This document summarizes Robert H. Edelstein's presentation on long-term and short-term economic issues. The presentation discusses fundamental drivers of the global economy like competition and globalization. It analyzes growth in countries like China, India, and the US. It also examines issues like the US economy, capital markets, the subprime crisis, housing prices, and elements needed for short-term and long-term resolution of financial crises.

1. Peninsula Hotel
Beverly Hills, California
November 3, 2008

2. Presentation by
Robert H. Edelstein
University of California at Berkeley

4. A Quagmire of Long-Run and Short-Run
Issues

5. Fundamental International
Economic Drivers
• Competition – The World is Flat and Crowded
(Friedman)
• Globalization and Economic Integration: A Two-edged
Sword (Stiglitz)
• Capital Market Integration and Securitization – The
Limits are Imagination
• World Melting Pot of Socio-Political Ideology,
Resource Environmental Competitiveness, Technology
and Innovations
• Enhanced Volatility and Responsiveness – Integrated,
Compacted World

6. Long View of Fundamental Economic
& Financial Determinants: Summary
• International Growth Locomotives: China, India &
United States
• Future Growth Determinants: Frontier Technologies,
Globalization, Demographics, Environmental
Degradation and Energy Resources

7. Annual Percentage Change in GDP
-4
-2
0
2
4
6
8
10
12
14
16
18
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
Source: IMF (World Economic Outlook)
92
China
19
93
19
94
GDP Growth
19
95
USA
19
96
19
97
19
98
Germany
Time (Years)
19
99
20
00
India
20
01
20
02
20
03
Japan
20
04
20
05
20
06
20
07
20
*
08
20
*
09
20
10
*
are estimates.
20
11
*
20
* Data after 2007
*
12
20
13
*

8. Energy Use Per Capita
100000
E 90000
n
e
80000
r
g
(
y 70000
k
W
U
h 60000
s
/
e
c
50000
a
p
p
e
i 40000
r
t
a
C 30000
)
a
p
20000
t
i
a 10000
0
Year 2002
China USA Japan Germany India
Source: International Atomic Energy Agency – Energy and Environment Data Reference Bank

9. U.S. Economy and the Deadly
“D’s”
Deluxe Living
Dis-saving
Debt – private and Public
Deficits – Trade, Governments and Households
De-Regulation
Degradation – Environment, etc.

10. Total Credit Market Debt Held by Rest of World as
Share of Total US Credit Market Debt
Outstanding; 1945-2007
Source: Flow of Funds;
Table L 1

11. Foreign Holdings of US Securities as Share of Total
Amount Outstanding
Source: US Treasury TIC data; Federal Reserve Flow of Funds

12. Share of Global Reserves
2007
Source: BIS, IMF

13. Share of Chinese Reserves in
Dollar Denominated
Securities
$, Bill
73%
56%
Source: Peoples Bank of China, US Treasury, Estimates by Authors

14. Official Institutional Share of
Holdings by Foreigners
Source: US Treasury

15. Capital Markets and M&A Overview
Privatization Trends – 2005/2006
Drivers for Buyers
• Abundant supply of institutional and opportunistic capital
• Strong financing markets and attractive interest rates
• Reasonable return expectations
• Improving fundamentals for many asset types
• Arbitrage between public and private markets / Ability to line-up
sales of specific assets / portfolios
Additionally, many Public Companies played a role in
Privatizations through institutional / jv model:
• Boards acted strategically and empowered by strong currencies and
availability of low-cost debt and JV equity
• Public markets were much more receptive to strategic transactions
than in the past

16. Capital Markets and M&A Overview
Privatization Trends – 2005/2006
Drivers for Sellers
Motivated seller base influenced by attractive valuations
and purchase price premiums / multiples
Valuations / proposals above most NAV estimates
Aggressive suitors and increased review of strategic
alternatives
Constraints of public market
Short-term accretion attention
Leverage constraints
Analyst and Investor perceptions
Active Boards
More attention to procedures, responses and corporate
governance
Roles for management in private forum, including growth of
platform
Increased scrutiny and costs of being a public company

17. Capital Markets and M&A Overview
2007 Mid-Summer Correction - Context for the Current Situation
Since the 2007 mid-summer correction, the capital markets have undergone a significant re-pricing of risk
Risk premiums on high yield bonds have ballooned to levels well above their 12-month average of 455 bps and
all-time low of 262 bps seen 6/1/2007 (1)
In contrast, high yield default rates remain at an historic low of 0.9% - a record gap between risk premiums and
defaults (2)
Since July, financial firms have announced $181 billion of write-downs linked to sub-prime exposure (3)
Major firms have raised $72.3 billion of new capital to shore up balance sheets (4)
In 2007, an estimated $326 billion of residential mortgage payments reset; $412 billion are scheduled to reset during
2008 (5)
(1) Source: BAS High Yield Bond Index.
(2) High yield default rates of 0.9% as of 12/2007. Record gap between risk premiums and default rates as per Moody’s economist John Lonski (Source: Wall Street Journal).
(3) Source: Bloomberg as of 2/29/08.
(4) Source: Bloomberg as of 1/15/2008 and company reports.
(5) Source: Deutsche Bank, Loan Performance and Rosen Consulting Group. Includes rate adjustments and IO expirations.

