Deutsche Bank Return to Normalcy

Microsoft PowerPoint - Return to Normalcy_Jan 2010_FINAL.ppt

A Return To Normalcy in 2010?

Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities in the United States.

January 2010

30 Key Steps in the U.S. Response to the Economic, Real Estate, Banking and Credit Crisis in 2010

Stefan Auer(212)[email protected]

Francis Kelly(202)[email protected]

Toby Cobb(212)[email protected]

Tom Joyce(212)[email protected]

2To avert a panic, central banks should lend early and freely (and without limit), to solvent firms, against good collateral, and at high rates.

~ Walter Bagehot (1826 1877), Editor-in-Chief of The Economist, Renown businessman, essayist and journalist

A Return to Normalcy in 2010?

Normalcy is a term people use for normal when they are no longer taking it for granted.

~ William Safire, The Economist magazine, 2009

3Section

1 How Bad were the Financial Crisis Losses in 2008 - 2009?

2 30 Key Steps in the U.S. Response in 2010

A. Response to the Real Estate Crisis in 2010

B. Response to the Banking Crisis in 2010

C. Response to the Non-Bank Credit Crisis in 2010

D. Response to the Economic Crisis in 2010

Contents

Appendix

1. 2008 - 2009 FDIC Seized U.S. Banks

Section 1

How Bad were the Financial Crisis Losses in 2008 - 2009?

5Global Financial Asset Values: Over US$16 Trillion DeclineGlobal Financial Assets Fell by $16 Trillion in 2008

Global Financial Asset Values Comments

$34 $36 $38 $40$43 $46

$51 $56$61

$17 $18$20 $22

$24$27

$28$29

$32

$24$27

$28$31

$34$37

$42$48

$51

$37 $33$26

$33

$38

$45

$54

$62 $34

$112 $114 $113

$126

$139

$155

$174

$194

$178

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2000 2001 2002 2003 2004 2005 2006 2007 2008

$

t

r

i

l

l

i

o

n

Bank deposits Government debt securities Private debt securities Equity securities

$7.0 $9.4 $10.3 $11.6$12.5

$6.9$9.9 $10.8

$12.1 $13.1$11.3$11.5 $11.4

$11.5 $11.5$4.5

$8.7$10.4

$12.3$14.3

$4.4

$6.8$7.8

$8.7$9.7

$34.0

$46.3$50.7

$56.1$61.1

0

10

20

30

40

50

60

70

2000 2005 2006 2007 2008(

$

i

n

t

r

i

l

l

i

o

n

)

United States EurozoneJapan Emerging countriesOther mature countries

Source: McKinsey Global Institute (Sept 09), Bloomberg

The current financial crisis interrupted a 3-

decade-long expansion of global financial asset

values

The 2008 decline was by far the largest on

record

Total Financial Assets: Over $16 trillion total net decline in 2008

Equity and real estate: declines wiped out nearly $30 trillion of global wealth in 2008 and 1H 2009

Global AUM: fell > $15 trillion in 2008 Cross border capital flows: fell > 80% Financial Institutions: Losses > $1.7

trillion from 2007 2009 Government debt: will soar with post-

crisis fiscal deficits

Deposits: Increased > $5 trillion

2009 data not yet available

Return to Normalcy?Global Bank Deposits

(US$ Trillions)

Strong global equity market performance since March 2009

Non-government debt markets performing well

Financial system stabilized with strong earnings growth forecast

Global financial assets declined over $16 trillion in total in 2008, although the decline in equities was nearly $30 trillion

6Global Equity and Real Estate Losses: ~ US$30 TrillionGlobal Equity and Real Estate Losses (2008 1H 2009)

Declines in equity and real estate

values wiped out nearly $30 Trillion

of global wealth in 2008 and the first

half of 2009

Global residential real estate values

doubled from 2000 to 2007 and

exceeded $90 trillion at their

peak

but have lost over $5 trillion during

the financial crisis through June 2009

Global equities lost nearly half of their value in 2008 and early 2009, wiping out $28.8 trillion of value in 2008 and first half of 2009

Most severe market crash since the Great Depression Every single major global equity market in the world lost value in 2008 Nearly all markets began rebounding in March 2009 Shows the high auto-correlation of global markets, driven largely by investor flows

Residential and commercial real estate markets have had over $7.5 trillion in losses: Residential Real Estate: Over $5 trillion of global losses Commercial Real Estate: Over $2 trillion of losses in the U.S. alone

Source: Bloomberg, McKinsey Global Institute

-49.9% -52.5%-38.8% -41.1%

-51.5% -53.2% -55.1% -54.6%-63.4%

52.7% 57.3%

84.3%

43.3%

60.8%47.0%

39.4%

71.9%

48.7%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Dow Jones S&P 500 BrazilBovesta

FTSE 100 DAX CAC 40 Nikkai 225 Hang Seng Shanghai

Oct 1, 2007 - Mar 1, 2009 Mar 1, 2009 - Dec 18,2009

Global Stock Market Losses

Americas Europe Asia

Return to Normalcy?

Since March 09, the Dow is up over 50%, and financial stocks have doubled

Nearly all global equity markets up significantly (auto correlation indicative of positive fund flows)

7$20.6 $22.1 $24.7 $27.3$30.5 $31.4 $36.4

$38.6 $38.9

$17.5 $19.4$21.2

$23.6$28.9 $31.0

$31.8 $30.0 $27.1$12.3 $11.3

$10.8$10.2

$8.8 $9.6$8.5 $9.5 $9.3

$3.5 $3.8$5.4

$6.2$7.3

$9.3$15.6 $12.6 $14.0

$53.9 $56.6$62.1

$67.4$74.5

$82.3

$88.3 $90.8 $87.3$85.4

$0

$20

$40

$60

$80

$100

2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009

$

t

r

i

l

l

i

o

n

Western Europe U.S. Japan Other

Global Real Estate Losses: Over US$7.5 TrillionGlobal Residential Real Estate Values (2008 1st Half 2009)

U.S. Commercial Real Estate Losses (June 2008 November 2009)

Nearly $2 trillion of U.S. CRE equity has been

wiped out during the crisis, and we expect

U.S. banks alone to take $200 - $300 bn

of total losses on nearly $2 trillion of

outstanding CRE debt

Source: Richard Parkus, Head of DB Commercial Real Estate Research. Real Estate Roundtable. The Economist magazine. 2009 CRE data assumes 30% declines, 90% attributable to equity and 10% to debt. OECD, Haver Analytics. McKinsey Global Institute.

June 2008 November 2009

Equity$3.2 trn

Debt$3.5 trn

Equity$1.4 trn

Debt$3.3 trn

Total Value: $6.7 trn Total Value: $4.7 trn

Nearly $2 Trillion of CRE Equity Losses

Over $5 Trillion of Residential Real Estate Losses

Global residential real estate values doubled

from 2000 to 2007 and exceeded $90 trillion at

their peak

but lost over $5 trillion during the financial

crisis through June 2009

Return to Normalcy?

Most of the residential real estate losses have been taken

The bank CRE losses ahead should not result in failures among the largest U.S. banks

As of December 2009, property prices are still falling in more places globally than they are rising

8Global Financial Institution Losses: Over US$1.7 Trillion

8

U.S. Banking Crisis: 2 Phases

Source: Bloomberg, as of December 18, 2009.

Started: Mid 2007 Peak: Mid/ late 2008 Focus: sub-prime and mortgage backed securities

markets

Accounting: Largely fair value Result: Significant mark-to-market losses; liquidity

crunch; broker dealer failures; bank failures; Government bail-outs; loss of confidence

Status: Nearly over

Started: 2008-2009 (losses); still early stages Peak-defaults: 2009-2010 (varies by asset class) Focus: residential, CRE, credit card, auto and

consumer loans

Accounting: Hold-to-maturity Result: Significant reserving, loan losses and

charge-offs still to come

Status: possibly 2-3 additional years of high loan losses remain; economy is key variable

Phase 2: Bank Loan CrisisPhase 1: Securities Market Crisis

Return to Normalcy?

Stabilization of global banking system in 2009

U.S. and European stress test processes in 2009 augmented confidence

Significant private capital raises in 2009

Significant repayments of Government rescue capital in 2009

Global financial institutions have lost

over US$1.7 trillion since the beginning

of the current Financial Crisis

through December 2009

Most of the losses still to come in 2010 will

be from bank loan portfolios (see 2

phases of banking crisis below)

$1,230

$234 $249

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Banks Insurance GSEs

$

b

i

l

l

i

o

n

$1,108

$563

$43

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Americas Europe Asia

$

b

i

l

l

i

o

n

Write downs by Region and Financial Sector (as of December 2009)

Total: $1,713 Total: $1,713

By Region (As of Dec 09) By Sector (As of Dec 09)

9Global Assets Under Management Decline: Over $15 Trillion

Assets Under Management (2007 2008)

Global Financial Assets Comments

Source: McKinsey Quarterly: The New Financial Power Brokers. Crisis Update (Sept 2009)

$30.4

$26.2

$18.9

$5.1 $4.4

$1.9$0.9

$25.0

$18.8

$16.2

$5.0 $4.8

$1.4 $0.9

0

5

10

15

20

25

30

35

PensionFunds

Mutual Funds InsuranceAssets

PetrodollarForeign

Investors

Asian SWFs Hedge Funds PrivateEquity

$

t

r

i

l

l

i

o

n

2007 2008

% Change: (-18%) (-28%) (-14%) (-2%) +9% (-26%) 0%

2007 Global AUM: $87.8 trillion2008 Global AUM: $72.1 trillion

2009 data not yet available

Total Global AUM: declined from $88 trillion to $72 trillion in 2008

Pension funds: significant losses across broad scope of asset classes

Insurance: largely fixed income focused, but significant equity losses

Petrodollars: includes central banks, SWFs and individuals of major oil exporters (future size closely linked to price of oil)

Asian Sovereign: includes central banks and SWFs; Chinas reserves represent over 50%; growth will depend on global GDP

Hedge Funds: over 25% decline in 2008; investor withdrawals continued strongly in 1H 2009; recovery may be slow

Private equity: investment focus shifting from large leverage buyouts to distressed debt, infrastructure, distressed banks and real estate, and venture capital

(US$ Trillions)

Global assets under management

declined sharply during the crisis,

with declines in excess of $15

trillion in 2008 alone

Sharp declines continued in the

first half of 2009, although year-end

data is not yet available

Over the next 5 years, assets from oil

producing states and Asian

sovereigns are expected to grow

more rapidly than hedge funds and

private equity

Return to Normalcy?

