions 18-Sep *UK offers details on capital injection plan takes major stakes in HBOS, Lloyds and RBS *Liquidity added through record system repos of $110 billion *MUFG agrees to $9 billion capital injection into Morgan Stanley *Treasury guarantees money market assets *S&P 500 up 11.08%, its best day since 1933 13-Oct *SEC announces new short selling rules 19-Sep *TED spread hit record wide of 436 basis points *TARP plan unveiled *World central banks offer "unlimited" liquidity to banking system *FTSE has biggest one-day gain ever *U.S. Treasury agrees to inject $125 billion of capital into nine banks *Goldman Sachs and Morgan Stanley convert to banks 14-Oct *Increases guarantee on bank deposits and bank debt 22-Sep *Fed loosened rules that limited buyout firms and private investors to take big stakes in *Iceland stock market re-opens and falls 76% banks from 25% to 33% *The DJIA falls 7.87% for its 11th worst day ever (and worst since October 1987) 23-Sep *Berkshire Hathaway invests in Goldman Sachs 15-Oct *ECB expands collateral framework , accepts lower-rated credit instruments and also 25-Sep *Washington Mutual (WaMu) taken over by JP Morgan instruments denominated in $, £ and yen . *Bradford & Bingley nationalised *Swiss government injects $5 billion in UBS and could own 9% It will also acquire $60 27-Sep *Fortis bailed out by Dutch, Belgian, Luxemburg governments billion of illiquid assets *Hypo Real Estate bailed out by German government-sponsored lenders 16-Oct *Credit Suisse raises SF 10bn 28-Sep *Glitnir bailed out by Icelandic government *French President Sarkozy calls for a "revamp of capitalism" *Citigroup takes over banking business of Wachovia with FDIC guarantees *Bank of England eases rules for borrowing at the discount window *Ireland guarantees all deposits *The Netherlands Government injects $13.4 billion into ING Groep NV 29-Sep *House rejects TARP plan 20-Oct *EU loosens mark-to-market rules on European Banks *DJIA falls a record 777 points *South Korean Government Guarantees Up To $100 Billion in Bank Loans *Belgian government bails out Dexia *France Injects $14 billion into top 6 banks 21-Oct *South Korea, Taiwan, Indonesia Ban Short sales on all stocks temporarily *Pakistan discusses with IMF a $10bn-$15bn support package to stabilise its economy 30-Sep *Fed pumps a record $630B of liquidity into swap lines with foreign central banks 23-Oct * Fed Announces $540 billion facility to but CP from Money Market Funds *Senate passes revised TARP plan * Austrialian Banks Freeze Redemptions 24-Oct *Berkshire Hathaway invests in GE * Stock Futures Limit Down Before NYSE Open *UK lifts depositor guarantee to £50,000 from £35,000, * IMF Money To Urkaine 1-Oct 27-Oct *Well Fargo takes over Wachovia despite Citigroup deal 4 days earlier * IMF Money To Hungray *Fortis bailout amended, Dutch government buys Dutch businesses 28-Oct * DJIA Up 890 Points 3-Oct *TED spread hits record of 340 bps, House passes revised TARP plan * Volkswagon Short squeeze - Stock up 500% *BNP buys rest of Fortis * Bank of China Cuts Rates * Norway Cuts Rates 50 Basis Points *Germany guarantees all individual savers 29-Oct 5-Oct *Hypo Real Estate bailout re-negotiated * Fed Cuts the funds rate 50 basis points to 1.00% *Denmark and Sweden guarantee deposits * Fed Announces $120 billion swap lines with Brazil, South Korea, Singapore and Mexico *Unicredit bailed out in Italy 30-Oct * Fed Increases AIG Loan $21 Billion *FTSE has worst day in over 20yrs, Dow trades down over 800pts at one stage, *Japan cuts Interest Rates to .03 % cut in 7yrs *Federal Reserve boosts TAF auctions to $900bn (last Dec started with $50bn as a 3-Nov *Auto Sales dropped 30 % in October, Worst Since 1945 "temporary measure") 4-Nov * Obama is elected President 6-Oct *Iceland takes control of banking system, 5-Nov * Fed Raises rates it pays on reserves (equal To target rate) *UK government meet with bank CEOs to discuss capital injection 10-Nov * AIG deal renegotiated, Gets $40 billion of TARP Money * China announces $586 Billion stimulus package *RBA cuts rates by 100bps 11-Nov *RBS trades down 40% on talk of UK government injection into banks * Fannie Mae announces $29 Billion loss 7-Oct *Federal Reserve