National Economic Overview: Impact of the Credit Crisis on Banks and Businesses
October 07, 2009
Financial Shock: Interference with Information Flow
Feedback
Choice
New Framework?
Supply Incentives and Returns
Demand Expected Rate of Return, Income
Role of Expectations and the Evolution of the Risk-Reward Tradeoff
Spreads FHFA (formerly OFHEO) Risk: Delinquencies and Foreclosures Asymmetric Information between Borrower and Lender
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Reaction to Shock: 2007
Investors Seek Safety; Plunge in T-bill Rate Counterparty Risk Rose: Protect Liquidity, Wider Spreads on Inter-bank Lending
Issuance and Trading of Structured Products Safety first
Declined
High Yield Issuance Declined Leveraged Loans Declined
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Signs of Adjustment in the Credit Cycle
TED Spreads
Investment Grade Issuance
LIBOR Rate
Leveraged Loan Issuance
Corporate Risk Spreads
Capital Flows & Dollar
Non-Investment Grade Issuance
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Mortgage Market Securities
4
Investment Grade Issuance
Investment Grade Monthly Issuance Deals vs. Volume
$40.00
30
Volume in $Billions # of Deals
$35.00
25
$30.00 20
$25.00
Bond supply continues
$20.00
15
$15.00
10
$10.00 5
$5.00 $0.00
0 Oct '08
Dec '08
Feb '09
Apr '09
Jun '09
Aug '09
Source: Wells Fargo Securities, LLC
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Mortgage Delinquencies
Conventional Mortgage Delinquency Percent of Loans Past Due, Seasonally Adjusted
6.5%
Total Prime: Q2 @ 6.4% (Left Axis) Total Subprime: Q2 @ 25.4% (Right Axis)
6.0%
Delinquencies lag business cycle: traditional response
28.0% 26.0%
5.5%
24.0%
5.0%
22.0%
4.5%
20.0%
4.0%
18.0%
3.5%
16.0%
3.0%
14.0%
2.5%
12.0%
2.0%
10.0%
1.5%
8.0% 1998
2000
2002
2004
2006
2008
Source: Mortgage Bankers Association and Wells Fargo Securities, LLC
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Residential Real Estate Loans
Nonperforming Residential RE Loans As Percent of Total; Large Organizations
8.0%
8.0%
Nation 7.0%
Nonperforming loans lag business cycle: traditional response
Tri-State Area
7.0%
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0% 2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
Source: Federal Reserve Bank of Philadelphia and Wells Fargo Securities, LLC
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Commercial Real Estate Loans
Nonperforming Commercial RE Loans As Percent of Total; Large Organizations
7.0%
7.0%
Nation 6.0%
Nonperforming commercial real estate loans: traditional response
Tri-State Area
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0% 2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
Source: Federal Reserve Bank of Philadelphia and Wells Fargo Securities, LLC
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Loan Demand
Net Percent of Banks Reporting Stronger Demand Small Firms
Demand for credit still weak
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60% Demand for C&I Loans to Small Firms: Q3 @ -54.7%
-80% 1991
-80% 1993
1995
1997
1999
2001
2003
2005
2007
Source: The Federal Reserve and Wells Fargo Securities, LLC
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Credit Standards
Net Percentage of Banks Tightening Standards C&I Loans to Small Firms 10%
100% C&I Loans to Small Firms: Q3 @ 34.0% (Left Axis) Federal Funds: Q3 @ 0.2% (Right Axis)
80%
Tighter standards: fewer tightening typical of late recession period
8%
60%
6%
40%
4%
20%
2%
0%
0%
-20%
-2%
-40% 1990
-4% 1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: The Federal Reserve and Wells Fargo Securities, LLC
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Credit Spreads
Net Percent of Banks Increasing Spreads Small Firms
100%
Spreads: adjustment for risk?
100%
80%
80%
60%
60%
40%
40%
20%
20% 0%
0% -20%
-20%
-40%
-40%
-60%
-60% Banks Increasing Spreads to Small Firms: Q3 @ 64.2%
-80% 1990
-80% 1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: The Federal Reserve and Wells Fargo Securities, LLC
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Small Business Optimism Small businesses are not yet feeling the relief of recovery NFIB Small Business Optimism
August Overall Index (1986 = 100) Net Percent Planning to Hire Net Percent Reporting Tighter Credit Percent Saying Good Time to Expand
Renewed confidence is still distant—a bad sign for employment
3 Mo. Ago
88.6 0 14 5
88.9 -5 16 5
Historical Perspective Small Businesses Planning to Increase Employment
Small Businesses Reporting Credit Hard to Get
Net Percent 24%
24%
Net Percent 18%
18% 3-Month Moving Average: Aug @ 14.3%
20%
20%
16%
16%
12%
12%
8%
8%
4%
4%
0%
0% -4%
-4%
15%
15%
12%
12%
9%
9%
6%
6%
3%
3%
3-Month Moving Average: Aug @ -1.3% -8%
-8% 86
88
90
92
94
96
98
00
02
04
06
08
0%
0% 86
88
90
92
94
96
98
00
02
04
06
08
Source: National Federation of Independent Businesses and Wells Fargo Securities, LLC
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Credit Spreads
TED Spread Basis Points
450
450
TED: Sep @ 17 bps
The broad thawing in credit markets has continued at the short end of the yield curve
400
400
350
350
300
300
250
250
200
200
150
