Global financial crisis

Global Financial Crisis Summary of the media’s coverage of the timeline, causes, implications, impact and recommended path forward December 1, 2008

Table of Contents Objective and Methodology Global Financial Crisis • Timeline of Events • Causes and Implications • Future Outlook and Recommendations Appendixes November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 2

Global Financial Crisis Objective and Methodology Objective: Provide a rich, yet concise summary of the media coverage on the current global financial crisis The synopsis was created using the following methodology: Universe of Expert Step 1 Opinions and Articles Selected 12 publications (e.g., Economist, FT, Wall Street Journal), 8 think tanks and select sources from other media such as radio Scanned all sources for coverage of the current global financial crisis between mid 2007 and October 2008 ~100 articles and reports from preferred sources Step 2 Read ~100 articles and shortlisted them according to the following criteria: • Analytical insight • Breadth of coverage ~50 Relevant Articles • Uniqueness of opinion for analysis Step 3 Summarized shortlisted articles and incorporated them into the slides that follow which cover: • Timeline of events (2007/08) Synopsis • Causes and Implications of the Global Financial Crisis • Global Impact • Future Outlook and Recommendations November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 3

Table of Contents Objective and Methodology Global Financial Crisis • Timeline of Events • Causes and Implications • Future Outlook and Recommendations Appendixes November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 4

Global Financial Crisis Timeline of Events – 2007/08 The current financial crisis is categorized as the worst since the Great Depression. Some of the major events related to the crisis are mapped to the Dow Jones Industrial Average 15,000 DJIA Index Value, June 2007-October 2008 Bernanke and Nouriel Roubini Paulson urge fast states that action to approve the governments will USD 700 Bn bailout have to come up with even bigger 12,000 Henry Paulson Paulson rejected the international rescues assures investors possibility of the that the sub-prime housing crisis leading to problem is contained a broader economic Paulson shares that the crisis US Treasury has no plans to bailout Fannie Mae or Freddie Mac 9,000 Housing Financial institutions fall Future bubble Stock market collapses outlook bursts 0 Jun’ 07-Jul’07 Aug’ 07 Sep’ 07 Oct’ 07 Nov’ 07 Dec’ 07 Feb’ 08 Mar’ 08 Jun’ 08 Jul’ 08 Sep’ 08 Oct’ 08 Two hedge Federal Morgan US S&P cuts Merrill has Lehman Russia, funds of Reserve Stanley financial ratings of USD 5.7 Brothers Romania Bear reduces suffers crisis Morgan Bn of write files for and Ukraine Sterns the fed loss of affects Stanley, downs; bankruptcy close their forced to fund rates USD UBS which Merrill sells stock dump by half 3.7 Bn confirms Lynch and shares exchange assets, percentage loss of Lehman for few days due to point USD 18.4 Brothers due to crisis losses. Bn Bear Bank of Stearns Government Fed and America rescues Governments of many funds file buys countries announce for other banks by central Merrill nationalizing bailouts for their bankruptcy Lehman Lynch for financial institutions Merrill banks JP Morgan Fannie Mae, Brothers Lynch share and Fed USD 50 Freddie Mac and HSBC reports ~USD 40 Reserve Bn; Bank and giving shut some loss on Bn in take steps of China AIG an Iceland’s financial crisis of their USD 8.4 special to rescue buys 20% emergency grows as all three of its offices Bn write loans to Bear stake in loan of USD major banks are down banks Stearns Rothschild 85 Bn nationalized Source: News Releases November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 5