to buy commercial paper direct from companies 12-Nov * Fed changes role of Tarp to Capital Injection Fund *UK bank bailout plan 13-Nov * CIT converts to commercial bank * Bloomberg Sues The Fed For Disclosure on Collaterizled Loans *Coordinated rate cuts with Fed, ECB, BoE, BoC, Riksbank, SNB and PBOC 14-Nov 8-Oct * SEC lifts restrictions of short selling * Deadline for publicly held banks to apply for TARP money *Dow completes worst 6 days in history 15-Nov * G-20 Meeting *European stocks endured worst 3 days since 1987 17-Nov * Goldman Senior Executives Will Not Take A Bonus For 2008 *The DJIA falls 7.33% for its 13th worst day ever 18-Nov * UBS Senior Executives Will Not Take A Bonus For 2008 9-Oct *UK announces plan to recapitalize banking system 20-Nov * S&P 500 slumps 52% from all-time high, worst bear market in 60 years 21-Nov * Fannie/Freddie suspend foreclusres through Janaury 9
Bianco Research, L.L.C December 5, 2008 9 The Credit Crisis: The Largest Outlay In American History
From Our Newsclips/Daily Commentary
Measuring The Size Of The Bailouts As of November 27, 2008 The current bailout cost is greater than all these “big budget events” combined The Federal Reserve Program (Description) Maximum Amount Current Amount (detailed in the link above)! Net Portfolio Commercial Paper Funding (Purchases ST Debt directly from corporate issuers) $1,800.0 $270.9 Term Auction Facility (TAF) •Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion (Banks get loans for as many as 28 days by posting collateral) $900.0 $415.3 Other Assets $601.9 $601.9 •Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion MMIFF •Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion (Money Market Investor Funding Facility) $540.0 $0.0 MBS/FHLB/Agency In Reverse Auctions $600.0 $0.0 •S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion Term Securities Lending Facility (TSLF) (Allows primary dealers to borrow Tsys by posting collateral) $250.0 $190.2 •Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion Other Credit Extensions (The AIG Loan) $122.8 $122.8 •The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est) Primary Credit Discount •Gulf War II / War on Terror: Cost: $551b, Inflation Adjusted Cost: $597 billion (Original Fed lending program for commercial banks) $92.6 $92.6 Asset-Backed Commercial Paper (ABCP) Liquidity •Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion (Loans to banks to buy ABCP from mutual funds) $61.9 $61.9 Primary Dealers and others •NASA (Cumulative): Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion (A discount window for all primary dealers and securities firms) $46.6 $46.6 Net Portfolio Maiden Lane (Bear Stearns Assets) $38.8 $26.9 Securities Lending Overnight Collectively, all the “big budget items” above totaled $3.92 trillion. (one-day loans to banks on collateral) $10.3 $10.3 Secondary Credit $0.1 $0.1 Federal Reserve Total $5,065.0 $1,839.5 Only one big budget item in American history comes close to matching the cost of The FDIC FDIC liquidity guarantees the credit crisis: (Guarantees bank-to-bank loans) $1,400.0 $0.0 Loan Guarantee To Lending Arm of GE $139.0 $139.0 FDIC Total $1,539.0 $139.0 •World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion Treasury Department TARP $700.0 $350.0 Fannie Mae/ Freddie Mac (bailout) $350.0 $0.0 Of course the difference between these items above and the credit crisis is those Stimulus Package (Spring 2008) $168.0 $168.0 Treasury Exchange Stabilization Fund events were expenses whereas the bailout for the credit crisis is considered to be a (Buys and sells Foreign currencies to moderate their fluctuation) $50.0 $50.0 loan. Presumably the government will get most of its money back when these loans Tax Break For Banks $29.0 $29.0 Citibank Asset Backstop $306.0 $0.0 are paid back. Nevertheless, the initial outlays, all done in 2008, vastly exceed TALF $200.0 $0.0 Treasury Total $1,803.0 $597.0 anything seen in American history. FHA Hope for Homeowners (provides loan guarantees for struggling mortgage borrowers) $300.0 $300.0 Other Auto Loans (via Dept. of Energy) $25.0 $0.0 Grand Total $8,707.0 $2,875.5 Sources: CNBC, Bloomberg, WSJ
Bianco Research, L.L.C December 5, 2008 10 Who Gets TARP Money?
