U.S. GDP Growth. Percent Change, Year Ago 5. Source: International Financial Statistics

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1 U.S. GDP Growth Percent Change, Year Ago Source: International Financial Statistics

2 A Brief Period of U.S. Budget Surplus % of GDP 4 2 Surplus Deficit Source: U.S. Department of the Treasury, Bureau of the Public Debt

3 Where the U.S. Budget Money Goes Spending, 2008 Budget, % of Total Total = $2.9 Trillion Medicare and Medicaid 20% Other nondiscretionary 11% Defense 17% Other security 6% Social security 21% Non-security discretionary 16% Net interest 9% Source: Office of Management and Budget

4 Increasing Int. Expense on Public Debt $406 Billion in 2006 U.S. Billions % 450 Average interest rate on public debt (R) Interest expense on public debt as % of GDP (R) Interest expenses on total government debt Source: U.S. Department of the Treasury, Bureau of the Public Debt

5 Declining U.S. Dollar Role Currency Denomination of International Debt Outstanding 1999 US$ 4,999 Billions 2006Q3 US$ 16,267 Billions Japanese yen 10% Pound sterling 8% Other 6% U.S. dollar 47% Pound sterling 8% Japanese yen 3% Other 5% U.S. dollar 37% Euro 29% Euro 47%

6 Decline of the Dollar Yen/USD Euro/USD Yen (L) Euro (R) Source: Bloomberg

7 Lower Dollar, Higher Oil Price January 2000 = 100 January 2000 = Crude oil (L) Trade-weighted dollar (R) Source: Bloomberg, International Financial Statistics 80

8 Rising Household Spending on Debt Services Percent of Disposable Income Ratio of mortgage and consumer debt payments to disposable personal income 12.0 Source: Economy.com

9 Corporate Bond Credit Spread Yield to Maturity Percent ML Corp BBB 1-3 Yr (L) Percent ML Corp AAA 1-3 Yr (L) Spread (R) Source: Bloomberg

10 Step by Step 17 Fed Fund Rate Hikes Since 2004 Percent Source: Federal Reserve

11 Mortgage Rates United States Percent Year Fixed 15-Year Fixed 1-Year ARM Sources: Freddie Mac, Economy.com

12 Quickly Flattening Treasury Yield Curve Percent Dec. 29, 2006 Dec. 30, Dec. 31, M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y Source: Federal Reserve

13 Converging Yield Percent year Treasury bonds 2-year Treasury bonds year Treasury bonds 3-month Treasury bills Source: Federal Reserve

14 U.S. Homes Price and Availability 3.7 millions homes and condos for sale in January 2007 Millions US$ Thousands Average sales price of existing homes (R) Source: Economy.com Number of homes available for sale (L)

15 Homeownership and Adjustable Mortgage % of Total U.S. Households % of Total Mortgage Conventional Adjustable Mortgage Share of Total Mortgage Homeownership Rate Source: Federal Housing Finance Board and Census

16 Mortgage Rate and Mortgages Outstanding US$ Billions years fixed mortgage rate $13.3 trillion total mortgages outstanding Percent Source: Economy.com

17 U.S. Subprime Mortgages Composition of Total Mortgages Originated US$ Billions 1,200 "Alt A" 1,000 Subprime % 32% 34% % of total 10% Sources: Inside Mortgage Finance and Milken Institute staff estimates

18 Subprime Problems Drive Down Financial Stock Prices The Dow Closed Down 243 Points on March 14, 2007 Source: Wall Street Journal Stock price change on March 14 Points Contribution to the Dow J.P. Morgan Chase American Express Citigroup Altria McDonald's Microsoft GM Dupont Wal-Mart Home Depot Merck AIG Hewlett-Packard Alcoa Boeing

19 Riskier in Mortgage? By Type of Mortgage Loan Percent Negative Amortization Interest Only (zero) Amortization Normal (positive) Amortization

20 U.S. Energy Supply and Consumption Quadrillion BTU, 2005

21 U.S. Oil Imports Annual Percent Change, Year Ago Venezuela Cyprus Botswana Morocco Russia Peru Vietnam China Yugoslavia Croatia Source: Energy Information Administration

