2008 Annual Report

Page 1 | 2

What Types of Programs Help People to Understand and Manage Their Finances?

The Chicago Fed helps consumers learn how to manage their personal finances. In challenging economic times, knowledge of subjects like budgeting, saving, and using credit wisely is especially important. Toward that end, we have increased the number of participants in our Money Smart programs in central Illinois, Chicago, Indiana, Michigan, Iowa, and Wisconsin. Approximately 1,200 partners took part in these Money Smart Weeks in 2008, including local community groups, financial institutions, not-for-profit organizations, businesses, schools, libraries, local and national government agencies, and media personalities. They worked together to bring roughly 2,100 seminars, classes, and special events on personal finance topics to thousands of consumers. Among the Money Smart Week Chicago events:

Nearly 400 people attended an event sponsored by the Illinois Financial Planners Association. The audience heard from author and financial expert Terry Savage and had the opportunity to meet one-on-one with certified financial planners.
Harold Washington College hosted 500 students and community members for its second-annual financial literacy fair, featuring more than a dozen Money Smart partners and topics.
The Bank and Visa, Inc. co-sponsored a "webinar" on ways to bring financial education to consumers.

What is the Outlook for the Auto Industry?

With about one-third of the nation's new motor vehicles produced in the Chicago Fed's five-state region, we have a deep interest in the health of the auto industry. In June of 2008, the Automotive Outlook Symposium at our Detroit Branch brought together more than 90 economists and analysts from the industry, academia, and government. The group discussed the near-term outlook from the perspectives of U.S. auto manufacturers, heavy truck producers, auto dealers, and parts suppliers.

David Andrea, vice president of the Original Equipment Suppliers Association, predicted that bankruptcies among the auto parts suppliers will continue in the near term. Yet, looking past 2009, he cited diversification into non-automotive work and increasing globalization as reasons for optimism. In 2007, 68.6 million automobiles were sold across the world, and Andrea predicted the volume to increase to 87.3 million by 2014.

The auto industry was also the topic of discussions at the Chicago Fed's annual Economic Outlook Symposium in December 2008. This meeting was held two weeks after U.S. auto executives appeared at Congressional hearings on the future of the industry and amid growing uncertainty about the industry. Conference participants debated whether the industry's short- and long-term struggles would be best addressed through normal bankruptcy or a government-assisted restructuring outside the court system. Speaking about the short-term market dynamics, William Shearin, formerly with Chrysler LLC, said that composite measures of consumers "ability to buy" and "willingness to buy" had deteriorated significantly in the previous 12 months. In a forecast survey associated with the conference, economists forecasted light vehicle sales to fall further in 2009. But Shearin did give one reason to be optimistic about sales once credit markets normalize: The average age of used vehicles has increased to a historically high 6.5 years, suggesting that many vehicle owners will want to replace their aging vehicles as soon as economic conditions allow them to do so.

Finally, the ownership structure of the auto industry was the focus of a presentation in 2008 at a conference sponsored by the Federal Reserve System's Private Equity Merchant Banking Knowledge Center, which is based at the Chicago Fed. The July event brought together private equity professionals, banking supervisors, academics and bankers to discuss how the financial crisis has dramatically altered the landscape for private equity, particularly in the buyout sector. In the first luncheon keynote address, Jacques Nasser, managing director of One Equity Partners and formerly president and CEO of the Ford Motor Company, explored private equity investment strategies that target the auto industry. Each of the three segments of the auto industry (manufacturers, suppliers, and dealers) has significant structural and operational weaknesses that could present opportunities for private equity firms, he said. Nasser also proposed a broader and longer-term strategy — with investments in a range of new technologies that would benefit energy security and environmental protection while generating profits for both the automotive sector and the private equity industry at large.

How Are Equity Investment Markets Adapting to the Global Credit Crunch?

At the conference mentioned directly above, Meredith Coffey from the Loan Syndication and Trading Association described how supply and terms in the so-called "leveraged lending" market have become much less favorable for private equity firms. As a result, merger and acquisition lending has fallen sharply, with leveraged buyouts hit hardest. Private equity firms had become accustomed to a stream of increasingly large buyout deals, with their buying power supported by the availability of inexpensive leverage. Now that this access to credit has largely dried up, some private equity firms have altered their investment strategies.

According to Avy Stein, Willis Stein Partners, such new strategies include the middle market, minority (non-controlling) investments, emerging markets, non-equity instruments, and distressed assets. Private equity investors see opportunities in the U.S. banking sector, as well as the auto industry, in the current weak environment.

Finally, the prospect of lower returns on private equity investments going forward will affect a wide range of investors. These include institutional investors such as pension funds and university endowments, which in recent years have been increasing their use of private equity, among other nontraditional investments. In view of recent experience, it is also very likely that institutional investors will change their investment strategies to favor a more traditional, lower-risk investment mix once more.

Conclusion

In this essay, we have shared some examples of the issues addressed at conferences hosted by the Chicago Fed in 2008. With the credit crisis still to be resolved and with new public policy issues regularly emerging, the Chicago Fed will continue to leverage its ability to convene the best minds from the Seventh District, the nation, and abroad to discuss appropriate ways forward in the face of uncertainty.

This essay was a collaborative effort, with contributions from many Chicago Fed staff members including: Mike Berry, Cathie Bourke, Adrian D'Silva, Emily Engel, Doug Evanoff, Harry Ford, Brian Gordon, William Mark, Michael Munley, Mark Kawa, Helen Koshy, Cathy Lemieux, Michael Plaskett, William Strauss, Doug Tillett, Steven VanBever, Dan Wassmann, and Alicia Williams.

Page 1 | 2