Presentation title Subtitle
The Post-Crisis Landscape:Global Trends and the Reform
Debate
Robert C. PozenChairmanMFS Investment Management. The views
expressed in this presentation are those of the speaker and are
subject to change at any time.
06/1019961.1
Major financial crises 1945 to 1997*Includes: U.S., Europe,
Russia, Japan, Israel, Canada, Australia, and New ZealandSource:
Carmen M. Reinhart and Kenneth Rogoff, This Time is Different:
Eight Centuriesof Financial Folly, 2009.Major Banking Crises in
Advanced Industrial Societies*Source: Michael Bordo and Barry
Eichegreen, Crisis Now and Then: What Lessons from the Last Era of
Financial Globalization?, National Bureau of Economic Research
Working Paper No. 8716.2Broad Definition
U.S. current account deficitAs a Percentage of Gross Domestic
Product (GDP)Source: U.S. Department of Commerce/Bureau of Economic
Analysis 3
Stimulus spending by nationAs a Percentage of GDPFrom October
2008 through March 2009Source: IMF; www.lesjones.com, August 2009
4
Continuing negative savings by U.S.(Personal and
government)Sources: Federal Reserve Bank of St. Louis;
Congressional Budget Office; Brookings Institution.U.S. Personal
Saving Rate
U.S. Budget DeficitsPublicly held debt at end of fiscal year
(FY) 2008 $5.8 trillionBudget deficit in FY 2009 $1.4
trillionPublicly held debt at end of FY 2009 $7.2 trillionProjected
budget deficits in FY 2010 2018$9.0 trillionProjected publicly held
debt at end of FY 2018 $16.2 trillion++== 5
Holdings by foreign banks inEurozone countries 6Source: The
Economist, 5/1/10; Bank of International Settlement data
Global institutional trends in asset allocation:Increasing
allocation to fixed income7
7Source: Greenwich Associates Fixed-income asset allocation
across regions, 2005 to 2009
Bond yields remain low around the worldSource: Bloomberg 7
Emerging market bonds:Returns and correlations
Correlations 4/00 12/09JP Morgan EMBI GlobalS&P 5000.54MSCI
World ex-US0.61Barclays Long Treasury0.33Returns through
12/31/09Sources: FactSet, SPAR
9
Global institutional trends in asset allocation: Reducing home
country equities10
Source: Greenwich Associates
10Domestic equity asset allocation across regions, 2005 to
2009
Decoupling trend11Sept. 9, 2008 to March 9, 2009Performance of
major stock indexes in Group of 20 countries ($ USD)March 9, 2009
to Sept. 9, 2009Source: Bloomberg ChinaJapanBrazilU.S.South
AfricaGermanySouth KoreaFranceSaudi
ArabiaCanadaBritainE.U.IndonesiaArgentinaAustraliaIndia
MexicoRussiaItalyTurkey+ 3% 38 44 45 46 47 48 48 49 49 49 49 49 50
50 53 55 57 60 61
TurkeyIndonesiaIndiaItalyBrazilMexicoAustraliaSouth
AfricaRussiaSouth
KoreaArgentinaCanadaGermanyE.U.FranceBritainJapanU.S.ChinaSaudi
Arabia+133%+125+112+109+105+ 98+ 96+ 95+ 94+ 89+ 86+ 75+ 74+ 74+
70+ 70+ 56+ 53+ 45+ 38
11
Historical return and risk10 years endingDecember 200710 years
endingDecember 2009ReturnRiskReturnRiskS&P
5006.30%14.70%0.4%16.1%MSCI World
ex-U.S.10.10%14.60%3.7%18.0%Emerging Market
Equity16.50%23.70%12.8%24.9%Barclays U.S.
