UPDATE: Events since May haveprovided dramatic answers to thatquestion, reaching an absolutecrisis point in September.

On September 7, as subprime borrowerswere defaulting on loans in ever largernumbers, the U.S. government tookcontrol of mortgage corporations FannieMae and Freddie Mac, which betweenthem accounted for almost half the U.S.home-loan market. Financial servicescompanies that had bought packets ofsubprime loans bundled into CDOs(collateralized debt obligations) saw themarket value of their CDO portfoliosplummet, dragging them towardinsolvency. The U.S. authorities allowedinvestment bank Lehman Brothers to gobankrupt on September 15. On the sameday, Bank of America acquired troubledinvestment bank Merrill Lynch. OnSeptember 16, vast insurance corporationAIG faced a liquidity crisis and acceptedup to $85 billion of Federal Reserve creditin exchange for 79.9% equity in the group.

All around the world, big-name banksfaced collapse. As we wrote in May, thetiny nation of Iceland was in trouble afterits aggressively expanded banks could nolonger fund themselves on the moneymarkets; Iceland effectively went bankruptOctober 9. The list of woes has grownlonger by the day as consumer andbusiness confidence declines.

The answer to the question is that whentoo many people and institutions can’trepay their loans, governments themselvesbecome the only entities strong enough tostep in—individually or collectively (throughthe International Monetary Fund)—withbailouts, cash injections and liquidityguarantees. The U.S. financial system wassaved from collapse by a $700 billionFederal bailout plan passed October 3. TheU.K. government rescued the Britishbanking system October 8 with a £400billion package for eight of the country’sbiggest banks and mortgage lenders. Othercountries such as France, Germany andSwitzerland followed suit. The IMF bailedout Ukraine to the tune of $16.5 billion onOctober 26 and stepped in with $25 billionto rescue Hungary on October 29.

The focus so far has been on managingthe fallout from mortgage-related debt. Butmortgages are only one of the wayshouseholds get money on loan. The nexthousehold loan crisis brewing is consumercredit, which has been the top-up fuelthat’s turbo-charged the booming economyin recent years. At the end of 2007, U.S.consumers alone owed $961 billion incredit card debt. Now that home equitywithdrawal has become more difficult orimpossible (with house prices falling andequity turning negative) consumers haveturned to credit cards to pay for everydaypurchases. But with bad home loansmounting, card issuers are anticipating aspike in credit card defaults. They’rebecoming much choosier about who theylend to, how much credit they extend andhow quickly they expect payment.Consumers are finding that fees and ratescan land them deeper in trouble.

It’s now increasingly clear that highlevels of debt have determined theheadlong dynamics of whole markets,national economies and the whole globaleconomy.

INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST1

JUST MONTHS after we published our “Prime Angst” Intelligent Dialogue paper in May 2008, the tremors of the U.S. subprime crisisgave way to a full-blown earthquake, shaking the global financial system to its core. And as we all see, aftershocks are spreading fastinto the everyday global economy of jobs and purchases and family finances.

In keeping with our principles of Intelligent Dialogue, just as we raised questions back in May, we continue to examine theconstantly shifting environment and encourage discussion. In this follow-up, we explore the landscape by revisiting questions we askedthen, and by looking ahead.

WHAT HAPPENS WHEN BORROWERS CAN’T REPAY THEIRLOANS, AND HOW DOES THIS AFFECT EVERYONE ELSE?

How long will it take for more manageable forms of debt and more sustainable dynamics to emerge? Can financelead the way, or will governments force the issue through intervention and regulation?

INTELLIGENT DIALOGUE

BEYOND PRIME ANGSTUPDATE

UPDATE: We said in May thatall around the world, some of themost profound effects of the crisiswill be felt at the beginning andend of adulthood, and this iscertainly proving to be the case.

