[PPT] - 2 o o '" 3. The concern over contagion IV '-' en -u ;;: PowerPoint Presentation

SLIDE 1

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>.

Lessons Learned

from the Recent Turmoil in the Credit Markets

Anthony M Santomero Senior Advisor McKinsey & Company

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

SLIDE 2

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

~

TODA V'S DISCUSSION

1. An environment of credit and liquidity growth
2. The US mortgage market as the epicenter of the crisis
3. The concern over contagion
4. Implications and outlook
Winners and losers
Implications for select financial areas
5. Lessons for Professional Risk Managers

NYO-AAA 123-20080330-

1

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 3

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

""

"-l

TODA V'S DISCUSSION

2. The US mortgage market as the epicenter of the crisis
3. The concern over contagion
4. Implications and outlook
Winners and losers
Implications for select financial areas
5. Lessons for Professional Risk Managers

NYO-AAA 123-20080330-

2

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 4

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>. W

NYO-AAA 123-20080330-

GROWING GLOBAL FINANCIAL ASSETS FOSTERED INCREASED LIQUIDITY AND CREDIT AVAILABILITY

Global financial assets

$ Trillions 167 1980 1995 2000 2001 2002 2003 2004 2005 2006

Source: McKinsey Global Institute; Global Financial Stock database

Equity securities Private debt securities Government debt securities Bank deposits

3

:i'

;<- ~. ~ ;- r ro !!i- s; "- ~ "-

...

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 5

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>. .j>.

NYO-AAA 123-20080330-

CROSS-BORDER CAPITAL FLOWS INCREASED SUBSTANTIALLY, WITH THE U.S. AS THE PREFERRED DESTINATION

".,.,.,.,.,.,.,.,.,.,.,., ,.,.,.,., .. ,.,.,.,., ,.,.,.,. , .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,·'1 .,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,., .. ,.,.,.,.".,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,·,::::::::::)):::::::::::::))::11

8 7 6 5 4 3 ""CAGR 1980-90: 8.3% 2

c;:)ro·

"

9J9J\Y

G~G«-.

~olo ,~.

I

I I I I I

'80 '85 '90 '95 '00 '05 Percent 4.4 3.5 4.8 5.4 13.6 15.4

f global

GOP

Source: McKinsey Global Institute; World Bank 674

1
9
~

I!IIIIII!I Net capital importers 1;-

[2J Net capital exporters

~

8.

140
153

=;;

m

a.

2

'"

IV c;. en ~ '0 ;;:

4'

s·

I[

US UK Aus India E.

Lat. Mid

Japan China Eur.

Am. East

4

SLIDE 6

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>. U1

NYO-AAA 123-20080330-

PRIVATE CAPITAL, SEEKING ATTRACTIVE RISK

.. ADJUSTED RETURNS,

FURTHER FUELED LIQUIDITY

..... Cumulative

commitment

verhang

~ ;<- ~.

~

Global buyouts

~mMl

Commitments I ~

368 375 456 257 96 97 98 99 00

01

02 03 04 05 06 07

Source: PE Intelligence; Hedge Fund Research (HFR.com), McKinsey analysis

II

Investments

400 348 300 200 233 238 233 22 200 100

I::::::"'''' "

96 97 98 99 00 01 02 03 04 05 06

5

s;

8.

~ "-

2

'"

IV

'"

en ~

u

;;:

4'

S'

I[

SLIDE 7

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>. 0)

NYO-AAA 123-20080330-

GROWTH IN CDOs AND CLOs, HELPED ESTABLISH THE "COO BID" FOR LEVERAGED LOANS AND ABS

Percent CAGR $480 billion Percent 1,200 1,100 Non U.S. Banks 1,000 Global

21

900 U.S. banks 800

"

I

'U.S.

700 25 Securities firms* 600

I

500

,/

400

;'

300

/'

COOs and Others** 200

........ -

.....,..,. 100 2000 2001 2002 2003 2004 2005 2006 2007

I I

2000 2006

* Also includes finance companies and insurance companies ** Also includes hedge funds, prime-rate funds and high-yield funds Source: LSTA, BBA, Fitch, S&P PMD; Standard and Poor's Leveraged Buyout Review

6

:i'

;<- ~. ~ ;- r ro !!i. s; a. ~ a.

...

2

'" '"

'"

en ~ '0 ;;:

4'

s·

I[

SLIDE 8

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD .j>.

..j

NYO-AAA 123-20080330-

SINCE JULY '07, WE HAVE SEEN A REVERSAL OF CREDIT AND LIQUIDITY GROWTH WHICH PREVAILED FOR MOST OF THE LAST DECADE

Global COO Issuance Jan 1997

Dec 2007

$ Billions

60 50 40 30 20 10

Credit and liquidity growth

Crisis onset July 2007

1

,--------, ---------'

Credit and liquidity crisis and contagion 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Main drivers of liquidity growth

Growth in financial assets (e.g.,

equity, private and government debt, bank deposits)

Increasing importance of

private capital

Entry of new investors into the

market through innovative financial products (e.g., CDOs)

Source: Oealogic

Triggers of liquidity crisis

Complexity and
pacity of

subprime/CDO risk

Risk mispricing
Aggressive chase for

yield Areas of contagion

Mortgage backed

securities

Wholesale funding

market

7

~

""

~.