Known TARP Money Awarded Known TARP Money Awarded as of December 2, 2008 as of December 2, 2008 Date Amount Date Amount Bank Name Announced (in Millions) Bank Name Announced (in Millions) Citigroup 10/12/2008 $45,000 Taylor Capital 11/8/2008 $105 American International Group 11/12/2008 $40,000 Park National Corp 12/2/2008 $100 Wells Fargo 10/12/2008 $25,000 Midwest Banc Holdings 11/12/2008 $85.5 JPMorgan Chase 10/12/2008 $25,000 Sandy Spring Bancorp 11/20/2008 $83.0 Bank of America 10/12/2008 $15,000 First Financial 10/8/2008 $80.0 Morgan Stanley 10/12/2008 $10,000 Columbia Banking System 11/12/2008 $76.9 Merrill Lynch 10/12/2008 $10,000 TowneBank 11/26/2008 $76.5 Goldman Sachs Group 10/12/2008 $10,000 Independent Bank Corp 11/24/2008 $72.0 PNC Financial Services Group 10/12/2008 $7,700 Virginia Commerce Bancorp 11/26/2008 $71.0 US Bancorp 11/12/2008 $6,600 Southwest Bancorp 11/20/2008 $70.0 Capital One Financial 10/12/2008 $3,550 Superior Bancorp 11/18/2008 $69.0 SunTrust Banks 10/12/2008 $3,500 Nara Bancorp 11/14/2008 $67.0 Regions Financial 10/12/2008 $3,500 First Financial Holdings 12/1/2008 $65.0 Fifth Third Bancorp 10/12/2008 $3,400 CoBiz Financial 11/8/2008 $64.4 BB&T 10/12/2008 $3,100 Wilshire Bancorp 11/20/2008 $62.0 Bank of New York Mellon 10/12/2008 $3,000 Great Southern Bancorp 11/17/2008 $60.0 KeyCorp 10/12/2008 $2,500 American West Bank 11/8/2008 $57.0 Comerica 10/12/2008 $2,250 Center Financial Corp 11/24/2008 $55.0 State Street 10/12/2008 $2,000 NewBridge 11/8/2008 $52.0 Marshall & Ilsley 10/12/2008 $1,700 Ameris Bancorp 11/21/2008 $52.0 Northern Trust 10/12/2008 $1,500 Home Bancshares, Inc 11/21/2008 $50.0 Zions Bancorp 10/12/2008 $1,400 Fidelity Southern Corp 11/24/2008 $48.2 Huntington Bancshares 10/12/2008 $1,400 Captital Bank 11/17/2008 $43.0 Freddie Mac 9/12/2008 $1,000 Southern Community Group 11/18/2008 $42.8 Fannie Mae 9/12/2008 $1,000 First Community Bancshares 10/30/2008 $42.5 Synovus 11/14/2008 $973 Bank of Florida 10/12/2008 $40.7 Popular, Inc 11/18/2008 $950 Simmons First National 10/8/2008 $40.0 First Horizon National 10/12/2008 $866 Heritage Commerce 11/8/2008 $40.0 E-Trade 11/8/2008 $800 Porter Bancorp 11/13/2008 $39.0 M&T bank Corporation 11/20/2008 $600 Peoples Bancorp 11/13/2008 $39.0 Colonial BancGroup 12/2/2008 $550 Cascade Financial 11/12/2008 $39.0 Associated Banc-Corp. 11/8/2008 $530 Eagle Bancorp 11/21/2008 $38.2 Webster Financial 11/12/2008 $400 TIB Financial Corp 12/1/2008 $37.0 City National 10/12/2008 $395 First Defiance Financial Corp 11/24/2008 $37.0 Fulton Financial 11/8/2008 $375 HF Financial Corp 11/14/2008 $35.0 TCF Financial 11/12/2008 $361 Peapack-Glsdstone Financial 11/20/2008 $28.7 South Financial Group 11/14/2008 $347 Bank of Marin Bancorp 12/2/2008 $28.0 Wilmington Trust 11/14/2008 $330 CenterState Banks of Florida 11/24/2008 $27.9 Valley National Bancorp 10/12/2008 $330 Intermountain Community Bancorp 11/7/2008 $27.0 Whitney Holding 11/26/2008 $301 Washington Banking Company 12/1/2008 $26.4 Tennessee Commerce Bancorp 11/25/2008 $300 LNB Bancorp 11/20/2008 $25.2 Susquehanna Bancshares 11/19/2008 $300 VIST Financial Corp 11/24/2008 $25.0 Sterling Financial Corp 11/24/2008 $300 Horizon Bancorp 11/26/2008 $25.0 Citizens Republic Bancorp 11/14/2008 $300 Home Federal Financial 10/12/2008 $25.0 UCBH Holdings 10/12/2008 $298 First California Financial Group 12/2/2008 $25.0 Whitney Holding 10/12/2008 $282 Heritage Financial 11/8/2008 $24.0 Cathay General Bancorp 11/18/2008 $258 Severn Bancorp 11/18/2008 $23.5 Wintrust Financial Corp 11/26/2008 $250 Wainwright Bank & Trust 11/20/2008 $22.0 First Merit 11/13/2008 $248 Indiana Community Bancorp 11/20/2008 $21.5 Trustmark 11/8/2008 $215 Unity Bancorp 11/24/2008 $20.6 Umpqua Holdings 10/12/2008 $214 Citizens South Banking Corp 12/1/2008 $20.5 Washington Federal 10/12/2008 $200 First PacTrust Bank 11/13/2008 $19.3 International Bancshares 10/8/2008 $200 HopFed Bancorp 11/20/2008 $18.4 First Midwest Bancorp 11/12/2008 $193 Redding Bank 10/27/2008 $17.0 Pacific Capital Bancorp 11/12/2008 $188 Bank of Commerce 10/12/2008 $17.0 First Niagara Financial 10/12/2008 $186 Valley National Corp 11/26/2008 $16.0 United Community Banks 11/18/2008 $180 