SilviaOct2009

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

| Economics Group

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

| Economics Group

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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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