Global Financial Crisis Causes: US Housing Market Collapse Many experts believe that the global crisis was triggered by the US housing market collapse US Housing Market Collapse Easy access to credit: Falling interest rates and rising availability of mortgages, combined with rising housing prices encouraged consumers to buy homes Relaxed lending standards: To cater to the growing number of mortgage seekers, lenders relaxed standards and issued a large number of sub-prime loans Inadequate regulations: Regulations did not keep pace with innovations in US financial products, leading to much higher complexity, poor transparency and greater risk Complex credit derivatives: The invention and use of complex debt derivatives such as CDOs1 made it difficult to identify and contain the sub-prime lending problem, once default rates began to rise Market collapse: The property boom led an over-supply of housing and prices could no longer be supported. Just like the self-perpetuating behavior that led to the rise, the crash was also self-perpetuating. As prices fell, more foreclosures started taking place, increasing the supply of homes on the market. Lenders started to tighten their standards and fewer consumers could qualify for mortgages and help reduce the supply Note: 1Collateralized Debt Obligations Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Crazy crisis may herald the end of new derivative folly’, FT, Dec 23, 2007; ‘Rethinking Capital Regulation’, WSJ, Aug 23, 2008; ‘Central banks and financial crises’, WSJ, Aug 23, 2008; ‘Spooking investors - Financial markets remain on edge because the credit crunch has not been solved’, Economist, Oct 25, 2008; ‘Out of the frying pan’, Economist, Jun 05, 2008 November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 6

Global Financial Crisis Causes: US Housing Market Collapse … some experts have other opinions Alternative Viewpoints New Bank Capital Requirements: Some experts believe that an international regulation (Basel I) that came into effect in 1988 contributed to the financial crisis. This regulation mandates that banks hold more capital if they make riskier loans or investments. This encouraged banks to get rid of risky loans by turning them into securities to be sold to investors Role of the Credit Rating Agencies: Many experts blame ratings agencies such as Moody’s, Standard & Poor’s and Fitch for the crisis because they granted AAA ratings to risky mortgage backed securities (MBS). Profits of ratings agencies grew rapidly over the last decade. Almost all agencies follow an ‘issuer-pays’ revenue model1, and this poses a potential conflict of interest, which some experts contend led to inappropriately high ratings for risky MBS. Riskier Investment Decisions by Banks: Some experts blame poor decision-making on the part of banks for the crisis. Banks kept huge amounts of MBS on their balance sheets in spite of the sub-prime risk involved. They financed these and other risky assets with short-term market borrowing and with a decline in the housing market, banks found it difficult to roll over short-term loans against these MBS and hence were forced to sell the assets at a substantial loss Mark-to-Market Accounting Rules: Financial regulation such as mark-to-market accounting stipulates that financial firms must treat potential losses as cash losses. Even though many financial instruments may still yield returns in the future, their current asset price is highly devalued. This concept makes firms ripe for forced liquidation, chases away capital, and leads to further decline in asset values Misleading Economic Statistics: Some statisticians believe that government statistics (e.g. GDP and unemployment rate) have been revised over the years to show the best possible picture of the US economy. These experts hold that such revisions in economic statistics are misleading and were used by Wall Street to sell their over-valued products Note: 1The entity that issues the security is also seeking the rating, and pays the rating agency for the rating Source: ‘New Bank Capital Requirement Helped to Spread Credit Woes’, WSJ, Aug 30, 2008; ‘How to Start the Healing Now’, WSJ, Oct 01, 2008; ‘Rethinking Capital Regulation’, WSJ, Aug 23, 2008; ‘Economy lacked a trusted national leader’, Washington Post, Oct 15, 2008; ‘Wall Street: the dark theory’, Fortune, Sep 19, 2008; ‘Triple-A Failure’, New York Times, Apr 27, 2008 November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 7

