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From PLI’s Course HandbookMergers & Acquisitions 2008: What You Need to Know Now#14049
9
WHAT CAUSED THE 2007CREDIT CRUNCH?—POWERPOINT PRESENTATION
Jonathan CaryMerrill Lynch Investment Banking
© Copyright 2007
Attachment I: Copyright © 2006 Peter K. Yu.Reprinted with permission of the author
Attachment II: Copyright © 2005 Peter K. Yu.Reprinted with permission of the author.
Jonathan Cary is a Managing Director in Merrill Lynch’s Financial Sponsors group. Jonathan has worked
in investment banking since 1992 and completed numerous transactions in both Asia and the United States.
He covers a number of the larger private equity firms in the US. Selected transactions include IPO’s for
Blackstone, Select Medical, Dex Media, Prestige Brands, Valor Communications, and Huntsman. He has
also completed numerous debt financings including the $2.4 billion LBO of Select Medical and $5.2 billion
LBO of Jefferson Smurfit. In 2007 he completed the $6.3 billion buyout and financing for Nuveen
Investments. He has a Bachelor of Business Degree with Honors from the University of Technology in
Sydney, a Masters of Finance from the Securities Institute of Australia and was admitted to the Australian
Institute of Chartered Accountants. He moved from Australia to the United States in 1995.
Table of Contents
What Caused the 2007 Credit Crunch?Presentation to PLI M&A Seminar
1. Stylized Facts
2. Causes
3. Consequences
4. Attempts at Resolution
June 2007 Current
Rates:
Fed Funds Target Rate 5.25% ê 2.00%
2Yr Treasuries Bid 4.89 ê 2.64
AAA Corporate Spreads 0.66 é 1.58
High Yield Spreads (1)
2.98 é 7.35
Equity Market:
Dow Jones 13,360 ê 11,382
S&P 500 1,503 ê 1,285
Financials Mkt Cap/S&P 500 22% ê 15%
Volatility (VIX) Index 15.75 é 23.65
Credit Quality:
Prime Mortgage Delinquencies 2.73% é 3.71%
Sub-Prime Mortgage Delinquencies 14.82 é 18.79
ABX Historical Price (2)
54.5 é 54.1
Economic:
2008 Real GDP Forecast (3)
2.4% ê 1.4%
Unemployment 4.60 é 5.50
New Jobs (4)
190,000 ê 55,000
Probability of Recession (WSJ) 23% é 61%
Consumer Sentiment Index (5)
101.9 ê 67.6
Stylized FactsChanging Investor Sentiment & Market Outlook
Flight to Quality: Treasuryyields have fallen and credit
spreads have widened
Equity Market Correction:Higher volatility, with financialstocks declining precipitously
Mortgage Market Mess:Rising delinquencies, falling
home prices
Recession Fears:Growth is slowing and
confidence in U.S. economyis declining
____________________Source: FactSet, Markit, Wall Street Journal, Bloomberg and Wall Street research. Market value data as of July 1, 2008.(1) High yield spreads are US high yield master II spreads. Data as of July 1, 2008.(2) ABX BBB 07-01 historical prices.(3) Consensus.(4) Nonfarm payroll, based on consensus.(5) Consumer sentiment index per university of Michigan Survey.
1
Credit Crunch: A Snapshot
Stylized FactsTimeline
____________________Source: Bloomberg, Financial Times, The Wall Street Journal.
2
Date Event
15 June Moody's downgrades the rating of 131 ABSs backed by subprime home loans and places about 250 bonds on review for downgrade
20 June News reports suggest that tow Bear Stearns-managed hedge fund invested in securities back by subprime mortgage loans are close to
being shut down
22 June One of the troubled hedge funds is bailed out through an injection of $3.2 billion in loans
10 July S&P places $7.3 billion worth of 2006 vintage ABSs backed by residential mortgage loans on negative ratings watch and announces a
review of CDO deals exposed to such collateral; Moody's downgrades $5 billion worth of subprime mortgage bonds
11 July Moody's places 184 mortgage-backed CDO tranches on downgrade review; further reviews and downgrades are announced by all major
rating agencies in the following days
24 July US home loan lender Countrywide Financial Corp reports a drop in earnings and warns of difficult conditions ahead
26 July The NAHB index indicates that new home sales slid by 6.3% year on year in June; DR Horton, the largest homebuilder in the United
States, reports an April-June quarter loss
30 July Germany's IKB warns of losses related to the fallout in the US subprime mortgage market and reveals that its main shareholder,
Kreditanstals für Wiederaufbau (KfW), has assumed its financial obligations from liquidity facilities provided to an asset-backed
commercial paper (ABCP) conduit exposed to subprime loans
31 July American Home Mortgage Investment Corp announces its inability to fund lending obligations; Moody's reports that the loss expectations
feeding into the ratings for securitizations backed by Alt-A loans will be adjusted
1 August Further losses exposed at IKB lead to a 3.5 billion rescue fund being put together by KfW and a group of public and private sector banks
6 August American Home Mortgage Investment Corp files for Chapter 11 bankruptcy, leading to a term extension on outstanding ABCP by one of
its funding conduits
9 August BNP Paribas freezes redemptions for three investment funds, citing an inability to appropriately value them in the current market
environment; the ECB injects 95 billion of liquidity into the interbank market; other central banks take similar steps
17 August The Federal Reserve's Open Market Committee issues a statement observing that the downside risks to growth have increased
appreciably; the Federal Reserve Board approves a 50 basis point reduction in the discount rate and announces that term financing will
be provided for up to 30 days
Key Events Leading to Credit Crisis
3
Stylized FactsWhen Compared To Prior Market Dislocations, The Current CrisisIs Proving To Be The Most Challenging For Credit Markets
0
50
100
150
200
250
300
350
Jul-72 Jul-75 Jul-78 Jul-81 Jul-84 Jul-87 Jul-90 Jul-93 Jul-96 Jul-99 Jul-02 Jul-05 Jul-08
Corp
. Spre
ad (bps)
0
5
10
15
20
25
Fed Funds Rate (%
)
Corp Spread (left) Fed Funds Rate (Right)
Recession/Bank Failure
Recession (Double-dip)
Corporate Raiders
Recession/RTC
Monetary Shock
Orange Cnty
IEM Crisis
Tight Policy to Squas
Irrational Exuberance
Subprime Contagi
Fraud/Corp Governanc
4
Stylized FactsCredit Spreads Across Asset Classes Are Near 10 Year Highs
Credit Spread Snapshot (bps) (1)
