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Financial Crisis and the Global Fund’s Investments Presentation to the Global Fund Board November 7, 2008 Trustee, World Bank 1 V.1 Bubble Bursts on Subprime Market Source: Inside Mortgage Finance Source: Office of Federal Housing Enterprise Oversight Mortgage Bankers Association, as reported by the Federal Reserve Bank of San Francisco Huge financial institution losses Banks deleverage 2 Financial Markets in Turmoil: Events Bear Stearns insolvent, JP Morgan buys it with support from the US Federal Reserve. [March 16] US Government places Fannie Mae & Freddie Mac under conservatorship. [September 7 ] Lehman in bankruptcy, lots of toxic assets with no buyers; Merrill Lynch folded into Bank of America to avoid a run. [September 14] Further erosion of confidence. US Federal Govt extends $85 billion to AIG [September 16] Morgan Stanley & Goldman Sachs convert to bank holding companies – take deposits, buy/merge with other financial institutions [September 21] All 5 major broker dealers are gone – within 6 months 3 Nov-07 Nov-08 Nov-06 Nov-05 Nov-04 Nov-03 Nov-02 Nov-01 Nov-00 Nov-99 Nov-98 Nov-97 Nov-96 Nov-95 Nov-94 Nov-93 Nov-92 Nov-91 Nov-90 Nov-89 Nov-88 Significant Losses in the Equity Markets S&P 500 Index 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - 4 11/1/08 10/1/08 9/1/08 8/1/08 7/1/08 6/1/08 5 5/1/08 6 4/1/08 3/1/08 2/1/08 1/1/08 12/1/07 11/1/07 10/1/07 9/1/07 8/1/07 7/1/07 6/1/07 5/1/07 4/1/07 3/1/07 2/1/07 1/1/07 12/1/06 Yield (%) LIBOR Spread has Widened 7 US 3 month T-bill US 3 month LIBOR 4 3 2 1 - 5 Comparison with Other Market Returns Major Market Indices (Returns in USD) 2007 CYTD September 30, 2008 MSCI World 9.57% -23.84% S&P 500 Index 5.49% -19.29% UST 1-5 Index (ML) 8.16% 4.28% US MBS Index (Lehman) 6.90% 3.83% US Corporate Bond Index (ML) 5.37% -7.19% US Lehman Aggregate Index 6.97% 0.63% Global Fund Investment Portfolio 6.89% 3.44% EQUITIES FIXED INCOME 6 What are the Implications for the Global Fund Investment Portfolio? 7 Conservative Risk Parameters Preservation of principal is paramount objective. Investment strategy is designed to minimize vulnerability to negative returns. High-quality credit assets (subset of those authorized for IBRD and IDA). 8 Changes to Adapt to the Financial Crisis Since June 2008 Shortened duration* From 1.75 years to 1.25 years. Reduced bank exposures. From 62% to around 50% * Duration of non-working capital and non-MBS components. 9 Global Fund Trust Fund Returns Global Fund TF Returns relative to US 2Y Yields 2002 - 2008 % 8 CY07 6.89% 7 6 CY06 4.54% CY02 4.84% 5 4 CY04 2.16% CY03 1.70% 3 CY05 2.52% CY08 3.44% 2 1 Aug-08 May-08 Feb-08 Nov-07 Aug-07 May-07 Feb-07 Nov-06 Aug-06 May-06 Feb-06 Nov-05 Aug-05 May-05 Feb-05 Nov-04 Aug-04 May-04 Feb-04 Nov-03 Aug-03 May-03 Feb-03 Nov-02 Aug-02 May-02 Feb-02 0 On January 31,2005, the assets of Trust Funds were converted into two separate tranches. GFATM participates in both tranches. CY05 return includes pre-tranche returns for January 2005. The return shown above for 2002 to 2004 is for the total Trust Funds (includes GFATM). CY08 return is not annualised and is for the period to 30 September 2008. 