On the education front, expectations ofever-increasing prosperity have pushed updemand for education as well as costs.According to the U.K.’s Daily Telegraph,between 2001 and 2006, average Britishschool fees rose by 39 percent. Parentshave squeezed their budgets and taken outloans to give kids a running start in lifewith private education aimed at gettingthem into top universities. However, nowthat credit is drying up and incomes arethreatened, many parents are pulling theirchildren out of private education andlooking for ways to reduce educationalcosts. A recent New York magazine articlereports that 45 families have informed the

300-year-old competitive-enrollmentTrinity School in New York City that theirkids will not be returning next year, a hugedrop considering the school’s enrollmentof only 1,000 for its entire K-12 program.Students are finding it harder to get loansand grants as banks become tighter. Thisis bad news for private educationalinstitutions because it’s reducingenrollment income at the same time thatinvestments are being hit by falling stockmarkets. Inevitably some schools won’tmake it through the economic crisis.

Publicly funded school systems are lessdirectly vulnerable to students’ ability topay fees, but they too are facing fundingproblems. Falling tax revenues and risingdemands on public funds mean thatschools will increasingly struggle withtighter budgets.

This raises serious questions aboutinvestment in the education of futureproblem-solvers and wealth-generators:Will economic strain result in a relatively

short-term dip in educational provisionand output? Or will it inflict longer-termdamage that harms nations’ capacity toeducate and results in a “lost generation”?

No matter what, young people have theexpanse of their whole adult life to get backon track. People approaching retirementhave no such prospects. Those who madeprovisions for retirement in pension plansare seeing the value of plans decline as stockmarkets have fallen. Those who thoughttheir home would fund their pension mustthink again, realizing home equity won’t bean option unless housing markets pick up,and that could take a long time.

Younger people have the consolation ofknowing there’s a fair chance that theeconomy will pick up sooner or later, allowingthem to get back to work with a reasonablechance that stock markets and propertywill gradually start to recoup lost value.But for older people, working beyond theirplanned retirement may not be an optionin a recessionary or stagnant economy.

UPDATE: In the short-term, theimpact of the crisis is expected to showup in matters of mental health. TheWorld Health Organization warnedon October 9 that the global financialcrisis is likely to cause increasedmental health issues and even suicidesas people struggle to cope with the lackof cash, the prospect of unemploymentand even losing their homes.

As we noted in May, 47 million Americanadults were without health insurance and each percentage-point rise inunemployment will result in an additional

1.1 million people losing their coverage.Inevitably, as the economic effects of thecrisis hit jobs and household finances,more families will cut back on medicalcosts and defer medical attention.Compounding the emotional stress of aneconomic crisis, this certainly has seriouslonger-term implications for public health.

A major meta-analysis of 293independent studies published by theAmerican Psychological Association foundthat people’s immune systems suffer badlyfrom stress-inducing events that changetheir identities or social roles, are beyondtheir control and seem endless: “Thelonger the stress, the more the immunesystem shifted from potentially adaptive

changes … to potentially detrimentalchanges, at first in cellular immunity andthen in broader immune function. Thus,stressors that turn a person’s world upsidedown and appear to offer no ‘light at theend of the tunnel’ could have the greatestpsychological and physiological impact.”

People who lived through the GreatDepression of the 1930s and other majorhardships (war, internment, dictatorship)are evidence that people have survivedworse traumas. But quality-of-lifeexpectations are much higher today. Notonly that, societies are more complex andinterconnected; as the economic crisis hasshown, events in one place can set off achain that travels far and wide.

INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST2

IS TODAY’S CRISIS A PRELUDE TO EVEN BIGGER DISASTERS IN OTHER SECTORS SUCH AS EDUCATION AND RETIREMENT?

Will the crisis prove to be a wake-up call for consumers and governments to make more robust provisions for thehuge numbers of baby boomers moving toward retirement age? Or is it the early phase of a chronic problem ofsenior short-funding?

DOES THE SUBPRIME CRISIS HAVE HEALTH IMPLICATIONS?