Corporate Spreads
AA Industrial index credit spreads
BBB Industrial index credit spreads
B High yield index credit spreads
Financials
Broker Dealer CDS
Bank CDS
Commercial Mortgages
CMBX AAA
CMBX AA
Residential Mortgages
AAA Home Equity ABS
BBB – AA Home Equity ABS
Agency ABS
BBB Municipals
____________________Source: MLX and Bloomberg. Data as of June 30, 2008.(1) OAS Spreads.
Current level (June 30, 2008) Historic min/max Pre June '07 max
694461 66 205
43726756 192
362338 59 186
39931657 216
1107778236
37 155134 149
36728490
68454171 260
7 280134
What started as a housing/subprime problem has become a systemic credit problem that has prompted a retrenchment from risky assetscausing a widening of credit spreads in riskier asset classes.
1875136 461 1679
14 125122 189
5
Stylized FactsHigh Yield Index
High Yield Master II
____________________Source: MLX.
Spread (Bps)
0
200
400
600
800
1,000
1,200
1/2/97 8/24/98 4/15/00 12/5/01 7/28/03 3/18/05 11/8/06 6/29/08
6
Stylized FactsABX - AAA/BBB Indices
____________________Source: Markit.
0.00
20.00
40.00
60.00
80.00
100.00
120.00
1/2/07 4/21/07 8/8/07 11/25/07 3/13/08 7/1/08
AAA 06-2 BBB 06-2 AAA 06-1 BBB 06-1
AAA 06-1
AAA 06-2
BBB 06-2
BBB 06-1
7
Stylized FactsAsset Backed Commercial Paper
ABCP Outstanding
____________________Source: Federal Reserve Board.
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1/3/07 3/4/07 5/4/07 7/4/07 9/2/07 11/2/07 1/2/08 3/2/08 5/2/08 7/2/08
ABCP Outstanding($ in Millions)
(38%)
8
Stylized FactsHigh Yield and Monthly Loan New Issuances have DeclinedDramatically in 2008
High Yield New Issue Volume($ in Billions) (1)
Monthly Loan New Issue Volume($ in Billions) (2)
____________________(1) Deals Priced as of Q2 2008. Source: Merrill Lynch.(2) Source: S&P Leveraged Commentary & Data.
Jan - Jun
2007
Jan - Jun
2008 YoY
Proceeds $113.4 $28.1 (75.2%)
# of Transactions
211 56 (73.5%)
Jan - Jun
2007
Jan - Jun
2008 YoY
Proceeds $329.8 $95.7 (71.0%)
# of Transactions
826 221 (73.2%)
$0
$5
$10
$15
$20
$25
$30
Jan-0
7
Feb-0
7
Mar-
07
Apr-
07
May-
07
Jun-0
7
Jul-07
Aug-0
7
Sep-0
7
Oct-
07
Nov-
07
Dec-
07
Jan-0
8
Feb-0
8
Mar-
08
Apr-
08
May-
08
Jun-0
8
$0
$10
$20
$30
$40
$50
$60
$70
$80
Pro Rata InstitutionalJa
n-0
7
Feb-0
7
Mar-
07
Apr-
07
May- 07
Jun-0
7
Jul-07
Aug-0
7
Sep-0
7
Oct-
07
Nov-
07
Dec-
07
Jan-0
8
Feb-0
8
Mar-
08
Apr-
08
May-
08
Jun-0
8
9
Stylized Facts
($ in Billions)
____________________Source: Totals based off publicly available data.Note: Totals are as of the beginning of each month.
$88$119
$131$152$163$162$171
$209$232$237 $63
$67$70
$67$67$74
$81
$101
$100$107
$0
$50
$100
$150
$200
$250
$300
$350
$400
$345$332
$310
$252$236
$229$218
$201$186
$151
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08
(56%)
The Supply Overhang Has Declined Significantly Since Aug. '07
Bank BondOutstanding Commitments
10
Stylized FactsHistorical CLO Formation
($ in Billions)
Robust demand for leveraged loan paper was driven by a reliable bid by CLOs, which accounted for 63% of total demand in 1H07. Sincethen, CLO new issuance has decreased dramatically.
$1.9
$1.1
$3.8
$1.5
$0.7
$1.7
$6.1
$5.0
$7.8
$6.1
$3.9
$10.4
$10.8$11.6
$10.2
$12.1
$2.5
$10.8
$13.4
$7.3
$4.6
$13.5
$5.3
$10.8
$8.1
$6.4
$9.0
$5.6
$2.1
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
Jan-0
6
Feb-0
6
Mar-
06
Apr-
06
May-
06
Jun-0
6
Jul-06
Aug-0
6
Sep-0
6
Oct
-06
Nov-
06
Dec-
06
Jan-0
7
Feb-0
7
Mar-
07
Apr-
07
May-
07
Jun-0
7
Jul-07
Aug-0
7
Sep-0
7
Oct
-07
Nov-
07
Dec-
07
Jan-0
8
Feb-0
8
Mar-
08
Apr-
08
Cale
ndar
____________________Source: S&P Leveraged Commentary & Data.
LTM $112.5Bn LTM $39.6Bn
11
CausesCredit Crisis Cycle
And the Crisis Unfolded…
Historically Low Interest Rates
RisingUnemployment
Relaxation in Mortgage Lending
Poor Underwriting
Increase in Defaults and Delinquencies
Subprime Crisis
Market Struggles With CDS Repricing Risk Lack of Transparency or Risk Distribution
Write Downs at Banks Negative Impact on Market
Macroeconomic Consequences Increase in Credit Spreads
More Trouble for LBOs (CLOs)
CausesHistorically Low Interest Rates…
Federal Reserve Target Rate vs. 10 Y Treasury Note
12
____________________Source: FactSet and Mortgage Information Service.(1) The index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for
the last 5 working days of the month.