10 Investment Income Earned by Global Fund 700 6 Investment Income 5 Cumulative Income Liquidity Balance 500 4 400 3 300 2 200 1 100 0 2 CY Balance in USD Billions Investment Income in USD Millions 600 0 002 2 CY 003 2 CY 004 2 CY 005 *Note: CYTD income through September 30, 2008 2 CY 006 2 CY 007 YT 008 2 D 11 Conclusion Continuing prudent management of Global Fund funds. Anticipate lower returns in low yield environment. 12 Additional Slides 13 Illustrative Performance Comparison 1H 2008 return (annualized) Last 3 years Average annual return Volatility Frequency of negative returns Last 5 years Average annual return Volatility Frequency of negative returns Portfolio 1 Portfolio 2 UST & MBS (70:30) Equities & Bonds (60:40) * 4.08% -13.68% Portfolio 3 Endowment -12.44% 4.7% 2.4% 0.0% 3.6% 5.5% 16.7% 5.3% 6.0% 16.7% 3.6% 2.2% 0.0% 5.0% 5.5% 10.0% 7.8% 6.4% 10.0% Note: Portfolio 1 comprises of 70% Merrill Lynch US Treasuries 1-3 Index and 30% US MBS Portfolio 2 comprises of 40% US investment grade bonds (Lehman Aggregate Index) and 60% US equities Portfolio 3 comprises of 45% public equities, 20% investment grade fixed income, 15% hedge funds, 12% real estate and 8% private equity Based on quarterly data from Bloomberg, LehmanLive. 14 EUR/USD FX Rates Since the beginning of the 2008, the USD has strengthened by approximately 15% from 1.45 EUR/USD as of January 1, 2008 to 1.24 EUR/USD on October 29, 2008. EUR/USD FX Rates (Jan. 1, 2008 - Oct. 29, 2008) 1.7 1.6 1.5 1.4 1.3 10/01/2008 09/01/2008 08/01/2008 07/01/2008 06/01/2008 05/01/2008 04/01/2008 03/01/2008 02/01/2008 01/01/2008 1.2 15 US Treasury Yield Curve has Steepened Aggressive Fed rate cuts and flight to quality have driven the steepening of the yield curve 4.50% 4.00% 3.50% 3.00% 2.50% 31-Dec-07 03-Nov-08 2.00% 1.50% 1.00% 0.50% 0.00% 0.25 1 2 3 4 5 In years 6 7 8 9 10 16 Donor Contributions Amount received in USD million $11,819 $9,648 $6,752 $4,734 $3,319 $2,045 $2,895 $2,171 $2,019 $1,343 $1,274 $1,414 CY 2003 CY 2004 CY 2005 $702 CY 2002 CY 2006 CY 2007 Calendar Year (CY) Annual contributions CY 2008 Jan-Sepr08 Cumulative contributions 17 Grant Commitments $9,508 Value of commitments in USD million $7,796 $5,329 $3,482 $1,959 $2,467 $1,108 $1,847 $1,712 $1,524 $1,101 $7 CY 2002 CY 2003 $851 CY 2004 CY 2005 CY 2006 CY 2007 CY 2008 Jan-Sepr08 Calendar Year (CY) Annual commitments cumulative commitments 18 Disbursements to Principal Recipients Disbursement to PR in USD million $6,346 $4,964 $3,235 $1,912 $1,730 $845 $1,381 $1,323 $1,067 $232 $1 $231 CY 2002 CY 2003 $613 CY 2004 CY 2005 CY 2006 CY 2007 CY 2008 Jan-Sepr08 Calendar Year (CY) Annual disbursements Cumulative disbursements 19 Transaction Volumes Volume of commitment and disbursement transactions 4341 3573 2445 1554 840 887 357 686 565 651 370 8 202 139 113 149 205 241 117 CY 2002 CY 2003 CY 2004 CY 2005 CY 2006 CY 2007 CY 2008 Jan-Sepr08 Calendar Year (CY) # of annual commitments # of annual disbursemetns Cumulative # of transactions 20