Will the economic crisis lead to a longer-term problem of more stress-related illnesses? How can the economic crisisbe prevented from turning into a health crisis?

UPDATE: Since we raised thequestion in May, this has become avery hot topic. In allowing LehmanBrothers to go bankrupt, U.S.authorities may have intended agesture of punishment; manyanalysts now contend that the movewas a mistake that accelerated themeltdown of the financial system.

In any event, Lehman was the exception;authorities around the world quicklyconcluded that banks could no longer beallowed to fail, since that would put the globalfinancial system at risk. In fact, far from beingpunished, other troubled banks have eitherbeen rescued with bailouts or guided into thearms of more solvent financial firms; forexample Merrill Lynch was bought/rescuedby Bank of America in September.

There was outrage and opposition to the$700 billion bailout of the U.S. financialsystem proposed by U.S. TreasurySecretary Henry Paulson in September—amove that prompted the phrase“Capitalism on the way up, socialism on

the way down.” In fact the plan was voteddown by the House of Representatives onSeptember 29 before it was modified andaccepted October 3.

Rightly or wrongly, there is awidespread public perception in manycountries that the banking and financeindustry is to blame. Since banks havebeen bailed out with taxpayers’ money inthe U.S., U.K., France, Germany,Switzerland and the Benelux countries, themedia and the public are on alert for anysigns that banks are abusing the largesse ofcitizens by paying themselves too much orby sitting on cash rather than extendingbadly needed credit.

There are plenty of accounts of PR foul-ups by bankers. On October 24, New YorkTimes journalist Joe Nocera wrote of aconference call with JP Morgan Chaseemployees, during which the bankreportedly planned to use bailout moneyto buy weaker banks and grow, ratherthan to ease the consumer credit crunch.In the U.K., Chancellor of the Exchequer(finance minister) Alistair Darlingsummoned big bank chiefs to “persuade”them to pass on the benefits of the Bank of

England’s historic 1.5 percent point cut inbase rates. The banks were reluctant topass on the cuts. This prompted thechairman of Parliament’s Treasury SelectCommittee to comment, “They are beingshort-sighted. Given that they have hadcopious amounts of money from thetaxpayer and are fully guaranteed, it mustdawn on them that they have a socialresponsibility as well. The pressure onthem will be maintained until theyacknowledge that responsibility.”

The net result appears to be a standoff.The financial system is absolutely reliantupon government willingness to step inwith bailouts, yet governments areabsolutely reliant on banks and financial-services firms to keep money movingthrough the economy.

In May, we asked whether the financialcrisis would mean a return to stricterregulation for the banking industry. As ofNovember, there is certainly talk, but theG20 summit of world leaders inWashington resulted in no definitive stepforward. A follow-up meeting has beenscheduled for April 30, 2009, 101 days afterBarack Obama takes office as U.S. President.

INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST3

IF BANKING AND FINANCE ARE TO BLAME, WHO WILL PUNISH THEM AND HOW?

Is it possible to design and enforce a global financial system that is more stable than the current one? Will bankscooperate to foster greater stability, or are the interests of global financial institutions now decoupled from theinterests of the global economy?

WHO WILL BENEFIT FROM THE CREDIT CRUNCH?

In the meantime the questions on everybody’s mind are: How much worse will it get before it gets better, and howlong will that take? And how will we know when the crisis is over?

UPDATE: It’s very early to talkabout benefits from a crisis that’s along way from finished. However,history will likely say that the crisisdefinitively tipped the 2008 U.S.presidential election in favor ofBarack Obama. The more the crisisspiraled, the more commandingObama’s lead in the polls became.

