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2 o o '" 3. The concern over contagion IV '-' en -u ;;: - PowerPoint PPT Presentation

Jan 16, 2023 •359 likes •802 views

~ ~ () o 3. c: II) 3- Lessons Learned from the Recent Turmoil in the Credit Markets Anthony M Santomero Senior Advisor McKinsey & Company This report is solely for the use of client personnel. No part of it may be circulated, quoted, or

  1. ~ ~ () o 3. c: II) 3- Lessons Learned from the Recent Turmoil in the Credit Markets Anthony M Santomero Senior Advisor McKinsey & Company This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral () presentation; it is not a complete record of the discussion. =i :;; () C'i r m ::c o o ..... CD .j>. o

  2. ~ ~. ~ ~ ~ ~ ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- TODA V'S DISCUSSION ;<- 1. An environment of credit and liquidity growth o !!L s; 8. 2. The US mortgage market as the epicenter of the crisis ~ "- 2 o o '" 3. The concern over contagion IV '-' en -u ;;: 4' s· 4. Implications and outlook I[ • Winners and losers • Implications for select financial areas 5. Lessons for Professional Risk Managers () 1 =i :;; () C'i r m ::c o o ..... CD

  3. ~. ~ ~ ~ ~ ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- TODA V'S DISCUSSION ;<- o !!L s; 2. The US mortgage market as the epicenter of the crisis 8. ~ "- 2 o o '" 3. The concern over contagion IV '-' en -u ;;: 4' 4. Implications and outlook s· I[ • Winners and losers • Implications for select financial areas 5. Lessons for Professional Risk Managers () 2 =i :;; () C'i r m ::c o o ..... CD "" "-l

  4. ~ ~ ~. ~ () o 3. c: II) 3- NYO-AAA 123-20080330- GROWING GLOBAL FINANCIAL ASSETS FOSTERED INCREASED LIQUIDITY AND CREDIT AVAILABILITY Global financial assets $ Trillions 167 :i' 0 ;<- Equity 0 ~ ;- securities r ro !!i- s; 0 "- ... ~ "- 2 0 0 '" Private debt IV '-' en securities -u ;;: 4' s· I[ Government debt securities Bank deposits 1980 1995 2000 2001 2002 2003 2004 2005 2006 () 3 =i Source: McKinsey Global Institute; Global Financial Stock database :;; () C'i r m ::c o o ..... CD .j>. W

  5. ~ G~G«-. ~olo ,~. ~ ~ ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- CROSS-BORDER CAPITAL FLOWS INCREASED SUBSTANTIALLY, WITH THE U.S. AS THE PREFERRED DESTINATION .. ,.,.,.,·,::::::::::)):::::::::::::))::11 ".,.,.,.,.,.,.,.,.,.,.,., ,.,.,.,., .. ,.,.,.,., ,.,.,.,. , .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,·'1 .,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.".,.,.,., o I!IIIIII!I Net capital importers 1;- 8 [2J Net capital exporters 674 8. 7 =;; m a. c;:)ro· 2 6 " 9J9J\Y o o 5 '" IV c;. en 4 '0 ;;: 3 ""CAGR 1980-90: 8.3% 4' s· • 2 I[ -1 -9 o I I I I I I '80 '85 '90 '95 '00 '05 -140 -153 US UK India E. Lat. Mid Japan China Aus Percent 4.4 3.5 4.8 5.4 13.6 15.4 Eur. Am. East of global GOP () 4 =i Source: McKinsey Global Institute; World Bank :;; () C'i r m ::c o o ..... CD .j>. .j>.

  6. ~ ~ ~mMl ~ ~. ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- PRIVATE CAPITAL, SEEKING ATTRACTIVE RISK .. ADJUSTED RETURNS, FURTHER FUELED LIQUIDITY ..... Cumulative ;<- commitment o overhang Commitments I ~ Global buyouts s; II 8. Investments ~ "- 2 400 o 348 o '" IV '" en 300 -u ;;: 233 238 233 22 4' 200 S' I[ 200 368 375 456 100 257 o I::::::"'''' " 96 97 98 99 00 01 02 03 04 05 06 07 96 97 98 99 00 01 02 03 04 05 06 () 5 =i Source: PE Intelligence; Hedge Fund Research (HFR.com), McKinsey analysis :;; () C'i r m ::c o o ..... CD .j>. U1

  7. ~ ~ ~ ~. () o 3. c: II) 3- NYO-AAA 123-20080330- GROWTH IN CDOs AND CLOs, HELPED ESTABLISH THE "COO BID" FOR LEVERAGED LOANS AND ABS Percent CAGR $480 billion 1,200 Percent :i' 0 ;<- 1,100 Non U.S. Banks 0 1,000 ~ ;- Global 21 r ro 900 !!i. s; 800 U.S. banks 0 " a. ~ a. ... I 700 25 'U.S. 2 600 Securities firms* 0 I 0 '" 500 '" '" en ,/ 400 ........ - '0 ;' ;;: 300 COOs and /' 4' Others** s· 200 .....,..,. I[ 100 0 2000 2001 2002 2003 2004 2005 2006 2007 I I 2000 2006 * Also includes finance companies and insurance companies ** Also includes hedge funds, prime-rate funds and high-yield funds () 6 =i Source: LSTA, BBA, Fitch, S&P PMD; Standard and Poor's Leveraged Buyout Review :;; () C'i r m ::c o o ..... CD .j>. 0)

