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  • AN EXCELLENT PRESENTATION FOR FINANCE STUDENTS. CAN U PLZ TELL ME THE WAY TO DOWN LOAD? OUTSTANDING EFFORTS.

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Merrill Lynch Demystifying The Market Merrill Lynch Demystifying The Market Presentation Transcript

  • De-mystifiying the market By Sarah Butcher – Editor eFinancialCareers.com
  • Agenda
    • Part 1 – The current market place and how did we get here.
    • Part 2 – Government rescue.
    • Part 3 – Where are we going and the implications for the future.
    • Part 4 – Questions and Answers
  • Taking stock: where we are now
    • Writedowns:
    • - $50 trillion of financial assets (stocks, bonds and currencies) written down in 2008 according to the Asian Development Bank. Equivalent to one year’s global GDP
    • - 40-45% of the world’s wealth destroyed says Stephen Schwarzman, chairman and chief executive of Blackstone Group
  • Taking stock: where we are now
    • Financials have taken a (big) hit
    Source: StockCharts.com
  • Taking stock: where we are now
    • Financials have taken a (big) hit
    • Citigroup shares fell to $1, down from highs of $55 in 2007
    • Further writedowns from Eastern Europe, credit cards, corporate and consumer debt are very possible
    • 277,400 finance industry jobs lost worldwide (Bloomberg)
  • Taking stock: where we are now
    • Ready to default?
    Source: Wall St. Journal
  • Taking stock: where we are now
    • Volatile equity markets
    • - FTSE at 6 year low in late February
    • S&P 500 at 12 year low in late February
    • 20% recovery in S&P by late March 2009, 7% recovery on Monday March 23 rd after the Geithner plan was announced
    • From March 9 to March 20 2009, the KBW bank index rose by 33 percent, while the overall Dow Industrials rose by only 11 percent.
    • Citibank quadrupled in value from early March to mid-April.
    • Bear market rally?
    • Star fund managers call the bottom of the market – March 15 th Anthony Bolton said we may be near the bottom, and entering a new bull market.
  • Taking stock: where we are now
    • Volatile equity markets
    Source: MoneyWeek
  • Taking stock: where we are now Source: Clusterstock
  • Taking stock: where we are now
    • Manufacturing trauma
    • Number of cars assembled in the US down 60% in Jan 09
    • Chinese exports down 17% in Jan 09
    • Japanese exports down 46% in Jan 09
  • Taking stock: Where we’ve come from
    • 2007-8
  • Taking stock: Where we’ve come from
    • 2007: Rumblings
    • February: HSBC fires chiefs of US division (Household International)
    • May: UBS closes Dillon Reed Capital Management
    • June: Bear Stearns bails out its hedge funds for the first time
    • August: 3 BNP Paribas funds, once worth €1.6bn, suspended
    • August: Stock markets tumble, central banks intervene
    • September: Northern Rock
    • October: $8.4bn loss at ML, Stan O’Neal ousted
  • Taking stock: Where we’ve come from
    • 2008: Disintegration
    • FTSE down 31%
    • Bye bye Bear Stearns
    • So long Lehman
    • BofA and Merrill get together
    • Goldman and Morgan Stanley become bank holding companies
    • Perilously close to meltdown: Crisis in the money markets. September $550bn withdrawn in a few hours on Sept 18 th after money market fund the Reserve Fund caught holding Lehman debt. US gov introduced $3.4 trillion money market guarantee programme.
  • Taking stock: Where we’ve come from
    • 2008: Disintegration
    • LIBOR (London interbank offer rate) post Lehman
    Source: John Taylor, Stanford University, via FTAlphaville
  • Taking stock: Where we’ve come from
    • 2008: Disintegration
    Source: FTAlphaville
  • Taking stock: Where we’ve come from
    • 2008: Crisis timeline
    Source: Pragmatic Capitalist
  • How did it come to this?
  • How did it come to this?
    • The ‘Great Moderation’
    Source: Dallas Fed
  • How did it come to this?