18. Capital Markets and M&A Overview
CMBS Market Overview

19. Real Estate Company
Valuations
Sources: FactSet, Company reports and Wall Street Research as of 2/1/08.

21. What Are The Follow-up “D’s”
for Now?
De-leveraging – Farewell Cheap Debt
Distrust and Dismay
Deflation – Asset Market “Booms” Farewell
Disarray
Defaults

22. Capital Markets Overview
Market Current Situation & Outlook
The M&A market has slowed significantly since its late July 2007 peak
as a result of the credit market “backup”
The current M&A market slowdown is marked by the following
dynamics:
Large, highly levered financings not available
Short-term asset flipping is no longer a viable strategy
Seller’s pricing expectations have been slow to adjust despite market
expectation of
cap rate expansion
Going forward, key capital market themes in M&A will include:
Opportunistic investors, especially sovereign wealth funds, exerting pressure
on distressed situations
Likely contraction of valuation multiples / widening of cap rates
Credit re-pricing and overall leverage reductions
Increase in joint ventures as institutional real estate capital remains available
Capital structures increasingly funded by opportunistic players such as hedge
funds, commitments from multiple institutions, or SWF

23. House Prices Inflate to Create an Historic Bubble
Relative to underlying household income, the median house price appreciated far to fast.
About two-thirds of the bubble has already been deflated.
Our expectation is for the housing market to overshoot the historic price-to-income ratio.
Median House Price/Avg. HH Income
February 2008 MML (Recession)
2.60
2005Q3
2.40
Foreclosures
Wells Bubble Policy Instituted, break-out to
First in the Nation, 2003Q4 the upside.
2.20
Start of the housing bubble,
2001Q4
2.00
Ratio
1.80
1.60
Correction
will
overshoot.
1.40
1.20
1.00
19 8
19 9
70
19 1
72
19 3
19 4
75
19 6
19 7
19 8
79
19 0
19 1
19 2
83
19 4
85
19 6
87
19 8
89
19 0
91
19 2
93
19 4
95
19 6
97
19 8
99
20 0
01
20 2
03
20 4
05
20 6
07
20 8
09
20 0
11
12
6
6
7
7
7
7
7
7
8
8
8
8
8
8
9
9
9
9
9
0
0
0
0
0
1
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20

24. Recent Events of Concern
• What Happened to Bear Stearns?
• Why did IndyMac Fail?
• How do FNMA and FHLMC fit into the
Sub-Prime Crisis? AIG?
• The BIG five: G-S, M-S, Lehman, M-L, and B-S

25. Policy Action!?
• Why has the Fed acted as the Ultimate
Source of Liquidity?
• Can the U.S. let a Large Institution Fail?
• What needs to be done in the Short-Run and
the Long-Run?

26. ABX-HE Index Prices Have Deteriorated
This chart shows the ABX index for AAA bonds backed by home equity loans issued
in February 2007 (as of April 22).
Even AAA bonds have lost about 43% their value in 14 months.

27. Summary
The financial markets are still under stress. Losses from
mortgage derivatives are creating counter-party risk, and they
have prevented the normal flow of transactions and credit as a
result.
The result is that risk spreads are elevated.
The poor economic outlook has also boosted the risk spread in
the corporate sector foreshadowing increased corporate
bankruptcies, loan and bond defaults.
The Fed and the Treasury are still engaged!?