Global Financial Crisis Impact: Global Economic Slowdown Impact on Stock Markets Globally Losses to Investors Freeze in Inter Bank Credit World stock markets have taken a beating, Both institutional investors and individual Failure of banks fueled anxiety in international leading to a loss in confidence amongst investors investors have suffered huge losses both in MBS banking markets leading to a freeze in inter-bank who are stepping back in spite of several cuts in and related products, and in equities lending lending rates by the banks • Banks alone are reported to have suffered • E.g. DJIA fell below 10,000 mark (first time in USD 600 Bn of credit-related losses globally. four years) plunging more than 800 points in According to IMF estimates, American and a single day in October. The fall was mirrored European banks are predicted to loose USD in stock markets, such as NASDAQ, NYSE, 10 trillion of assets Nikkei 225, London’s FTSE, Germany’s DAX, etc Increasing Unemployment Decline in Businesses Globally Bailouts There have been job cuts in many companies There is considerable decline in business all over Several bailout packages have been announced across various sectors around the globe. This world marked by reduced output and consumer by governments around the world to fight the trend has not been limited to the financial sector spending, particularly in Britain, France, growing financial crisis alone Germany and Japan. The industries being • The US has announced a USD 700 Bn • High number of layoffs were announced in impacted include automotive, airline, building bailout package for its banking sector, the US through September 2008: 111,000 in materials etc. Automotive companies such as Germany announced a bailout package of financial sector, 95,000 in automotive sector, GM, Ford and Toyota reported 45%, 30% and more than USD 200 Bn and Britain more than 62,000 in transportation, 51,000 in retail, 23% decline in sales respectively, in October USD 500 Bn for this financial crisis (see 28,000 in telecommunications and more in 2008 appendix for more detail on global bailout other sectors announcements) Source: ‘The Giant Pool of Money’, NPR News and This American Life Episode, Sep 09, 2008; ‘Off a cliff’, Economist, Oct 10, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct 06, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008; ‘The end of the beginning’, Economist, Oct 16, 2008; ‘When fortune frowned’, Economist, Oct 09, 2008; ‘But will it work’, Economist, Oct 16, 2008; ‘Yahoo expected to point to advert drop-off’, Financial Times, Oct 20, 2008; ‘India’s Jet Airways cuts 1,900 jobs’, Oct 16, 2008; ‘U.S. layoffs increase as businesses confront crisis’, IHT, Oct 26, 2008 November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 8

Global Financial Crisis Future Outlook Opinions about what happens next gravitate toward several scenarios By Experts Most Common Future Outlook Scenarios Consolidation and Restructuring Emerging Economies to Help Out Worsening financial crisis due to of Banks – Changes are already Developed Nations – Cash rich the unraveling of Alt-A mortgages evident with deals that are taking economies of world (developing nations – This is the segment of mortgage place: and their Sovereign Wealth Funds) are loans given to prime borrowers but • Bank of America taking over expected to bailout the developed without complete documentation. Merrill Lynch nations from the current crisis. As stock From 2002 to 2007, Alt-A mortgages • Bank of China acquiring 20% prices of the big banks from developed as a percentage of total mortgages stake in private banks such as nations fall, they are expected to attract have risen from 2% to ~13%, and Rothschild investors from developing nations. experts say that the defaults on this • Barclays acquiring Lehman Some experts believe that China will category of mortgages will impact Brothers act as the savior of developed the financial market even more than • BNP Paribas expected to take a majority stake in the Belgian and economies facing the risk of recession sub-prime lending Luxembourg operations of Fortis by buying their banks NV Source: ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’, Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ, Sep 03, 2008; ‘Global breakdown: Winners and losers’, Fortune, Sep 30, 2008; ‘Market meltdown: Global problem, global cure’, Fortune, Oct 06, 2008; ‘A monetary malaise’, Economist, Oct 09, 2008; ‘Barclays: Wall Street's new gambler’, Fortune Oct 21, 2008 November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 9