22 Foreign Holdings of U.S. Securities $15.5 Trillion, June 2006 Russia 1% S. Korea 2% Taiwan 2% HK 1% Australia 1% Others 11% Euro Area 26% Singapore 2% Middle East 3% Switzerland 3% Canada 5% U.K. 8% China 9% Japan 15% Offshore Financial Centers 11% Source: U.S. Treasury

23 Most Costly Disaster in US History Drastically reduced tax revenue base, unemployment, displacement, bankruptcy Interrupted oil production, importation, and refining in the Gulf area had a major effect on fuel prices Loss of approximately $500,000 in tax revenue for each day riverboat casinos were closed Loss of timber products estimated at $1.3 billion; USDA declared 31 agricultural disaster areas TOTAL ECONOMIC IMPACT ~ APPROX. $200B USD

24 Insurance Industry Loss Estimate September 2005 Loss Component First Landfall in Florida Offshore Energy Wind & Surge, Second Landfall New Orleans Flooding Additional Sources of Loss Total Gross Industry Loss $1-2 Billion $2-5 Billion $20-25 Billion $15 25 Billion $2 3 Billion $40 - $60 Billion Claims Filed 1,752

25 Government Aid After Disasters 2005 Billion USD Billions USD Within 3 weeks of Katrina s landfall, the federal govn t authorized $75B in aid -- more than all the federal aid for 9/11, 2004 s hurricanes and Hurricane Andrew combined Hurricane Katrina (2005) Sept. 11 Attacks (2001) Hurricane Andrew (1992) Hurricanes Charley, Frances, Ivan & Jeanne (2004)

26 Accelerate or Decelerate? IMF: World Economic Outlook Global GDP Forecast Percent % Confidence interval 70% Confidence interval % Confidence interval Source: International Monetary Fund

27 Global Risk Factors Impact on GDP Percentage Points of Global GDP Growth U.S. housing sector Domestic demand in Europe Emerging market growth Inflation risks Oil supply Disorderly unwinding of global imbalances Financial stability -5.2% 2.5% 3.1% -3.8% -3.9% -2.6% -3.9% Source: International Monetary Fund

28 Major Contributors to World GDP Growth Percent Percent U.S U.S Japan 23.9 China 9.9 Germany 9.6 U.K. 6.6 France 5.0 Italy 3.9 Italy 3.8 Canada 3.7 U.K. 3.4 Russia 3.6 Brazil 3.1 France 3.6 Korea 2.6 Spain 3.4 China 2.4 Mexico 2.9 Spain 2.1 India 2.7 Others 18.0 Others 27.8 Source: World Economic Outlook

29 Is Inflation Still A Threat? Percent E E Africa The Middle East Latin America and the Caribbean Developing Asia Developed Countries Source: International Monetary Fund

30 GDP Growth: Is Europe Left Behind? Percent World Euro area Newly Industrialized Asia United States Est Est. Source: World Economic Outlook

31 Europe s Energy Reliance on Former Soviet Union Countries Percent of Total Oil Imports, 2005 South & Central America 2% Asia 1% Unidentified* 5% North America 3% Sub-Saharan Africa 5% Former Soviet Union 45% North Africa 15% Source: BP Middle East 24% * Includes changes in the quantity of oil in transit, movements not otherwise shown, unidentified military use etc.

32 World s Equity Market Share December 1950 vs. December 2006 Market Capitalization 1950 Market Capitalization 2006 Europe 26% Other 6% Other 23% U.S. 39% Japan 9% U.S. 59% Europe 26% Japan 9% Source: World Exchanges Federation

33 World s Equity Market Share December 1988 vs. December 2006 Market Capitalization 1988 Market Capitalization 2006 Europe 26% Other 14% U.S. 29% Other 23% U.S. 39% Japan Source: World Exchanges Federation Europe 26% Japan 9%

34 World Equity Market Performance Top 10 USD Adjusted Returns, 2006 Percent Change, Year Ago Source: Bloomberg Venezuela Cyprus Botswana Morocco Russia Peru Vietnam China Yugoslavia Croatia

35 Robust Global Equity Markets Despite $70 Crude Oil Jan.2003 = DJIA FTSE Nikkei Emerging Markets Crude Oil US$ per Barrel Source: Bloomberg, Datastream

36 Countries That Export Capital 2006 Other countries 22.2% Venezuela 2.1% China 13.5% Algeria 2.3% Japan 12.2% U.A.E. 2.7% Source: IMF Singapore 2.8% Kuwait 3.6% Netherlands 3.7% Switzerland 37% Norway Saudi Arabia Russia 8.8% Germany 8.8%

37 Countries That Import Capital 2006 Other countries 15.2% Italy 1.9% Turkey 1.9% United States 63.7% France 2.8% Australia 3.0% United Kingdom 4.1% Spain 7.4% Source: IMF

38 Net Direct Investment Developing Countries, US$ Billions 120 Africa Middle East 100 Developing Asia Western Hemisphere Source: World Economic Outlook

39 Regional Share of World Trade US$ 21 Trillion in 2005 West Hemisphere 5% Middle East 4% Africa 2% Europe 7% Asia 22% Industrial countries 60% Source: Direction of Trade Statistics

40 Composition of China s Financial Market China Total = $5.3 trillion United States Total = $53.7 trillion Bonds 17% Equity 15% Equity 32% Bank Assets 23% Bank Assets 68% Bonds 45% Sources: International Financial Statistics, Bank for International Settlements, and Global Stock Market Factbook

41 Fixed Investments Contribute More than 40% to China s GDP Growth Percent of GDP Growth Sources: International Financial Statistics and Bureau of Statistics (China)

42 Accumulating Appreciation Pressure on Renminbi Index, 2000=100 RMB/USD 200 Renminbi Pressure Indicator Renminbi Exchange Rate Source: International Financial Statistics and Milken Institute

43 100 Most Underfunded S&P 500 Defined-Benefit Plans US$ Billions $ $141 -$114 -$137 -$138 -$ Source: Bloomberg

44 Cash Flows from G-10 Government Bonds and Projected Pension Payments Percent Payments from G-10 Government Bonds Outstanding Projected Payments Out of G-10 Pension Fund Liabilities Cash Flows Assumption: 75 percent of total pension fund assets are allocated to bonds Source: OECD, Global Pension Statistics, Insurance Statistics and other administrative sources.

45 $100 Invested in These Asset Classes in 2000 Would Give You: $303 $230 $201 $190 $189 $179 $171 $102 Energy Gold Mid-Cap U.S. Emerging Markets Small-Cap U.S. Hedge Funds Commodities Large-Cap U.S. Stocks Stocks Stocks Source: Bloomberg

46 U.S. Stock Market Plummeted on February 27, 2007: A Market Correction Made in China Dow Jones Index 12,450 12,400 The Dow dropped 241 points in 3 minutes 12,350 12,300 12,250 12,200 12,150 12,100 12,050 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 Source: Bloomberg

47 Higher Degree of Integration Between NYSE and Shanghai Stock Exchange Index, Jan = Correlation = January 2006 March 2007 Dow Jones Industrial Average (L) Shanghai Stock Exchange (R) Composite Source: Bloomberg 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 0

48 21 st Century Global Equity Market Convergence Correlation with Dow, 12-Month Rolling Returns Source: Bloomberg S&P 500 COMPOSITE NASDAQ COMPOSITE FTSE 100 EURONEXT 100 DAX 30 MSCI WORLD

49 Converging Yield to Maturity Percent Emerging Markets Sovereign Plus Index U.S. Government Index Source: Merrill Lynch

50 Convergence in Sovereign Bond Yields, Source: Michael A. Clemens and Jeffrey G. Williamson (2004)

51 Narrowing Spread Between Hedge Fund Return and One-Year Treasury Yield Percent Spread between average hedge funds return and 1-year Treasury yield Sources: Hedgefund.net, Bloomberg and MI staff

52 Historical Bond Default Rates US$ Billions Percent 100 Par Value Defaults (L) Default Rates (R) Sources: Altman

53 Increasing International Financial Convergence Sum of Foreign Assets and Liabilities as a Ratio to GDP Percent Emerging Markets China India (e) Sources: Lane and Schmukler and Milken Institute staff estimates

54 Sources of Funds into Emerging Markets Percent Foreign Direct Investment Source: International Monetary Fund Equity Debt

55 Global Futures Market Notional Amounts US$ Trillions Equity index (R) Interest rate (L) Currency (R) Source: Bank for International Settlements 0