Better performing capital markets

Improved liquidityRisk appetite

increasing

Significant growth expected

over next 5 years

10

-2.5

-4.7

-3.9

-2.5

-5.4

5.4

8.5

3.6

1.5 1.5

3.7

1.1

7.7

9.0

-8

-6

-4

-2

0

2

4

6

8

10

US UK Euroland LatAm Japan Asia (ex-Japan) China

R

e

a

l

G

D

P

G

r

o

w

t

h

(

%

)

2009 E 2010 E

Global GDP Contraction During the Crisis

Source: DB Economics Research Team

Global Economic Growth (2009E 2010E)The recession which accompanied the

Financial Crisis was the longest

and deepest since the 1930s

but in some sense, was actually less

calamitous than many had feared

as markets were collapsing in late

2008

Return to Normalcy?

It could have been much worse

Many of the large developing world economies showed resilience to the Financial Crisis

Fiscal stimulus packages should boost GDP growth through 2010 2009 has become known as the Great Recession, but an equally apt name may be

the Great Stabilizationfor 2009 was extraordinary not just for how output fell, but for how a catastrophe was averted.

~ The Economist magazine, December 2009

DBs economists see a 25% chance

that the 2010 U.S. economy could

either stall or even fall into a double-

dip recession

Many of the developing world

economies, especially in Asia,

showed strong resilience to the

Financial Crisis

11

Dramatic Credit Spread Widening

11

Note: Data based on 10-year Bloomberg industrial indices.

Source: Bloomberg as of December 18, 2009

Credit spreads across the ratings

spectrum gapped sharply wider

during the Financial Crisis,

with high yield credits and

leveraged loan spreads providing

an early indicatorof the Crisis

10 Year Industrial Credit Spreads (1991 2009)

Return to Normalcy?

Significant spread tightening across all ratings in 2009

Spreads now notably tighter than 2 year averages

Strong high yield new issue markets

Non-guaranteed financial debt markets functioning

Liquidity much improved

0

200

400

600

800

1,000

1,200

Apr-91 Dec-93 Aug-96 Apr-99 Dec-01 Aug-04 Apr-07 Dec-09

S

p

r

e

a

d

t

o

U

S

T

(

b

p

s

)

AAA AA A BBB BB

Change vs. Change vs.20-year historical 2-year local

Current average average average averageAAA +83 +63 +20 +118 (35)AA +100 +74 +26 +152 (52)A +124 +99 +24 +198 (74)BBB +203 +143 +60 +291 (88)BB +436 +314 +121 +618 (182)

Dec 18

12

0

10

20

30

40

50

60

70

80

90

J a n- 0 5

A pr - 0

5J u l

- 0 5O c

t - 0 5J a n

- 0 6A p

r - 06

J u l- 0 6

O ct - 0 6

J a n- 0 7

A pr - 0

7J u l

- 0 7O c

t - 0 7J a n

- 0 8A p

r - 08

J u l- 0 8

O ct - 0 8

J a n- 0 9

A pr - 0

9J u l

- 0 9O c

t - 0 9

Unprecedented Market VolatilityVIX Daily Closing Values (2005 2009)

Source: Bloomberg

High yield and leverage loan indices gap wider

Hedge fund implosions and fire sales

SIV unwinds Bear Stearns

Fannie/ Freddie Lehman Brothers AIG Reserve Primary fund

Bank Stress Tests Bank capital raises Bank earnings rebound PPIP announcement Fiscal stimulus MBS purchase program Legacy TALF announce

As the financial crisis accelerated,

liquidity virtually disappeared

across capital markets globally

and volatility spiked to historical

highs

As market confidence and visibility

improved in Q2 2009, investor cash

flows changed accordingly,

driving higher liquidity and

spread tightening in most markets

Return to Normalcy?

As visibility has improved, risk appetite has increased

Very positive fund flow implications

On December 22, 2009, the VIX Index dropped below 20, the lowest level since August 2008

13

Perspective: Cost of the U.S. Financial Crisis?

13

Source: David Wyss, Chief Economist, Standard & Poors. OECD, IMF, Global Insight.

0

5

10

15

20

25

30

35

South Korea1997 2002

Japan1991-Present

Spain1977 1985

Finland1991 1994

Norw ay1987 1993

Sw eden1991

U.S. S&L Crisis1984 1991

U.S. SubprimeCrisis

2007-Present

%

o

f

N

o

m

i

n

a

l

G

D

P

Although the absolute amount of

the losses in the current global

financial crisis were

unprecedented

the actual fiscal expenditure

required by the U.S. Government

to alleviate the crisis was not as

large (on a relative basis) as several

other recent banking crises in

recent decades

Fiscal Costs of Post-War Banking Crisis

Return to Normalcy?

Though daunting, the losses and debt burdens to date are manageable vis--vis the size of the U.S. economy

14

9.0%8.5%

9.0% 9.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2008 2009E 2010E 2011E

Perspective: Crisis in the West, or Rise of the East?

Key Question

When we look back 25 years from now,

will the real economic story of

the first decade of the 21st Century be

the Western market financial crisis

or will it be the rapid rise, and shift

East, of economic power to Asia?

0

5

10

15

20

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

m

i

l

l

i

o

n

US China

Forecast

Note: Vehicle sales under 6 tons gross weightSource: J.D. Power and Associates

U.S. & China New Vehicle Sales

0.0

0.5

1.0

1.5

2.0

2.5

U

S

D

t

r

i

l

l

i

o

n

s

Chinas FX Reserves

04 05 06 07 08 09

0

50

100

150

200

250

300

'01 '02 '03 '04 '05 '06 '07 '08

E

U

R

b

i

l

l

i

o

n

s

Exports to ChinaImports from China

Source: Eurostat. Wall Street Journal.

European Union Trade with China

Chinas Financial Crisis GDP Growth China had the largest (13% of GDP), earliest

implemented (Nov 08), and most effective fiscal stimulus plan globally during the financial crisis

Chinas GDP growth continues to be unmatched

New vehicle sales in China will exceed the U.S. for the first time ever in 2009

Chinas trade surplus with the worlds largest economies grew rapidly during the crisis

Chinas FX reserves increased 50% during the global financial crisis to $2.3 trillion

75% of Asias $5 trillion in reserve holdings are in US$

Source: DB Economics Research. Peoples Bank of China.

Section 2

Key Steps in the U.S. Response in 2010

16

Over $16 Trillion in U.S. Government ProgramsBreakdown of $16 Trillion U.S. Government Initiatives by Agency and Program

Federal Reserve ($7.4 trn, 45.1%)

FDIC ($2.7 trn, 16.3%)

Treasury ($6.3 trn, 38.6%)

Sources: Fed, FDIC and Treasury websites, WSJ and other public articles (as of 12/18/09).

History suggests that exiting too soon from policies to contain a financial crisis can significantly prolong an economic downturn.

~ U.S. Treasury Secretary, Timothy Geithner, December 2009

Max ($bn) Used ($bn)

Debt Guarantee Program (EXPIRED) 940.0 307.2Deposit Insurance Programs 1,384.0 22.0Asset Guarantee for Citi / BofA (TERMINATED) 346.5 0.0

Subtotal 2,670.5 329.2 % of combined $16.4 trn / % or utilization 16.3% 12.3%

Max ($bn) Used ($bn)

CP Funding Facility (CPFF) 1,800.0 9.4Term Auction Facility (TAF) 900.0 85.8Term ABS Loan Facility (TALF) 1,000.0 58.9Currency Swaps / Other Assets 602.0 108.8MM Inv. Funding Facility (MMIFF) (EXPIRED) 540.0 0.0MBS Purchase Program 1,250.0 1,086.6 U.S. Treasuries Purchase Program (EXPIRED) 300.0 300.0Term Securities Lending Facility (TSLF) 250.0 0.0AIG Credit Extensions (incl. ML LLC II + III) 103.3 57.5GSE Debt Purchase Program 200.0 159.9Primary Credit Discount 110.7 19.2Primary Dealer and Others (PDCF) 147.0 0.0Maiden Lane LLC (Bear Stearns) 29.5 26.6ABCP Money Market Fund Liquidity (AMLF) 152.1 0.0Securities Lending Overnight 13.1 8.3Secondary Credit 0.6 0.0

Subtotal 7,398.3 1,921.0 % of combined $16.4 trn / % or utilization 45.1% 26.0%

Max ($bn) Used ($bn)

Money Market Mutual Funds (EXPIRED) 3,000.0 0.0Public-Private Investment Fund (PPIF) 1,000.0 26.7Feb '09 Stimulus Package 787.0 194.5Troubled Asset Relief Program (TARP) 700.0 399.8Fannie Mae / Freddie Mac Bailout 400.0 110.6Student Loan Purchases 195.0 32.6Feb '08 Stimulus Package 168.0 168.0Treasury Exchange Stabilization Fund (ESF) 50.0 50.0Tax breaks for banks 29.0 29.0

Subtotal 6,329.0 1,011.2 % of combined $16.4 trn / % or utilization 38.6% 16.0%

($bn) Max Used PeakFed 7,398.3 1,921.0 3,827.3Treasury 6,329.0 1,011.2 1,011.2

FDIC 2,670.5 329.2 329.2Total 16,397.8 3,261.4 5,167.7

Section A

Response to the Real Estate Crisis in 2010

18

Step # 1: Address the Excess U.S. Housing Supply

U.S. Residential Real Estate Peak-to-Current Declines (As of Sep 09)

Rapid Rise in Serious Delinquencies U.S. Homeowners with Mortgage > Value

Source: Karen Weaver, Head of DB Securitization Research. Case Shiller data as of 9/09. First American. CoreLogic.

