THE LIGHTS IN THE GLOOM

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• THE LIGHTS IN THE GLOOM
• Presented by Andrew Hill
• Disclaimer
• The information contained in this presentation is
  a collection of information sourced from a wide
  variety of sources.
• I didnt directly participate in or contribute to
  the US Sub Prime Crisis but I have read as much
  on the topic as I could since it became a reality
  in 2007.
• No aspect of this presentation should be
  considered advice (financial or otherwise) nor
  should
• any decision to invest or divest be made as a
  result of the content of this presentation.
• Thanks to
• Ryan Barnes Author The Fuel that Fed the
  Subprime Meltdown
• Karina Barrymore Herald Sun 02 Feb 09 Lights
  in the Gloom
• www.treasurer.gov.au
• www.pm.gov.au

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• ?
• What was the catalyst that created our current
  economic decline?
• How has this economic decline affected us?
• Explanation of what the Government is doing to
  attempt to stem the economic downturn.
• What are the personal business opportunities in
  our current economic situation?

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What was the catalyst that created our current
economic decline? November 19, 2008 The cost
for the Federal Reserve and US Government for the
recent bailout mania has already gone past 4
trillion dollars according to CNBC - the 700
billion TARP programme is just the tip of the
iceberg. Thats more than the cost of World War
II, inflation adjusted. The Troubled Asset
Relief Program (TARP) is a program of the United
States Government to purchase assets and equity
from financial institutions in order to
strengthen its financial sector. It is the
largest component of the governments measures in
2008 to address the subprime mortgage crisis.
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• What does a subprime loan mean?
• A type of loan that is offered at a rate above
  prime to individuals who do not qualify for prime
  rates
• What does Residential Mortgage-Backed Security
  (RMBS) mean?
• A type of security whose cash flows come from
  residential debt such as mortgages. Home Equity
  Loans and Subprime Mortgages. This is a type of
  MBS that focuses on Residential instead of
  Commercial debt.

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• THE PATH TO A CRISIS
• Was this the case of one group or one company
  falling asleep at the wheel?
• In 2001 the US Federal Reserve began cutting
  rates dramatically, and the fed funds rate
  arrived at 1 in 2003. The goal of a low federal
  funds rate is to expand the money supply and
  encourage borrowing, which should spur spending
  and investing.
• REAL ESTATE BEGINS TO LOOK ATTRACTIVE
• As lower interest rates worked their way into the
  economy, the real estate market began to work
  itself into a frenzy as the number of homes sold
  and the prices they sold for - increased
  dramatically in 2002.

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• INVESTMENT BANKS, AND THE ASSET BACKED SECURITY
• If the housing market had only been dealt a
  decent hand say, one with low interest rates
  and rising demand any problems would have been
  fairly contained.
• Unfortunately, it was dealt a fantastic hand,
  thanks to new financial products being spun on
  Wall Street.
• A SIMPLE IDEA LEADS TO BIG PROBLEMS
• Take a bunch of assets that have predictable and
  similar cash flows, bundle them into one managed
  package that collects all of the individual
  payments, and use the money to pay investors.

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• WIDENING THE MARGINS
• Thanks to an exploding real estate market, an
  updated form of the Asset Backed Security (ABS)
  was also being created, only these ABSs were
  being stuffed with subprime mortgage loans.
• Subprime loans, along with their much higher
  default risks, were placed into different risk
  classes, or tranches.
• All of a sudden, even the subprime mortgage
  lenders had an avenue to sell their risky debt,
  which in turn enabled them to market this debt
  even more aggressively.
• As a result of this activity, it became very
  profitable to originate mortgages even risky
  ones.

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COLLATERALISED DEBT JOINS THE FRAY The ability to
borrow more prompted banks and other large
investors to create collateralised debt
obligations (CDO), which essentially scooped up
equity and mezzanine tranches from Mortgage
Backed Securities and repackaged them yet again,
this time into mezzanine CDOs. By using the same
trickle down payment scheme, most of the
mezzanine CDOs could gain an AAA credit
rating, landing it in the hands of hedge funds,
pension funds, commercial banks and other
institutional investors.
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TEASER RATES AND THE ADJUSTABLE RATE
MORTGAGE Teaser Rates three, five or seven
years. The Real Estate Market pushed to its peak
in 2005 and 2006. What borrowers didn't take into
account in the booming housing market, however,
was that any decrease in home value would leave
the borrower with an untenable combination of a
balloon payment and a much higher mortgage
payment. Over the space of five years, home
prices in many areas had literally doubled. New
homes couldn't be built fast enough, and
homebuilders' stocks soared. The CDO market
(secured mainly with subprime debt) ballooned to
more than 600 billion in issuance during 2006
alone - more than 10-times the amount issued just
a decade earlier.
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• CRACKS BEGIN TO APPEAR
• New home sales stalled, and median sale prices
  halted their climb.
• Interest rates - while still low historically -
  were on the rise, with inflation fears
  threatening to raise them higher.
• All of the easy-to-underwrite mortgages and
  refinances had already been done, and written 12
  to 24 months earlier, were beginning to reset.