56 Global Options Market Notional Amounts US$ Billions Currency (R) Interest rate (R) Source: Bank for International Settlements Equity index (L)

57 Global Credit Derivatives Market US$ Trillions (est.) Source: British Bankers Association

58 Global Derivative Markets: Rating of Underlying Assets 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% (Est.) Below B BB B A BBB AAA AA Source: British Bankers Association

59 Banking Crises Since Late 1970s 168 Crises in 138 Countries 117 Systemic in 93 Countries 51 Nonsystemic in 45 Countries Source:Caprio, Gerard and Daniela Klingebiel (2003) Information not Available

60 Cost of Resolving Bank Problems Norway ( ) Spain ( ) Paraguay (1995-ongoing) Colombia ( ) Sri Lanka ( ) Malaysia ( ) Sweden ( ) Indonesia ( ) Poland ( ) United States ( ) Ghana ( ) Turkey ( ) Thailand ( ) Australia ( ) Turkey (1994) New Zealand ( ) France ( ) Argentina (1995) Egypt ( ) Philippines (1998-ongoing) Thailand (1997-ongoing) Uruguay ( ) South Korea (1997-ongoing) Côte d'ivoire ( ) Venezuela ( ) Japan (1992-ongoing) Mexico (1994-ongoing) Malaysia (1997-ongoing) Slovenia ( ) Brazil ( ) Philippines ( ) Bulgaria ( ) Ecuador (1996-ongoing) Czech Republic (1991-present) Finland ( ) Hungary ( ) Senegal ( ) United States 3% S. Korea 27% Chile ( ) Thailand 33% Argentina ( ) Indonesia (1997-ongoing) Indonesia 50% Percent of GDP

61 Share of World Oil Production 2005 Rest of World 31% Total: 81.1 million Barrels per Day Saudi Arabia 14% Russia 12% Nigeria 3% Kuwait 3% U.A.E. 3% Source: BP Norway Venezuela 4% 4% Canada 4% China 4% Mexico 5% United States 8% Iran 5%

62 Share of World Oil Consumption 2005 Rest of World 45% Total: 82.5 million Barrels per Day United States 25% China 8% Source: BP Canada 3% South Korea 3% India 3% Germany 3% Russia 3% Japan 7%

63 Oil Reserves Concentrated in Unstable Regions Other 3% Russia 5% Canada 14% United States 2% Venezuela 6% Africa 10% Middle East 60% Sources: Energy Information Administration

64 Global Demand for Oil Exceeds Refinery Capacity 90 Thousand Barrels per Day Source: EIA Oil Demand Refinery Capacity

65 Rising Global Prices of Oil, Gold and Food January 2002 = Crude Oil Gold Food Source: Bloomberg, Datastream

66 World Gas Prices November 2006 $ Per Gallon Iran S. Arabia U.S. Mexico India Brazil Germany U.K. Venezuela Libya Nigeria China S Africa Japan France Italy Source:GTZ

67 The True Cost of a Gallon of Gas USD Per Barrel Average U.S. Pump Price Hidden U.S. Defense Costs World Oil Persian Gulf Oil Source: National Council and GasBuddy.com

68 Energy Prices and Taxes US Dollars Per Gallon, 2006 Venezeula Indonesia Saudi Arabia Russia China Guatemala Argentina Mexico Jamaica Ghana United States South Africa Canada Brazil Ecuador India Australia Lithuania Finland Japan Poland Korea France Italy Germany United Kingdom Norway Turkey Price Before Tax Tax Source: World Economic Outlook,

69 China and India s Energy Efficiency Energy Consumed per $ 1,000 GDP Tonnes Oil Equivalent Per US$ 1,000 GDP China India United States Sources: BP, World Economic Outlook

70 Volatile Oil and Natural Gas Prices US dollars per barrel $80 WTI Crude Oil Price Natural Gas Price $70 $60 $50 $40 $30 $20 US dollars per Thousand Cubic $12 $10 $8 $6 $4 $2 $ $0 Sources: Energy Information Administration