First Financial Services 11/14/2008 $16.0 Old National Bancorp 10/12/2008 $162 The Bank Holdings 11/8/2008 $15.0 Provident Bankshares 10/12/2008 $157 Bridge Bancorp 11/8/2008 $14.3 National Penn Bancshares 11/26/2008 $150 Pamrapo 11/8/2008 $11.4 Boston Private Financial Holdings 11/19/2008 $150 Mackinac Financial 10/8/2008 $11.1 Western Alliance Bancorp 11/13/2008 $140 Mid Penn Bancorp 11/26/2008 $10.0 CVB Financial 11/19/2008 $130 Broadway Financial Corp 11/14/2008 $9.0 Sterling Bancshares 12/2/2008 $125 Central Federal Corp. 11/24/2008 $7.2 Banner Corp 11/12/2008 $124 American River Bancorp 11/24/2008 $6.0 Signature 10/8/2008 $120 Capital Pacific Bancorp 11/8/2008 $4.0 Iberiabank Corp 11/18/2008 $115 Seacoast Commerce Bank 12/1/2008 $1.8 Saigon National Bank 10/12/2008 $1.2 Total $245,318 Bianco Research, L.L.C December 5, 2008 11 The Federal Reserve’s Exploding Balance Sheet
Total Federal Reserve Bank Credit Total System Repo And TAF Outstanding 2,400 2,400 550 550 11/12/2008 495.30 2,200 2,200 500 500 11/19/2008, 2178.89 TAF Auction 2,000 2,000 450 450
1,800 1,800 The Fed's balance sheet 400 400 expanded by over $1 trillion 1,600 billion in the last two months. 1,600 350 350 1,400 1,400 300 300 1,200 1,200 250 250
1,000 1,000
Billions Of DollarsBillions Of DollarsBillions Of DollarsBillions Of DollarsBillions 200 200 800 800 9/10/2008 888.28 150 150 600 600 Y2K 1/5/2000 100 100 400 400 "Sept. 11" 9/19/2001 200 200 50 50
- - 0 0
1/9/1980 2/5/1992 6/9/1993 3/3/2004 7/6/2005 1/1/2003 9/7/2005
5/13/1981 9/15/1982 1/18/1984 5/22/1985 9/24/1986 1/27/1988 5/31/1989 10/3/1990 2/14/1996 6/18/1997 2/23/2000 6/27/2001 11/8/2006 3/12/2008 7/15/2009 4/26/2000 11/8/2000 5/23/2001 12/5/2001 6/19/2002 7/16/2003 1/28/2004 8/11/2004 2/23/2005 3/22/2006 10/4/2006 4/18/2007 5/14/2008
10/12/1994 10/21/1998 10/30/2002 10/13/1999 10/31/2007 11/26/2008
Treasury Securities Lent By The Fed Treasuries As A Percentage Of Total Federal Reserve Bank Credit 260 260 100% 100% 10/1/2008, 255.80 240 240 95% 95% 90% 90% 220 220 85% 85% 200 200 80% 80% 3/26/1986, 78.63% 9/19/2001, 77.80% 180 180 75% 1/5/2000, 75.50% 75% Japanese Long- Sep-11 Bond Squeeze 160 160 70% Y2k 70% 65% 65% 140 140 60% 60% 120 120
55% 55%
Billions Of DollarsBillions Of DollarsBillions Of DollarsBillions Billions Of DollarsBillions 100 7/16/2008 100 50% 50% 104.27 80 80 45% 45%
40% 40% 60 60 35% 35% 40 40 30% 30%
20 20 25% 25% 11/12/2008, 22.27%
0 0 20% 20%
7/9/2003 8/4/2004 5/7/2008 5/9/1984 2/7/1990 6/1/1994 3/1/2000 8/8/2001 5/9/2007
1/21/2004 2/16/2005 8/31/2005 3/15/2006 9/27/2006 4/11/2007 1/16/1980 6/24/1981 12/1/1982 3/25/1987 8/31/1988 7/17/1991 11/8/1995 4/16/1997 9/23/1998 1/15/2003 6/23/2004
12/25/2002 10/24/2007 11/19/2008 10/16/1985 12/23/1992 11/30/2005 10/15/2008 Bianco Research, L.L.C December 5, 2008 12 The Federal Reserve’s Exploding Discount Window
Discount Window Borrowings - Including Brokers (Daily Average For The 7 Day Week) 450 450 10/15/2008, 438
400 400
350 350
300 300
250 250
200 200
BillionsDollars of Billions of DollarsBillions 150 150 Continental Bank Crisis Dealers Borrow From The Window 100 100 Large Number of Bank Failures (most since the great depression) 50 50 Breaking Down Discount Window Borrowings
0 0 Weekly Average For November 12, 2008
Total Chg. From
1/2/1980 9/2/1987 8/2/1989
11/2/1983 10/2/1985 7/10/1991 6/23/1993 5/24/1995 4/30/1997 3/31/1999 2/28/2001 1/29/2003
12/2/1981 Type of Loan (Billions) 10-Sep
11/29/2006 10/29/2008 12/29/2004 Primary Loans (Traditional Bank Borrowings) $95.38 $75.58
Discount Window Borrowings - Banks Only Primary Dealer Credit Facility (PDCF) $64.93 $64.93 (Daily Average For The 7 Day Week) ABCP MMMF Liquidity Facility (New This Week) $80.24 $80.24 116 116 112 112 Other Credit Extensions (Primarily The AIG Loan) $82.28 $82.28 108 108 104 104 Seasonal Credit (Traditional Bank Borrowings) $0.10 $0.01 100 11/12/2008, 95.380 100 96 96 Total $322.93 $303.04 92 92 88 88 84 84 80 80 76 76 72 72 68 68 64 64 60 60 56 56 52 52
48 48 BillionsDollars of Billions of DollarsBillions 44 44 40 40 36 36 32 32 Continental Bank Crisis 28 Computer Breakdown At Bank 28 24 of New York Clearing 24 20 Operations 20 16 16 12 8/22/1984, 9.037 9/12/2001, 11.837 12 8 7/20/1988 8 4 4.224 1/2/2008, 5.77 4