From 2002 to 2005, monetary policy has been accommodating.
Contract Mortgage Yield (CMY) (1) Fed Target Rate/10 Y Treasury
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1980 1984 1988 1992 1996 2000 2005 2008
CMY Fed Target Rate 10 Y Treasury
Low Rates Lead toIncreased Liquidity
Causes…Fueled Increasing U.S. Household Indebtedness
13
0.00x
0.20x
0.40x
0.60x
0.80x
1.00x
1.20x
1.40x
1.60x
1973 1976 1980 1984 1988 1991 1995 1999 2003 2007
2001: 1.03x
2007: 1.36x
1973: 0.64x
____________________Source: Federal Reserve Board, Funds of Flows.
U.S. household leverage rose almost as much in the past five years as it did in the previous 28 years.
U.S. HouseholdDebt/Income Ratio
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1945 1952 1959 1966 1973 1979 1986 1993 2000 2007
Causes…and in particular Mortgage Debt
14
Low interest rates and rising home prices led to an unprecented mortgage indebtedness.
____________________Source: Federal Reserve Board and Bureau of Economic Analysis.
Mortgage Debt to GDP
CausesSoaring Home Prices
Real Home Price Index – S&P/Case-Shiller Index
15
0
50
100
150
200
250
1987 1989 1991 1993 1996 1998 2000 2002 2005 2007
Home Price Index
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
____________________Source: S&P/Case-Shiller Index.(1) Includes the largest 10 cities in the U.S.(2) Includes the largest 20 cities in the U.S.
YoY % ChangComposite-10 (2)Composite-20 (1)
YoY%Changes
Rising home prices were both a cause and a consequence of increasing household leverage.
June 2007
Composite-20
Composite-10
YoY % Change
(40.0%)
(20.0%)
0.0%
20.0%
40.0%
60.0%
80.0%
Commercial Real Estate Residential Mortages
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
CausesRelaxation in Mortgage Lending Standards from 2001 through 2006
Percentage of Banks Reporting Tightening Standards
16
____________________Source: Federal Reserve Bank, Senior Loan Officer Opinion Survey on Bank Lending Practices.
Tighter
Tighter
Tighter
Easier
Easier
Easier
June 200
Causes
Relaxation in Mortgage Lending Standards from 2001 Through 2006
17
Rise of Subprime Origination andSecuritization (1)
Underwriting Standards in SubprimeHome-Purchase Loans (2)
____________________(1) Source: Inside Mortgage Finance, Inside MBS/ABS.(2) Source: Freddie Mac via IMF.
Year
ARM
Share
IO
Share
Low/No
Doc Share
Debt
Payment to
Income Ratio
Average
LTV Ratio
2001 73.8% 0.0% 28.5% 39.7% 84.0%
2002 80.0% 2.3% 38.6% 40.1% 84.4%
2003 80.1% 8.6% 42.8% 40.5% 86.1%
2004 89.4% 27.2% 45.2% 41.2% 84.9%
2005 93.3% 37.8% 50.7% 41.8% 83.2%
2006 91.3% 22.8% 50.8% 42.4% 83.4%
8.9
%
19.1
%
18.9
%
17.1
%
7.2
%
6.3
%8.4
%11.1
%
11.1
%
9.3
%12.2
%
9.6
%
9.4
%
40.5%
53.0%
79.3%
81.4%
92.8%
72.9%
68.1%66.0%
55.1%
28.4%
39.5%
37.4%
45.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Subprime as % ofTotal Mortgage
Originations
Est. Subprime/ Alt-ASecuritization Rate
Issuance of interest – only adjustable rate mortgages andmortgages with limited documentation.
CausesProliferation of Securitization
Structured Finance (CDO, ABS CDO, CDO^2, CLO, EM, SME Loan, unspecified) Issuance(monthly, $ in billions)
18
Source: CreditFlux, CreditSights.
Structured finance, now depressed, illustrates the prominence of a financing model: originate to sell. Credit has become a product forsale, rather a product kept and monitored.
0
10
20
30
40
50
60
70
80
90
1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008
CausesOverview of the CDO Market
19
Source: CSFB Europe Equity Research, June 2007.
US CDO Outstanding Volume Holding of US CDO Securities
High Grade
CDO
Mezzanine
CDO
CDO^2
Other CDOs
CLO
30%
29%
3%
17%
21%
Hedge Fu
Banks
Asset Managers
Insurance Companies
25%
15%
30%
30%
CausesEvolution of ABS CDOs
ABS CDO Timeline
Diversified Era (2000–2002) Real Estate Era (2003–2005)
____________________Source: Lehman Brothers, Intex data.
2000 2001 2002 2003 2004 2005 2006 2007
Diversified Era Real-Estate Era
First ABSCDO issuedin late-1999
Aircraft ABSincurs
significantdowngradesand losses
following 9/11
Multitude ofdowngrades inmanufacturedhousing (e.g.
Conseco
Finance,Oakwood, etc.)
ABS CDOmarket recovers
after severedowngrades in
underlyingsectors,
emerges withmore residential
mortgage
concentration
High Grade CDOmarket begins its
exponentialgrowth
Single-NameCDS is
standardized inlate-2005
“Hybrid” CDOsbecome the
norm inmezzanine
____________________Source: Lehman Brothers.
Other
CMBS
CDO
RMBS
Home Equity
Loans37%
0%
24%
10%
29%
OtherCMBS
CDO
RMBS
Home Equity Loans
55%
19%
14%
5%7%
20
CausesSubprime Mortgage Delinquencies by Mortgage Vintage Year
Cumulative 60-Day+ Delinquencies
21
2005–2007 originations have significantly deteriorated.