Aggregate5.90%3.50%6.2%3.8%Barclays High
Yield5.70%7.50%7.2%11.5%Barclays 3-5 Year
Treasury5.70%3.80%5.9%4.0% 12Sources: Fact Set, SPAR
Global institutional trends in asset allocation:Continued
interest in alternatives
Source: Greenwich Associates survey data, 2005 to
2009Alternatives asset allocation across regions, 2005 to 2009
13
Hedge fund returns vs. other asset classes (Annualized as of
March 31, 2010)*HFRI (Hedge Fund Research Index) returns are
constructed from over 2,000 self-reported hedge fund manager
returns. Returns are net of all fees and the index is equal
weighted.20082009Hedge Fund Index*-19.03%19.98%S&P
500-37.00%26.46%MSCI AC World-42.19%34.63% 14
U.S. Treasury: Bailing out institutions15
RINA PICCOLO
Wall Street Dealer
State Pension FundMortgage securitizationShell Company
Mortgage BrokerBarton Family
MORTGAGEMORTGAGE
MORTGAGES
MBS$$$$$$$$$$$$Mortgage Servicer
Credit Rating AgencyMBS$$$Non-US Bank16
Restarting securitizationBrokers sold mortgages without
retaining any risk of lossSecuritization vehicles:Multilayered and
opaqueCredit rating agencies haveconflicts of interest
ProblemSolutionSellers of loans should retain atleast 5% risk of
lossSimpler vehicles with moreongoing disclosuresSEC-appointed
representativeto choose credit rating agency
17
18Executive compensation
Improving boards of mega-banksExisting mega-bank board model
Large boards: 12 to 18 membersLack of industry expertiseMeet 6
times per yearBoard of Super-DirectorsSmaller number of directors:
5 to 7All directors with relevant experienceDevote 2 to 3 days per
month 19
Bank capital International standardsfrom Basle
20
20International cooperation:Talk vs. actionTalkBritish Prime
Minister Gordon Brown:[We must] seize this time of profound change
to forge forour generation a new internationalism, a new era
ofinternational cooperation (March 2009)
ActionU.K. invokes anti-terrorist laws to freeze its assets in
Icelandic banks (October 2008)Source: www.londonsummit.uk.gov;
3/27/09. 21
Protectionism in international tradeG-20 anti-protectionist
pledge, November 2008:We underscore the critical importance of
rejecting protectionism and not turning inward in times of
financial uncertainty we will refrain from raising new barriers to
investment or to trade in goods and servicesBy March 2009, 17 of 20
countries had adopted protectionist measures
Buy American restrictionsStimulus Act of 2009 (iron, steel,
manufactured goods)Procurement barriers for Chinese firms
Solution: Bind current level of trade barriersSource: Statement
from the G-20 Summit, November 2008; as reprinted in The New York
Times, 11/15/08. 22
Shift in voting power 23Sources: IMF, World BankExisting
(%)Proposed (%)United
States16.7716.73Japan6.026.23Britain4.864.29France4.864.29China3.663.81Russia2.692.39Belgium2.091.86India1.892.34Brazil1.381.72World
Bank April 2010
Increased voting percentage of developing and transition
countries to 47.19%, up 4.6% since 2008
Biggest winners: China, India, and Brazil
China is now third-largest shareholderbehind U.S. and JapanIMF
Voting Share
Needed governmental reformsAgree in advance on criteria and
proceduresfor bailoutsRevamp loan securitization and
redesigncapital requirementsBind existing trade barriers and
reallocatevoting rights at IMFConstrain the rise of U.S. budget and
currentaccount deficits 24
Investment implicationsWatch out for bond blowup if U.S. does
notlimit deficit growthFocus your clients on interest-rate risk
inhigh-quality bondsOrganize equity research by global sector,not
countryIncrease asset allocation to emergingmarkets securities
25
Chart10.28180.26460.0666-0.05630.08110.00420.1052-0.0095
JPMorgan Emerging Markets Bond Index (Global)S&P 500
Sheet11 year3 year5 year10 yearJPMorgan Emerging Markets Bond
Index (Global)28.18%6.66%8.11%10.52%S&P
50026.46%-5.63%0.42%-0.95%