Core U.S. Problem:Excess Supply

35 mm excess units Rising inventories,

especially distressed Rising delinquencies,

especially prime High unemployment Tight credit 2-4 years to absorb

U.S. home price declines vary by

market and have been staggering

and remain vulnerable based

on fundamentals (which continue to

be daunting)

Return to Normalcy?

The U.S. Government response has been massive

Most markets near bottom on pricing

Affordability Momentum may limit

downside Low rate environment

29

58

12 1415

18 19 2022 23

27 28

38 39 39 4043

4752

55

0%

15%

30%

45%

60%

2

0

-

C

i

t

y

I

n

d

e

x

D

a

l

l

a

s

D

e

n

v

e

r

C

h

a

r

l

o

t

t

e

C

l

e

v

e

l

a

n

d

B

o

s

t

o

n

A

t

l

a

n

t

a

N

e

w

Y

o

r

k

P

o

r

t

l

a

n

d

C

h

i

c

a

g

o

S

e

a

t

t

l

e

M

i

n

n

e

a

p

o

l

i

s

W

a

s

h

i

n

g

t

o

n

S

a

n

D

i

e

g

o

S

a

n

F

r

a

n

c

i

s

c

o

L

o

s

A

n

g

e

l

e

s

T

a

m

p

a

D

e

t

r

o

i

t

M

i

a

m

i

P

h

o

e

n

i

x

L

a

s

V

e

g

a

s

H

o

m

e

p

r

i

c

e

d

e

c

l

i

n

e

s

i

n

c

e

p

e

a

k

(

C

a

s

e

-

S

h

i

l

l

e

r

)

19

Step # 2: Continue U.S. Government Housing Programs

Program Size DescriptionAgencyCategory

Lower Mortgage Rates

GSE Debt Purchases (Expired) Treasury $200 billion Purchase of GSE debt securities

GSE MBS Purchases (March 2010 Expiry)

Treasury $1,250 billion Purchase of MBS guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae

UST Purchases (Expired) Treasury $300 billion Purchase of U.S. Treasury Notes

Spending ProgramsHome Affordable Modification Program (HAMP)

FHFA / Treasury

$75 billion Payments to lenders and borrowers to modify primary and secondary mortgages

354,000 trial modifications as of Sept 2009

Guarantees through Fannie Mae / Freddie Mac

FHFA / Treasury

Unlimited On Dec 24, 2009, Treasury committed to an unlimited guarantee of GSE losses through 2012 (previously $400 billion)

Tax Savings

Mortgage Interest Deduction IRS $80 billion(2009 est.)

Allows homeowners to deduct mortgage interest payments from their taxable income

Deductibility of State and Local Property Taxes

IRS $16 billion(2009 est.)

Allows homeowners to deduct state or local taxes imposed on their homes

First-Time Homebuyer Credit(extended to April 2010)

IRS $14 billion $8,000 credit against federal income tax liability for first-time homebuyers and $6,500 for repeat homebuyers

Capital Gains Exclusion IRS $16 billion Allows homeowners to earn a tax free capital gain on the sale of their primary home

Today, the U.S. Government, directly or indirectly, underwrites 9 of every 10 new residential mortgages (twice the pre-financial crisis percentage)

On December 24, Treasury said it would cover unlimited losses at Fannie and Freddie through 2012

Return to Normalcy?

The U.S. Government response has been massive

Congress and White House very focused on this issue

Source: Congressional Budget Office (November, 2009); Wall Street Journal.

20

Step # 3: Address Massive 2010-2013 CRE Refinancing Wave

Over $2 trillion plus of U.S. commercial real estate equity has been wiped out Market values: Pre crisis (~ $6.7 Trillion); Dec 09 (~ $4.1 Trillion)

$3.3 trillion of debt outstanding Banks ($2 trn); CMBS market (~$1 trn); Insurance (~$300 bn) Smaller U.S. banks (i.e., # 30 100) have the largest and lowest quality loan

exposures (significant non-cash flow assets) Sharp price declines, highly levered properties, and lower LTV lending standards

have combined to create a significant refinancing risk issue for the market between 2010 2013 in particular

The 2010 2014 CRE Refinancing Wave will most negatively impact U.S. banks

Commercial Real Estate (CRE) Mortgage Maturities

$0

$50

$100

$150

$200

$250

$300

$350

1 98 0

1 98 2

1 98 4

1 98 6

1 98 8

1 99 0

1 99 2

1 99 4

1 99 6

1 99 8

2 00 0

2 00 2

2 00 4

2 00 6

2 00 8

2 01 0

2 01 2

2 01 4

2 01 6

2 01 8

2 02 0

Banks CMBS Life Cos Other

Source: Richard Parkus, Head of DB U.S. Commercial Real Estate research. Foresight Analytics. Wall Street Journal. Real Estate Roundtable.

Potential Impact: Consumer confidence Bank failures Pension losses State budget gaps Over 9 million jobs

130100

170

630

0

100

200

300

400

500

600

700

2008/2009 2010 2011 2012+

$

b

i

l

l

i

o

n

Est. Required Equity to Refinance

$ Cumulative: $130 $230 $400 $1,030

Return to Normalcy?

Not much! The top 20 U.S. banks (85%

of the system) have significantly less relative exposure than the smaller banks, thereby reducing systemic risk

Peak: 2010 - 2014

21

0

50

100

150

200

250

1 99 9

2 00 0

2 00 1

2 00 2

2 00 3

2 00 4

2 00 5

2 00 6

2 00 7

2 00 8

2 00 9

CMBS

Step # 4: Restart the CMBS New Issue Market

Return to Normalcy?

Expiry dates extended for TALF CMBS Program (to Mar and June 2010)

Small pick-up in new issuance activity in November and December 2009

U.S. CMBS Issuance

Includes cash volumes. Excludes 2nd derivative CDO and synthetics

$1.4

Secondary Trading Levels

2009 U.S. CMBS Issuance

2009 U.S. CMBS Issuance ($1.36 billion) Comment

0

250

500

750

1,000

1,250

1,500

J a n- 0 7

A pr - 0

7J u l

- 0 7O c

t - 0 7J a n

- 0 8A p

r - 08

J u l- 0 8

O ct - 0 8

J a n- 0 9

A pr - 0

9J u l

- 0 9O c

t - 0 9

M

B

S

S

p

r

e

a

d

v

s

.

S

w

a

p

s

10 yr CMBS (AAA)

Date Issuer Tranche WAL Ratings Size ($ mm) Pricing TALFNov-09 Developers A 4.69 AAA / Aaa / AAA 323.5 S + 140 yes

Diversified (DDR) B 4.69 AA / Aa2 / AA 41.5 5.75%C 4.69 A / A2 / A 35.0 6.25%

Total 400.0

Dec-09 Flager A 6.67 AAA / AAA 350.0 S + 225 noDevelopment B 7.11 AA / AA 30.0 S + 400

C 7.11 A / A 33.0 S + 450D 7.11 BBB / BBB 47.0 8.75%

Total 460.0

Dec-09 Inland Western A-1 5.62 AAA / AAA 58.3 S + 150 noA-2 9.95 AAA / AAA 330.6 S + 205

X N/A AAA / AAA N/A N/AB 9.95 AA / AA 24.1 S + 360

C 9.95 A / A 42.9 S + 420D 9.95 BBB / BBB 44.0 9.00%

Total 500.0Source: Deutsche Bank, Bloomberg

Strong 2009 CMBS spread tightening: Driven by PPIP announce, TALF,

improved liquidity and stronger economic data

Spreads still well above historical norms

Limited TALF impact on new issuance: Originators not prepared to take

aggregation risk of multi-billion pool for several months; complicated by lengthy underwriting process

TALF CMBS Expiry Dates: Legacy CMBS: March 31, 2010 New CMBS: June 30, 2010

Although TALF has had de minimus

impact on new CMBS issuance

strong investor appetite for 3 new

CMBS financings at the end of 2009 (2 non-

TALF) were important steps, albeit small,

toward a possible revival of the market in

2010

22

0

100

200

300

400

500

1 99 9

2 00 0

2 00 1

2 00 2

2 00 3

2 00 4

2 00 5

2 00 6

2 00 7

2 00 8

2 00 9

Prime

Alt-A

Subprime

Other

0

500

1,000

1,500

2,000

2,500

3,000

J a n- 0 7

A pr - 0

7J u l

- 0 7O c

t - 0 7J a n

- 0 8A p

r - 08

J u l- 0 8

O ct - 0 8

J a n- 0 9

A pr - 0

9J u l

- 0 9O c

t - 0 9

M

B

S

S

p

r

e

a

d

v

s

.

S

w

a

p

s

10yr Subprime RMBS (AAA)

Step # 5: Restart the Non-Agency RMBS MarketThe Fed did not

include new or legacy (non-

Agency) RMBS as a TALF-eligible

asset in 2009

and issuance volumes remain

down sharply from pre-Financial

Crisis levels

The only substantive issuance activity

today is taking place through the

GSEs

The GSEs will be under the microscope of Congress in 2010, but will nonetheless continue to dominate issuance in the year ahead

U.S. (Non-Agency) RMBS Issuance

Source: Deutsche Bank, Inside MBS&ABS, Thomson Financial & S&P

Secondary Trading Levels

Source: Thompson Financial; DB Global Markets Research

Return to Normalcy?