0 0
1/2/1980 9/2/1987 8/2/1989
12/2/1981 11/2/1983 10/2/1985 7/10/1991 6/23/1993 5/24/1995 4/30/1997 3/31/1999 2/28/2001 1/29/2003
12/29/2004 11/29/2006 10/29/2008
Bianco Research, L.L.C December 5, 2008 13 It Is All The Same Trade
S&P 500 S&P 500 1600 1600 1600 1600 1500 1500 1500 1500 1400 1400 1400 1400 1300 1300 1300 1300 1200 1200 1200 1200 1100 1100 1100 1100 1000 1000 1000 1000 900 900 900 900 800 800 800 800 700 700 700 700
0 0 80,000 Brazilian Stocks 80,000 Emerging Market Spreads 70,000 70,000 200 (EMBI+ OAS) 200 Correlation to the S&P 500 = 95.14% 400 400 60,000 60,000 600 600 Does Everything Trade Like The S&P 500? 50,000 50,000 100% 100% 800 800 The eight markets are: This chart shows the least correlated market to the 40,000 40,000 1,000 1,000 1. Brazilian Stocks S&P 500 from a selection of eight markets. The 30,000 30,000 80% 2. Investment Grade Spreads correlation is calculated on a rolling 6-month 80% 1,200 1,200 3. Bond Market Volatiltiy basis. 20,000 20,000 1,400 Correlation to the S&P 500 = 96.92% 1,400 4. Stock Market Volatiltiy 5. Commodities (Reuters/Jeffries CRB 10,000 10,000 1,600 1,600 60% Index) 60% 1,800 1,800 6. Freight Rates (Baltic Dry Index) 0 0 7. The Euro 40% 8. Emerging Market Spreads 40% 0 Investment Grade OAS 0 1.60 Euro 1.60 1.50 1.50 100 100 20% 20% 1.40 1.40 200 200 1.30 1.30 300 300 1.20 1.20 0% 0% 400 Correlation to the S&P 500 = 96.83% 400 1.10 1.10 1.00 1.00 -20% -20% 500 500 0.90 0.90 600 600 0.80 Correlation to the S&P 500 = 90.94% 0.80 -40% -40% 700 700 0.70 0.70
-60% -60% 500 Reuters/Jeffries CRB Index 500 12,000 The Baltic Dry Index 12,000 10,000 10,000 -80% -80% 400 400 Correlation to the S&P 500 = 93.31% Correlation to the S&P 500 = 92.34% 8,000 8,000 -100% -100% 300 300 6,000 6,000
4,000 4,000
200 200
8/5/1999
9/20/2000 11/5/2001 12/4/2002 1/16/2004 2/24/2005 3/21/2006 4/16/2007 5/27/2008 5/19/2009 2,000 2,000 7/17/1998
100 100 0 0
0 0 The MOVE Index 0 The VIX 0 50 50 20 20 100 100 40 40 150 150 60 Correlation to the S&P 500 = 97.69% 60 200 Correlation to the S&P 500 = 85.37% 200 250 250 80 80
300 300 100 100
1/5/1998 3/1/2001 4/8/2003 7/2/2008 1/5/1998 3/1/2001 4/8/2003 7/2/2008
1/12/1999 1/27/2000 3/25/2002 4/28/2004 5/19/2005 5/31/2006 6/12/2007 6/10/2009 1/12/1999 1/27/2000 3/25/2002 4/28/2004 5/19/2005 5/31/2006 6/12/2007 6/10/2009
Bianco Research, L.L.C December 5, 2008 14 Medicated Market - LIBOR And The TED Spread
3-Month Libor vs. 3-Month T-Bills From Our Newsclips/Daily Commentary 6.0% 6.0% 3-Month Libor 5.5% 5.5% Comment – With LIBOR stabilizing nearly 200 basis 5.0% 5.0% points above the 3-month T-bill rate, it is still at what
4.5% 4.5% would have been considered a panic level any time before Labor Day. Just because current rates “look 4.0% 4.0% good” relative to the levels of early October does not 3.5% 3.5% mean this market is well. 3.0% 3.0%
2.5% 3-Month T-Bills 2.5% Further, as we have been highlighting, LIBOR and commercial paper are what we called “medicated 2.0% 2.0% markets.” Government involvement (medication) is so 1.5% 1.5% large in these markets that it is almost questionable 1.0% 1.0% whether they can still be considered markets. Who is
0.5% 0.5% buying term commercial paper other than the Federal Reserve? If investors are not buying, is it still a 0.0% 0.0% market? Over half the banks that report LIBOR are 5.00% The Difference Between 3-Month Libor And 5.00% receiving government assistance (marked in red in the 3-Month Treasury Bills or TED Spread 4.50% 4.50% table above), and they are being told publicly to “do
4.00% 4.00% something” about the high level of LIBOR. Furthermore, with over $1 trillion in Term Auction 3.50% 3.50% Facilities (TAF) and swap agreements designed to 3.00% 3.00% manipulate LIBOR, can we honestly consider this a freely traded market? 2.50% 2.50%
2.00% 2.00% Given the high level of manipulation from the Federal
1.50% 1.50% Reserve/Treasury, we believe it is impossible to say if these “markets” are getting better. Only when 1.00% 1.00% government involvement subsides and these rates can 0.50% 0.50% stand on their own can we say things are getting better.
0.00% 0.00% Currently, these markets are a long way from this
happening.