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THE CRUNCH OF EASY CREDIT Scores of mortgage
lenders - with no more eager secondary markets or
investment banks to sell their loans into - were
cut off from what had become a main funding
source and were forced to shut down operations.
As a result, CDOs went from illiquid to
unmarketable. Flight to quality, three-month
Treasury bills became the new "must-have"
fixed-income product and yields fell a shocking
1.5 in a matter of days. Many institutional
funds were faced with margin and collateral calls
from nervous banks, which forced them to sell
other assets, such as stocks and bonds, to raise
cash. To help stem the impact of the crunch, the
central banks of the U.S., Japan and Europe,
through cash injections of several hundred
billion dollars, helped banks with their
liquidity issues and helped to stabilise the
financial markets.
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• How has this economic decline affected us?
• 9 Apr 2009 ... The jobless rate in March climbed
  to 5.7, seasonally adjusted, from 5.2 in
  February, the most since December of 2003.
• Interest Rates are at the lowest they have been
  in 30 years.
• A number of Mortgage Backed Investment Funds have
  been frozen.
• The Financial Institutions have changed
  dramatically
• Financial Institutions have changed their
  appetite for risk.
• Financial Institutions have either disappeared
  from the market or have been bailed out by other
  Financial Institutions.
• Many small medium size businesses have had to
  close their doors.
• Many large size businesses have downsized or
  restructured.

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• What is the Australian Government doing?
• First Home Owners Boost
• Free ceiling insulation for around 2.7 million
  Australian homes.
• Building or upgrading a building in every one of
  Australias 9,540 schools
• Building more than 20,000 new social and defence
  homes
• Introduced the Household Stimulus Package
• Tax Bonus for Working Australians of up to 900
  for eligible taxpayers, depending on income
  thresholds
• Single-Income Family bonus of 900 to provide
  additional assistance for families that have one
  main income earner.
• Farmers Hardship Bonus of 950.
• Training and Learning Bonus of 950.
• Back to School Bonus of 950.
• Significantly increased funding for local
  community infrastructure and local road projects.
• Introduced a temporary business investment tax
  break for small businesses.

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What are the personal business opportunities in
our current economic situation? Looming
recession or not there are winners and losers in
every investment cycle and this one is no
different. Anyone cashed up and debt free is
already on a potential winning streak. On the
other hand, businesses facing downturns,
households faceing job losses, businesses with
heavy debt or households with heavy debt are most
at risk. The financial crisis is takeing its toll
on our economy, businesses and households.
However, there are still some shining lights of
opportunity if you know where to look. The first
place to look is within. Most advisers and
financial experts say confidence is the biggest
deciding factor in any investment, personal or
business finance decision, even more important
than how much money you have. Overconfidence
often means too much risk, while not enough can
see you miss out on rare opportunities. It's
easy to do nothing in uncertain times, however
this is exactly when the professional investors
make their move.
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• PROPERTY
• With interest rates at the lowest they have been
  in 30 Years, this is the best time for those with
  equity and stable businesses and/or jobs to
  purchase investment properties.
• With the Governement funded First Home Owners
  Boost it is an ideal time for First Home Owners
  to enter the market.
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• SHARES
• Heavily discounted share prices are always the
  green light for counter-cyclical investors. Many
  of Australia's blue chip investment stocks are at
  historically low levels and therefore a good buy.
• SMALL BUSINESS AND GENERAL TAX BREAK
• PAYG INSTALMENT REDUCTION

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• How do we survive the current situation?
• Review your financial position regularly both
  personal business.
• Invest if your financial position is strong
  enough, after seeking professional advice.
• Ensure you take advantage of the personal
  business initiatives that the governement
  introduces.
• Review your business regularly and consider
  alliances or partnerships, to help share expenses
  or strenghen your business.
• Support small businesses where possible to ensure
  their survival.

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• In the business world,
• the rearview mirror is always clearer
• than the windshield.
• Warren Buffett