  8. ~ ~ ~. ~ ~ ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- SINCE JULY '07, WE HAVE SEEN A REVERSAL OF CREDIT AND LIQUIDITY GROWTH WHICH PREVAILED FOR MOST OF THE LAST DECADE Crisis onset Global COO Issuance Jan 1997 -Dec 2007 July 2007 $ Billions 1 ,--------, ---------' 60 Credit and liquidity Credit and liquidity growth "" 50 crisis and contagion o 40 !!i. s; 8. 30 ~ a. 2 o o 20 '" IV '-' en 10 "0 ;;: 4' s· o I[ 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Main drivers of liquidity growth Triggers of liquidity Areas of contagion • Growth in financial assets (e.g., crisis • Mortgage backed equity, private and government securities • Complexity and debt, bank deposits) opacity of • Wholesale funding subprime/CDO risk market • Increasing importance of private capital • Risk mispricing • Entry of new investors into the • Aggressive chase for market through innovative yield financial products (e.g., CDOs) () Source: Oealogic 7 =i :;; () C'i r m ::c o o ..... CD .j>. -..j

  9. ~ ~ ~. ~ ~ ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- TODA V'S DISCUSSION ;<- 1. An Environment of credit and liquidity growth o !!L s; 8. ~ "- 2 o o '" 3. The concern over contagion IV '-' en -u ;;: 4' 4. Implications and outlook s· I[ • Winners and losers • Implications for select financial areas • Impact on interest in risk management () 8 =i :;; () C'i r m ::c o o ..... CD "" co

  10. ~: ~ ~. ~: Working Draft - Last Modified 4f712008 12:15:01 PM Printed < ;I' rc' ~; to ··:·: . . b I ... .; " .: '-,' W :; ~. a o Confidential CITI-FCIC-LEH 00151949

  11. ~ ~ ~ ~. ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- RISKIER MORTGAGES CONTINUED TO GROW SIGNIFICANTLY, REACHING -50% OF MORTGAGE ORIGINATIONS IN 2006 Nonconforming* products as percentage of total mortgage originations 49 49 ;<- o !!L s; 8. ~ "- 2 o o '" Between 2003 and 2006 share of non- conforming <J i products grew disproportionately Sub-prime Home Equity Alt-A 01 01 02 02 03 03 04 04 05 05 06 06 07 07 01 03 01 03 01 03 01 03 01 03 01 03 01 03 * Excludes Jumbo () 10 =i Source: Mortgage Bankers Association, Census Bureau, Goldman Sachs Research Estimates :;; () C'i r- m ::c o o ..... CD U1 o

  12. A29N)~I ~ ~ ~ ~ ~. ~ ~ \~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- SUB-PRIME MORTGAGES BECAME THE DOMINANT UNDERLYING ASSET FOR MANY COOs BY THE END OF 2006 Percent Representative ABS COO ~ Representative ASS COO ~ 2002* 2006* ABS structured ABS settlement RMBS ;<- franchise ABS aircraft o I ABS COO !!L ABS COO equipment s; 8. •••••••••• ~r20'$~c~O~it CDS lease ~ "- 2 ABS auto o o '" IV '-' en )))) )!41 CMBS large ABS credit -u ;;: card 4' s· I[ prime RMBS RMBS RMBS subprime CDS Subprime MH Note: ABS - asset-backed securities, COO - collateralized debt obligation, CMBS - commercial mortgage-backed securities, CTL - credit tenant lease, RMBS - residential mortgage-backed securities, HE - home equity, MH - Manufactured housing, RMBS - residential mortgage-backed securities, COS - credit default swap * 2002 closed COO issue by SFE CABS III COO, Ltd, 2006 closed COO issue by GSC ABS COO 2005-1 () 11 =i Source: Fitch Ratings presale report :;; () C'i r m ::c o o ..... CD

  13. ~ ~ ~/ ~ ~ ~ ~. ~ ~ () o 3. c: II) 3- NYO-AAA 123-20080330- RISING US MORTGAGE AND HOME EQUITY LOSSES BECAME EVIDENT AS EARLY AS 2004 Static cumulative loss rates by vintage DISGUISED EXAMPLE Percent 19 18 17 ;<- o 16 15 !!L Q405 s; I 14 8. I ~ "- 13 2 .. Q305 o 12 o '" I IV 11 '-' en # 10 -u ;;: '" Q205 9 ff 4' s· of' I[ 8 '" .., /Q105 '" 7 Q404 # ,,/ 6 #' #' .. '" .... .. Q304 5 '" ;;;-. -.::: :...: .::.... _ _ ::::.. _ .-:-:::.. -=-- '" ... ",&.':#' ... 4 # Q 1 04 Q204 3 2 1 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 Age (months) () 12 =i :;; () C'i r m ::c 0 0 ..... CD U1 "-l

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