8/1/2008
6/30/2006 9/11/2006 1/31/2007 4/12/2007 6/21/2007 8/29/2007 11/7/2007 1/14/2008 3/20/2008 5/27/2008 10/8/2008
11/17/2006 12/15/2008
Bianco Research, L.L.C December 5, 2008 15 Medicated Market - Commercial Paper
30 Day AA-Rated Commercial Paper Rates 6.50 6.50
6.00 9/30/2008 6.00
5.50 5.50 Asset Backed 5.00 5.00
4.50 Financial 4.50
4.00 4.00
3.50 3.50
3.00 3.00 Outstanding Levels of Financial Commercial Paper
2.50 2.50 900 900 5/21/2008, 886.39 2.00 2.00 850 850 1.50 1.50 Non-Financial 9/10/2008 1.00 1.00 808.08 800 800 0.50 0.50
0.00 0.00
750 750
8/8/2007 9/6/2007 1/3/2008 2/1/2008 3/3/2008 4/1/2008
4/17/2007 5/15/2007 6/12/2007 7/11/2007 10/4/2007 11/2/2007 12/4/2007 4/29/2008 5/28/2008 6/25/2008 7/24/2008 8/21/2008 9/19/2008 11/18/2008
10/20/2008 700 700 BillionsofDollars Percentage Of Commercial Paper That Matures in Less Than 4 Days BillionsofDollars Financial Companies Only 650 650 100% 100%
95% Blue = 5-Day Moving Average 11/13/2008, 91.83% 95% Gray = Single Day Reading 600 600 90% 90%
85% 85% 10/22/2008, 569.35 80% 80% 550 550
75% 75%
70% 70% 500 500 65% 65%
60% 60%
9/6/2006 4/4/2007 8/8/2007 3/5/2008 7/9/2008
6/14/2006 7/26/2006 1/10/2007 2/21/2007 5/16/2007 6/27/2007 9/19/2007 1/23/2008 4/16/2008 5/28/2008 8/20/2008 10/1/2008
11/29/2006 10/31/2007 12/12/2007 11/12/2008 12/24/2008 55% 55% 10/18/2006
50% 9/12/2008 50% 51.07% 45% 45%
40% 40% 11/26/2008 35% 35%
30% 30%
25% 10/29/2008 25%
20% 20%
2/1/2008 3/6/2008 4/9/2008 7/2/2008 8/6/2008
1/16/2008 2/19/2008 3/24/2008 4/25/2008 5/13/2008 5/29/2008 6/16/2008 7/21/2008 8/22/2008 9/10/2008 9/26/2008 12/8/2008
12/31/2007 10/15/2008 10/31/2008 11/19/2008 Bianco Research, L.L.C December 5, 2008 16 Agency Spreads – The Fed Replaces The Chinese
5-Year Swap And 5Year FNMA/TSY Spreads From Our Recent TIC Update 1.80 1.70
1.70 1.60 1.60 Net Purchases of U.S. Government Agency Securities by Total Asia 1.50 (Monthly Flows) 1.50 1.40 24 24 1.40 1.30 1.30 20 20 1.20 1.20 1.10 16 16 1.10 1.00 1.00 12 12 0.90 0.90 0.80 8 8 0.80 0.70 0.70 5-Year Swap Spreads 4 4 0.60 0.60 5-Year FNMA 0 0 0.50
0.50 Spreads Billionsof Dollars Billionsof Dollars 0.40 0.40 -4 -4 0.30 0.30 -8 -8 0.20 0.20
-12 -12
3/8/2007 8/9/2007
9/29/2006 1/16/2007 4/27/2007 6/19/2007 10/1/2007 1/16/2008 3/10/2008 4/29/2008 6/19/2008 8/11/2008 9/30/2008
11/23/2007 11/20/2008 -16 -16 11/21/2006
-20 -20 10-Year Swap And 10Year FNMA/TSY Spreads
Net Purchases of U.S. Government Agency Securities by Total Asia 2.00 2.00 1.90 1.90 175 (12-Month Rolling Sum) 175 1.80 1.80 1.70 1.70 10-Year FNMA 150 150 1.60 Spreads 1.60 1.50 1.50 1.40 1.40 125 125 1.30 1.30 1.20 1.20 100 100 1.10 1.10 1.00 1.00 0.90 0.90 75 75 0.80 0.80 10-Year Swap
0.70 Spreads 0.70 Billionsof Dollars Billionsof Dollars 50 50 0.60 0.60 0.50 0.50 0.40 0.40 25 25 0.30 0.30 0.20 0.20
0 0 0.10 0.10 0.00 0.00
-25 -25
3/8/2007 8/9/2007 1/9/2009
9/29/2006 1/16/2007 4/27/2007 6/19/2007 10/1/2007 1/16/2008 3/10/2008 4/29/2008 6/19/2008 8/11/2008 9/30/2008
11/21/2006 11/23/2007 11/20/2008
Jul-86 Jul-91 Jul-96 Jul-01 Jul-06
Mar-83 Nov-84 Mar-88 Nov-89 Mar-93 Nov-94 Mar-98 Nov-99 Mar-03 Nov-04 Mar-08 Bianco Research, L.L.C December 5, 2008 17 Mortgage Spreads – Not Getting Worse
Fannie Mae 30-Year Mortgage Spreads Jumbo 30-Year Fixed Mortgage Rates vs. 2.60 2.60 Conforming 30-Year Fixed Mortgage Rates 11/20/2008 7.75% 7.75% 2.324 2.40 3/6/2008, 2.385 2.40 10/28/2008 7.50% 7.50%
2.20 8/18/2008 2.20 7.25% 7.25%
Jumbo Mortgage Rates 2.00 2.00 7.00% 7.00% (More Than $417,000) 11/20/2007 1.80 1/23/08 1.80 6.75% 6.75%
6.50% 6.50% 1.60 8/16/2007 1.60
5/8/2008 9/15/2008 6.25% 6.25% 1.40 1.40
6.00% 6.00% 1.20 1.20
5.75% 5.75% 1.00 1.00 5.50% Conforming Mortgage Rates 5.50% (Less than $417,000) 0.80 0.80
5.25% 5.25%
7/9/2007 2/5/2008
6/4/2007 5.00% 5.00%
9/29/2006 11/3/2006 12/8/2006 1/16/2007 2/20/2007 3/26/2007 4/30/2007 8/10/2007 9/14/2007 3/11/2008 4/14/2008 5/16/2008 6/19/2008 7/23/2008 8/26/2008 9/29/2008 12/4/2008
10/19/2007 11/26/2007 12/31/2007 10/31/2008 The Difference Between Jumbo 30-Year Fixed Mortgage Rates 1.60% 1.60% 10-Year Treasury Yields And And Conforming 30-Year Fixed Mortgage Rates 1.52% 30-Year FNMA Mortgage Yields 3/26/2008 1.51% 6.50 6.50 1.40% 1.40%
6.00 6.00 1.20% 1.20%
5.50 5.50 1/23/2008 30-Year FNMA Yields 1.00% 1.00%
5.00 5.00 0.80% 0.80%
4.50 4.50 0.60% 0.60% 10-Year Treasuries 4.00 4.00
0.40% 0.40% 3.50 3.50