29. Elements for the Short-term and Long-
term Resolution of the Subprime and
Other Financial Crises
Devise Programs to Stabilize the Housing Market and Housing
Finance System
Engender Housing and General Financial Market Viability
Implement Policies that Avoid Recurrence and Moral Hazards
Prepare for Potential Wider Domestic Economic Implication of
the Sub-prime Crisis
Recognize and Plan for Potential Global Economic and
Financial System Interactions
29

30. Overview Subprime Issues
Direct Effects
Delinquencies
Foreclosures
home prices
Lender Industry and Secondary Market Behavior
New Profit Model
Underwriting Standards
Fee Structures
Accessibility of Secondary Market
Risk Contagion Effects
New Construction
Real Estate Services
Equity Loans
Financial Institutions
Global Effects
Risk Spread “Adjustments”
U.S. Consumption and International Trade, World-wide Stock Market/Bond Market
30

31. Why Were We So
Susceptible to the
Subprime Crisis?
• Diminution of Underwriting Quality
• Inexperience of Owner-Borrowers
• Financial “Wizardry”
• Aggressive, Risk-Taking Investors
31

32. How Exposed Are We?
Total US housing stock is 128 million units
Annual sales since 2000 represent between 4-6% of
stock
States with high levels of price declines account for a
large share of housing stock; and larger share of
mortgages outstanding
Nationwide, the ability to buy a home has not changed
dramatically, but regional variations show large areas
of vulnerability
Subprime loans are 12 percent of all outstanding
mortgages
32

33. Per Capita Income and Home Price Indices
Compared, Far West, 1975-2008
1600
1400
1200
1000
800
600
400
200
0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
19
OFHEO index Per Capita Income Index
Source: Indices created by authors using Office of Federal Housing Enterprise
Oversight index (adjusted to 1975 base); US Bureau of Economic Analysis data. 33

34. Understanding Variation in Exposure and
Experience Can Help Shape Policy
Wide variation within the US in housing markets
(median 2007 home value ranges from $88,000 in
Mississippi to $536,000 in California)
Wide variation in exposure to subprime loans (low of
6% in South Dakota, high of 20% in Nevada)
Share of subprimes in foreclosure range from 3% in
Utah to 18% in Michigan
Factors, such as age, household size, ownership rates,
and government regulation, can influence the level
and outcome of exposure.
34

35. Local and State Revenue
Impacts
Loss of Capital Gains Tax
Loss of Property Tax Base
Other Transactions Based Fees and Taxes

36. Some Troubling Conclusions
Regional differences are significant?
Homeownership at what social costs?
Credit tightening needs to be selective, especially where
economies are weak?
36

37. Policy Objectives
Stability in Housing (and other asset) Markets
Retaining high home ownership rates
Arresting drastic value slide
Maintaining ownership incentives for households with
negative equity
Normalizing new and existing market activity
Liquidity in Mortgage (and other asset) Markets
Stabilizing financial markets
Efficient securitization
Reorganizing Fannie and Freddie to be viable entities (at
low social costs)
37

38. Whose Problem?
• Homeowners/Borrowers
• Homebuyers
• Home-sellers
• Builders
• Lenders
• Securitizers
• Investors
• Regulators
• Taxpayers
• Government sector
• International Components
38

39. Policy Evaluation
Criteria/Benchmarks
Moral Hazard Issue or Chance of Recurrence
Fairness and Equity
Bang for the Buck (Efficiency)
“Good” vs. “Bad” Subprime Loans
Distributional (Income and Geographic) Impacts
Linkages of Housing finance System with Broader
Financial System and Economy
39

40. The Secondary Market
Enigma
1. FNMA and FHLMC
2. FDIC and Banks
3. IB and Securitization
4. Monoline Insurers
5. CDS
40

41. Real Sector Constraints for
Policy
Economic Environment
Job Creation
Household Formation
Wage Growth Prospects
41

42. Policy Perspective
No Single Policy is the Silver Bullet
Complex Benefits-Costs Analyses Require Multi-faceted
Solutions
Regional-State Differences Require Regionally
Differentiated Approaches
Reinvigorate Securitization Process
Triage “Bad” Loans
42

43. Targeting Policy
Economic Slow-downs
Credit Tightening
Loss of Confidence in System
43

44. What Should We Focus on
Next?
Credit Crunch
Synchronized World Recession
China Bubbles Burst
Dollar Crash (Inflation Risk)
Geopolitical Risks

45. Flux = Opportunity

46. Positive Demographics – Echo – Baby Boom; 72 Million
People in Next 10 Years
Expensive Energy Scenarios – Changing Urban Form and
Urban Density
Financing Real Estate – What’s Next?
U.S. May Represent Best Real Estate Investment
“Opportunistic Plays” During Next Five Years!?

47. Office – Not Overbuilt, Except O.C., Seattle
Residential – Rebound in Values Over the Next Five
Years; MF vs. SF
Retail – Well-Situated (LxLxL)
Hotels – Dangerous Sector?
Industrial/Warehouse – If Globalization Continues?!
Securitized Real Estate Markets -- ?
Land Play – Have a Hunch---Buy a Bunch will Not
Work!? -- Not for the Meek!