THE GLOBAL ECONOMIC CRISIS

www.maybridgeasia.com

GenesisNot too long ago .....

A decade of robust economic growth producing huge surpluses of capital .....

plus easy credit that produced liquidity exceeding the demands of the real economy .....

.....created tremendous wealth that insanely chased assets, producing asset bubbles in the process .....

..... Housing, financial assets, commodities ..... the bubbles were all over the place

..... Then the housing bubble burst

..... and all hell broke loose!

LIQUIDITY

HOW EXCESSIVE LIQUIDITY CREATES ASSET BUBBLES

REAL ECONOMY’S NEEDS

GROWTH IN REAL ECONOMY’S NEEDS

ASSET PRICE INFLATION

NORMAL LIQUIDITY GROWTH

EXCESSIVE LIQUIDTY GROWTH

LIQUIDITY

HOW DISAPPEARING LIQUIDITY SHRINKS THE ECONOMY

REAL ECONOMY

DEMAND DESTRUCTION; RECESSION

ASSET PRICE DEFLATION

CONTRACTING LIQUIDITY

EXAGGERATED CONTRACTION

Bursting asset bubbles: Housing, financial assets, commodities

Financial losses

Shattered confidence

Systemic wealth destruction

Net outflow of FDI and hot money, lower Fil-Am demand for property, weaker global demand

External eventsDomestic events

Constricted liquidity, lower purchasing and investing power

Falling asset prices, full-blown economic crisis

Full economic crisis

Fortunately for the Philippines . . . .

• Asset bubbles outside the equity market were far smaller.

• Corporate balance sheets were not as over-leveraged as in 1997.

• So far, OFW and immigrant remittances have held up

• Privatization proceeds and windfall VAT gave the fiscal position a momentary boost.

Just the same, financial institutions have to brace themselves . . . . .

Weak business climate

Volatile and jittery markets

Inflation and rising interest rates

Elevated risks

Market risks: trading losses; decline in asset values

Credit risks: defaults, deterioration in asset quality

Operational risks: customer and employee fraud, lapses

Margin squeeze: as liquidity disappears, funding costs rise faster than asset yields

Overhead drag persists despite declining revenues

Shrinking revenue base and declining revenue stream

Capital flight; panic withdrawals

THANK YOU FOR LISTENING. For any clarifications, email us at

joeybermudez@maybridgeasia.com

Firm                                 Losses   Capital Raised

Wachovia Corporation*                       96.5          11.0Citigroup Inc.*                             68.1          74.0Merrill Lynch & Co.*                         55.9          29.9Washington Mutual Inc.*                     45.6          12.1UBS AG                                       44.2          31.1HSBC Holdings Plc*                           32.8           5.0Bank of America Corp.                       27.4          55.7National City Corp.*                         26.2           8.9JPMorgan Chase & Co.                         20.5          44.7Wells Fargo & Company*                      17.7          41.8Royal Bank of Scotland Group Plc*           16.0          51.3Morgan Stanley                               15.7          24.6Lehman Brothers Holdings Inc.*               13.8          13.9Credit Suisse Group AG                       13.5          11.5IKB Deutsche Industriebank AG               13.1          10.8Deutsche Bank AG*                           11.8           5.8Fortis                                       8.4          20.5ING Groep N.V.                               8.0          17.1Credit Agricole S.A.                         7.8          11.4

INJURY LIST

Firm                                 Losses   Capital Raised

Societe Generale*                             7.6           10.5Mizuho Financial Group Inc.                   6.9           0.0Barclays Plc                                 6.8           27.5Canadian Imperial Bank of Commerce           6.3           2.5Bayerische Landesbank                         6.2           8.2HBOS Plc*                                     5.9           24.2BNP Paribas*                                 5.4           3.3Indymac Bancorp Inc*                         4.9           0.0Goldman Sachs Group Inc.*                     4.9           20.5Dresdner Bank AG*                             4.6           0.0Landesbank Baden-Wurttemberg                 4.2           0.0E*TRADE Financial Corp.                       4.1           2.2Lloyds TSB Group Plc*                         3.9           13.6Bank of China Ltd                             3.7           0.0Nomura Holdings Inc.                         3.7           1.3Natixis                                       3.6           7.4KBC Groep NV*                                 3.5           4.5Bear Stearns Companies Inc.*                 3.2           0.0HSH Nordbank AG                               3.1           1.6Rabobank                                     3.1           0.0