Not much!Market in 2010 will

continue to be dominated by Government Agency issuance

Status of the Non-Agency (Private Label) RMBS Market

New Issuance: Virtually no new non-agency (private label) RMBS issuance during the Financial Crisis in 2008 and 2009; significant change from pre-crisis market

No significant change in 2010 anticipated in this regard On August 17, 2009, the Federal Reserve indicated new or legacy RMBS will not be TALF eligible

Spreads: Significant tightening, and improved liquidity, since the announcement of Treasurys PPIP program in early 2009; modest economic recovery has also helped

Regulatory Reform: GSE restructuring will likely not be part of the final 2010 financial regulatory reform bill

Outlook for 2010: Virtually the entire market will continue to be supported by U.S. Government liquidity, directly or indirectly, in 2010; private label (non-Agency) market cannot really compete

Government Agency MBS will continue to dominate in 2010 (Fannie, Freddie, GNMA, and FHA)

Section B

Response to the Banking Crisis in 2010

24

0

100

200

300

400

500

600

1 9 34

1 9 37

1 9 40

1 9 43

1 9 46

1 9 49

1 9 52

1 9 55

1 9 58

1 9 61

1 9 64

1 9 67

1 9 70

1 9 73

1 9 76

1 9 79

1 9 82

1 9 85

1 9 88

1 9 91

1 9 94

1 9 97

2 0 00

2 0 03

2 0 06

2 0 09

#

o

f

F

a

i

l

e

d

B

a

n

k

s

Step # 6: Close Weak Banks that Hurt the System

# of Failed U.S. BanksThe # of small U.S. bank failures will

accelerate in 2010

Among the 8,099 banks in the U.S., the #

of failures has risen sharply as we

approach peak defaults in the

crisisthe 50 failures in Q3, 2009 was the

highest quarterly total since 1992, but will

likely be surpassed in 2010

The unfolding commercial real estate

crisis will be a critical driver

1930 1934: ~ 9,100 (estimated); 33% of U.S. banks 1934 1941: 373 1988 1992: 818 (4.9% of U.S. banks) 2008 - 2009: 164 (25 in 2008; 139 in 2009) 2010 FDIC Problem List: 552 (~ $350 bn assets) Current crisis estimated failures: 500 1,000 +

Credit Sights: estimates between 600 1,100 banks will fail in the current financial crisis (see below)

The Economist: notes that over 1,000 U.S. banks could fail, many in 2010-2011

Source: FDIC as of Friday, December 18. (CreditSights, November, 2009).

5076

252

305

552

0

100

200

300

400

500

600

2006 2007 2008 3/09 9/09

#

o

f

P

r

o

b

l

e

m

I

n

s

t

i

t

u

t

i

o

n

s

FDIC Problem-Bank Watch List (2006 2009)

Bank failures tend to lag the crisis and will accelerate sharply over the next few yearsReturn to Normalcy?

Unlikely that any of the top 20 U.S. banks fail in the current crisis (85% of the system)

Unlikely to create a systemic risk issue

U.S. Bank Failures since 1934

552 banks currently on FDIC Problem Watch List

Credit Sights Estimated 2008 - 2011 U.S. Bank Failures

Severe Case: 1,090 failures (13.4% of U.S. banks) Adverse Case: 842 failures (10.4% of U.S. banks) Base Case: 622 failures (8.6% of U.S. banks)

Bank failures, on average, cost the FDIC ~25-35% of the failed institutions assets; tends to be on higher end for smaller banks who tend to have fewer debt, preferred and equity investors to absorb losses

25

Step # 7: Efficiently Distribute Assets of Failed U.S. BanksTop 20 U.S. Government Assisted Bank Transactions (2008 2009)

Source: FDIC. DB DCM and Investment Banking FDIC Coverage Teams

PPIP Legacy Loan Pilot Transactions Recent FDIC Participation / LLC Transactions Franklin Bank Residential Mtge Portfolio

FDIC sold $1.3 bn residential mortgage portfolio of failed Franklin Bank to newly created LLC

50% LLC equity stake auctioned off with 6-to-1 leverage through issuance of FDIC gtd notes

Corus Bank Construction Loans FDIC sold $4.5 bn portfolio of performing and

non-performing construction loans to LLC

40% LLC equity stake auctioned off with FDIC leverage in form of notes and advance facility

($ in millions) Failed bank financials1

Target name Buyer nameDate

seizedState of

targetBranches

assumed Assets DepositsDeposit

premium2

1 Washington Mutual, Inc. JPMorgan Chase & Co. 9/25/08 WA 2,207 307,000 188,000 NA2 Colonial Bank BB&T 8/14/09 AL 346 25,000 20,000 2.8%

3 IndyMac Bank, F.S.B. OneWest Bank4 7/11/08 CA 33 23,500 6,400 NA4 Guaranty Bank BBVA Compass 8/21/09 TX 162 13,000 12,000 0.0%

5 Downey Savings & Loan U.S. Bancorp 11/21/08 CA 213 12,800 9,700 5.2%6 BankUnited, FSB BankUnited (newly chartered) 5/21/09 FL 86 12,800 8,600 0.0%

7 United Commercial Bank East West Bank 11/6/09 MI 63 11,200 7,500 1.1%8 California National Bank (FBOP) U.S. Bancorp 10/30/09 CA 68 7,792 6,160 0.0%

9 Corus Bank MB Financial Bank 9/11/09 IL 11 7,000 6,600 0.2%10 Franklin Bank, SSB Prosperity Bancshares Inc. 11/7/08 TX 46 5,100 3,700 1.7%

11 Park National Bank (FBOP) U.S. Bancorp 10/30/09 IL 30 4,706 3,731 0.0%12 Silverton Bank N/A 5/1/09 GA N/A 4,100 3,300 NA

13 PFF Bank & Trust U.S. Bancorp 11/21/08 CA N/A 3 3,700 2,400 4.2%14 San Diego National Bank (FBOP) U.S. Bancorp 10/30/09 CA 29 3,608 2,892 0.0%

15 First National Bank of Nevada Mutual of Omaha 7/25/08 NV 28 3,400 3,000 4.4%16 Security Bank Corp (6 bank subs) State Bank and Trust Company 7/24/09 GA 20 2,800 2,400 0.0%

17 Irwin Union Bank & Trust First Financial Bank 9/18/09 IN 27 2,700 2,100 1.0%18 Orion Bank IBERIABANK 11/13/09 FL 23 2,700 2,100 (1.5%)

19 Pacific National Bank (FBOP) U.S. Bancorp 10/30/09 CA 18 2,335 1,763 0.0%20 Georgian Bank First Citizens Bank and Trust Company 9/25/09 GA 5 2,230 1,960 NA

Average 1.0%Median 0.2%

1) Last reported.2) As reported either in FDIC press release or subsequently available submitted bid form from acquiror.

3) Reported numbers are combined for multiple institutions acquired.4) Amounts shown as of sale of bridge bank, not from date of seizure.

FDIC SaleMSMC Venture

LLC FNBN I LLC ANB Venture LLC FNBN Rescon I LLCFNBN CMLCON I

LLC

Date 5/6/2008 12/29/2008 1/12/2009 2/5/2009 2/20/2009

Failed institution

NetBank First National Bank of NV

ANB Financial First National Bank of NV

First National Bank of NV

Winning bidder

Gulf Coast Bank and Trust

PennyMac Kingston Mgmt Services

Stearns Bank Diversified Bus. Strategies

SFR Construc & Lot

SFR Construction Res. Construction Comml Construction

$145.6 mm (UPB)

$560.5 mm (UPB)

$1,120.3 mm (UPB)

$732.7 mm (UPB) $701.6 mm (UPB)

$19.1 mm for 40% interest

$43.2 mm for 20% interest

$20.2 mm for 20% interest

$32.2 mm for 20% interest

$140.3 mm for 20% interest

32.8% price 38.6% price 9.0% price 22.0% price 29.2% price

Winning bid

amount

Assets in structure

Return to Normalcy?

FDIC receivership and distribution mechanisms are well established

S&L crisis provided a useful roadmap

We expect the FDIC to demand equity appreciation units from bidders in 2010

As of December 2009, the FDIC had

auctioned off the assets of > 100 failed

U.S. banks in the current financial crisis

26

Step # 8: Implement Global Financial Regulatory Reform

Systemic Financial

Stability

Robust Economic

Growth

Review of Proposed 2010 U.S. Financial Regulatory Reforms

Striking the Balance Focus of Reforms

Expected Timing

Balancing market stability and growth

will be the challenge of regulatory reform

in 2010

Unfortunately, the margin for error of

too much too soon is likely to be high (less

haste and more thought needed)

Return to Normalcy?

Significant progress already, especially in the House

Senate and House will hopefully strike right balance on remaining contentious issues in 2010

Required compromise to pass legislation likely to dampen more radical proposals

More appetite for compromise on both sides of aisle than initially apparent

We expect a final U.S. financial regulatory reform bill to become law sometime late in Q2, 2010

Bank capital requirements Limits on Federal Reserve (monetary policy, bank

supervision, consumer protection, emergency lending authority)

OTC derivatives reform Consumer protection agency Systemic regulator Bank supervision authority Too Big To Fail Resolution / unwind authority (including treatment

of bank creditors)

Executive compensation/ corporate governance Hedge fund registration Credit rating agencies Securitization reform Non-bank financial regulation (insurance, finance

companies, ILCs)

Red = More contentious pieces of regulatory reform

U.S. House: Passed landmark legislation on December 11, 2009 with 223 202 vote

U.S. Senate: Initial bi-partisan draft from Senate Banking

Committee (Senators Dodd and Shelby) expected in late January, early February

Senate floor vote in late Q1/ early Q2, 2010 Reconciliation of Senate/ House bills: expected

in Q2, 2010

Final Law: Late Q2, 2010 (DB estimate) Mid-term elections: November, 2010

27

Step # 9: Address Too Big to FailSpectrum of U.S. Government Strategies for Addressing Too Big to Fail Banks

The top 4 U.S. banks represent > 55% of industry assets (among 8,099 banks)

U.S. Banking Asset Concentration

Total Industry Assets estimated at $13.2 trillion (Q3, 2009)

As of Q3 '09

Company Name Assets ($ bn) Bank Cumulative

1 Bank of America 2,251.0 17.0% 17.0%2 JPMorgan Chase 2,041.0 15.4% 32.4%3 Citigroup 1,888.6 14.3% 46.7%4 Wells Fargo 1,228.6 9.3% 55.9%

5 Goldman Sachs 882.2 6.7% 62.6%6 Morgan Stanley 769.5 5.8% 68.4%7 MetLife 535.2 4.0% 72.4%8 PNC Financial 271.4 2.0% 74.5%9 U.S. Bancorp 265.1 2.0% 76.5%

10 Bank of NY Mellon 212.0 1.6% 78.1%

Total 10,344.6

% of Industry Assets

59% 61%65%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

June 06 June 07 June 08 June 08

A

s

s

e

t

s

o

f

W

o

r

l

d

'

s

T

o

p

1

0

B

a

n

k

s

(

%

)