____________________Source: Loan Performance.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2000 2001 2002 2003 2004 2005 2006 2007
1 9 17 25 33 41 49 57 65 73 81 89 97 102
2000
2001
20022003
2004
2005
2006
2007
22
CausesDecline in Sales of Existing Homes, Surge in Inventory
Existing Home Sales Home Inventory
Total ExistingHome Sales (mm)
____________________Source: National Association of Realtors. Includes single–family and condominiums sales.
Total ExistingHome Inventory (mm)
5,652
6,478
7,0766,778
6,175
5,6315,332
5,1715,190
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1999 2000 2001 2002 2003 2004 2005 2006 2007
3,905
3,450
2,846
2,2242,270
2,1082,0682,0481,894
8.9
6.5
4.5
4.3
4.64.74.64.5
4.8
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Inventory Total Monthly Supply
1999 2000 2001 2002 2003 2004 2005 2006 2007
Total Monthly Supply
CausesExtended Period of Risk Appetite by Financial Institutions
TED Spread (Treasury/Eurodollar) (1)
____________________Source: FactSet.(1) Difference between 3 month T-Bills interest notes and 3 month LIBOR.
(100)
(50)
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 July
2008
23
June 2007Bps
Average: 36.4 Bps
Causes…and Credit Markets…
U.S. Corporate Spreads
24
____________________Source: MLX.
0
50
100
150
200
250
300
1/3/1997 4/14/1998 7/25/1999 11/2/2000 2/12/2002 5/24/2003 9/2/2004 12/12/2005 3/24/2007 7/3/2008
0
200
400
600
800
1,000
1,200
High Yield (Bpps)Investment Grade (Bps)
Investment Grade High Yield
June 2007
25
CausesIncreasing LBO Volume and Size
U.S. LBO Volume Average LBO Size
____________________Source: Standard & Poor's.
$394
$434
$233
$130
$94
$47
$22$20
$40$53$57
167
207178
134133
67
43
51
123
168175
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
0
50
100
150
200
250
LBO Volume Number of Deals
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 LTM
3/31/08
$ in Billions
$2,128$2,095
$1,309
$972
$706$716
$540
$389$351$367
$403$361
$516
$0
$500
$1,000
$1,500
$2,000
$2,500
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08
$ in MillionsNumber of
Deals
26
CausesIncreasing Valuations and Debt Multiples
Average Purchase Price Multiples of LBO's >$500 Million Enterprise Value (1)
Average Debt Multiples of LBO's withEBITDA > $50 Million
____________________Source: Standard & Poor's.(1) Including fees.
10.4x10.2x
8.8x8.8x
7.9x
7.3x7.0x
6.7x7.0x
8.3x
8.9x8.8x
7.7x7.5x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
1994/5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08
3.6x
4.8x4.4x
3.7x
3.0x
2.4x2.4x2.7x
3.2x3.1x3.1x
3.8x
0.6x
0.6x
0.3x
0.2x
0.3x
0.3x0.1x
0.1x0.1x
0.2x
0.8x
0.8x
0.7x
1.3x
1.6x
1.8x
1.5x1.4x
1.0x
1.6x
2.2x
1.7x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
Senior Debt/EBITDA Other Senior Debt/EBITDA Subordinated Debt/EBITDA
5.7x
5.4x
4.8x
4.2x4.1x
4.0x
4.5x
4.9x
5.3x5.4x
6.2x
4.9x
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1H08
96.6
23.6
2.4
0.10.5
0.30.3
3.1
1.8
125
37
4
1
3
N/A 1
22
19
12
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
0
7
14
21
28
35
Volume ($BN) Number of Deals
18
35
6
$50.0
$100.0
$25.0
125$120.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1H08 2Q08
12
CausesWeakening of Credit Discipline
Volume of Covenant – Lite Loans
27
Covenant–lite deals volume quadrupled in 2007 vs. 2006, growing up to 15% of total bank debt outstanding. Since July 2007, appetite forthis type of structure has all but vanished.
Volume ($Bn) Number of Deals
____________________Source: Standard & Poor's.
28
Causes
Number of PIK Deals PIK Proceeds
$1,378
$2,797
$7,267
$8,271
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
2005 2006 2007 2008
4
3
16
18
0
2
4
6
8
10
12
14
16
18
20
No. Deals
2005 2006 2007 2008
The rise of PIK toggle structures has all but slowed down to a trickle since the onset of the credit crunch.
Proceeds ($ in mm)
PIK Toggle Transactions
CausesCredit Quality Has Been Deteriorating
High Yield Issuance Volume by Credit Rating
29
The issuance of high yield CCC+ or below and non-rated has increased substantially since 2002, reaching 35% in 2007 of total high yieldissued in 2007.
____________________Source: Wall Street Research.
73%
85%
45%40%
35%
43%
19% 21%25%
21% 23%
39%
27%23% 21% 21%
29%
21%
11%
27%
14%
48%
47%
50%41%
71%61% 54%
71%61%
56%
70%
67%
56%59%
52%
44%
75%
1%0%
7%13% 15% 16%
10%
18%21%
8%
16%
4% 4%10%
23%20% 19%
35%
14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
BB B CCC and NR
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
30
ConsequencesImpact on U.S. Economy
Key Indicators Signal Trouble
Real GDP growth increased by 11% in first quarter of 2008
Investors are concerned that a recession has started
Unemployment rate iincreased by 0.9% since June 2007
Home prices ddown by 18% since June 2007
Home prices have taken a plunge not only in major US cities but around the nation; rising home inventories are puttingpressure on price
LBO average leverage ddown by 1.3x since 2007
With credit not being as cheap as in recent years and liquidity being an issue, LBO leverage and volume tolerated bythe market have decreased significantly
S&P 500 ddown by 18% since June 2007
Stocks across the board have taken a hit; investors fear that the slowing economy will have a negative impact onearnings and that recovery will be lengthy
Banking Sector doown by 50% since June 2007
Banks stocks have been trading at very low levels because of exposure to CDOs
US Economy in Recession.
____________________Source: Wall Street Research.
40%
140%
240%
340%
440%
540%
640%
Large Cap Banks Mid Cap Banks Small Cap Banks S&P 500
6/27/92 4/18/94 2/7/96 11/28/97 9/19/99 7/10/01 5/1/03 2/19/05 12/11/06 6/27/08
31
Bank Stocks Down Significantly And Have Yet To Find a Bottom
____________________Source: FactSet. Data as of June 27, 2008.Note: Large cap banks include all banks with market cap greater than $7.5bn, mid cap banks include all banks with market cap between $2.0bn and $7.5bn and
small cap banks include all banks with market cap smaller than $2.0bn.