0.20% 0.20% 3.00 3.00 Source: Bankrate.com 0.00% 0.00%
2.50 2.50
8/1/2004 1/4/2007 2/1/2008 5/9/2008
11/5/2004 2/14/2005 5/23/2005 8/29/2005 12/5/2005 3/16/2006 6/22/2006 9/28/2006 4/12/2007 7/19/2007 8/15/2008
10/26/2007 11/24/2008
6/4/2007 7/9/2007 2/5/2008
9/29/2006 11/3/2006 12/8/2006 1/16/2007 2/20/2007 3/26/2007 4/30/2007 8/10/2007 9/14/2007 3/11/2008 4/14/2008 5/16/2008 6/19/2008 7/23/2008 8/26/2008 9/29/2008 12/4/2008
10/19/2007 11/26/2007 12/31/2007 10/31/2008 Bianco Research, L.L.C December 5, 2008 18 Muni Spreads – Still At Panic Levels
General Obligation Municipal Yields As Percentage of Treasury Yields Reuters - Massachusetts explores funding options 185% 185%
180% 12/2/2008 180% 175% 175% Massachusetts' state treasurer has asked the federal government 170% 170% about borrowing money under similar conditions that banks have 165% 165% 160% 160% received if the state runs into financial trouble during the current 155% 155% 10/22/2008 financial crisis. "I hope that the money won't be needed," Rep. 150% 150% 145% 145% Barney Frank, a Massachusetts Democrat and the powerful head 140% 140% of the House Financial Services Committee, told Reuters on 135% 135% 3/17/2008 130% 130% Monday. "But if it is, there is no better borrower than the state," he 125% 125% said. Treasurer Tim Cahill last week explored the possibility of 120% 120% 115% 115% going to the Federal Reserve to borrow money if needed. 10-Year 110% 110% 105% 105% Comment - It is tempting to joke about two "blue states" asking for 100% 100% 95% 95% a bailout. However, as the two charts below show (same series, 90% 5-Year 90% different time periods), the muni market is in chaos again. General 85% 85% 80% 80% obligation bonds as a percentage of Treasury yields are at their
highest level ever. The previous record was during the Bear
9/3/07 1/7/08 6/2/08 8/4/08
8/13/07 9/24/07 11/5/07 1/28/08 2/18/08 3/10/08 3/31/08 4/21/08 5/12/08 6/23/08 7/14/08 8/25/08 9/15/08 10/6/08 12/8/08
11/26/07 12/17/07 10/27/08 11/17/08 10/15/07 Stearns failure, which led directly to the Auction-Rate Securities
General Obligation Municipal Yields As Percentage of Treasury Yields (ARS) implosion.
160% 160% 12/2/2008, 157.16% Add munis to the ever-growing list of crisis markets. 150% 150%
140% 140% Bloomberg.com – Joe Mysak: Begging for Bailout Cash, U.S 10/22/2008, 137.73% Cities Told to Go Fish 130% 130% Atlanta, Detroit, Philadelphia and Phoenix have all asked in recent
120% 120% days for some of the Troubled Asset Relief Program billions. You
3/17/2008, 113.13% can expect more to ask. Some want the government to spend the 110% 110% 10/31/2002 money on infrastructure-construction projects and to buy short-term 106.71% 100% 100% note issues to help tide them over. Others want the money to help 10/15/1998 91.38% 90% 90% pay for employees and mass transit, among other things. Whether you're a municipal bond investor or simply a taxpayer, this should 80% 80% make you feel a little queasy. This isn't good news. 10-Year Maturity 70% 70%
60% 60%
Jul-97 Jul-07
Apr-98 Oct-99 Apr-08
Jan-92 Jun-94 Jan-99 Jun-04 Jan-09
Mar-91 Mar-95 Mar-05
Feb-02
Nov-92 Aug-93 Dec-95 Sep-96 Aug-00 Nov-02 Aug-03 Dec-05 Sep-06 May-01 Bianco Research, L.L.C December 5, 2008 19 Credit Spreads Are At Their Worst Levels
Investment Grade Spreads Measuring Leveraged Loans The Option-Adjusted Spread (OAS) of the Merrill Investment Grade Corporate Master Index LCDX Index - Price 700 700 101 101 12-Oct 100 100 650 12/2/2008, 650 650 99 99
600 600 98 98 Roll to New Series 10-Dec 97 97 550 550 96 96 500 500 95 95 94 94 450 450 93 93 400 400 92 27-Jul 92 91 91 350 350
90 90
BasisPoints BasisPoints Percent of Par Percent 300 3/26/2008, 316 300 of Par Percent 89 89 10/10/2002, 267 88 88 250 250 87 87 12/8/2000, 203 200 200 86 86 85 85 11/4/1998, 144 150 150 84 84 5/19/2005, 110 83 LCDX is a tradeable index with 100 equally-weighted underlying 83 100 100 16-Oct, 82.44 82 single-name loan-only credit default swaps (LCDS). The default 82 5/28/1998, 69 3/10/2005, 79 2/26/2007, 86 swaps each reference an entity whose loans trade in the secondary 18-Nov, 82.31 50 50 81 leveraged loan market, and in the more recent LCDS market. 81
80 80
5-Jul 3-Jul
5/6/2002 4/6/2004 9/1/2006 2/2/2009
9-Apr
6-Jun 5-Jun
2-Aug 1-Aug
19-Jul 18-Jul
7-May
