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Ten ways the financial crisis affects youManaging in the Post-Crisis World
CFA Québec
Huston Loke, CFA
Co-President
DBRS
MARCH 30, 2010
TED Spread
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 2
Benchmark Returns, U.S. Pension Funds
July 2008-June 2009
Public equities (28.5)%
Private equities (23.9)
Absolute return (13.2)
Real assets (38.5)
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 3
Real assets (38.5)
Fixed income (3.4)
Source: Harvard Endowment Fund.
The “Scoreboard”
Positive Negative
x Investment losses
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 4
Rating Changes by Industry - 2009
Upgrades Downgrades Total
Autos & Auto Suppliers 2 11 13
Telecom/Media/Technology 5 6 11
Consumer Products and Retail 2 2 4
Energy 5 1 6
Financial Services 1 57 58
Industrial and Transportation 1 5 6
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 5
Infrastructure and Public Finance 3 2 5
Natural Resources 0 13 13
Real Estate 0 0 0
Total 19 97 116
Note: Includes multiple rating actions to individual credits.Source: DBRS.
Quarter by Quarter Rating Activity, 2009
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 6
The “Scoreboard”
Positive Negative
x Investment losses
x Corporate downgrades
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 7
GDP
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 8
The “Scoreboard”
Positive Negative
x Investment losses
x Corporate downgrades
x Weakened economy
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 9
What does $10,000 look like?
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 10
$1 million
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 11
$1 billion
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 12
$1 trillion (pallets stacked two high!)
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 13
Assuming this is not an option
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 14
Total Spending as % of GDP and Per Capita, by
Province
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 15
Source: DBRS
The “Scoreboard”
Positive Negative
x Investment losses
x Corporate downgrades
x Weakened economy
x Higher taxes
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 16
Prime Residential Mortgage Default Rates
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 17
Fed Overnight Lending Rating versus BOC
Overnight Target Rate
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 18
What can a Homeowner Afford to Pay?
A Comparison of Mortgage Options
House price $337,410 House price $526,298
Rate 5.50% Rate 2.25%
Down payment 25% $84,353
Down payment 15.7% $82,629
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 19
Years 25 Years 35
Mortgage balance $253,058 Mortgage balance (including insurance premium of 1.75%)
$451,434
Monthly payment $1,554 Monthly payment $1,554
The buyer can “afford” to cover the mortgage on a home that is 56% more expensive.
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
x Corporate downgrades
x Weakened economy
x Higher taxes
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 20
U.S. Home Price / Income Ratio
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 21
Canadian Home Price / Net Income Ratio
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 22
Source: People Patterns Consulting based on Statistics Canada, Vanier Institute of the Family
Bond Outstandings – Canada Mortgage Bond
Program
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 23
CMHC Insurance in Force & Units Approved
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 24
CMHC’s Investment Portfolio
Investment Securities
$ millions December 31 2008
FIXED INCOME SECURITIES
Issued or Guaranteed by:
Corporate/Other Entities $5,080
Government of Canada $1,610
Provinces/Municipalities $3,521
Sovereign and Related Entities $1,054
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 25
Sovereign and Related Entities $1,054
Total Fixed Income $11,265
EQUITIES
Canadian Equities $1,203
U.S. Equities $532
Foreign Equities $555
Total Equities $2,290
Total Investments $13,555
Source: CMHC Annual Report 08.
Insured Mortgage Purchase Program
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 26
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
√ CMHC x Corporate downgrades
x Weakened economy
x Higher taxes
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 27
Average Capital Ratios, DBRS-rated Canadian
Banks
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 28
Tier 1 Capital and Tangible Common Equity
Ratio (January 31, 2010)
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 29
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
√ CMHC x Corporate downgrades
√ Canadian banks x Weakened economy
x Higher taxes
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 30
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
√ CMHC x Corporate downgrades
√ Canadian banks x Weakened economy
x Higher taxes
x Models have limits
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 31
x Models have limits
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
√ CMHC x Corporate downgrades
√ Canadian banks x Weakened economy
x Higher taxes
x Models have limits
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 32
x Models have limits
Consider
(1) The long term
The “Scoreboard”
Positive Negative
√ Canadian housing x Investment losses
√ CMHC x Corporate downgrades
√ Canadian banks x Weakened economy
x Higher taxes
x Models have limits
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 33
x Models have limits
Consider
(1) The long term
(2) The effects of optimization
Contact Information
Huston Loke, CFACo-President
+1 416 597 7533hloke@dbrs.com
TEN WAYS THE FINANCIAL CRISIS AFFECTS YOU 34
www.dbrs.com
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