Historical Price Performance
Consequences
Historical Price Performance
Large Cap Mid Cap Small Cap S&P 500
1 Month (21.4%) (21.2%) (17.3%) (8.1%)1 Year (48.8) (56.9) (45.7) (15.1)5 Year (34.9) (44.0) (32.7) 31.010 Year (34.7) (47.5) (21.1) 12.7
Mid Cap Banks
S&P 500
Large Cap Banks
Small Cap Banks
(41
.8%
)
38.9
%
0.6
%
(9.3
%)
(12
.2%
)
(15
.2%
)
(30
.8%
)
(32
.8%
)
(39
.7%
)
(72
.6%
)
(76.2
%)
(84
.2%
)
(88
.2%
)
(7.8
%)
(22
.5%
)
(28
.3%
)
(69
.4%
)
(67
.9%
)
(56
.5%
)
(54
.3%
)
(45
.4%
)
(41
.7%
)
(33
.9%
)
(70
.2%
)
(67
.3%
)
(64
.6%
)
(60
.3%
)
(59
.9%
)
(57
.9%
)
(56
.6%
)
(44
.9%
)
(100.0%)
(50.0%)
0.0%
50.0%
Wa
ch
ov
ia
Citig
rou
p
Su
ntr
ust
Ba
nk o
f A
me
rica
BB
&T
M&
T
We
lls F
arg
o
JP
Mo
rga
n C
ha
se
U.S
. B
an
co
rp
PN
C
Wa
sh
ing
ton
Mu
tua
l
Na
tio
na
l C
ity
Fift
h T
hird
Re
gio
ns
Sy
no
vu
s
Ma
rsh
all
& I
lsle
y
Ke
yC
orp
Zio
ns
Hu
ntin
gto
n
So
ve
reig
n
Co
me
rica
Asso
cia
ted
City N
atio
na
l
Un
ion
Ba
nC
al
Va
lley N
atio
na
l
Co
mm
erc
e
Ba
nk o
f H
aw
aii
Cu
llen
/Fro
st
BO
K
UM
B F
ina
ncia
l
32
ConsequencesOverall Market Capitalizations And Valuations Have Contracted
Change in 2008E P/E Since 1/1/2007
Change in Market Capitalization Since 1/1/2007Large Cap (Median (43.6%)) Mid Cap (Median (57.2%))
(5.1
x)
(4.0
x)
(3.4
x)
(2.7
x)
(2.1
x)
(1.7
x)
(1.4
x)
(0.9
x)
(0.8
x)
(0.6
x)
(8.1
x)
(5.1
x)
(3.8
x)
(2.8
x)
(2.4
x)
(2.2
x)
(2.1
x)
(1.9
x)
(1.5
x)
(1.3
x)
(1.2
x)
(1.1
x)
(0.9
x)
(0.6
x)
(0.6
x)
(0.4
x)
(0.4
x)
(0.4
x)
(0.2
x)
(0.7
x)
(10.0x)
(8.0x)
(6.0x)
(4.0x)
(2.0x)
0.0x
Citig
rou
p
Wa
ch
ov
ia
Su
ntr
ust
Ba
nk o
f A
me
rica
M&
T
JP
Mo
rga
n C
ha
se
PN
C
We
lls F
arg
o
BB
&T
U.S
. B
an
co
rp
Wa
sh
ing
ton
Mu
tua
l
Ke
yC
orp
Na
tio
na
l C
ity
Zio
ns
Co
me
rica
Fift
h T
hird
Ma
rsh
all
& I
lsle
y
City N
atio
na
l
Sy
no
vu
s
Re
gio
ns
Un
ion
Ba
nC
al
So
ve
reig
n
Hu
ntin
gto
n
Asso
cia
ted
BO
K
Co
mm
erc
e
Cu
llen
/Fro
st
Ba
nk o
f H
aw
aii
Va
lley N
atio
na
l
Small Cap (Median)
Large Cap (Median (1.9x)) Mid Cap (Median (1.3x))
Small Cap (Median)
____________________Source: FactSet. Data as of June 27, 2008.Note: Large cap banks include all banks with market cap greater than $7.5bn, mid cap banks include all banks with market cap between $2.0bn and $7.5bn a
small cap banks include all banks with market cap smaller than $2.0bn.
Monoline Insurers Stocks Down Significantly
____________________Source: Capital IQ.
Historical Price Performance
Consequences
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
5/1/92 2/16/94 12/4/95 9/20/97 7/8/99 4/24/01 2/9/03 11/26/04 9/13/06 7/1/08
AMBAC MBIA
Historical Price Performance
AMBAC MBIA
1 month (60.9%) (38.5%)
1 year (98.7%) (93.1%)
5 year (98.2%) (91.3%)
10 year (97.1%) (91.4%)
15 year (91.6%) (80.7%)
33
34
Attempts at ResolutionMulti-Pronged Approach
Public and Private Interventions
FED Intervention
Aggressive monetary policies to boost liquidity; numerous FED rate cuts in relatively short period of time
SEC Intervention
Intervention to encourage support for financial services companies in the public markets (e.g. restriction onshort selling)
Capital raising by banks
Investment Banks seek to bolster their balance sheet; banks raised funds locally and internationally tostrengthen their liquidity positions
Banks taking write-downs
Banks absorbing losses related to mortgage products; more than $100 billion of mortgage-related bank assetshave been written down
Inflow of foreign investments targeting discounted assets
Foreign investors have been making strategic investments because of weak dollar
Tightening of mortgage lending standards
Underwriters have increased their loan qualifying requirements significantly; less people are in position toborrow money for an investment in the housing market____________________
Source: Congressional Research Report (March 2008).
35
Attempts at ResolutionFED Interventions
Aggressive Use of Monetary Policy Tools
Federal Funds Rate cut sseven times since June 2007
Cuts of 75 bps in January and March 2008
Discount window
Open market operations target the system as a whole; discount lending provides support to particular bankswith need for liquidity
Eligible banks can borrow short-term directly from central bank; currently expanded to investment banks
Limitation of discount lending – only four major banks borrowed from the FED initially; borrowing at discountwindow may signal to market that a bank is having liquidity problems
Term auction facility
Series of auctions of short term loan funds to banks; accepts as collateral same wide variety of assets that canbe used to secure discount window borrowing
More than 60 banks submitted bids and participated in program
____________________Source: Congressional Research Report (March 2008).
FED aware that actions may encourage moral hazard in the future, but risk of financial market slowing down macroeconomic growthoutweighs all other factors.