71 Areas Reporting Avian Influenza in Poultry and Birds 2003 April 10, 2007 Source: WHO

72 Malaria Distribution Where Malaria is Endemic Source: Malaria-vaccines.org

73 Tuberculosis Distribution 100 or More Cases Per 100,000 People Source: University of South Carolina

74 HIV Distribution Adult HIV Prevalence of 5% or More Source: WHO

75 Hepatitis B Distribution Prevalence of 7% or More Source: CIA

76 Water Shortages High Vulnerability to Water Scarcity Source: World Resources Institute

77 World Hunger 20% or More Undernourished Source: World Resources Institute

78 Much Of Africa Remains Poor World Bank Income Groups

79 Aid Outstrips Private Investment

80 Dependents - Developed Countries Forecast Dependency Ratio Percent of Working Age (15-64) Aged 0-14 Aged Source: United Nations

81 Dependents - Developing Countries Forecast Dependency Ratio Percent of Working Age (15-64) Aged 0-14 Aged Source: United Nations

82 India Laos Viet Nam China Peru Venezuela Philippines Colombia Pakistan Brazil Mexico ndonesia Chile Proportion of Population under $1 a Day Source: World Bank, Asian Development Bank Korea Malaysia Thailand

83 Catastrophic Risk on the Rise Global Number of Catastrophic Events, Natural Catastrophes Man-Made Disasters Sources: Allstate Insurance Company

84 Economic Impact of Catastrophes US$ Billions 250 Insured Property Loss 200 Uninsured Loss and Other Economic Loss $222.0 (Est.) $52.4 (Est.) Sources: Allstate Insurance Company $41.6 $56.0 $15.9 $27.0 $25.7 $29.0 $169.6 Earthquake 1 Hurricanes 2 Hurricanes 3 Northridge, California (1994) Charley, Frances, Ivan and Jeanne (2004) Katrina, Wilma and Rita (2005)

85 Larger Impact on Emerging Market Economies 38% Hurricane Flood Earthquake 14% 12% 8% 7% 3% 3% 2% 2% Honduras Dominican Republic Ecuador Iran Algeria Poland India Mexico Argentina Sources: Allstate Insurance Company

86 Top 10 Military Spending Countries 2006 Military Spending United States United Kingdom France Germany Japan China Russia Italy Saudi Arabia India Source: The World Factbook, CIA Billion $

87 Capital Access Index 2006 Gauging Entrepreneurial Access to Capital Max = Hong Kong Source: Milken Institute United Kingdom U.S. India China Brazil Russia

88 Capital Access Index, ,000 60,000 GDP per Capita, US$ 50,000 40,000 30,000 20,000 10,000 y = 6,821x - 21,731 R 2 = , Sources: World Economic Outlook and Milken Institute Less access More access C it l A I d

89 Improved Capital Access Can Add Billions to Emerging Economies Mexico Russia Argentina Pakistan India Forgone GDP Growth % Forgone GDP US$ Billions

90 Cost of Opacity, Opacity Index Premium/Discount 6.63% China 9.45% Nigeria 10% 8% Opacity Index % UK -0.48% HK 0.00% USA 5.76% India 6.00% Russia 6% 4% 2% 0% Premuim/Discount 10-2% 0-4% Source: Milken Institute, 2006

91 Terrorist Attacks Are Becoming More Frequent and More Intensive Number of Incidents Incidents Fatalities and Injuries Oct. 23, 1983, Lebanon Apr. 1988, Pakistan Military June 25, 1985, Canada Dec. 21, 1988, U.K. Airline Feb. 26, 1993, U.S. Business Mar. 12, 1993, India Jan. 11, 1998, Algeria Business Aug. 7, 1998, Kenya Diplom atic May 20, 1995, Japan Transportation Jan. 31, 1996, Sri Lanka Business Feb. 21, 2004, Uganda, Private Aug. 11, 2001, Angola Transportation Sept. 11, 2001, U.S. Business Mar. 11, 2004, Spain, Transportation Oct. 22, 2002, Russia Private Sept. 1, 2004, Russia Educational Number of Fatalities and Injuries Sources: MIPT and Milken Institute staff calculation

92 Corporate Crisis by Category Percent of Total Crisis Sources: Institute for Crisis Management, 2007 White Collar Crime Mismanagement Class Action Law Suits Labor Disputes Catastrophes Casualty Accidents Defects/Recalls Consumer Activism Discrimination Financial Damages Workplace Violence Environment Executive Dismissal Sexual Harassment Hostile Takeover Whistle Blowers