150
100
100 50
50 0 2004
0 2005
2006
2007
2008
2009
Source: Federal Reserve Board and Wells Fargo Securities, LLC
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Corporate Spreads
Aaa and Baa Corporate Bond Spreads Over 10-Year Treasury, Basis Points
700
700
Baa Spread: Sep @ 291 bps 600
Spreads have tightened considerably but remain wide historically
Aaa Spread: Sep @ 172 bps
600
500
500
400
400
300
300
200
200
100
100 0
0 -100 1960
-100 1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: Federal Reserve Board and Wells Fargo Securities, LLC
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Outlook Summary Economic Recovery is Here, but Do Not Expect a Rapid Rise Wells Fargo U.S. Economic Outlook
Actual 2005 Real Gross Domestic Product Personal Consumption Business Fixed Investment Equipment and Software
1
2008
2009
2010
2.7 2.9 7.9 7.4 3.2
2.1 2.7 6.2 2.6 2.9
0.4 -0.2 1.6 -2.6 3.8
-2.5 -0.9 -18.4 -18.7 -0.6
2.1 0.7 -1.6 2.6 1.3
16.8 4.39
10.5 4.71
-4.1 4.04
-11.8 2.25
-10.1 3.60
7.8 4.00
2 2
2007
3.1 3.4 6.7 8.5 3.4
Consumer Price Index
Corporate Profits Before Taxes 10-Year Treasury Note
2006
Forecast
Forecast as of: September 9, 2009 1C ompound Annual Growth Rate 2Year-over-Year Percent C hange
Source: Wells Fargo Securities, LLC
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Appendix
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Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Distribution Lists
Recent Special Commentary Date
Monthly Economic Outlook
October-05 October-05
Weekly Economic & Financial
Title Georgia Economic Outlook: October 2009 Comments Before Federal Reserve Advisory Panel
September-24 What's Wrong With the Dollar? September-03 Commercial Real Estate Chartbook: Second Quarter September-02 Clunkernomics: Auto Sales Set to Boost Real GDP
Commentary
Economic Indicators Global Economic Commentary Federal Reserve Commentary Real Estate & Housing Consumer & Retail Chief Economist List To join any of our research distribution lists please visit our website:
Bryson Vitner, Khan & Kamar. Vitner & Khan
Benchmarking Recovery: Rhyming not Repeating Will Debt Restrain Euro-zone Consumer Spending? State & Local Financial Woes Still Building Wobbly Fundamentals for Business Spending Housing Chartbook: August 2009 Healthcare Employment Stays out of the Sick Ward Early Recoveries are Typically “Jobless”
Silvia Bryson Vitner & Khan Silvia & Quinlan Vitner & York Silvia, York & Whelan Silvia & York
July-29 July-21 July-16 July-08 July-01
Recession Probability Drops Again Decision-Makers’ Guide to Stimulus Part Deux Is China the Next Bubble? Macro Clouds, Micro Foundations Pass-Through Effect of Housing Weakness
Silvia & Iqbal Silvia Bryson Silvia Vitner & Whelan
June-30 June-30 June-29 June-25 June-19 June-18 June-11 June-11 June-11 June-10 June-04
New Jersey Outlook - June 2009 Cash-for-Clunkers Boost Likely Unsustainable Breakdown, Adjustment & Rebuilding in Finance Recession Probability Drops Again to 37 Percent Labor Market Evolution: Realities and Romantics What Drives Consumer Delinquency Rates? Florida Economic Outlook - June 2009 Global Chartbook - June 2009 Housing Chartbook - June 2009 Consumers Remain Thrifty Amid Economic Turmoil Past Recessions Suggest Sluggish Road Ahead
Vitner, Khan & Kamar. Vitner & Khan Silvia Silvia & Iqbal Silvia, York & Whelan Vitner & Iqbal Vitner & Kamaruddin Bryson & Quinlan Vitner & York Vitner & York Vitner & Khan
August-31 August-26 August-24 August-18 August-14 August-14 August-13
Special Reports
Authors Vitner & Kamaruddin Silvia
http://www.wachovia.com/economicsemail
| Economics Group
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Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg Global Head of Research & Economics
diane.schumaker@wachovia.com
Mark Vitner
Jay H. Bryson, Ph.D.
Senior Economist
Global Economist
mark.vitner@wachovia.com U.S. Macro Economy Real Estate
John E. Silvia, Ph.D. Chief Economist
jay.bryson@wachovia.com Global Economies Foreign Exchange
john.silvia@wachovia.com
Scott Anderson, Ph.D.
Eugenio Aleman, Ph.D.
Senior Economist
scott.a.anderson@wellsfargo.com
Senior Economist
U.S. Macro Economy
eugenio.j.aleman@wellsfargo.com U.S. Macro Economy
Sam Bullard
Anika Khan
Azhar Iqbal
Adam G. York
Economist
Economist
Econometrician
Economist
sam.bullard@wachovia.com U.S. Macro Economy Financial Services
anika.khan@wachovia.com Real Estate Retail & Automotive
azhar.iqbal@wachovia.com Quantitative MacroEconomic Modeling
adam.york@wachovia.com U.S. Consumer Real Estate
Ed Kashmarek
Tim Quinlan
Kim Whelan
Yasmine Kamaruddin
Economist
Economic Analyst
Economic Analyst
Economic Analyst
ed.kashmarek@wellsfargo.com U.S. Macro Economy
tim.quinlan@wachovia.com Global Economies Business Investment
kim.whelan@wachovia.com U.S. Macro Economy Business Investment
yasmine.kamaruddin@wachovia.com U.S. Macro Economy
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wachovia Bank N.A., Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2009 Wells Fargo Securities, LLC.
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
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