    • Leverage, leverage, leverage
    Source: Market Oracle
  • How did it come to this?
    • Money from overseas
    Source: BusinessWeek
  • How did it come to this?
    • New funding model
    • “ In the UK, regulators and shareholders acquiesced while six major banks increased their aggregate reliance on wholesale, unsecured funding from £38bn in 2003 to £498bn in 2008 in order to finance increasingly speculative lending.”
    • Guy Hands, CEO Terra Firma Capital Partners
  • How did it come to this?
    • Securitization
    Source: Economistsview
  • How did it come to this?
    • Securitization
    • Think David Bowie’s back catalogue
    • Pools of mortgaged backed securities collected and re-securitized
    • SIV= Structured investment vehicle – issues short and medium term debt payable in 2-270 days
    • CDO= Collateralised debt obligation – longer term debt
  • How did it come to this?
    • CDOs
    Source: Reserve Bank of Australia
  • How did it come to this?
    • CDOs
    Source: SIFMA (via SuddenDebt)
  • How did it come to this?
    • Sub prime loans
    Source: Carpe Diem
  • How did it come to this?
    • Underestimation of risk
    • Complicity of ratings agencies –
    • “ It could be structured by cows and we would rate it.”
    • Retrospective risk models
    • Low interest rates encourage investors to look for high returns
  • How did it come to this?
    • Writedowns
    • $450bn of CDOs of ABS issued from late 2005 to mid 2007
    • Around $305bn of these CDOs are now in a formal state of default
    • Mark to market accounting obliged banks to price assets according to current market value.
    • European banks: $316bn of writedowns to Feb 09 (Bloomberg)
    • Global banking writedowns: $1 trillion to Feb 09 (Roubini). Predicts $1.8 trillion.
    • Most securities now written down. Writedowns on loans still to come
  • How did it come to this?
    • Negative feedback loop
    Source: BBC
  • Governments to the rescue
  • Governments to the rescue
    • US banking rescue lot bigger than the Marshall plan
    Source: Alea (Total value of the rescue in March 2009 = $11.6 trillion)
  • Governments to the rescue
    • Rescues by genre
    • Capital injections (buying preferred equity/ordinary stock)
    • Unfreezing credit markets (Eg. Central banks swap cash/government bonds for asset backed securities).
    • Attempts to buy up banks’ toxic assets – Eg. Original TARP and Geithner plan
    • Guarantees/insurance programmes – Eg. above a pre-determined level, governments insure banks against losses on their toxic assets.
    • Loans to get markets moving again – Eg. US government lending up to $200bn to holders of asset backed securities under TALF.
  • Governments to the rescue
    • So, who’s been bailed out?
    • Fannie and Freddie, UBS, Commerzbank, Bank of America, Citigroup, RBS, AIG, Bradford & Bingley, Lloyds Banking Group, Northern Rock, Fortis, Dexia, SocGen, BNP Paribas, Credit Agricole, Bank of Ireland, Allied Irish, Goldman Sachs, Morgan Stanley, JPMorgan Chase, State Street, Northern Trust, Unicredit, Gulf Bank…
    • What?
    • Very big insurance company. Insures 90% of Fortune 500.
    • Operating in 140 countries globally
    • Offered both standard insurance (eg. car insurance) and insurance against financial products defaulting. $1.6 trillion in ‘notional derivatives exposures.’
    • Why bailed out?
    • Systemic risk from loss of AAA rating. ‘Confidential report said’ –
    • ‘ The failure of AIG would cause turmoil in the US economy and global markets and have multiple and potentially catastrophic unforseen consequences.’
    • - Eg. Plummeting dollar. ‘Enormous downward pressure’ on securities valuations as products dumped.
    • How bailed out?
    • On 16th September 2008, the day after Lehman went under, the US government lent AIG an initial $85bn to save it from collapse.
    • It received a 79% stake in the company in return.
    • Was the bailout successful?
    • - Yes: meltdown averted.