~

~ !!i. s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

4'

s·

I[

SLIDE 9

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

""

co

TODA V'S DISCUSSION

1. An Environment of credit and liquidity growth
3. The concern over contagion
4. Implications and outlook
Winners and losers

Implications for select financial areas Impact on interest in risk management

NYO-AAA 123-20080330-

8

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 10 Working Draft - Last Modified 4f712008 12:15:01 PM Printed

Confidential

<

;I'

rc'

~; to

~

. .

~.

b

~:

I

··:·:

...

" .; '-,' .:

W

:;

~. a

~:

CITI-FCIC-LEH 00151949

SLIDE 11

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD U1

RISKIER MORTGAGES CONTINUED TO GROW SIGNIFICANTLY,

REACHING -50% OF MORTGAGE ORIGINATIONS IN 2006

Nonconforming* products as percentage of total mortgage originations Sub-prime Home Equity Alt-A 49

49 01 01 02 02 03 03 04 04 05 05 06 06 07 07 01

03

01

03

01

03

01

03

01

03

01

03

01

03

* Excludes Jumbo Source: Mortgage Bankers Association, Census Bureau, Goldman Sachs Research Estimates

NYO-AAA 123-20080330-

Between 2003 and 2006 share of non-

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

conforming

<J

products grew

i

disproportionately

10

SLIDE 12

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

~

NYO-AAA 123-20080330-

SUB-PRIME MORTGAGES BECAME THE DOMINANT UNDERLYING ASSET FOR MANY COOs BY THE END OF 2006

Percent Representative ABS COO ~

2002*

ABS structured ABS settlement franchise

I

ABS aircraft ABS

\~

COO equipment lease ABS auto ABS credit card prime

A29N)~I

••••••••• ~r20'$~c~O~it

)))) )!41 CMBS large RMBS RMBS Subprime MH Representative ASS COO ~

2006*

RMBS subprime CDS RMBS ABS COO CDS

Note: ABS - asset-backed securities, COO - collateralized debt obligation, CMBS - commercial mortgage-backed securities, CTL - credit tenant lease, RMBS - residential mortgage-backed securities, HE - home equity, MH - Manufactured housing, RMBS - residential mortgage-backed securities, COS - credit default swap

* 2002 closed COO issue by SFE CABS III COO, Ltd, 2006 closed COO issue by GSC ABS COO 2005-1

Source: Fitch Ratings presale report

11

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 13

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1 "-l

RISING US MORTGAGE AND HOME EQUITY LOSSES BECAME EVIDENT AS EARLY AS 2004

Static cumulative loss rates by vintage Percent

19 18 17 16 15

I

14 13

I

12

..

11

I

#

Q405 Q305

10

'" Q205

9

ff

f'

8

'"

7

/Q105

..,

'"

#

6

#' #'

5

'"

NYO-AAA 123-20080330-

DISGUISED EXAMPLE

Q404

'" .... .. Q304

'"

4

#

3

,,/

~/

",&.':#'

... ~

..

;;;-. -.::: :...: .::.... _ _ ::::.. _ .-:-:::.. -=--

Q 1 04 Q204 ...

2 1 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42

Age (months)

12

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 14

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD U1 W

NYO-AAA 123-20080330-

COOs ACROSS RATING TRANCHES DECLINED SHARPLY IN VALUE, STARTING WITH THE RISKIER TRANCHES

Current value of COOs of subprime mortgages Tranches of ABX.HE.2007

2 index

,

"

"./

.,J

~

r

...

\

.. ...

" ~

"Safer" tranches sustained their value for longer

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en

5

..

\ \

AM (53¢)

~

30

20 10

"Riskier" tranches declined

much sooner

,

.. ..

July

2007

August September October

,

~

.,....,,-

,.....

,/

' ..... ,.... ...... -

\/

,

.. ... ...

<to

..

November '" ..

.......

..

~

..

'IiIICI ..

.... '

......... /M (22¢)

,r~

.;-= *--... .. _

.. /A (16¢)

..

~ ~

December January February

2008

\ BBB (13¢) BBB- (13¢)

March

Source: ABX index values and home equity CDS spreads from Markit and JPMorgan

13

4'

s·

I[

SLIDE 15

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD U1 .j>.