11,500
12,000
12,500
13,000
13,500
14,000
14,500
07/01/07 08/07/07 09/13/07 10/20/07 11/26/07 01/02/08 02/08/08 03/16/08 04/22/08 05/30/08
36
Attempts at ResolutionThe Fed Has Taken Bold & Creative Steps to Stabilize TheFinancial System
Innovative Solutions: $504Bn of Liquidity Injections & 300bps in Rate Cuts
Equity Market Remains Volatile As Investors Search for An End to The Credit Crisis
____________________Note: $ in billions.(1) Index of government and corporate securities with a composite rating greater than AAA. Composite rating based on the average of Fitch, Moody's, and S&
ratings.(2) Eligible securities include treasury, agency debt, agency MBS – that are eligible as collateral in open market purchase.(3) JPMorgan funds first $1 billion in losses.
112,638
Dow Jones
Date Amount Action
A 9/18/07 -- Rate cut of 50bps
B 10/31/07 -- Rate cut of 25bps
C 12/11/07 -- Rate cut of 25bps
D 12/18/07 $36 Foreign Currency Swaps
E 12/21/07 $100 TAF Auctions
F 1/22/08 -- Rate cut of 75bps
F
A
D
B
C
E
Date Amount Action
G 1/30/08 -- Rate cut of 50bps
H 3/07/08 $100 Rolling 28 -day Repos (2)
I 3/11/08 $200 Term Securities Lending Facility
J 3/16/08 $38 Primary Dealer Credit Facility
K 3/16/08 $30 (3 )
Bear Stearns Merger Funding
L 3/18/08 -- Rate cu t of 75bps
L
G
J
H
I
K
A BC E
D
F G
H
I L
J, K
37
Significant Capital Raisings Have Been Completed/Announced
U.S
.
Since the crisis began approx $300BN in capital has been raised or committed to be raised of which approx $160BN hasbeen raised by U.S. institutions
26 Nov 2007
Citigroup$7.5BN
Issue ofmandatoryconvertible toADIA
Euro
pean
____________________Source: Merrill Lynch, Bloomberg, Company data.Note: Excludes Eur26BN of Tier I issuance announced by European financial institutions since Sep '07 which are not directly linked to repairing balance sheet after assets writedowns.
Attempts at Resolution
22 Oct 2007
Bear Stearns$1.0BN
Issuedconvertible trustpreferredsecurities toCITIC Securities(withdrawn)
1 Apr 2008
UBSApprox. CHF
15.0BN/$15.0BN
Announced arights issue, fullyunderwritten by asyndicate ofbanks
30 Nov 2007
Fortis3.0BN/$4.3BN
IssuedCASHES/Conver-tible Preferred
10 - 11 Dec 2007
UBSCHF13.0BN/$11.6BNCHF2.0BN/$1.8BN
0.6BN/$0.9BN
Mandatory convertible to GIC(CHF11BN/$9.8BN),undisclosed investor(CHF2BN/$1.8BN); $1.8BNsale of treasury shares;$0.9BN PNC10 Tier I issue
24 Jan 2008
Société Générale5.5BN/$8.1BN
4.9BN ($7.2BN)pre-tax loss onfraudulent positions;arranged 5.5BNrights issue fullyunderwritten bysyndicate of banks
27 Feb 2008
Fortis$0.75BN
Issue of PNC5.5Tier I PerpetualPreferredSecuritiestargeted atEuropean andAsian investors
28 Nov 2007
Fortis1.81BN/
$2.69BN
Acquisition ofapprox. 4.19%stake in Fortis byPing An
11 Dec 2007
Société Générale0.6BN/$0.9BN
$0.9BN PNC10Tier I issue dayafter $4.3BNliquidity facility tosupport PACESIV liquidityneeds
19 Feb 2008
BCP1.3BN/$1.9BN
Announcesproposal of arights fullyunderwritten byMerrill Lynch andMorgan Stanley
22 Apr 2008
RBS£12BN/$23.9BN
Announced arights issue, fullyunderwritten by asyndicate ofbanks
13 Dec 2007
Security CapitalAssurance
$2BN
Discloses $2BNfunding gap,plans a range ofoptions toaddress shortfall(withdrawn)
24 Dec 2007
Merrill LynchUp to $6.2BN
Issue of commonstock to TemasekHoldings (up to$5BN) and DavisSelectedAdvisors($1.2BN)
12 May 2008
Sovereign$1.25BN
Issue of $1.25BNcommon stock
22 Jan 2008
Wachovia$2.8BN$0.8BN
Announces$2.8BN issue ofpreferred stockand $0.8BN oftrust preferred
5 Feb 2008
Wachovia$3.5BN
$3.5BN issuanceof perpetualpreferred stock
14 Apr 2008
Wachovia$7.0BN
Issue of $3.5BNof both commonand non-cumulativeperpetualpreferred stock
21 Apr 2008
Colonial $0.3BN
Issue of $0.3BNof common stock
13 June 2008
KeyCorp$1.65BN
Issue of $1.0BNcommon stockand $0.7BNpreferred stock
10 Dec 2007
WashingtonMutual Inc
$2.9BN
Issuedconvertiblepreferred
14 Jan 2008
CIBCC$2.9BN/$2.8BN
Issue of commonstock throughpublic offering($1.4BN) andprivate placementto institutionalinvestors($1.5BN)
15 Jan 2008
Citigroup$14.5BN
$12.5BNconvertiblepreferred to GIC($6.88BN) andothers as wellas $2BN offeredpublicly; dividendcut
24 Jan 2008
Bank of America$12BN
$6BN indepositary sharesand $6BN in non-cumulativeperpetualconvertiblepreferred stock
6 Feb 2008
Lehman Brothers$1.9BN
$1.9BN issuanceof perpetualpreferred stock
8 Apr 2008
WaMu$7.0BN
Announce issue$7.0BN commonstock
19 Dec 2007
Morgan Stanley$5.0BN
Issue ofmandatoryconvertible toChina InvestmentCorporation
23 Apr 2008
East WestBancorp $0.2BN
$0.2BN issuanceof non-cumulativeperpetualconvertiblepreferred stock
15 Apr 2008