Global Financial Crisis Recommendations Opinion leaders and governments have made various recommendations for how to manage the current global financial crisis and stabilize the economy … By Opinion Leaders Some experts have suggested alternative bail-out plans, such as: • Government Loans: Funds allocated for bailout can be used to provide loans (with mortgage securities as collateral) rather than buying the securities outright. This avoids the complexity of pricing the securities and enables interest from the loans to be returned to taxpayers or used for their benefit • Reverse Auction: The government (one buyer) can invite lowest bids from many sellers for different categories of securities • Issue T-Bonds Now: The US Treasury should borrow money to pay for the bailout now by issuing 5-year and 10-year notes, since interest rates and the cost of funding the bailout will rise as the economy begins to recover Some experts have also indicated that the real solution is to stabilize employment and hence cash flow. They believe that though the government is infusing liquidity into the market, households can still default on various debt instruments and hence the problem will still remain unsolved By Henry Paulson, Treasury Secretary of US By European Governments Paulson’s suggestions for the US financial market include: European governments reportedly believe that rather than • Fed should be the highest authority regulating all financial institutions and a new buying toxic assets, the government should focus to authority should look after consumer protection issues recapitalize the banks directly in exchange for some control • The Securities and Exchange Commission should be merged with the of operations of the banks Commodity Futures Trading Commission. Thus by tightening the regulatory gaps, banks will follow the Basel II guidelines (which it claims could have mitigated the credit crisis, if followed earlier) • Large investors, such as insurance companies, should be brought under the federal regulations, by allowing them to opt for federal chartering and oversight (instead of state chartering) Source: ‘The $700 Billion Question: How Much Is That Exotic Security?’, Knowledge@Wharton, Oct 01, 2008; ‘How to build a better bailout’, Fortune, Oct 06, 2008; ‘Why it's stimulus time again’, Fortune, Oct 14, 2008; ‘Financial sector in crisis’, FT, Sep 10, 2008; ‘A Return to 'Normality'?’, WSJ, Sep 03, 2008; ‘Europe to U.S.: You messed up the rescue, too’, Fortune, Oct 13, 2008; ‘Keeping U.S. Financial Markets Competitive And Orderly’, Forbes, Mar 31, 2008 November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 10

Table of Contents Objective and Methodology Global Financial Crisis Appendixes • A: Global Bailout Announcements • B: Relevant Opinion Articles November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 11

Global Financial Crisis Appendix A: Global Bailout Announcements as of Dec 1, 2008 The total value of global bailout announcements to date is USD 1.89 trillion Norway Luxembourg Belarus Ukraine Latvia 0.8 Bn 4.2 Bn 2 Bn1 16.5 Bn1 0.4 Bn 1.3 Bn Netherlands Denmark 92.6 Bn 0.9 Bn Belgium Iceland 22.1 Bn 2 Bn1 0.7 Bn Russia 216.4 Bn Canada 23.5 Bn 21.6 Bn Switzerland 59.3 Bn US 725 Bn 544.8 Bn ASEAN, Japan, China and South Korea South 80 Bn Korea 42.2 Bn UK France Spain Austria Hungary Germany UAE Qatar India Kazakhstan China International Financial 437.5 Bn 54.1 Bn 41 Bn 20.3 Bn 31.9 Bn1 136.6 Bn 32.6 Bn 5.3 Bn 0.7 Bn 8 Bn Corporation 5 Bn 0.4 Bn 98.1 Bn 18.1 Bn 3.5 Bn 92.2 Bn (For banks of poor countries) Serbia 3 Bn 0.5 Bn1 Oman Pakistan 2 Bn 7.6 Bn1 Starting with the US financial sector, the crisis soon spread across the globe and into other markets Chile beyond just financial services 0.85 Bn In response to the crisis, governments around the world have infused capital to bail out and stabilize many private banks such as Fortis Bank, Royal Bank of Scotland, etc, and companies in other sectors Total Bailout Government Company Legend 0Bn – 100Bn 101Bn – 250Bn 251Bn – 400Bn Above 400Bn Bailout Funds Bailouts Note: All figures are in USD; Bailout announcements updated on Dec 1, 2008; Figures only include capital allocated for institutions in the form of equity or debt; 1Loans provided by Institutions such as IMF and World Bank or other countries. November 05, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 12

