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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 1: GDP Growth Absolute growth

Nominal GDP 14

12 A b s 10 o l u 8 t e G r o w t h

6

4

1990 to 2007 GDP is 2.4 times bigger

2

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: BEA

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 1: GDP and Mortgage Debt Absolute growth

US GDP and Mortage Debt 1990 to 2007 14

12 A b 10 s o l u 8 t e G r o w t h

6

4

HH Mortgage debt 3.8 times bigger

2

1990 to 2007 GDP is 2.4 times bigger

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources: OFHEO annual reports, CFC 10-K

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 1: GDP, total Mortgage, and FNM & FRE Absolute growth

GDP, HH Mortgages, FNM + FRE mortage holdings 1990 to2007

14

12 A b 10 s o l u 8 t e G r o w t h

1990 to 2007: combined FNM and FRE balance sheet is 11 times bigger

Accounting fraud puts limits on FNM and FRE

6

4

HH Mortgage debt

2

1990 to 2007 GDP is 2.4 times bigger

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources: OFHEO annual reports, CFC 10-K

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 1: GDP, total Mortgage, FNM & FRE, and CFC Absolute growth

Fannie Mae and Freddie Mac...then Countrywide...take US over a cliff 15

13

Combined: FNM+FRE+CFC A 11 b s o l 9 u t e 7 G r o w t h

1990 to 2007: combined FNM and FRE balance sheet is 11 times bigger

Accounting fraud puts limits on FNM and FRE

5

HH Mortgage debt 3

1990 to 2007 GDP is 2.4 times bigger 1

-1

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources: OFHEO annual reports, CFC 10-K

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 1: Incentives Matter, a Lot Absolute growth 16

Countrywide's balance sheet doubles and more, filling in as "extensive financial fraud" puts limits on FNM and FRE asset growth.

14

A 12 b s o l 10 u t e 8 G r o w t h

Combined: FNM+FRE+CFC 1990 to 2007: combined FNM and FRE balance sheet is 11 times bigger

Accounting fraud puts limits on FNM and FRE

Explosive growth of government sponsored entities (GSEs); FNM chairman, Franklin Raines, makes over $90 million from 1998 to 2003

6

4

HH Mortgage debt

2

1990 to 2007 GDP is 2.4 times bigger

0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources: OFHEO annual reports, CFC 10-K, BEA

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: Government Sponsored Lunacy Single-Family Mortgage Originations by market segment, 2001-2007

Source: OFHEO Report 2008 to Congress 7

Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: How can this be?  FNM & FRE Guarantee sub-prime mortgages  Banks originate; then create, sell, or keep  Investors buy ABS; eventually the smart ones short them Fannie Mae 2001 Annual Report:

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: Lunacy in Detail.

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: Lemmings (banks) following FNM & FRE 2005 Sub-Prime "League Table" 2005 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Subprime Lender Ameriquest Mortgage New Century Countrywide Financial Wells Fargo Option One Mortgage Washington Mutual Fremont Investment & Loan First Franklin Financial GMAC-RFC HSBC Mortgage Services WMC Mortgage CitiFinancial Decision One Accredited Home Lenders BNC Mortgage Aegis Mortgage ECC Capital Finance America American General Finance Chase Home Finance NovaStar Financial Equifirst Ownit Mortgage Solutions IndyMac Bank ResMae Mortgage

Volume ($billions) $79.7 $52.7 $44.6 $42.3 $40.1 $36.1 $34.9 $29.3 $25.3 $25.1 $24.0 $20.5 $16.9 $16.6 $15.6 $14.7 $14.0 $10.3 $9.9 $9.7 $9.3 $8.8 $8.3 $7.4 $6.9

Mkt Share 12.0% 7.9% 6.7% 6.4% 6.0% 5.4% 5.2% 4.4% 3.8% 3.8% 3.6% 3.1% 2.5% 2.5% 2.3% 2.2% 2.1% 1.5% 1.5% 1.5% 1.4% 1.3% 1.2% 1.1% 1.0%

$603

90.6%

$475 $665

100.0%

Total Top 25 2005 Total Top 25 2004 Total 2005 All Lending Source: Inside B&C Lending, 2/17/06

2004 Rank 1 2 3 9 6 4 7 5 10 11 12 8 13 14 16 15 18 20 25 17 19 21 26 27 29

2004 YoY Mkt Shr Gain (Loss) 15.6% -4% 8.0% 25% 7.4% 13% 4.2% 89% 4.9% 54% 5.7% 20% 4.5% 46% 5.5% 1% 3.8% 24% 3.4% 38% 2.5% 81% 4.4% -13% 2.4% 34% 2.3% 33% 2.1% 40% 2.2% 23% 1.7% 54% 1.6% 24% 0.9% 115% 1.8% 1% 1.6% 10% 1.2% 43% 0.7% 126% 0.7% 103% 0.5% 156%

2005 Mortgage Originations (billions) Total: $2,774 Sub-prime: $605 (22%)

89.7% 100.0%

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: Countrywide, over the cliff. Into the void

Countrywide Financial Assets 30 25 20 15

Balance sheet grows more than 25 times

10 5 0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Source: Countrywide 10K, 2007

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: And, who funded Countrywide Bank? Inconceivable! Countrywide Bank Year end 2006 Assets (millions) Mortgages Other

79,085 1,678

Total

80,763

Liabilities (millions) Deposits FHLB* Other Equity Total

49,855 21,496 3,907 5,505 80,763

62% 27% 5% 7%

* The Federal Home Loan Bank of Atlanta source: Countrywide Financial 10K report, 2006 12

Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 2: The beginning of the End‌2007 August 8, 2007

German Fund Stops Payouts, Citing Mortgage Market Unease By BLOOMBERG NEWS

WestLB Mellon Asset Management suspended redemptions of an asset-backed securities fund yesterday amid investor concern about the problems in the subprime mortgage market in the United States.

WSJ Lenders Broaden Clampdown on Risky Mortgages Tightening Standards Could Worsen Slump In the Housing Market By JAMES R. HAGERTY and RUTH SIMON August 3, 2007; Page A3

Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records. This worsening credit crunch threatens to put further pressure on the housing market, where prices are flat to declining in much of the country

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 3: In search of the villains…  The banks: BSC, LEH, CFC, JPM, …?  The bankers: Cayne, Fuld, Mozilo, Diamond, …?  The rating agencies: S&P, Moody’s, Fitch, …?  Congress: Dodd, Frank, et al…?  We the people? We voted for them. They wrote the law.

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Part 3: Evidence. Fannie Mae 2001 annual report, The American Dream, page 47

Source: Wall Street Journal 15

Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Conclusion

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Postscript Never attribute to malice that which is adequately explained by stupidity. (Hanlon’s razor)

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Stephen Sexauer Allianz Global Investors (AllianzGI) (2003–2012) Mr. Sexauer is a Managing Director and Chief Investment Officer for Multi-Asset US at Allianz Global Investor US (previously the Chief Investment Officer of Allianz Global Investors Solutions LLC, which merged into Allianz Global Investors U.S. in January 2013. Prior to Allianz Global Investors US, Mr. Sexauer was a portfolio manager at Morgan Stanley Investment Management from July 1989-March 2002. Mr. Sexauer worked at Salomon Brothers from November 1986-June 1989. Mr. Sexauer previously worked in Economic Consulting at Merrill Lynch Economics and at Wharton Econometrics. Mr. Sexauer holds an MBA from the University of Chicago with concentrations in economics and statistics and a BS from the University of Illinois in economics.

Economic data in this presentation are derived from internal research, publicly available statistics published by Bloomberg, the US Federal Reserve, OFHEO, the US Department of Commerce, and the International Monetary Fund. The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy, or investment product, nor an offer or solicitation for the purchase or sale of any financial instrument. This material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation. Past performance is not indicative of future results. The information presented in this presentation has been developed internally and/or obtained from sources which AllianzGI US believes to be reliable; however, AllianzGI US does not guarantee the accuracy, adequacy or completeness of such information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Appendix Countrywide Financial Company 2006 10K Page 10

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Stephen Sexauer Global Interdependence Center Central Banking Series The Evolving Landscape Hamilton Bermuda, October 2013


Sexauer, steve