WestLB AG*                                   2.8           6.4Fifth Third Bancorp                           2.7           2.6Sovereign Bancorp Inc.*                       2.4           1.9DZ Bank AG                                   2.3           0.0Landesbank Sachsen AG                       2.2           0.0U.S. Bancorp*                                 2.2           6.6Commerzbank AG*                               2.1          10.5ABN AMRO Holding NV                         2.0           0.0Royal Bank of Canada                         1.9           0.0Mitsubishi UFJ Financial Group           1.7          11.8Industrial and Commercial Bank of China       1.7           0.0KeyCorp                                       1.6           4.2Bank Hapoalim B.M.                           1.5           2.3Marshall & Ilsley Corp.                       1.5           1.7Dexia SA                                     1.5           8.2UniCredit SpA                                 1.3           9.2Alliance & Leicester Plc                     1.1           0.0Bank of Montreal                             1.1           0.0Sumitomo Mitsui Financial Group               1.0           4.9Groupe Caisse d'Epargne                       1.0           0.0

Firm                                 Losses   Capital Raised

Hypo Real Estate Holding AG               1.0           0.0Gulf International Bank                       1.0           1.0Sumitomo Trust and Banking Co.               0.8           1.1National Bank of Canada                       0.6           0.8DBS Group Holdings Limited*                   0.2           1.0Other European Banks                         8.2           3.8 (not listed above) Other Asian Banks*                           5.0          11.2 (not listed above) Other US Banks                               3.6          17.5 (not listed above) Other Canadian Banks                         0.3           0.0 (not listed above)                                        

TOTAL                             695.0       714.9

Firm                                 Losses   Capital Raised

Total Subprime Losses of Banks

Total Capital Raised by Banks

Total Number of Banks with Losses

US$695.0 Billion

US$714.9 Billion

Over 66

Review of the tragic domino• January: Countrywide Financial was taken over by Bank of

America • February: Northern Rock was nationalized• April 1: Bear Stearns was taken over by JP Morgan• July 11: Indymac Bank collapsed• September 7: Fannie Mae and Freddie Mac were taken over • September 14: Merrill Lynch was taken over by Bank of

America • September 14: Lehman Brothers declared bankruptcy • September 16: AIG was rescued

Review of tragic domino (cont’d)• September 18: HBOS was taken over• September 26: Washington Mutual went bankrupt, was

partially taken over by JP Morgan • September 28: Bradford and Bingley was nationalized• September 28: Fortis was nationalized• October 3: Wachovia was taken over by Wells Fargo• October 7, 8 and 9: Landsbanki, Glitnir, and Kaupthing Bank

were nationalized • October 13: Royal Bank of Scotland, Halifax Bank of Scotland

(HBOS) and Lloyds TSB received major capital infusions (43-63%) from the British government

Financial institutions that ran into trouble in 2007-2008

• Acquired by other institutions: 29– United Kingdom (11)– United States (11)– Iceland (3)– Benelux (2)– Australia (1)– Denmark (1)

• Declared bankruptcy or were shut down by regulators– United States (40) including 15 credit unions

Debt

Capital

Liquidity

Spending and Investing Power

The Anatomy of Liquidity Leveraging De-leveraging

Panic! Panic!

More! More!Loss! Loss!

Sept 2007

Jan 2008

Mar 2008

June 2008

Sept 2008

Nov 7 2008

Dow Jones Industrial Average

Market Capitalization (Free Float Only)

Jan 2008

April 2008

July 2008

Sept 2008

Global

U.S.

Philippines

Source: World Federation of Exchanges

US$55.2T US$56.4T US$50.7T US$42.7T

US$93.6B US$78.0B US$73.2B US$70.3B

US$18.3T US$18.6T US$17.0T US$16.1T

Economies in Trouble

• Economies that have entered recession– Q1: Denmark and Iceland (rebounded in Q2)– Q2: Estonia, Latvia, Ireland, New Zealand– Q3: Japan, Hong Kong, Singapore, Germany, Italy,

European Union as a whole• Economies that have contracted

– Q1: Canada, Mexico, Portugal, Sweden– Q2: France, Turkey– Q3: Hungay, United Kingdom, United States

Sept 2007

Jan 2008

Mar 2008

June 2008

Sept 2008

Nov 7 2008

Philippine Stock Exchange Index

86

88

90

92

94

96

98

100

102

Sept2007

Jan2008

March2008

June2008

Sept2008

PRICES OF ROP 32

A Major Local BankPeso Funds

Short-Term Fund

Premium Bond Fund

Equity Fund

Balanced Fund

Institutional Fund

YOY

YTD

3.39

2.77

4.57

2.95

-43.87

-41.06

-28.62

-25.84

3.91

2.08YIELDS

A Major Local BankForeign Currency Funds

YIELDSYOY

YTD

1.57

1.17

-33.48

-31.15

0.14

1.22

-6.82

-8.61