Global Financial Crisis Appendix B: Relevant Opinion Articles and Radio Shows Date Title Source Links 17-Oct-07 Think the credit crunch is over? Think again Fortune http://money.cnn.com/2007/10/17/news/economy/eavis_creditcrunch.fortune/index.htm Same as it ever was - What do earlier banking crises reveal about 10-Jan-08 Economist http://www.economist.com/finance/displaystory.cfm?story_id=10496807 America's travails today? 31-Mar-08 How to crack the credit crunch Fortune http://money.cnn.com/2008/03/27/news/fed-information.fortune/index.htm?postversion=2008032911 Predicting The U.S. Recovery: Some Leading Indicators Are Better 22-May-08 TD Bank Financial Group http://www.td.com/economics/special/bc0508_usecon.pdf Than Others 23-Jun-08 The U.S. Credit Crisis In Perspective Forbes http://www.forbes.com/2008/06/23/credit-crisis-japan-ent-fin-cs_kw_0623whartoncreditcrisis.html 23-Aug-08 Central banks and financial crises Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-Buiter081608.pdf?mod=relevancy 23-Aug-08 Rethinking Capital Regulation Wall Street Journal http://online.wsj.com/public/resources/documents/Fed-JacksonHole.pdf?mod=relevancy This American Life (and 5-Sep-08 Giant Pool of Money http://www.thislife.org/extras/radio/355_transcript.pdf NPR News) 10-Sep-08 Financial sector in crisis Financial Times http://www.ft.com/cms/s/0/ffa3bbd4-7f18-11dd-a3da-000077b07658.html 17-Sep-08 Wharton Faculty Debate the Impact of the Financial Crisis Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2053 19-Sep-08 Wall Street: The dark theory Fortune http://money.cnn.com/2008/09/19/news/economy/siklos_shadowstats.fortune/ 23-Sep-08 \"Constructing a Financial Perfect Storm\" by Jagadeesh Gokhale Cato Institute http://www.cato.org/dailypodcast/podcast-archive.php?podcast_id=745 30-Sep-08 Global breakdown: Winners and losers Fortune http://money.cnn.com/2008/09/29/news/economy/gumbel_world_economy.fortune/index.htm 01-Oct-08 The $700 Billion Question: How Much Is That Exotic Security? Knowledge@Wharton http://knowledge.wharton.upenn.edu/article.cfm?articleid=2064 01-Oct-08 How to Start the Healing Now Wall Street Journal http://online.wsj.com/article/SB122282734447293049.html 02-Oct-08 Blocked pipes - When banks find it hard to borrow, so do the rest of us Economist http://www.economist.com/displaystory.cfm?story_id=12342237 06-Oct-08 How to build a better bailout Fortune http://money.cnn.com/2008/10/06/news/economy/betterbailout_sloan.fortune/ 9-Oct-08 A monetary malaise Economist http://www.economist.com/specialreports/displaystory.cfm?story_id=12373682 10-Oct-08 Off a cliff Economist http://www.economist.com/finance/displaystory.cfm?story_id=12405370 13-Oct-08 Europe to U.S.: You messed up the rescue, too Fortune http://money.cnn.com/2008/10/13/news/international/gumbel_eurobank.fortune/index.htm 16-Oct-08 The end of the beginning? Economist http://www.economist.com/world/europe/displaystory.cfm?story_id=12436221 15-Oct-08 Analysis: Economy lacked a trusted national leader Washington Post http://www.washingtonpost.com/ac2/wp-dyn/emailafriend?contentId=AR2008101500432&sent=no http://money.cnn.com/2008/10/10/news/economy/fox_great_depression.fortune/index.htm?postversi 13-Oct-08 We can beat this crisis Fortune on=2008101307 Spooking investors - Financial markets remain on edge because http://www.economist.com/finance/displaystory.cfm?story_id=10024679 25-Oct-08 Economist the credit crunch has not been solved November 19, 2008 | Copyright © 2008 Grail Research, LLC — Confidential 13

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Global financial crisis

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