In May we noted a comment from RogerMartin-Fagg of Henley Business School at

the University of Reading in the U.K.:“Power and ownership are shiftingeastward.” As developed-world economiesof the United States and the EuropeanUnion struggle to find cash for bailouts, alleyes turn to countries with big cash piles.China and the Gulf States have trillions ofdollars in reserves that could enable theIMF to help smaller countries withstandthe present turmoil. British Prime MinisterGordon Brown, one of the most proactiveworld leaders in this crisis, toured the GulfStates in early November to bolster

funding for the IMF. At the very least,Gulf economies and China are likely towield much more authority in global tradeand finance talks.

In the meantime, down on Main Streetit’s hard to see who will benefit from thecrisis in the short term, apart frominsolvency practitioners and bargainhunters short on debt and long on cash.Still, with auto sales falling dramatically,consumers driving less and economicactivity slowing, the environment may beone unintentional beneficiary.

INTELLIGENT DIALOGUE UPDATE: BEYOND PRIME ANGST4

DURING THE YEARS of economic boom, everyone came to expect high rates of growth, especially in business. Many businesses wereexpected by analysts and investors to deliver double-digit growth year in, year out. In many cases, 10 percent annual growth was seenas disappointing, even though that means doubling in size every 10 years. It’s now clear that much of that growth was dependentupon credit, which has now become drastically less available.

As long as the downturn continues, it’s highly unlikely that many businesses will be able to achieve even minimal growth. In fact,maintaining business at previous levels will be a major achievement for many. And once economies emerge from the crisis, consumerswill need time to regain their confidence. Who will be quick to risk the sort of credit-fueled spending that delivered the big growth inthe boom years?

This begs the question: Will consumer-focused industries lead the way out of the recession? Which industries will drive futureeconomic growth? U.S. President-elect Barack Obama has a clear view on this issue: “The engine of economic growth for the past 20years is not going to be there for the next 20. That was consumer spending. … There is no better potential driver that pervades allaspects of our economy than a new energy economy.”

In the economies that emerge from the recession, where there is no easy credit to fuel business, what rates of growth will beregarded as reasonable and sustainable? Will the business culture become more prudent and cautious, or will it revert to the hard-driving pre-crisis attitudes?

And finally, how will the crisis shape the attitudes of Millennials and the generation behind them? They have never experienced aserious economic downturn, let alone one that has generated such widespread fear and angst. Will the experience traumatize them intobeing cautious and avoiding risk, or will they shrug it off and get back to the future?

LOOKING “BEYOND PRIME ANGST”

WHAT PORTER NOVELLI UNIQUELY OFFERS can be summed up in two words: Intelligent Influence. The basis forIntelligent Influence is Intelligent Dialogue. As yesterday’s mass media morph into today’s interactive media, peopleexpect to talk back at journalists and opinion leaders. Yesterday’s way was set-piece monologues broadcast to passiveaudiences by powerful brands and media owners. Today’s way is fluid, evolving dialogues conducted across multiple,linked channels. Ongoing dialogue is now possible and is truly the best basis of dynamic long-term relationships. Easysound-bite answers are seductive; they give a comforting but illusory sense of resolution. Instead, we need to cultivateopen, questioning minds that ask smart, creative questions. Smart questions spark Intelligent Dialogue, open upthinking and tap into the power of many minds.

The Porter Novelli INTELLIGENT DIALOGUE Principle

PORTER NOVELLI was founded in Washington, D.C., in 1972 and is a part of Omnicom Group Inc. (NYSE: OMC)(www.omnicomgroup.com). With 100 offices in 60 countries, we take a 360-degree view of clients’ businesses to build powerfulcommunications programs that resonate with critical stakeholders. Our reputation is built on our foundation in strategic planning andinsights generation and our ability to adopt a media-neutral approach. We ensure our clients achieve Intelligent Influence, bysystematically mapping the most effective interactions, making them happen and measuring the outcome. Many minds. Singular results.

CONTACT: Marian Salzman, Chief Marketing Officer, Porter Novelli Worldwide, 75 Varick Street, 6th floor, New York, New York 10013;212.601.8034; marian.salzman@porternovelli.com