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20080924_Debt_Crisis_-_Client_Presentation___Teleconference

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20080924_Debt_Crisis_-_Client_Presentation___Teleconference Powered By Docstoc
					  The Debt Crisis 2007/2008
       Client Seminars
Wednesday 24th & Thursday 25th
      September 2008

   •How it has happened
   •Putting it into context
   •Where to from here
   •Strategic Decisions for Individuals
  Slide 1 - How It Happened….
• It really did start with mortgages to people who
  could not afford them.
• They were sold by salespeople (mortgage
  brokers) on commission.
• The loans did not ‘stay’ with the financial
  institution who provided the loan (as tends to
  happen in Australia), they were ‘sold’ to other
  financial institutions. Therefore institutions were
  not so concerned over the credit worthiness of
  borrowers, because they were just selling the
  loans on.
 Slide 2 - Non Recourse Loans
• These loans were ‘non recourse’ loans – that is
  if the borrower could not pay the loans back, the
  lender could take back the property – without
  any further claim on their assets or income.
  (again, unlike Australia where borrowers have to
  pay back all of the loan amount).
• This is where the term ‘jingle mail’ comes from:
  USA homeowners posting their keys back to
  their lenders – because that is where the
  responsibility for their loan ends.
  Slide 3 – Bundling the Loans
• The loans were bundled together,
  sometimes with further borrowing, into
  various products including ‘Collateralised
  Debt Obligations (CDO’s)’.
• In Australia some superannuation funds,
  councils and banks invested in CDO’s.
       Slide 4 – No-one Trusts
            Anyone……..
• The problem is in debt markets. If these
  CDO’s can cause an investment bank to
  fail (Bear Sterns), then no-one wants to
  lend money to an institution that might
  have significant exposure to them.
Slide 5 – This is a Debt Problem
     Slide 6 – The Credit Rating
              Agencies
• In the early part of this decade there was
  another ‘sub-prime’ mortgage crisis in the
  USA. However house prices were still
  going up, so more than 90% of the value
  of loans were recovered.
• This time house prices are falling…..so far
  less is being recovered.
• Credit ratings agencies rated a lot of debt
  as much less risky that it really was.
     Slide 7 – Why House Prices
         (in the USA) Matter
• Stopping the fall of house prices in the
  USA will put a floor under the valuations of
  these CDO’s.
• It is an important plank in resolving the
  crisis.
 Slide 8 – Putting it into Context
• We don’t want to diminish what is
  happening in any way – this is a very
  serious financial problem; however there
  have been others that have gone before.
 Slide 9 – Putting it into Context
The media enjoys reporting ‘fear or greed’.

   – "This economic convulsion is unprecedented in the post-World
     War II era.” Robert J. Samuelson, "A World Meltdown?" Newsweek September 7, 1998
   – "This time it is different. This time the market won't be so quick to
     bounce back. . . . Who can look at the world right now and not
     conclude that things have changed dramatically?”
                   Joseph Nocera, "Requiem for the Bull," Fortune, September 28, 1998.

   – "The nation's top auditor said today that many more banks were
     effectively bankrupt than regulators had recognized. . . . 'The
     bank insurance fund is nearly insolvent, and I cannot
     overemphasize how important it is to restore it as quickly as
     possible,' Mr. Bowsher [Comptroller General] told the Senate
     Banking Committee.“ Stephen Labaton, "Bank Deposit Fund Nearly Insolvent, US
      Auditor Says," New York Times, April 27, 1991.
 Slide 10 – USA Investment Banks
  vs. Australian Banking System
• Lehman Brothers is an investment bank –
  a trading bank dealing in investment
• Australia’s banks are better ‘capitalised’,
  the Government’s credit rating is AAA (can
  raise cheap debt if needed), the RBA has
  not had to ‘prop up’ any institutions and we
  have an official interest rate of 7% - which
  provides room to cut interest rates if
  growth slows.
  Slide 11 – The Real Economy
• In Australia:
   – Unemployment is at historical lows (less than 5%)
   – There is no serious expectations of a recession
   – The economy is forecast to continue to grow (albeit at a slowing
     rate – which is not a bad thing in that it keeps inflation under
     control)
   – An International Monetary Fund (IMF) study suggests Australia
     is well placed to weather the global economic downturn

   – Even in the USA the ‘real economy’ seems to be surprisingly
     strong, unemployment is reasonable, consumer spending strong
     – and against forecasts they seem to have avoided a recession
     up till now (although that may change in the future).
   Slide 12 – Corporate Activity
• In the last week Warren Buffett has made 2
  significant investments, including $5 billion into
  Goldman Sachs overnight.
• Talk of BHP making a hostile bid for Rio Tinto.
• Lehman Brother’s assets purchased.
• Macquarie purchasing Channel 10??

   Corporate activity might be a sign of increased
    confidence in markets, and the values of companies.
        Slide 13 – The Bailout
• The proposal for the USA Government is to buy
  back large amounts of the mortgage debt.
• This potentially improves the situation by taking
  this ‘toxic debt’ out of the companies – making it
  easier for companies to lend and borrow with
  certainty.
• Many commentators have said that this takes
  the ‘depression scenario off the table’.
       Slide 14 - The Bailout
• It does seem to be a potentially solid
  solution.
• However, it has the ‘political risk’ that
  means that until it is passed, there will be
  uncertainty.
    Slide 15 - What is Priced Into
               Shares?
• There is an obvious desire to sell shares, and
  put the money into cash at such a difficult time.
  However, the price of shares at the moment
  must reflect a great deal of fear – from the USA
  problems and the reporting of this as a ‘crisis’.
• The value of shares at the moment would likely
  reflect:
  – The probability of a USA recession
  – Continued problems in credit markets
  – A slow down in company earnings
  Slide 16 – Strategic Decisions for
              Investors
• Keep a reasonable level of cash
• Diversification is a positive strategy (avoid collapses like MFS,
  ABC Learning, Macquarie Fortress Notes, Asset Loans, Babcock and Brown, Basis Capital,
  Absolute Capital, City Pacific, MFS Premium Income Fund, Centro Property………………)

• Aggressive Long Term Investors – possibility to
  buy in a distressed market (but a strategy with
  risk)
• Keep an eye on the ‘income’ from investments –
  Australian shares are paying a dividend yield of
  5.02%; that is very attractive
• Get in contact with us at any stage that you want
  to discuss your situation

				
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