Huntington$0.6BN
Issue of $0.6BNof non-cumulativeperpetualconvertiblepreferred stock
2 May 2008
South Financial$0.3BN
Issue of $0.3BNof mandatoryconvertible non-cumulativepreferred stock
21 April 2008
National City$7.0BN
Issue of $0.6BNof common stockand $6.4BN ofnon-cumulativeconvertibleperpetualpreferred stock
3 June 2008
State Street$2.8BN
Issue of $2.83BNcommon stock
15 Jan 2008
Merrill Lynch$6.6BN
Mandatoryconvertible preferredto KoreanInvestment Corp.,Kuwait InvestmentAuthority and MizuhoCorporate Bank
11 June 2008
UCBH$135MM
Issue of $135MMof non cumulativeconvertiblepreferred stock
6 June 2008
WebsterFinancial$225MM
Issue of $225MMof non cumulativeperpetualconvertiblepreferred stock
12 June 2008
Lehman Brothers$6.0BN
Issue of $4BN ofcommon stockand $2BN of noncumulativemandatoryconvertiblepreferred stock
12 June 2008
Barclays£4.5BN/$8.9BN
Issue of commonstock to
Sumitomo Mitsui,Qatar InvestmentAuthority, China
DevelopmentBank and others
1 Apr 2008
Lehman Brothers$4.0BN
Issue of non-cumulativeperpetualconvertiblepreferred stock
October November December January February March April May June
19 June 2008
Fifth Third$1.0BN
Issue of $1.00BNdepository shareof preferred stoc
38
Write-downs and Exposures for Banks with Total Assets Greater than $5bn ($mm unless noted)
____________________Source: Broker Research and company filings. Information updated as of June 30, 2008.(1) Provisions in excess of charge offs.(2) Assumes 35% tax rate on losses.
Excess Total Pre tax Total Pre tax Losses Capital Capital Raised 2008Q1 Dividend
Write-downs Provisions Losses as a % of 6/07 Raised as a % of Total Current Type of Capital Raised Change
Since 6/07 Since 6/07 (1) Since 6/07 Tier 1 Capital Since 6/07 ($mm) AT Losses (2) Tier 1 Ratio Dilutive Non-Dilutive Since 1/08
Citigroup $44,352 $8,010 $52,362 56.6% $45,297 133.1% 8.1% 45.4% 54.6% (40.7)%
Bank of America 15,155 5,077 20,232 21.3 18,485 140.6 7.8 37.3 62.7 0.0
Wachovia 8,386 3,304 11,690 28.2 14,725 193.8 8.6 54.8 45.2 (41.4)
Washington Mutual 6,566 3,476 10,042 46.3 11,200 171.6 9.0 91.1 8.9 (98.2)
JPMorgan 9,938 4,195 14,133 16.6 8,191 89.2 9.1 100.0 0.0
National City 1,951 1,498 3,449 39.6 8,168 364.3 6.9 85.7 14.3 (97.6)
Fifth Third 427 402 829 9.6 2,838 526.8 7.4 35.2 64.8 (65.9)
KeyCorp 531 320 851 10.2 2,390 432.1 8.0 69.0 31.0 (48.6)
Wells Fargo 3,050 1,900 4,950 12.9 1,575 49.0 7.8 100.0 0.0
Sovereign 168 277 446 - 1,438 496.2 7.2 100.0 (100.0)
PNC 457 174 631 7.5 840 204.8 7.2 100.0 4.8
M&T Bank 178 74 252 6.7 750 457.9 6.9 100.0 0.0
First Horizon 223 259 482 17.8 690 220.3 9.1 100.0 (55.6)
SunTrust 1,760 495 2,255 18.6 685 46.7 7.1 100.0 5.5
Huntington 654 169 823 26.5 569 106.4 6.8 100.0 (50.0)
US Bancorp 552 192 744 4.4 500 103.4 8.4 100.0 0.0
South Financial 65 50 116 9.9 374 497.2 9.3 100.0 (94.7)
New York Community 1 (1) 0 0.0 346 - 11.8 100.0 0.0
Regions 781 333 1,113 12.4 345 47.7 7.3 100.0 0.0
East West 31 36 67 7.2 230 528.1 8.8 100.0 0.0
Provident 11 9 21 3.9 115 855.3 9.2 11.8 88.2 (65.6)
Capital One 1,482 1,072 2,553 19.0 0 0.0 10.9 1304.5
Zions 166 122 288 8.0 0 0.0 6.9 0.0
M&I 143 74 217 5.8 0 0.0 9.4 3.2
UnionBanCal 13 192 205 4.7 0 0.0 7.4 0.0
BB&T 192 186 378 4.2 0 0.0 8.6 2.2
Attempts at Resolution
Banks taking their losses now…
39
Attempts at ResolutionCurrent Correction vs. Prior Corrections
____________________Source: LCD News(1) S&P/LSTA index tracks the current outstanding balance and spread over LIBOR for fully funded term loans.
The current crisis has impacted financing and equity markets alike, and compares negatively to any previous crisis inthe last 15 years.
Start Date End Date
S&P/LSTA
Index (1)
ML HY
Index S&P 500
Asian Contagion Aug-97 Sep-97 0.6% 0.1% (2.1%)
Russia Debt/LTCM Sep-98 Oct-98 (1.1%) (5.0%) (12.0%)
Nasdaq Meltdown Mar-00 May-00 1.0% (2.4%) (9.8%)
Sept 11 2001 Sep-01 Sep-01 (0.7%) (5.1%) (11.1%)
2002 Sell-Off (Iraq War) Mar-02 Nov-02 (1.5%) (8.6%) (22.1%)
Auto Downgrades Apr-05 May-05 (0.4%) (1.4%) 1.4%
(0.3%) (3.7%) (9.3%)
Start Date End Date
S&P/LSTA
Index (1)
ML HY
Index S&P 500
Jun-07 Aug-07 (3.2%) (2.4%) (1.9%)
Oct-07 Feb-08 (8.2%) (4.2%) (10.0%)
Jun-08 Jul-08 (1.5%) (4.0%) (8.9%)
(12.5%) (10.2%) (19.6%)Cumulative Decrease
Act III (Economic Recession Reality)
2007/2008 Bear Market
Previous Crisis
Period
Period
Average Prior Periods
Act I (Seizure in Financial Market)
Act II (CLO and CDO "Unwind Fear")
40
The Road Ahead
Conclusion
Lengthy Recovery
Low Rates for Too LongMassive Housing and Credit Bubble
Financial Market Dislocation not Seen Since
Great Depression
What happened?
