Subprime - Structural View

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					                       The Advantage of Innovative Thinking




GRAVITAS Capital Advisors, Inc.
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                 Review of Sub-prime Crisis
        Emerging Opportunities for the Caribbean Financial Sector

                                  35th Annual CAIB Conference
                                   Barbados – November 2008

                                          Presenter:
                                        Eric Guichard
                                      GRAVITAS Capital



GRAVITAS Capital Advisors, Inc.
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                                  Let’s Recap…
      Let’s        review the damage to date:
           – Citigroup has declared billions in value wiped out from
             its balance sheet (about to cut 50,000 jobs)
           – Merrill Lynch, Lehman, AIG, Bear Stearns no longer
             exist as independent going concerns
           – In total to date about US$1+Trillion lost (corporates,
             hedge funds, insurance companies, pension funds,
             endowments…)
           – Foreclosure rates are at historical highs (+70% in Sept)
           – Global impact…recessions in US, Japan, Germany,…

GRAVITAS Capital Advisors, Inc.
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                          What is sub-prime?

           “A picture is worth a 1000 words…”




GRAVITAS Capital Advisors, Inc.
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                   Housing pulls Economy
                                          Hardware      Jobs

                                  $


                                      $
                       Home                             Jobs
                                          Electronics
                      Purchase


                                      $


                                            Utilities   Jobs



GRAVITAS Capital Advisors, Inc.
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          Old days of Relationship Banking


                                    Mortgage
                                                       “Joe”
                       “Bob”                        The Banker
                  the homeowner
                                                  (owns mortgage)
                                      Loan



                    NB: Bank owns loan and knows client – is part of community




GRAVITAS Capital Advisors, Inc.
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      The Mortgage Market Today (A)
                            DISINTERMEDIATION


             Loan                      Steady Cashflows + Valuable Collateral
    HH

                         Lender                     Packager                   Rating
                                                  (Securitization)            Agencies
    HH
             Loan



                                     Pensions          Insurances       Endowments




                                                Investment Guidelines

GRAVITAS Capital Advisors, Inc.
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                 Securitization Process (A)
                                                                Low Yield
       Detroit        Exotic Loans                              Bonds
       Bank                                         Pool A:
                                                    30%D                Insurance
                                                    30%H                 Pensions
                                                    40%F                  Banks
                                  Wall Street
                                  Investment
     Hollywood                                  Exotic Structures
       Bank                          Bank
                                  (Packager)
                                                    Pool B:
                                                    70%D                Insurance
                                                    10%H                 Pensions
                                                    20%F                  Banks
       Florida
        Bank                                                  High Yield
                                                              Bonds
                  Selling/Buying Mortgages                    (Sub-prime)
GRAVITAS Capital Advisors, Inc.
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                Securitization Process (B)
                Pool A                                         Investors

                                             AAA
             High Credit                                                   Banks

                                              AA
                                                            Pensions
              Mid Credit

                                              BB
                                                                           Insurance
             Sub-Credit
                                        Exotic Structures
                                            CCC              Hedge
                 Hi Risk
                                                             Funds
                                  Credit Default Swaps


                                  Rating Agencies
GRAVITAS Capital Advisors, Inc.
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 CRISIS!! HOME PRICES PLUMMET
              Result:
              -All Securities/Collateral are valueless
              -Credit freezes/consumption collapses
              -Corporate layoffs rise
              -Dramatic shrinking of consumption
              -Recession…Depression looms

GRAVITAS Capital Advisors, Inc.
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                                  Who’s Fault??
(Credit Worthiness?)

                         (Pressures?)                (Due Diligence?)
             Loan                                                         (Due Diligence?)
     HH

                       Lender/Broker                  Inv. Bkr              Rating
                                                   (Securitization)        Agencies
     HH
             Loan



                                        Pensions        Insurances      Banks




   Collateral                                        (Due Diligence?)
   (Value?)

GRAVITAS Capital Advisors, Inc.
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       Now what does this all mean for
        Caribbean Financial Services?




GRAVITAS Capital Advisors, Inc.
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         Immediate Regional Implications?
      Capital          Calls from HQ
           – Freezing of major projects
           – Higher cost of financing (corp. and sovereign)
      Slowing            of Remittances
           – Mexico vs. Jamaica
      Fear        of Contagion
           – Regulatory Clamp Down (innovation and cross-border)
           – Delays in regionalization (securitization initiatives)
      Late        Effects
           – 2009 and beyond: Tourism

GRAVITAS Capital Advisors, Inc.
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                   Evolving Regional Market
                                  (What needs to be done?)

         G20 Initiatives for Reform (cf. Article)
           – Disparate application due to local politics
           – Macro vs. Micro Response
         The Fear of Contagion (cf. Article)
           – Is the dream of regionalization dead?
         Takeaway for the Caribbean Regulator:
           –   Coordinated oversight (Regional SEC?)
           –   Balance in Risk Taking (Boards - Incentives)
           –   Cooperation with Private Sector (not adversarial)
           –   Transparency
           –   Consistency across jurisdictions (Easier here)

GRAVITAS Capital Advisors, Inc.
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                                  Opportunities?
      As    normal sources dry up – seek alternative
          sources of finance:
           – Small Enterprise Assistance Fund (SME
             finance)
      New           product development
           – Remittances based products
                  Building        on counter-cyclicality and dependence
           – Community based financial services
                  Global         Education Savings Fund
GRAVITAS Capital Advisors, Inc.
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                                  In Closing
      Difficult          times ahead, but:
           –   Regulators need seek balance NOT restrict
           –   Boards should be more accountable (micro)
           –   Regional market should stay alive
           –   CAIB members should seek value in responsible
               innovation
      New     G20 Regulatory Framework bound to create
          new inefficiencies
           – Watch for unintended consequences.

GRAVITAS Capital Advisors, Inc.
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