Source: Capital IQ; Bank for International Settlements, WSJ, OCC, Bloomberg, FDIC

Top 10 Global Bank Asset Concentration

The top 10 global banks represent a growing percentage of global banking assets

81.1 77.9

47.8

39.131.7

0

10

20

30

40

50

60

70

80

90

JP Morgan Bank ofAmerica

GoldmanSachs

MorganStanely

Citigroup

N

o

t

i

o

n

a

l

V

a

l

u

e

O

u

t

s

t

a

n

d

i

n

g

(

U

S

D

t

r

i

l

l

i

o

n

)

U.S. Banking Derivative Contracts

Share: 28% 27% 16% 13% 11%

5 of top 6 U.S. banks account for 95% of U.S. bank derivative contracts (~$300 trillion notional)

Higher capital levels More stringent liquidity

standards

Less Aggressive Approach

More Aggressive Approach

Caps on certain businesses Limitations and selected

divestitures

Break-up the biggest banks Re-enforce Glass Steagall

It is still too early to tell which approach

regulators will take in 2010, but early

indications suggest a less aggressive

approach with a focus on higher

capital levels

28

As of Q3 '09 Assets TotalCompany Name ($ bn) Projected Loss Required Capital TARP Asset Guarantee FDIC TLG Debt TALF ($ bn)

1 Bank of America 2,251.0 136.6 33.9 45.0 118.0 44.5 8.9 216.42 JPMorgan Chase 2,041.0 97.4 - 25.0 40.8 5.0 70.83 Citigroup 1,888.6 104.7 5.5 45.0 306.0 64.6 14.9 430.54 Wells Fargo 1,228.6 86.1 13.7 25.0 9.5 34.55 Goldman Sachs 882.2 17.8 - 10.0 22.0 32.06 Morgan Stanley 769.5 19.7 1.8 10.0 23.8 33.87 MetLife 535.2 9.6 - - 0.4 0.48 PNC Financial 271.4 18.8 0.6 7.6 3.9 11.59 U.S. Bancorp 265.1 15.7 - 6.6 2.7 9.3

10 Bank of NY Mellon 212.0 5.4 - 3.0 0.6 3.611 GMAC 178.3 9.2 11.5 12.5 7.4 19.912 SunTrust 172.7 11.8 2.2 4.9 3.6 8.513 Capital One 168.5 13.4 - 3.6 - 3.614 BB&T 165.3 8.7 - 3.1 - 3.115 State Street 163.3 8.2 - 2.0 4.0 6.016 Regions Financial 140.0 9.2 2.5 3.5 3.8 7.317 American Express 120.4 11.2 - 3.4 5.9 2.3 11.518 Fifth Third 110.7 9.1 1.1 3.4 - 3.419 KeyCorp 97.0 6.7 1.8 2.5 1.9 4.4

Total 11,660.8 599.3 74.6 216.0 424.0 239.4 31.0 910.4

Fed Stress Test Use of Government Programs ($bn)

Step # 10: Closely Monitor Systemically Significant BanksA critical part of the U.S. Governments strategy in 2009 was not allowing the top 19

U.S. banks to fail

Source: Treasury, FDIC, Fed, Bloomberg, Deutsche Bank

1) Cum loss projections for 2009 & 2010 based on 10.2% unemployment scenario2) Exchanged $25 bn in common stock and repaid $20 bn3) Asset guarantee was terminated

(3)

Top 19 U.S. Banks Use of U.S. Government Programs

Red = repaid TARP ($164 billion) or terminated asset guarantees, both of which we still include in subtotals.

(1)

Return to Normalcy?

CitiGroup, WellsFargo and Bank of America repaid $115 billion of TARP in December, 2009

$245 billion of FY2009 TARP capital in U.S. banks, initially projected to cost $76 billion, will now earn a profit

(3)(2)

The top 19 U.S. banks were stress tested in 2009 and represent > 80% of U.S. bank industry assets

Nearly 700 U.S. banks received $245 billion of TARP capital

12 of the top 19 repaid by Dec 2009 ($164 billion)

52 of the 69 banks who received > $100 million of TARP have not repaid

(as of Dec 09)

29

Step # 11: Rebuild Capital and Increase Lending

Source: FDIC, Treasury, Company Filings, Bloomberg, Deutsche Bank

2009 U.S. Bank Capital Raises (U.S. Banks Only)

2009 Non-Guaranteed Debt Issuance

2009 Total: $90.4 billion

2009 Equity Capital Markets Issuance

Return to Normalcy?

Very difficult to mandate lending in size across the system

The most effective path to more lending is already underway:

Rebuild capital Stabilize economy

2009 Total: $134.3 billion

-250

-200

-150

-100

-50

0

50

100

150

200

250

300

$

b

i

l

l

i

o

n

Qrtly Change of Bank Loans Outstanding

2006 2007 2008 2009

Banks Choosing Treasuries over Loans

Commercial banks:

0

300

600

900

1200

1500

1800

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

$ bln

0

300

600

900

1200

1500

1800

$ bln

Commercial and industrial loans

Treasury and agency securities holdings

Savings and loans crisis

2001 dotcom bubble burst

Current crisis

2009 Patterns in U.S. Bank Lending

$0.1

$61.2

$8.3

$64.8

010203040506070

Q1 '09 Q2 '09 Q3 '09 Q4 '09

$

b

i

l

l

i

o

n

$5.3

$38.0$28.0

$19.1

010203040506070

Q1 '09 Q2 '09 Q3 '09 Q4 '09

$

b

i

l

l

i

o

n

We expect the 2009 re-opening of the

debt and equity capital markets for

U.S. banks to continue in 2010

In December 2009 alone, Citi, Wells and

BofA raised over $50 billion of equity

Only after banks continue to earn, and

rebuild their capital base, will lending in

size return

30

Step # 12: More Financial Statement Transparency

Return to Normalcy?

New FAS 166/ 167 standards effective as of 2010 The U.S. bank stress tests in Feb May 2009

already factored this impact in conclusions FDIC has provided a potential 1 year (2 x 2Qs)

extension on risk-based capital impact (but leverage ratio impact would be immediate)

$121$100

$48

$154

0

25

50

75

100

125

150

175

CITI BAC JPM WFC

$

b

i

l

l

i

o

n

Expected Impact of FAS 166/ 167 Effective Date: 2010 Increase in Assets: ~ US$ 500 billion

The vast majority of On-Balance Sheet asset consolidation will come from the top 4 U.S. banks

Some banks may explore the sale of certain off-balance sheet interests to mitigate consolidation

Higher risk-weighted assets: ~ $75 100 billion Possible Reduction to Retained Earnings: from

possible new loan loss reserves, and reversal of residual interests held; could also limit future credit creation

Reduction to regulatory capital levels: from both higher RWA, and lower Retained Earnings (if applicable)

Will increase regulatory leverage ratios

FAS 166/ 167

Changes to Accounting Rules Closely Tied to Proposed Financial Reform Efforts

Amendments to FAS 140 and FIN 46(R) All existing QSPEs evaluated for consolidation

Consolidation methodology: based on qualitative determination of both who has the

power and exposure to benefits and losses

Valuation methodology: some flexibility on whether to use (i) carrying, or (ii) fair value

Banks to lose Sales Treatment for certain assets previously sold to QSPEs

Entities likely included: credit card securitizations, bank administered ABCP, non-conforming RMBS

Loan-loss Provisioning

Fair Value Accounting Rules

More forward-looking loan loss provisioning under consideration

Changes to financial reporting with improved fair value information and greater transparency under consideration

New Accounting Rules in 2010

Estimated On-Balance Sheet Asset Increase

Same issuer may choose different valuation methods for different assets

Source: FASB; DB Research. Barclays Research (November, 2009).

Accounting transparency will

be a key focus in 2010

31

Step # 13: Halt Current Reversal in Financial GlobalizationImpact of Financial Crisis on Financial Globalization

Return to Normalcy?

Government response to bank sector globally was massive in late 2008 and 2009

Record bank capital raises in 2009

Modest economic recovery underway

Risk appetite has begun to improve

$1.5 $1.0 $0.9 $1.2$2.1 $2.8 $3.1

$4.9

($1.3)

$1.0$1.0 $1.0

$1.4

$2.0$2.4 $2.7

$2.6

$0.9$0.7 $0.9

$0.7

$0.8

$1.2$1.1

$0.6

$1.6

$1.9$1.0 $0.2

$0.5

$0.6

$1.2$1.5

$2.1

$1.8

$5.3

$3.8$3.0

$3.7

$5.4

$7.6$8.3

$10.5

$1.9

($0.2)

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

2000 2001 2002 2003 2004 2005 2006 2007 2008

(

$

i

n

t

r

i

l

l

i

o

n

)

Lending and deposits Debt securities Equity securities FDI

Source: McKinsey Global Institute

One of the most striking

consequences of the Financial Crisis was

the steep drop-off in cross-border capital

flows

Financial Globalization Impact of Financial Crisis

The Foreign Sector accounts for 16%, or $7.7 trillion, of the $50 trillion of outstanding non-

Government credit in the U.S. economy Over 50% of U.S. GDP

Primary components of cross border capital flows:

Foreign direct investment (FDI) Purchases of foreign securities (debt/ equity) Cross-border lending Deposits

Nearly 3 decade expansion in global financial assets abruptly halted

Peaked pre-crisis in 2007 The sharp decline was driven primarily by a

sharp decline in cross border-lending Fell from $4.9 trillion in 2007 to minus $1.3

trillion in 2008 (a $6.2 trillion swing in one year) Geographic reorientation domestically driven

by Government pressure and reduced risk appetite

Global Capital Flows (2000 2008)

2009 data not yet available

32

0

100

200

300

400

500

600

> $100bn $10bn -$100bn

$1bn - $10bn $100mm -$1bn

$0 - $100mm

Bank Size (Total Assets)

C

R

E

E

x

p

o

s

u

r

e

(

$

b

i

l

l

i

o

n

)

Step # 14: Address Bad Real Estate Loans of U.S. Banks

Overview

The 2 largest U.S. bank assets are still not yet at peak default levels:

Residential RE Loans: $2.59 Trillion(concentrated in top 4 banks)

Commercial RE Loans: $1.96 Trillion(concentrated in smaller banks)

There is No U.S. Government plan to address the toxic loans of going-concern banks

Source: SNL (as of Q3 09)

All U.S. Banks by Assets: Mortgage Asset Composition ($ mm)

U.S. Banks CRE Exposure (2Q 2009)

Will impact banks of all sizes; especially small banks JPM has only 3% of its $650 billion portfolio in CRE,

versus over 20% for a number of regional banks

Bad real estate loans on U.S. bank

balance sheets will create a drag on

new bank lending in 2010

Return to Normalcy?