6/24/1998 6/11/1999 12/3/1999 5/26/2000 5/14/2001 11/8/2001 4/22/2003 9/28/2004 3/29/2005 9/16/2005 3/14/2006 2/28/2007 8/21/2007 2/20/2008 8/13/2008
23-Apr
15-Oct 29-Oct 14-Oct 28-Oct
20-Jun 11-Jan 28-Jan 19-Jun
11-Feb 26-Feb 11-Mar 26-Mar
16-Aug 30-Aug 14-Sep 28-Sep 12-Dec 27-Dec 15-Aug 29-Aug 15-Sep 29-Sep
13-Nov 28-Nov 12-Nov
22-May 21-May
12/31/1997 12/16/1998 11/17/2000 10/25/2002 10/10/2003
High Yield Spreads iTraxx CDX Europe Crossover Index The Option-Adjusted Spread (OAS) of the Merrill High Yield Master Index Entities in Europe Straddling The Divide Between Investment Grade and High Yield 2,200 2,200 1,100 1,100
12/3/2008, 998.67 2,000 12/2/2008, 2,019 2,000 1,000 1,000
1,800 1,800 900 900
1,600 1,600 800 800
1,400 1,400 700 700
1,200 1,200 3/10/2008, 636.12 9/28/2001 10/10/2002, 1,097 600 600 1/2/2001 994
1,000 908 1,000
Basis Points Basis Basis Points Basis 5/17/2005 7/30/2007 3/17/2008, 862 500 461.30 500 800 800 452.02 10/19/1998 654 400 GM/Ford 400 600 5/9/2002 5/18/2005 600 Downgrades 5/19/2008 671 455 396.02 400 400 300 300
10/11/2007 200 3/30/1998 3/11/2005 6/5/2007 200 200 5/2/2006 269.67 200 255 273 241 3/8/2005 224.52 149.66 2/22/2007 0 0
100 170.81 100
5/6/2002 4/6/2004 9/1/2006 2/2/2009
6/7/2005 8/3/2005 9/5/2007
6/24/1998 6/11/1999 12/3/1999 5/26/2000 5/14/2001 11/8/2001 4/22/2003 9/28/2004 3/29/2005 9/16/2005 3/14/2006 2/28/2007 8/21/2007 2/20/2008 8/13/2008
6/24/2004 8/20/2004 2/10/2005 4/11/2005 9/29/2005 1/25/2006 3/30/2006 5/26/2006 7/25/2006 9/20/2006 1/17/2007 3/15/2007 5/11/2007 7/10/2007 11/1/2007 2/28/2008 4/29/2008 6/25/2008 8/21/2008
10/18/2004 12/14/2004 11/25/2005 11/15/2006 12/31/2007 10/17/2008 12/12/2008
12/31/1997 12/16/1998 11/17/2000 10/25/2002 10/10/2003 Bianco Research, L.L.C December 5, 2008 20 The Stock Market Decline Now Rivals The 1930s
The S&P 500
10,000 10,000
1,000 1,000
100 100
10 10
1 1
SPX Draw Down (The Percentage From High Since March 24, 2000, Closes only) 0% 0%
-10% -10%
-20% -20%
-30% 8/12/1982 -30% 6/27/1962 10/19/1987 -27.11% -27.59% -33.17% -40% 5/26/1970 -40% -36.06% 10/4/1974 10/9/2002 -48.15% -49.15% -50% 11/17/1949 -50%
11/20/2008 6/13/1949, -57.43% -60% -51.93% -60%
-70% -70%
4/28/1942, -76.53% -80% -80%
7/8/1932, -86.15% -90% -90%
-100% -100%
1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Bianco Research, L.L.C December 5, 2008 21 Bianco Research L.L.C. Arbor Research & Trading, Inc. 1000 Hart Road, Suite 260 Clybourn Galleria Barrington IL 60010 1731 N. Marcey Street Suite 510 Phone: (847) 304-1560 Fax: (847) 304-1595 Chicago IL 60614 e-mail: [email protected] http://www.arborresearch.com Phone: (847) 304-1511 Fax: (847) 304-1749 Domestic - For more information about Arbor Research & e-mail: [email protected] Trading and its services: http://www.biancoresearch.com New York Sales Office For more information about the contents/ opinions The Chrysler Building contained in these reports: 405 Lexington Ave President (847) 756-3599 New York, NY 10174 James A. Bianco [email protected] Edward T. McElwreath [email protected] Phone (212) 867-5326 Fax (212) 370-1218 Strategist/Analysts (847) 304-1511 Howard L. Simons [email protected] International - For more information about Arbor Research Greg Blaha [email protected] & Trading and its services: Ryan Malo [email protected] London Sales Office 4 Broadgate, 2nd Floor, Room 57 For subscription/service Information: London England EC2M 2QY Arbor Research & Trading, Inc. Phone 44-207-965-4784 Fax 44-207-965-4787 Director of Sales & Marketing (800) 606-1872 Neil Tritton [email protected] Fritz Handler [email protected] Ben Gibson [email protected] European Sales James L. Perry [email protected] Phone (847) 756-3510 Fax (847) 304-1595 Rich Kleinbauer [email protected] Phone (41) 22 363-9229 Far East Sales Robert Reynolds [email protected] Copyright 2008 Bianco Research, L.L.C. Phone (847) 756-3680 Fax (435) 647-3073 This message is intended only for the personal and confidential use of the designated recipients named above. If you are not the intended recipient of this message you are hereby notified that any review, dissemination, distribution or copying of this message is strictly prohibited. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Bianco Research LLC. Email transmission cannot be guaranteed to be secure or error-free. Therefore, we do not represent that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice.