the world economic & financial system: risks & prospects

1AIG

The World Economic & Financial The World Economic & Financial System: Risks & ProspectsSystem: Risks & Prospects

Prof. Jacob A. Frenkel Prof. Jacob A. Frenkel Vice Chairman AIG, Chairman G30 Vice Chairman AIG, Chairman G30

Former Governor, Bank of IsraelFormer Governor, Bank of Israel

01/28/20092AIG 2

2006 2007 20086,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

800

1,000

1,200

1,400

1,600

S&P 500

DowJones

(close - price) (close - price)

Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left)

Global Equity MarketsGlobal Equity Markets

Source: Bloomberg, Market Data, Last Update Jan 27 2009

01/28/20093AIG 3

Global Equity MarketsGlobal Equity Markets

Source: Bloomberg, Market Data, Last Update Jan 27 2009Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

40

60

80

100

120

140

160

180

Asia

Europe

LatinAmerica

(US$ returns, 12/31/2008 = 100)

EM Asia EM Europe EM Latin America

01/28/20094AIG

FHA/VA, 5.6%

Prime, 78.8%

Alt-A, 2.2%Subprime, 7.9%

U.S. Mortgage Market: 2003-2005U.S. Mortgage Market: 2003-2005

Source: Inside Mortgage Finance, Last update February 8, 2008

Prime, 58.9%

Subprime,

18.2%

FHA/VA, 4.5%

Alt-A, 6.3%

Prime, 53.2%

Subprime, 20.0%

Alt-A, 12.2%FHA/VA,

2.9%

2003 2004 2005

01/28/20095AIG

U.S. Mortgage Market: 2006-2007U.S. Mortgage Market: 2006-2007

Source: Inside Mortgage Finance, Last update February 8, 2008

FHA/VA, 2.7%Alt-A, 13.4%

Subprime, 20.1%

Prime, 49.3% Prime,

62.1%

FHA/VA, 4.2%

Alt-A, 11.3%

Subprime, 7.9%

2006 2007

01/28/20096AIG 6

Changes in U.S. Home PricesChanges in U.S. Home Prices

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-10

-5

0

5

10

15(% change from a year ago)

Dec 2008 -15.3%

Source: Nat'l Association of Realtors, quarterly averages, last observation 12/ 2008

01/28/20097AIG 7

U.S. Household Real Estate WealthU.S. Household Real Estate Wealth

2000 2002 2004 2006 200875

80

85

90

95

100

105

110

115

120

125

130

135

140 (percent)

Source: Federal Reserve, last observation Q3/ 2008

Q3 2008 79.84%

01/28/20098AIG 8

U.S. New Home Sales and Housing StartsU.S. New Home Sales and Housing Starts

1990 1992 1994 1996 1998 2000 2002 2004 2006 20080.2

0.4

0.6

0.8

1

1.2

0.8

1.2

1.6

2

2.4(Tsd. units) (Tsd. units)

Housing Starts (Right) New Home Sales (Left)

New Home Sales: .41M

Housing Starts: .65M

Source: US Dpt. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 11/ 2008 (Sales), 12/ 2008 (Starts)

01/28/20099AIG 9

Credit Market Losses: All Financials (bill. Credit Market Losses: All Financials (bill. Usd)Usd)

Source: Bloomberg, Quarterly, Last update Jan 9, 2009

Credit Turmoil Losses Since Beginning of 2007

Europe, 291.9

Asia, 31.1

Americas, 729.1

EuropeAsiaAmericas

01/28/200910AIG 10

Capital Raised: All Financials (bill. Usd)Capital Raised: All Financials (bill. Usd)

Source: Bloomberg, Quarterly, Last update Jan 9, 2009

Capital Raised Since Beginning of 2007

Europe, 326.9

Asia, 56.4

Americas, 572.1

EuropeAsiaAmericas

01/28/200911AIG

Size of the Derivatives MarketsSize of the Derivatives Markets(Billions Usd, Total Contracts, Gross Market Value)

0

5000

10000

15000

20000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

June 2008

20.3 Trill.

June 1998

2.5 Trill.

Source: BIS, 6 month levels, Last Observation Jun 2008

01/28/200912AIG 12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

6 (% change year ago)

Global GDP Growth (%)Global GDP Growth (%)

Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)

01/28/200913AIG 13

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-4

-2

0

2

4

6

8 (% from a year ago)

US Eurozone Japan Asian NIC

Real GDP Growth (%) Industrial CountriesReal GDP Growth (%) Industrial Countries

Asia NICs 3.9%

Japan -2.6%

Eurozone -2.0%

US -1.6%

Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)

01/28/200914AIG

Real GDP Growth (%) Developing CountriesReal GDP Growth (%) Developing Countries

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-2

0

2

4

6

8

10

(% from a year ago)

Russia Developing Asia Africa Central & Eastern Europe Latin America

Central & East. Europe -0.4%

Developing Asia 5.5%

Russia -0.7%

Africa 3.4%

Latin America 1.1%

Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)

01/28/200915AIG 15

Real GDP Growth (%) World EconomyReal GDP Growth (%) World Economy

Country 2003 2006 2007 2008 2009

World 3.6 5.1 5.2 3.4 0.5

Industrial Countries 1.9 3.0 2.7 1.0 -2.0Developing Countries 6.3 7.9 8.3 6.3 3.3

Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)

01/28/200916AIG

Global Growth ContributionsGlobal Growth Contributions

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

30

40

50

60

70

Industrial

Developing

(% contribution to GDP growth, based on PPP)

Industrial World Developing World

Source: IMF, av. annual growth rates, last update October 9 2008

01/28/200917AIG

World Trade Volume (annual change)World Trade Volume (annual change)

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010-4

-2

0

2

4

6

8

10

12

14 (annual percentage change)

Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)

01/28/200918AIG 18

Source: Conference Board, BEA, Qrtly averages; last observation Consumer Spending (11/08), consumer confidence (1/2009)

U.S. Consumer Confidence and SpendingU.S. Consumer Confidence and Spending

1992 1994 1996 1998 2000 2002 2004 2006 2008-2

-1

0

1

2

3

4

5

6

20

40

60

80

100

120

140

160

ConsumerConfidence

(Right)

RealConsumerSpending

(left)

(% from year ago) (Index)

01/28/200919AIG 19

Oil Price per BarrelOil Price per Barrel

2000 2001 2002 2003 2004 2005 2006 2007 20080

20

40

60

80

100

120

140

160Q2 2008

$140

2006 av.$65

2005 av.$59

2001 av.$24

2007 av.$95

2004 av.$39

Source: Reuters, Gold, USD/ troy oz, Last observation Jan 28 2009

28 Jan '09 $41.6

01/28/200920AIG

Coordinated Global Rate CutsCoordinated Global Rate Cuts

2005 2006 2007 2008

0

1

2

3

4

5

6 (%)

Canada United Kingdom United States Euro Zone Japan

UK 1.0%

Eurozone 2.0%

Canada 1.5%

US 0.25%

Japan 0.1%

Source: Bloomberg, Market Data, Last Update Jan 27 2009

01/28/200921AIG

U.S. Government Deficit as % of GDP U.S. Government Deficit as % of GDP

Source: Federal Reserve, US Department of Commerce, last observation Q3/2008

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-6

-5

-4

-3

-2

-1

0

1

2

3

4 (% of GDP)

01/28/200922AIG 22

Current Account of Balance of PaymentsCurrent Account of Balance of Payments

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-800

-600

-400

-200

0

200

400

600

800 ($B) Asia$682B

ME Oil Exp. plus Russia

$434B

Eurozone -$54B

U.S. - $485B

Asia & Oil Exporters SaveAsia & Oil Exporters Save

Europe BalancesEurope Balances

US SpendsUS Spends

Source: IMF, av. annual growth rates, last update October 9 2008, WEO (2008 estimate, 2009 forecast)

01/28/200923AIG 23

$1,280

$153

$321

$39$2

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

China Japan Russia Taiwan South Korea

($B)

$200$281

$441

$977

$1,890

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

China Japan Russia Taiwan South Korea

($B)

StockStock FlowFlow(2005 – 2007)(2005 – 2007)

Accumulation of Foreign Exchange Reserves ($B)Accumulation of Foreign Exchange Reserves ($B)

Source: Nat'l Statistical Institutes 11/ 2008 (China 12/ 2008), Foreign-Exchange Reserves ex. Gold

November 2008

01/28/200924AIG 24

% of income

56.2

35.1

30.0 28.6

21.9

10.0

0

10

20

30

40

50

60

CHINA INDIA KOREA, REP.OF

JAPAN EURO AREA(AGG.)

UNITEDSTATES

Source: EIU estimates, annual average rates, Last update 3/2008

National Savings Rate Comparison National Savings Rate Comparison Gross Domestic Savings: 2007 (% of GDP)Gross Domestic Savings: 2007 (% of GDP)

01/28/200925AIG 25

1992 1994 1996 1998 2000 2002 2004 2006 2008 20100

20

40

60

80

100

120

140 (US$ Bil.)

India China

Export Strategy: China and IndiaExport Strategy: China and India

Source: yearly avg., National Bureau of Statistics, Ministry of Commerce and Industry, (01/ 2009)

India $11.5B

China $111.2B