Strong earnings power of many banks

Significant 2009 capital raises

Likely to finally reach peak defaults in 2010 for most asset classes

Dollar Amt Dollar Amt % of Assets Dollar Amt % of Assets Dollar Amt % of AssetsTotal Assets (TA) 14,156,067 7,411,047 52.4% 2,977,190 21.0% 1,103,795 7.8%

% of Assets % of Total Loans % of Total Loans % of Total LoansTotal RE & Non-RE Loans 7,333,096 51.8% 3,126,989 42.6% 1,691,589 23.1% 701,024 9.6%

Residential RE Loans % of Loans % of Loans % of Loans % of LoansResi 1-4 Family 2,595,607 35.4% 1,270,749 40.6% 563,714 33.3% 223,420 31.9%

Comm RE & Farm 1,155,806 15.8% 181,869 5.8% 254,262 15.0% 157,425 22.5%Constr & Land Dev 503,974 6.9% 86,542 2.8% 125,233 7.4% 73,771 10.5%Multifamily 217,730 3.0% 60,543 1.9% 41,686 2.5% 40,337 5.8%Foreign Office R/E 85,085 1.2% 73,688 2.4% 6,540 0.4% 4,791 0.7%Total Commercial RE Loans 1,962,594 26.8% 402,643 12.9% 427,721 25.3% 276,324 39.4%

Total Real Estate Loans 4,558,201 62.2% 1,673,392 53.5% 991,435 58.6% 499,744 71.3%

All Banks Top 4 5-30 31-100

33

AllianceBernstein Angelo, Gordon & Co / GE Capital Real Estate

BlackRock

Invesco

Marathon Asset Management

Step # 15: Continue PPIP for Toxic U.S. Bank Securities

9 PPIP U.S. Fund Managers Were Pre-Selected

After an especially long build-up, the

PPIP Securities program will finally

be up and running in 2010

Its anticipation has already been

successful in driving liquidity and

significant tightening in the secondary

markets

Oaktree Capital Management

RLJ Western Asset Management

Wellington Management Company

The TCW Group (selection subsequently halted by Treasury)

2009 PPIP Securities Program Investments with U.S. Treasury

Source: U.S. Department of Treasury; Office of Financial Stability; Transaction Report for Period Ending December 16, 2009.

Return to Normalcy?

Designated manager capital raises were successful

RMBS and CMBS have rallied sharply since the programs announcement

TALF and modest economic recovery signs have also been helpful

Liquidity already much improved compared to peak crisis levels

1) The equity amount may be incrementally funded. Investment amount represents Treasury's maximum obligation if the limited partners other than Treasury fund their maximum equity capital obligations.

2) The loan may be incrementally funded. Investment amount represents Treasury's maximum obligation if Treasury and the limited partners other than Treasury fund 100% of their maximum equity obligations.

$ billion

Date Institution / FundFund

Equity Treasury

Equity (1)Treasury Contingent

Debt Obligation (2)

9/30/2009 UST/TCW Senior Mortgage Securities Fund, L.P. 1.1 1.1 2.2 9/30/2009 Invesco Legacy Securities Master Fund, L.P. 1.1 1.1 2.2 10/1/2009 Wellington Management Legacy Securities PPIF Master Fund, LP 1.1 1.1 2.2 10/2/2009 AllianceBernstein Legacy Securities Master Fund, L.P. 1.1 1.1 2.2 10/2/2009 Blackrock PPIF, L.P. 1.1 1.1 2.2 10/30/2009 AG GECC PPIF Master Fund, L.P. 1.1 1.1 2.2 11/4/2009 RLJ Western Asset Public/Private Master Fund, L.P. 1.1 1.1 2.2 11/25/2009 Marathon Legacy Securities Public-Private Investment Partnership, L.P. 1.1 1.1 2.2

Total $8.9 $8.9 $17.6

GRAND TOTAL $35.4

Treasury Participation

34

0

50

100

150

200

250

300

350

400

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

3

M

L

i

b

o

r

-

O

I

S

S

p

r

e

a

d

(

b

p

s

)

111.0119.5

35.223.4

5.4

020

4060

80100

120140

Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09

U

S

D

b

i

l

l

i

o

n

Fed Balance Sheet Expansion

Step #16: Continue to Guarantee Bank Liabilities as NeededFDIC Guaranteed Debt Issuance (Nov 2008 Oct 2009)

Source: FDIC; Bloomberg and DB Global Markets Research

Dramatic Easing of Stress in the System (September 2008 December 2009)

November 5th: FDIC announces TLG Debt Guarantee program

May 7th: Fed and regulators complete Top 19 Bank stress tests

May 19th: Congress extends $250k deposit insurance to 2013

The U.S. Government will continue to guarantee the liabilities of its banks in 2010 as follows: Retail deposits up

to $250K

Transaction account deposits (unlimited)

~ $300 bn of unsecured debt < 3.5 yrs issued between Nov 2008 and Oct 2009

(expired for new issues on 10/31/09)

Top 10 2008 - 2009 FDIC Guaranteed Debt Issuers Total FDIC Guaranteed Issuance

Return to Normalcy?

Government able to expire debt guarantee program

Non-guaranteed debt issuance market functioning

Depositor confidence restored

Inter-bank lending restored

Minimal costs for U.S. Government and significant fees

64.6 60.2

44.5 40.8

23.8 22.0

9.5 7.4 5.9 4.0

0

10

20

3040

50

60

70

Citi GECC BAC JPM MS GS WFC GMAC AXP STT

U

S

D

b

i

l

l

i

o

n

s

Section C

Response to the Non-Bank Credit Crisis in 2010

36

FinanceCompanies Loans

3%Corporate Bonds10%

CommercialBanks

18%

Securitization24%

Other14%

Thrift Loans2%

Foreign Sector16%

Non-FinancialSector

13%

Step # 17: Restart the Flow of Credit in the U.S. Economy

Providers of U.S. Non-Government Credit

With credit not flowing near pre-Financial Crisis levels, there will be significant pressure on an already strained consumer to drive the economic recovery in 2010

Source: Federal Reserve Board, FDIC, DB Research

Total: $50 TrillionPink shades of the pie represent those sources of credit that will be most directly impacted by the proposed regulatory reforms

($6.6 trillion)

($7.1 trillion)

($5.1 trillion)

($9 trillion)

($11.7 trillion)($7.7 trillion)

($1 trillion)

($1.6 trillion)

Comments

Return to Normalcy?

Cross-border capital flows should improve as the recovery progresses in 2010

Securitization markets have taken several small steps forward in Q4, 2009

Significant bank equity capital raised in 2009 should help

Strong investor demand in bond market will continue in 2010

Most of the key providers of credit in the U.S. economy are still not functioning properly

Foreign sector (16%): Cross-border lending activity came to a halt during the Crisis; geographic re-orientation domestically

Securitization (24%): Still not functioning in size without U.S. Government support

Bank lending (18%): Still very low by historic standards, especially where not supported by GSEs

Bond Market (10%): Re-opened with significant non-guaranteed issuance levels since Q2, 2009; however, only represents ~ 10% of total U.S. credit

As we enter 2010, many of the key

providers of credit in the U.S. economy are

still not functioning properly

37

Step # 18: Develop a Long-Term Strategy for the GSEs

The U.S. Governments nearly

$2 trillion of support to the GSEs since the

financial crisis began, and unlimited

commitment on 12/24/09, will be a

massive political issue in 2010

Return to Normalcy?

Congress has made this a 2010 priority!

U.S. Treasury & HUD are required to produce formal recommendations on a long-term strategy for the GSEs by Feb 2010:

Full nationalization?

Privatization? Hybrid model?

UnlimitedSupport

On December 24th, 2009, Treasury announced it would cover unlimited losses at Fannie Mae and Freddie Mac through 2012

Done just ahead of the Dec 31, 2009 deadline to avoid Congressional approval Entailed suspending prior bailout cap of $400 billion (combined) to ensure confidence Also involved an easing on Fannie/ Freddies $1.5 trillion (combined) portfolio cap on

securities holdings to $810 billion each in 2010, and 10% lower each year thereafter

U.S. Government Support for the GSEs during the Financial Crisis

Today, the U.S. Government, directly or indirectly, underwrites 9 of every 10 new residential mortgages (twice the pre-Financial Crisis percentage)

Fannie or Freddie currently own, or guarantee, 50% of the United States $11 trillion in home mortgages On December 24, Treasury said it would cover unlimited losses at Fannie / Freddie through 2012 Also eased their $1.5 trillion (combined) portfolio cap to $810 billion each in 2010, and 10% lower

each year thereafter (as of Dec 09, each company had portfolios in the high $700 billion range)

Capital Injections

$111 billion in Treasury capital injections; 79.9% equity stake (as of Dec 2009) $60 billion in Fannie Mae; $51 billion in Freddie Mac Per above, the combined $400 billion cap was raised to unlimited on 12/24/09

GSE MBS Purchase Program

Fed to purchase exactly $1.25 billion of MBS guaranteed by Fannie, Freddie or Ginnie Purchases as of Dec 2009: $1.086 billion Program expiry: March 31, 2010 (entails ~13-15 billion each week through 3/31/10) Some suggesting that the easing of GSE position limits on 12/24/09 may be intended to

have GSEs fill part of the void once Fed MBS purchase program expires in March 2010 (and therefore help keep mortgage rates low in 2010)

GSE Debt Purchase Program

Fed to purchase up to $200 billion of debt from Fannie, Freddie and FHLBs Purchases as of Dec 2009: $160 billion Program expiry: March 31, 2010

Source: Federal Reserve, Treasury, WSJ.