    • No: AIG has needed multiple bailouts.
    • US government injected more money in November 2008 and March 2009 .
    • The US government has $160bn pledged so far. In 4Q08 AIG lost $465,421 every single minute.
    • What?
    • The biggest bank in the world until 2008.
    • Operating in over 100 countries globally.
    • 325,000 employees worldwide in 2007
    • Why bailed out?
    • - Big exposure to toxic assets, comparatively small capital base.
    • $60bn of market to market losses on asset writedowns by early 2009.
    • $300bn plus in additional toxic debt.
    • Share price fell below $1 in March 2009 (after bailout).
    • How bailed out?
    • Bailout No. 1: October 2008, US gov invests $25bn in preferred shares (without voting rights).
    • Bailout No. 2: November 2008, US gov invests another $20bn investment in preferred shares; guarantees to cover most of the losses on $300bn toxic debt.
    • Bailout No 3: No more cash, conversion of gov’s preferred stock into into ordinary stock. 36% voting stake as a result.
    • Was the bailout successful?
    • Yes: meltdown averted
    • No: Citigroup’s stock fell 60% immediately after third bailout, but rose on reassuring words from the CEO.
    • Concerns of further big writedowns to come. Eg. On credit card debt.
    • What?
    • One of the UK’s largest mortgage lenders.
    • Former building society, formed 1965, floated on the stock exchange 1997 and changed its business model
    • Why bailed out?
    • Over-reliance on funding in wholesale markets
    • Wholesale funding dried up in August 2007.
    • 12/9/07 it emerged that Northern Rock needed an emergency loan from Bank of England.
    • Run on the bank.
    • How bailed out?
    • UK gov tried, failed, to find a buyer.
    • Feb 2008, UK gov lent Northern Rock £26.9bn: nationalization.
    • Little compensation offered to Northern Rock shareholders.
    • Was the bailout successful?
    • Yes: meltdown averted.
    • £18bn of government loan repaid in February 2009.
    • Northern Rock could form core of a good bank.
    • But bad debts on Northern Rock’s mortgages are rising.
    • What?
    • Very large and venerable Scottish bank.
    • Founded founded in 1727 by a Royal Charter of King George I.
    • Why bailed out?
    • Too many debts, too little capital.
    • Expensive ABN AMRO acquisition: £10bn at the top of the market.
    • RBS stock fell 40% in October 2008.
    • RBS stock fell 70% in February 2009 before reported biggest loss in UK corporate history: £24.1bn.
    • How bailed out?
    • Bailout No. 1: £20bn from UK gov in October 2008.
          • 60% stake in preference shares.
          • Converted to ordinary shares Jan 09; RBS agrees to increase lending.
    • Bailout No. 2: £19bn from UK government in Feb 2009.
          • 75% stake in preference shares.
          • Gov guarantee against losses on £325bn of toxic assets.
    • Was the bailout successful?
    • Yes: no meltdown.
    • RBS could be start of a bad bank. ‘Non-core’ RBS to include £300bn of unwanted operations and toxic assets.
  • What now?
    • Good bank/bad bank?
  • What about quantitative easing?
    • Creating money in the hope banks start lending again.
    • Bank of England: buying up to £100bn in short and medium term government bonds; up to £50bn in high grade corporate debt.
    • Federal Reserve : buying up to $300 billion of longer-dated Treasuries over the next six months and buy another $850 billion of mortgage securities.
    • Banks could either hoard the extra money or there could be…
    • - Zimbabwe introduced a 100 trillion note worth US$300
    Hyperinflation
  • What does this mean for you?
  • What does this mean for you?
    • Fewer jobs
    • Lower pay
    • More uncertainty
    • Danger of redundancy
    • New institutions?
  • What does this mean for you?
    • The havens:
    • FX trading
    • Sales and trading, simple products
    • Risk
    • Compliance (and working for the regulator)
    • Old-fashioned relationship banking
    • Private banking (at least until recently)
    • Fund management