Commercial Consumerism Jeffrey Gundlach Chief Executive Officer Chief Investment Officer June 23, 2010
Domestic Credit Market Debt as % of Gross Domestic Product 1929-2009 400% 350% Year 1 FDR Year 1 BHO Presidency 2009 353% 300% 250% 200% 150% 1933 299% Year 7 HST Presidency 1951 130% Year 1 RWR Presidency 1981 161% Year 1 GHWB Presidency 1989 229% Year 1 GWB Presidency 2001 276% 100% 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 1 Source: Morgan Stanley, Federal Reserve, Bureau of Economic Analysis
Government Promises-To-Pay Publicly Held Treasury Debt & Accrued Interest $80.0 Current Liabilities and Unfunded Promises to Pay $70.0 $60.0 $50.0 $40.0 $62.3 $30.0 $56.4 $50.1 $52.8 $43.3 $46.4 $20.0 $26.5 $30.1 $10.0 $3.6 $3.9 $4.3 $4.6 $4.9 $5.1 $5.8 $7.9 $0.0 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 Source: U.S. Treasury, Peter G. Peterson Foundation 2
U.S. Publicly Held Debt as Percentage of GDP 800% 700% OMB Projection through 2083, absent policy changes 600% 500% % of GDP 400% 300% 200% 100% 0% 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 Source: 2009 Financial Report of the U.S. Government, as prepared by Office of Management and Budget, DoubleLine Capital LP 3
Percentage of Composition of Receipts By Source Source: http://economix.blogs.nytimes.com/2010/02/01/government-priorities/ 4
Federal Tax Receipts as a % of GDP 25% Federal Tax Receipts as % of GDP 1929 through 2009 20% 15% 10% 5% 0% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 Source: Office of Management and Budget, DoubleLine Capital 5
Federal Receipts as % of Debt: 1940 through 2015 Receipts as % of Federal Debt 1940 through 2015 70% 60% 50% 40% 30% 20% 10% Gross Receipts as % of Debt Net Receipts as % of Debt OMB Estimate 0% 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 (e) 2015 (e) Gross Receipts equal Individual Tax, Corporate Tax, Excise Tax and Social Insurance and Retirement Receipts Net Receipts equal Gross Receipts less Social Insurance and Retirement Receipts Source: Office of Management and Budget (OMB) 6
Historical Net Surplus/Deficit : 1934 through 2015 5 Deficit Less Social Insurance Receipts as % of GDP (1934-2015) 0-5 -10-15 -20-25 -30-35 OMB Estimate 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 (e) 2015 (e) Source: Office of Management and Budget (OMB) ** Net Surplus/Deficit equals Federal Receipts Less Social Insurance Receipts minus Federal Outlays 7
U.S. Employment % Change from Start of Recession * Recovery on 2007 recession has yet to be determined, but is estimated to have begun in July 2009 Source: Bureau of Labor Statistics, Federal Reserve Bank of Minneapolis, DoubleLine Capital LP 8 8
U.S. Government Outlays versus Receipts % of GDP 70 60 50 40 30 Defense Other Noninterest Social Security Medicaid Medicare Interest on Past Debt New Net Interest Receipts 20 10 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 2052 2056 2060 2064 2068 2072 2076 2080 OMB Projection through 2083, absent policy changes Source: Office of Management and Budget, DoubleLine Capital LP 9
Gross Debt as % of GDP of Advanced Economies: 1991-2015 250 200 Gross Debt as % of GDP 1991-2015 150 100 50 0 Canada France Germany Italy Japan UK US Source: International Monetary Fund 10
Net Debt as % of GDP of Advanced Economies: 1991-2015 160 140 Net Debt as % of GDP 1991-2015 120 100 80 60 40 20 0 Canada France Germany Italy Japan UK US Source: International Monetary Fund 11
Net Debt as % of GDP of PIIGS: 1999-2011 140 120 Net Debt as % of GDP 1999-2011 100 80 60 40 20 0 Portugal Ireland Italy Greece Spain Source: European Commission 12
Gross Debt to GDP Projections: PIIGS vs Developed Countries Source: Bank of International Settlements (BIS), Organization for Economic Co-operation and Development (OECD) 13
Argentine Sovereign Debt Spread over U.S. Treasuries: 1997-2008 Source: National Bureau of Economic Research (NBER), Global Financial Data
Argentine Sovereign Debt Spread over British Consols: 1870-1914 Source: National Bureau of Economic Research (NBER), Global Financial Data
Historical Sovereign Default and Rescheduling Years in a Banking Crisis Since Independence, or 1800 Years in Default of Rescheduling Total # of Defaults and Reschedulings Austria 2 17 7 Belgium 7 Denmark 7 Finland 9 France 12 8 Germany 6 13 8 Greece 4 51 5 Hungary 7 37 7 Italy 9 3 1 Netherlands 2 6 1 Norway 16 Poland 6 33 3 Portugal 2 11 6 Spain 8 24 13 Sweden 5 UK 9 Source: Reinhart and Rogoff 16
Greece Generic Government 10-Year Yields: November 2, 2009 through June 14, 2010 14 Greece Generic Govt 10-Year Yields (%) 11/2/09 through 6/14/10 12 10 8 6 4 2 0 Source: Bloomberg Financial Services, DoubleLine Capital 17
ABX HE 2006-2 Single A Prices: November 2, 2006 through June 27, 2007 88 90 ABX 2006-2 A Price 11/2/2006 through 6/27/2007 92 94 96 98 100 Source: Bloomberg Financial Services, DoubleLine Capital 18
ABX HE 2006-2 Single A Prices: July 19, 2006 through March 31, 2009 0 20 ABX 2006-2 A Price 7/19/2006 through 3/31/2009 40 60 80 100 June 27, 2009 120 7/19/2006 8/19/2006 9/19/2006 10/19/2006 11/19/2006 12/19/2006 1/19/2007 2/19/2007 3/19/2007 4/19/2007 5/19/2007 6/19/2007 7/19/2007 8/19/2007 9/19/2007 10/19/2007 11/19/2007 12/19/2007 1/19/2008 2/19/2008 3/19/2008 4/19/2008 5/19/2008 6/19/2008 7/19/2008 8/19/2008 9/19/2008 10/19/2008 11/19/2008 12/19/2008 1/19/2009 2/19/2009 3/19/2009 Source: DeutscheBank, DoubleLine Capital 19
Projected Interest Payments as % of GDP Source: Bank of International Settlements (BIS), Organization for Economic Co-operation and Development (OECD) 20
Possible Outcomes 1. Increase GDP Growth Rate 2. Lower Interest Rates on Government Debt 3. Government Transfer Payment or Foreign Capital Transfer 4. Increase Taxes or Cut Spending Tax increase is on the way Difficult to cut public spending 5. Print Money We are 6. Default Any non-compliance of original loan terms equates to a default 21
Possible Solutions Cut Only Britain has successfully reduced debt burden through surplus, lower rates and economic growth (1815-1914) Print Only governments with monetary sovereignty, i.e. U.S., U.K. Only governments with own-currency denominated debt Default: Governments with limited monetary sovereignty Governments with foreign-currency denominated debt 22
10-Year UST Yield Minus 2-Year US Treasury Yield Source: Bloomberg Financial Services 23
U.S. RMBS 2005-2007 Vintage Credit Rating Migration Current S&P Rating AAA AA A BBB BB B CCC CC D % Downgraded AAA 19.78% 3.52% 3.00% 4.59% 5.90% 9.78% 37.14% 12.41% 3.90% 80.22% AA+ 19.37% 2.76% 2.36% 2.81% 9.28% 27.27% 18.37% 17.80% 82.43% AA 0.01% 20.55% 1.71% 1.14% 2.16% 5.06% 20.50% 20.81% 28.07% 79.84% AA- 9.70% 2.26% 2.16% 2.05% 4.53% 20.17% 20.36% 38.79% 90.30% A+ 7.69% 2.06% 2.32% 4.26% 17.47% 19.59% 46.61% 93.58% A 0.01% 5.93% 2.16% 1.81% 4.33% 14.62% 20.06% 51.07% 94.51% A- 1.22% 0.60% 1.06% 3.74% 10.23% 40.19% 42.96% 98.78% Original S&P Rating BBB+ 1.10% 0.62% 1.96% 10.93% 19.35% 66.02% 99.00% BBB 1.98% 0.42% 0.96% 10.96% 22.36% 63.32% 98.07% BBB- 0.48% 0.06% 0.94% 3.96% 36.04% 58.53% 99.51% BB+ 0.53% 0.07% 2.60% 13.58% 83.23% 99.50% BB 0.96% 0.55% 5.41% 17.04% 76.05% 99.04% BB- 0.46% 0.96% 64.83% 6.54% 27.21% 99.53% B+ 0.45% 54.22% 13.50% 31.82% 99.54% * Ratings migration based on outstanding 205-207 vintages only. Data through April 30, 2010 B 0.44% 1.99% 8.28% 89.31% 99.57% B- 0.52% 10.86% 17.54% 71.08% 99.48% Source: Standard and Poors, DoubleLine Capital 24
Subprime Serious Delinquency and Conditional Default Rate May 2010 Remittances 60% 50% 40% 30% 60++ CDR Total Unmitigated Disaster 46.57% 20% 10% 10.75% 0% Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 60++ refers to serious delinquency defined as loans 60 or 90 days late in mortgage payments, or already in foreclosure or REO status. Alt-A defined as FICO 675-725; or FICO > 725 and LTV >= 75. First lien only. Source: Loan Performance, Vichara, DoubleLine Capital LP 25
Alt-A Serious Delinquency and Conditional Default Rate May 2010 Remittances 30% 25% 60++ CDR 27.53% 20% 15% 10% Total Unmitigated Disaster 9.18% 5% 0% 60++ refers to serious delinquency defined as loans 60 or 90 days late in mortgage payments, or already in foreclosure or REO status. Alt-A defined as FICO 675-725; or FICO > 725 and LTV >= 75. First lien only. Source: Loan Performance, Vichara, DoubleLine Capital LP 26
72 Prime Serious Delinquency and Conditional Default Rate May 2010 Remittances 10% 9% 8% 7% 6% 60++ CDR 8.70% 5% 4% 3% 2% 1% 0% Total Unmitigated Disaster 2.45% 60++ refers to serious delinquency defined as loans 60 or 90 days late in mortgage payments, or already in foreclosure or REO status. Alt-A defined as FICO 675-725; or FICO > 725 and LTV >= 75. First lien only. Source: Loan Performance, Vichara, DoubleLine Capital LP 27
Historical Conditional Repayment Rates (CRR) May 2010 Remittances 45% 40% 35% Prime Alt-A Subprime 30% 25% 20% 15% 10% 5% 0% 15.03% 6.37% 2.37% Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Prime defined as FICO > 725 and LTV < 75 Alt-A defined as FICO 675-725; or FICO > 725 and LTV >= 75 Subprime defined as FICO < 675 First lien only 28 Source: Loan Performance, Vichara, DoubleLine Capital LP
92 Historical Loss Severity May 2010 Remittances 80% 70% 60% 50% Prime Alt-A Subprime 67.26% 57.38% 45.65% 40% 30% 20% 10% 0% Prime defined as FICO > 725 and LTV < 75 Alt-A defined as FICO 675-725; or FICO > 725 and LTV >= 75 Subprime defined as FICO < 675 First lien only Source: Loan Performance, Vichara, DoubleLine Capital LP 29
Wells Fargo Alternative Loan Trust (WFALT 07-PA3 1A3) WFALT 07-PA3 1A1 Market Price $68.00 Original Loan-To-Value 69.64% Coupon 5.75% Current LTV 94.11% FICO 741 60++ delinquencies Avg Loan Size $405,000 11/30/09 14.26% 5/20/2010 15.84% Voluntary Prepayment Rate (VPR) 7.51 Constant Default Rate (CDR) 4.78 Severity 53.71 Data Source: Bloomberg, DoubleLine Capital Research This security is for hypothetical purposes only. DoubleLine Capital makes no representation that this analysis will come to fruition. This security has not been recommended by DoubleLine Capital. 30
Wells Fargo Alternative Loan Trust (WFALT 07-PA3 1A3) Scenario Analysis Base Case Scenario Analysis New World Rates Up 200 bp Scenario Analysis Prepay 6% Prepay 8% CDR 6% CDR 4% Severity 60% Severity 40% Total Collateral Liquidation 41.88% Total Collateral Liquidation 27.59% Loss Adjusted Yield 9.67% Loss Adjusted Yield 13.17% Price-To-Yield (10.21%) $73.50 Effective Duration -4.0 Data Source: Bloomberg, DoubleLine Capital Research This security is for hypothetical purposes only. DoubleLine Capital makes no representation that this analysis will come to fruition. This security has not been recommended by DoubleLine Capital. 31
Duration Example Negative Duration of Distressed RMBS Jan-08 through Apr-10 4.5 4.5 Positive Duration of Agency RMBS Jan-08 through Apr-10 10-Year Treasury Yield (%) 4.0 3.5 3.0 2.5 R² = 0.34 10-Year Treasury Yield (%) 4.0 3.5 3.0 2.5 R² = 0.13 2.0 50 70 90 110 2.0 95 100 105 110 Non-Agency 30-Year Prime Fixed Rate RMBS Price ($) Fannie Mae 5.5 RMBS Price ($) Source: Amherst Securities Group, Bloomberg Financial Services, DoubleLine Capital 32
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