This Christmas Eve 2009 development will become very contentious in 2010

38

Step # 19: Continued Support for Consumer ABS Markets

U.S. Consumer ABS Markets

78%19%37%

39%58%

58%

97% 70%

45% 82%

$3.9$5.9$6.6

$16.9

$8.4

$12.1

$16.4

$11.0

$2.9

$8.2

02468

101214161820

March April May June July August September October November December

U

S

D

B

i

l

l

i

o

n

s

TALF Eligible TransactionsTALF Loans

$68 $70 $67 $53 $65 $66$94

$57 $44

$76 $84 $83$80

$107 $89$75

$34 $61

$6 $13$11

$19$18

$15

$3$10

$19$37

$42

$54$67 $57

$28$18

$163$179

$199$187

$245 $239 $241

$123 $132$8$10

$0

$50

$100

$150

$200

$250

2001 2002 2003 2004 2005 2006 2007 2008 2009

$

b

i

l

l

i

o

n

Credit Card Automobile Equipment Student LoanReturn to Normalcy?

Strongest performing securitization market in 2009

Strong new issue volumes and pricing

Will improve with economic recovery

TALF expiry in March 2010

U.S. ABS Issuance (2001 2009)

Unlike for the CMBS and RMBS

markets, the 2009 success of TALF

for consumer ABS has created

optimism for the viability of this

market after the program expires in

March 2010

TALF Issuance and Loan Requests (2009)

($ million)

Source: Deutsche Bank, NY Fed

Comment

New Issuance: Has not returned to pre-crisis levels but much improved going into 2010

Spreads: Significant tightening in 2009 due to PPIP announce, impact of TALF, improved liquidity and modest improvements in economic

recovery Auto: > $61 billion of new issuance in 2009 (one of

only segments to exceed 2008 volumes) Credit Card: >$44 billion of new issuance in 2009;

positive impact of improved Dec 09 unemployment Student Loan: > $18 billion of new issuance in

2009

TALF ABS Expiry:March 31, 2010

39

Step # 20: Create a U.S. Covered Bond MarketThe Potential Creation of a U.S. Covered Bond Market in 2010

EUR Covered Bond Spreads vs. Other Markets EUR Covered Bonds vs Other Bonds Outstanding

175

8962

2211

-50

0

50

100

150

200

250

300

350

400

450

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

EUR AAA RMBSCorporate Financials (AA)Covered BondsSub-SovereignsSovereigns

May09 ECB announces CB purchase plan

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

O

u

t

s

t

a

n

d

i

n

g

s

E

U

R

(

b

n

)

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%High YieldOther CollateralizedCorporate Non-FinancialCorporate FinancialSub-SovereignCovered BondsSovereign Share of the Covered Bond Market

Note: iBoxx Covered Bond Index is the avg of different CBs including German Pfandbrief, Spanish Cedulas, UK covered bonds, French OFs and others.

Recent bi-partisan support has

created momentum around the

possible creation of a U.S. covered

bond market in 2010

To successfully build a U.S. market,

certain legislative changes in our

legal system will be needed to

provide investors with more certainty

on recourse in the event of an

Issuers insolvency

What? Secured senior debt obligation issued by a bank or financial company that provides the

investor with recourse to the Issuer AND to an asset pool Preferential recourse to assets: upon Issuer insolvency, asset pool repays bonds like ABS Recourse to Issuer: any shortfall on assets recuperated through claim on Issuer

Why? Attractive alternative funding source for U.S. banks and potentially other financials

Potentially important source of credit in U.S. economy, especially given post-Financial Crisis changes in the securitization markets

Well established and deep, liquid covered bond market already in Europe (see below)

When? Some good momentum in 2009 (legislation introduced in House in June 2009; key amendment

filed in Nov 09 to establish legal framework: hearings held by House FSC)

Optimism around further legislative and regulatory progress in 2010

Return to Normalcy?

Significant momentum in 2H 2009

House Financial Services Committee committed to pick-up in 2010

40

ILC State Parent Name

Total Assets

($ mm) ILC State Parent Name

Total Assets

($ mm)

1 Merrill Lynch Bank USA UT Bank of America $65,240 23 Transportation Alliance Bank UT Flying J 517

2 UBS Bank USA UT UBS AG 33,958 24 Medallion Bank UT Medallion Financial 440

3 American Express Centurion UT American Express 24,470 25 Community Commerce Bank CA Telacu Industries 404

4 GE Capital Financial UT General Electric 11,512 26 First Security Business Bank CA First American 362

5 Capmark Bank CA Capmark 10,242 27 World Financial Capital Bank UT Alliance Data Systems 303

6 USAA Savings Bank NV USAA 6,473 28 Circle Bank CA Circle Bancorp 244

7 CapitalSource Bank CA CapitalSource 5,834 29 Celtic Bank UT Celtic Investment 214

8 BMW Bank of North America UT BMW of North America 5,144 30 Balboa Thrift and Loan CA 205

9 Sallie Mae Bank UT SLM Corporation 4,851 31 EnerBank USA UT CMS Energy 195

10 Woodlands Commercial Bank UT Lehman Brothers 4,841 32 ARCUS Financial Bank UT WellPoint 186

11 Beal Bank Nevada NV Beal Financial 4,184 33 Golden Security Bank CA 185

12 Advanta Bank Corp UT Advanta 2,962 34 5Star Bank CO Armed Forces Benefit 157

13 Fireside Bank CA Unitrin 1,310 35 Finance & Thrift Company CA F&T Financial Services 112

14 Merrick Bank UT CardWorks 1,109 36 Target Bank UT Target 103

15 OptumHealth Bank UT UnitedHealth 1,054 37 Rancho Santa Fe Thrift CA Semperverde 70

16 Trust Industrial Bank CO Fiserv 933 38 Morris Plan Company IN First Financial 57

17 Centennial Bank CA LandAmerica Financial 890 39 ADB Bank UT Leavitt Group 57

18 Finance Factors HI Finance Enterprises 705 40 WebBank UT WebFinancial 42

19 Pitney Bowes Bank UT Pitney Bowes 701 41 Eaglemark Savings Bank NV Harley-Davidson 36

20 Wright Express Financial UT Wright Express 670 42 LCA Bank Corporation UT Lease Corporation 34

21 Toyota Financial Savings Bank NV Toyota Motor 656 43 Minnesota First Credit & Savings MN Minnesota Thrift Co 27

22 Republic Bank UT 554 44 First Electronic Bank UT Fry's Electronics 18

Total $192,261

Step # 21: Support Active Role by ILCs in U.S. EconomyThe Important Role of Industrial Loan Companies (ILCs) in the U.S. Economy

Source: SNL.

Based largely in Utah, California, Colorado and Nevada, the $200 billion of Industrial Loan Companies (ILCs) play an important non-bank credit function in the U.S. economy

Comment

Industry Size: $200 billion in Assets

Function: Important non-bank credit provider in U.S. economy

The viability of Industrial Loan Companies (ILCs) had been brought into question during the Financial Crisis:

Funding model Reliance on securitization FDIC pushback on assets supporting

deposits Initial proposed regulatory reforms

The ILCs do not appear to be a direct focus of the proposed U.S. financial regulatory reforms (at least for now)

Would have required 5 year transition to BHC charter, possible separation from industrial parent, and sharply higher capital levels

41

Step # 22: Monitor Risk of Sovereign Credit Events

Return to Normalcy?

Economic recovery underway will hopefully mitigate the risk

Implicit backing by EU for relevant member risks will be important in containing any systemic impact

Source: Deutsche Bank research, Moodys

Sovereign risk differential will remain high

Debt burdens are expected to rise

The Sovereign misery index

EU Sovereign issuance % will be large

0 5 10 15 20 25 30

SpainLatvia

LithuaniaIreland

GreeceUK

IcelandUS

FranceEstonia

PortugalHungary

GermanyItaly

Czech Republic

%Fiscal Deficit (2010F) Unemployment Rate (2010F)

5305580

105130155180205230255280

P or t u

g al

I t al y

G re e

c e

S pa i n

A us t r

i a

F r an c

e U K

F i nl a n

d

5

y

S

e

n

i

o

r

C

D

S

(

B

p

s

)

12/31/2007 12/31/2008 12/22/2009

2007 avg.: 19bps

2008 avg.: 127bps

2009 avg.: 105bps

0

20

40

60

80

100

120

140

G re e

c e I t al y

B el g i

u mI r e

l a nd

P or t u

g al

F r an c

eG e

r ma n

yA u

s t ri a

S pa i n

N et h e

r l an d

sF i n

l a nd

D

e

b

t

/

G

D

P

r

a

t

i

o

2007 Debt/GDP ratio 2011E Debt/GDP ratio

A sovereign credit event remains one

of the highest risk scenarios for an

exogenous shock to the

global financial system in 2010

and should be closely monitored

42

Step # 23: Monitor Global Capital Flows More Closely

Record Asian FX Reserves

Global capital flows will have to be

monitored more closely in 2010 in order

to prevent asset bubbles that may pose

a systemic risk

The global imbalance between Trade and

Capital Flows was a significant contributor

to the Housing bubble

The problem was not the significant excess

savings themselves, but the magnitude and

speed of their accumulation

Sharp rise in Asian foreign-exchange holdings in the wake of the 1997 1998 Asian crisis

Many emerging market countries generated significant account surpluses in recent years

Following the mid 90s Asia economic crisis, a build-up in large FX reserves was intended to shield currencies from devaluations

Record Petrodollar Accumulation

Petrodollars accumulated significantly, with oil prices skyrocketing from ~ $25/barrel in 2000 to a peak of ~ $150/barrel in mid-2008

Most notably, oil-producing countries included the Persian Gulf states, Russia, Nigeria and Venezuela

Excess Global Savings Helped Fuel the Developed Market Housing Bubble

U.S. and International Housing Market

Investments of excess savings

needed a place to go

Developed-economy housing markets were among the few global markets large and liquid enough to absorb such a significant and rapid accumulation of capital

Domestic economies could not absorb these enormous surpluses Size of capital markets, scarcity of sizeable investment opportunities, political constraints, protectionist

policies, etc.