Liquidity Boost by FEDCapital Raising by
BanksFinancial Services Sector
Absorbed Losses+ +
However …
Difficult to overcome decade of cheap money in one year.
Disclaimers
In certain regions or jurisdictions this disclaimer may not apply. You must consult with your regional OriginationCounsel to ascertain whether this disclaimer is applicable.
Merrill Lynch prohibits (a) employees from, directly or indirectly, offering a favorable research rating or specific pricetarget, or offering to change such rating or price target, as consideration or inducement for the receipt of business orfor compensation, and (b) Research Analysts from being compensated for involvement in investment bankingtransactions except to the extent that such participation is intended to benefit investor clients.
This proposal is confidential, for your private use only, and may not be shared with others (other than your advisors)without Merrill Lynch's written permission, except that you (and each of your employees, representatives or otheragents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of theproposal and all materials of any kind (including opinions or other tax analyses) that are provided to you relating tosuch tax treatment and tax structure. For purposes of the preceding sentence, tax refers to U.S. federal and state tax.This proposal is for discussion purposes only. Merrill Lynch is not an expert on, and does not render opinionsregarding, legal, accounting, regulatory or tax matters. You should consult with your advisors concerning thesematters before undertaking the proposed transaction.
41
Def ini tion of Terms used in Credit Crunch Presenta t ion
Slide 1
Fed Funds Target Ra te: The fed funds target rate is a short-term rate objective of the Federal
Reserve Board. The actual Fed Funds Rate is the interest rate at which depository institutions
lend balances at the Federal Reserve to other depository institutions overnight.
Vola t il ity Index (VIX): VIX is the ticker symbol for the Chicago Board Options Exchange
Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Referred
to by some as the fear index, it represents one measure of the market's expectation of volatility
over the next 30 day period.
ABX Index: An asset-backed securities index, or ABX, is a credit derivative instrument with
asset-backed securities as an underlying.
Slide 4
AA Industr ia l Index: The Merrill Lynch US Industrial Index is a subset of The Merrill Lynch
US Corporate Index including all securities of Industrial issuers.
Broker dea ler CDS: The Merrill Lynch US Banking Index is a subset of The Merrill Lynch
US Corporate Index including all securities of Bank issuers.
CMBX AAA: Commercial Mortgage Securities AAA Index. The CMBX is a Commercial
Mortgage-Backed Securities credit default index just like the ABX.
AAA Home Equity ABS: Home Equity Loan (HEL) ABS are one of the major components
of the ABS market, along with credit card ABS, auto loan ABS, and student loan ABS. Securities
collateralized by home equity loans (HELs) are currently the largest asset class within the ABS
market. Investors typically refer to HELs as any non-agency loans that do not fit into either the
jumbo or alt-A loan categories.
BBB Municipa ls : The Merrill Lynch US Municipal Securities Index tracks the performance of
US dollar denominated investment grade tax exempt debt publicly issued by US states and
territories, and their political subdivisions, in the US domestic market.
Slide 5
LCDX: A specialized index of loan-only credit default swaps (CDS) covering 100 individual
companies that have unsecured debt trading in the broad secondary markets.
High Yie ld Master II : The Merrill Lynch High Yield Master II Index (H0A0) is a commonly
used benchmark index for high yield corporate bonds. The Master II is a measure of the broad
high yield market, unlike the Merrill Lynch BB/B Index, which excludes lower-rated securities.
Slide 6
ABX BBB Indices: The ABX Index is a series of credit-default swaps based on 20 bonds that
consist of sub-prime mortgages. ABX contracts are commonly used by investors to speculate on
or to hedge against the risk that the underling mortgage securities are not repaid as expected. The
ABX swaps offer protection if the securities are not repaid as expected, in return for regular
insurance-like premiums. A decline in the ABX Index signifies investor sentiment that sub-prime
mortgage holders will suffer increased financial losses from those investments.
ABCP Outstanding: A short-term investment vehicle with a maturity that is typically between
90 and 180 days. The security itself is typically issued by a bank or other financial institution.
The notes are backed by physical assets such as trade receivables, and are generally used for
short-term financing needs.
Slide 12
National Average Contrac t Mor tgage Yield: The index is the weighted average rate of
initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for
loans closed for the last 5 working days of the month.
Slide 15
S&P/Case-Shil ler Index: A group of indices that tracks changes in home prices throughout
the United States. The indexes are based on a constant level of data on properties that have
undergone at least two arm's length transactions.
Slide 18
CDO: Collateralized Debt Obligation - grade security backed by a pool of bonds, loans and other
assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.
ABS: Asset Backed Security - a financial security backed by a loan, lease or receivables against
assets other than real estate and mortgage-backed securities.
CLO: Collateralized Loan Obligation - a special purpose vehicle (SPV) with securitization
payments in the form of different tranches. Financial institutions back this security with
receivables from loans.
EM: Emerging market loan issuance
SME Loans: Loans which are provided to small and medium enterprises
Slide 20
CMBS: Commercial Mortgage-Backed Securities - type of mortgage-backed security that is
secured by the loan on a commercial property. CMBS can provide liquidity to real estate
investors and to commercial lenders.
RMBS: Residential Mortgage-Backed Security - a type of security whose cash flows come from
residential debt such as mortgages, home-equity loans and subprime mortgages.
Slide 23
TED Spread: The price difference between three-month futures contracts for U.S. Treasuries
and three-month contracts for Eurodollars having identical expiration months.
Slide 35
TAF Auctions: Term Auction Facilities -- monetary policy program used by the Federal
Reserve to help increase liquidity in the U.S. credit markets.