0

500

1,000

1,500

2,000

2,500

2 0 00

2 0 02

2 0 04

2 0 06

2 0 08

C

h

i

n

a

'

s

F

X

R

e

s

e

r

v

e

s

(

U

S

D

b

n

0

25

50

75

100

125

150

J a n- 0 0

J a n- 0 2

J a n- 0 4

J a n- 0 6

J a n- 0 8

O

i

l

P

r

i

c

e

(

U

S

D

)

Return to Normalcy?

Financial regulatory reforms focused on addressing systemic risk issues in 2010

Global Central Banks now more closely monitoring this issue

Section D

Response to the Economic Crisis in 2010

44

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jan-82

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Step # 24: Aggressive Tightening when the Time is RightConsiderations Regarding 2010 Federal Reserve Monetary Policy

U.S. Fed Funds Rate (1982 2009)

The Fed does not currently believe that inflation poses a significant risk to the U.S. economy over the next few Quarters, but this can change quickly

Rates likely to remain the same for at least the first 2-3 Quarters of 2010 Central Banks in smaller economies (Australia, Israel and Norway) have already begun to raise rates A number of key variables to watch in 2010:

Resource utilization: slack in the economy, such as unused factory capacity (lowers inflation risk) Stressed Consumer: > 70% of GDP (high debt levels, housing burdens, unemployment, wages) Double-dip risk: DBs economists see a 25% chance that the 2010 U.S. economy could either stall or

even fall into a double-dip recession

Unemployment: Even if falling, likely still to remain very high in 2010 (lowers inflation risk) Wage growth: continues to be very low (lowers inflation risk) Liquidity: Massive liquidity has been pumped into the system and must be closely monitored in 2010

Source: Bloomberg. DB Research.

Return to Normalcy?

Feds exit from Quantitative Easing programs already well underway

Rates likely to remain same for at least 2 - 3 more quarters in 2010

Good blueprints exist for aggressive Fed tightening, if needed

The Fed will likely exit most of its quantitative easing programs before raising rates in 2010 The behavior of financial markets will be a much bigger factor in Fed decisions this time around The pace of the expected 2010 tightening will likely be more aggressive than the slow and

methodical tightening cycle from 2004 to 2006

DB Interest rate forecasts

We expect the Fed to commence

tightening in Q3 2010, and to do so

more aggressively than the slow and

methodical tightening cycle of

2004 - 2006

FF2y

Tsy5y

Tsy10y

Tsy30y

Tsy4Q 09 0.00 0.75 2.50 3.50 4.501Q 10 0.00 0.75 2.50 3.50 4.502Q 10 0.00 1.00 2.75 3.75 4.753Q 10 0.75 1.75 3.00 4.00 5.004Q 10 1.25 2.25 3.50 4.50 5.25

45

0

500

1,000

1,500

2,000

2,500

9/08 10/08 11/08 12/08 1/09 2/09 3/09 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09

U

S

D

B

i

l

l

i

o

n

T reasury securities Repo OtherLiquidity for Banks & Dealers Swaps with foreign CB CP FacilitiesSupport for Critical Institutions MBS+GSE+TALF

Step # 25 : Wind-down Quantitative Easing ProgramsU.S. Federal Reserve Balance Sheet Expansion

Cumulative Fed Purchases of Treasuries, Agencies and MBS (Sept 1, 2008 Nov 12, 2009)

Treasuries ($ bn) Agencies ($ bn) MBS ($ bn)

Source: Treasury, Bloomberg, Deutsche Bank

Nov 08: 5.97%(Program announced)

Mar 09: 4.82%(Program upsized)

Dec 1, 09: 4.71%

Avg 30 Yr Mtg Rate

Whatever it takes! (Fed Chairman, Ben Bernanke)

(Expired) (Mar 2010 expiry)(March 2010 expiry)

Sep 2007: $800 billionDec 2009: $2.3 trillionEst. Peak: $2.5 trillion

0

200

400

600

800

1,000

1,200

1 / 7/ 0 9

2 / 7/ 0 9

3 / 7/ 0 9

4 / 7/ 0 9

5 / 7/ 0 9

6 / 7/ 0 9

7 / 7/ 0 9

8 / 7/ 0 9

9 / 7/ 0 9

1 0 /7 / 0

91 1 /

7 / 09

0

50

100

150

200

250

300

3 / 25 / 0

9

4 / 25 / 0

9

5 / 25 / 0

9

6 / 25 / 0

9

7 / 25 / 0

9

8 / 25 / 0

9

9 / 25 / 0

91 0 /

2 5 /0 9

020406080

100120140160

1 2 /5 / 0

8

2 / 5/ 0 9

4 / 5/ 0 9

6 / 5/ 0 9

8 / 5/ 0 9

1 0 /5 / 0

9

1 2 /5 / 0

9

The Fed appears poised to cautiously

continue the unwind of its quantitative

easing programs in 2010

knowing that a disorderly exit could

lead to unexpectedly high market rates,

and increase the chances of a double-

dip recession

46

0

2

4

6

8

10

12

14

China USA AUS CAN GER JPN UK FRA

%

o

f

G

D

P

Step # 26 : Implement Remaining Fiscal StimulusU.S. Fiscal Stimulus Compared to Other Selected G-20 Countries

Breakdown of $787 Billion U.S. Fiscal Stimulus

Approx 25% Implemented by Dec 2009 Commentary

Japans fiscal and monetary policies in the lost decade (1990s) were initially too slow and timid.

Japans fiscal stimulus to GDP: 1991 (0%); 1995 (3.6%); 1998 (8%); 2009 (2%)

83.856.3 76.3

204.2218.7

147.7

0

50

100

150

200

250

300

Tax Benefits Contracts, Grants,Loans

Entitlements

$

b

i

l

l

i

o

n

UnpaidPaid Out

$288$275

$224

Sources: OECD, DB Global Markets Research, IMF and www.recovery.gov

The U.S. will implement the rest

of its $787 billion fiscal stimulus

package in 2010, one of the largest

programs among advanced G-20

economies

While fiscal stimulus was clearly needed

and will positively impact 2009/ 2010

GDP growth, some economists have

argued it came too late and was not

optimally designed

Chinas fiscal stimulus plan during the Financial Crisis was the largest, the earliest implemented (Nov 08) and the most effective among major global economies

Return to Normalcy?

The U.S. and most other major global economies began to expand in the second half of 2009

Significant positive impact on first half 2010 GDP growth expected

How much growth does the stimulus represent? Assuming normalized U.S. GDP growth of ~2.5%, the $787 billion of U.S. fiscal stimulus represents approximately 2 years of GDP growth

What will be the impact in 2010? Several Wall Street economists have noted that U.S. fiscal stimulus will boost annualized GDP growth by 2% in the first half of 2010, with little to no impact expected in the second half

Critical Question: How will businesses and consumers respond once government support fades?

47

5.7 5.8 6.26.8 7.4

7.9 8.5 9.010.0

11.4

20.4

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2019E

U

S

D

T

r

i

l

l

i

o

n

Step # 27: Dampen the Impact of Rapidly Rising DeficitsThe U.S. national debt

will continue its sharp rise in 2010,

and will become a front and center

political issue

The $1.4 trillion budget deficit for

FY2009 has now pushed U.S. debt

held by the public above 50% of

GDP

Gross U.S. Federal Debt is Rising Sharply $1.4 trillion in Fiscal 2009 and $1.5 trillion projected in Fiscal 2010, adding $9

trillion to the Federal debt by 2019 (CBO projects $7 bn) Beyond 2013, much of the deficit growth comes from the demographics of an

ageing population (Medicare, Medicaid and Social Security) Interest on U.S. debt cost $182 billion in FY 2009; as rates rise, it could rival

defense in the U.S. budget (> $600 billion annually)

U.S. Government Debt Topped 50% of GDP in FY 2009, and on Path to 100%

Source: CBO, WSJ, IMF, Deutsche Bank

US Federal Debt Held by the Public

0

20

40

60

80

100

120

1900 1915 1930 1945 1960 1975 1990 2005

% of GDP

0

20

40

60

80

100

120

% of GDP

WW II

The Great Depression

WW I

Estimate for FY2009 and 2010

Return to Normalcy?

Not much! The national debt

has become an increasingly politically sensitive issue and is receiving more focus than it had previously

Largest Holders of U.S. Treasuries (9/30/09)

China: $799 bnJapan: 752U.K. 249OPEC 185Hong Kong 132Russia 121

The IMF estimates that U.S. Government debt will swell to 108% of GDP by 2014, from approximately 55-60% today

A record $118 billion of U.S. Treasuries auctioned the week of Dec 28, 2009, with demand dominated by foreign bidders

Net U.S. Treasury supply in 2010 may hit a new record of $1.8 trillion

48

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

S e p 0 8

O ct 0 8

N ov 0

8

D ec 0

8

J a n 0 9

F e b 0 9

M ar 0 9 A p r

0 9M a

y 09

J u n 0 9

J u l 0 9

A u g 0 9

S e p 0 9

O ct 0 9

N ov 0

9

D ec 0

9

U

n

e

m

p

l

o

y

m

e

n

t

R

a

t

e

Step # 28: Reduce UnemploymentRightly or wrongly, a

U.S. Jobs Bill will be at the very top of U.S.

legislative spending agendas in early 2010

The U.S. has led the world in both the

growth and absolute level of unemployment

during the crisis

..with over 7.5 million jobs lost since the

crisis began

Global Unemployment Rates

U.S. Unemployment Rates (2008 2009)

Source: Bloomberg, BLS, Federal Reserve, Deutsche Bank Economics Research.

Employment Declines from Recession Start

-6

-5

-4

-3

-2

-1

0

1

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

%

-6

-5

-4

-3

-2

-1

0

1

%

1981-832008-09

Number of months after peak employment

Recession era employment declines

10.0% 9.8%

7.9%

5.1%

0%

2%

4%

6%

8%

10%

12%

US Euro Area UK Japan

U

n

e

m

p

l

o

y

m

e

n

t

R

a

t

e

Return to Normalcy?

U.S. unemployment rate declined in December from 10.2% to 10.0%

Positive GDP growth projections for 2010