NYO-AAA 123-20080330-

COO RATINGS ARE BEING DOWNGRADED, SOMETIMES SEVERELY

2006 subprime transition table Percentage of outstanding classes Original rating level AAA AA

A

BBB BB Current rating level (after downgrades, if any)

I AAA

AA A BBB BB B

eee ee ew* )

k.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.} ········································1 ................................................................................ [ ....................................... [ ....................................... [ .. ·······································1·· ...................................... ]. ········································1

u.s. cash flow and hybrid COO of ABS-migration table

Vintage 102005-302007 Original rating level AAA

AA

A BBB BB

* Credit rating withdrawn

Current rating level (after downgrades, if any)

I AAA

AA A BBB BB B

eee

ee)

F.·.·.·.·.· .....

•·••••••.•••.•••

......... ·.·A ........................................ , .·.·.·.· .. · ... · ... ··.·.·.·.· .. · ... · ... ·1. ·.· .. ·.·.· ... · ... ·.·.·.·.·.· .. · ... · ... ·t ·.· .. · ... · ... ··.·.·.·.· .. · ... · ... · ... ·.t ·.· ... · ... · ... ··.·.·.·.· .. · ... · ... ··.·.t .· ... · ... ··.·.·.·.·.·.· ... · ... · ... ··.·.·1 .· ... · ... ··.·.·.·.· .. · ... · ... ··.·.·.·.·1

Source: S&P, January 31, 2008; team analysis lmilllli Percentage of

tranches not downgraded

14

~ ;<- ~

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 16

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1 U1

THE FINAL LEVEL OF LOSSES IS STILL UNKNOWN.

Percent of loans entering foreclosure by quarter (1 Q 1998-3Q 2007) Annualized rate 5.0

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

NYO-AAA 123-20080330-

Subprime ARMs All mortgages

#'

0.5

~

~ --

~-

-

~

.,..".,..-"'"
1998

1999

2000 2001 2002 2003 2004 2005 2006 2007

Source: Mortgage Bankers Association, Goldman Sachs Research estimates 15

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

'"

'-' en ~

u

;;:

4'

s·

I[

SLIDE 17

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1 0)

TODA V'S DISCUSSION

1. An Environment of credit and liquidity growth
2. The US mortgage market as the epicenter of the crisis
4. Implications and outlook
Winners and losers
Implications for select financial areas
5. Lessons for Professional Risk Managers

NYO-AAA 123-20080330-

16

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 18

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1

..j

NYO-AAA 123-20080330-

ILLIQUIDITY SPREAD RAPIDLY TO OTHER ASSET CLASSES

::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: ..................................................................................................................... ".

p~p~r~iG~B!

theCDObidi>···

........................................

Post crisis onset events (July, 2007 onward)

Moody's has changed its rating system for subprime-like loans, low/no equity loans, and low/no

documentation ("liar's") loans as loss estimates for these loans have increased substantially

Difference in interest rate between conforming mortgages (under $417,000) and prime

nonconforming mortgages (>$417,000) grows to -100 basis points

Moody's has downgraded 19% of the securities created from 2006 subprime mortgages they

rated and put 30% on a watch list

Fitch warned that numerous classes of COOs are on watch for a downgrade because the

subprime debt resold into COOs had been downgraded or put on watch for a downgrade

Banks negotiating for better terms on leveraged deals to clear $250-300 bn in high yield bond

backlog

Over 40 pending buyouts valued at $1 billion or more currently awaiting close and potentially in

jeopardy (e.g., Sallie Mae transaction aborted)

Over $200 billion in assets financed through the ABCP conduits moved back on banks' balance

sheet

Coventree, leading third party Canadian ABCP conduit, forced to restructure following inability to roll
ver commercial paper and unavailability of liquidity backstop lines
Goldman Sachs (along with Perry Capital and other investors) injected $3 billion into the firm's

Global Equity Opportunities Fund; Goldman's Global Alpha lost 27% of its value; AQR and Renaissance report similar declines

Sudden declines in other currencies on the opposite side of the carry trade (e.g., New Zealand

dollar and Australian dollar) accompanied by rise in the yen 17

~

""

~.

~

~ !!i. s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

4'

s·

I[

SLIDE 19

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1

co NYO-AAA 123-20080330-

THE CRISIS CAUSED AN INCREASE IN THE "PRICE OF RISK" WITH CREDIT SPREADS MOVING FROM TOO lOW TO QUITE HIGH

Leveraged loan BB spreads* Percent 600 550 500 450 400 350 300 250 200 150 100 50 1999 2000 2001 Spreads peaked following the Enronl telecom defaults

f 2002 and lasted for a

2002 2003 2004 2005 2006 2007 2008

* 3 months BB - US Composite over 3M LlBOR ** 9 year average (since 1/99), 5 year average (since 1/03), 3 year average (since 1/05) Source: LCD; Moody's; Reuters; McKinsey analysis

-- BB

, ........... Average spreads

9 yr avg**: 2.09% 5 yr avg: 1.35% 3 yr avg: 0.84% 18

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 20

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD U1 CD

TODA V'S DISCUSSION

1. An Environment of credit and liquidity growth
2. The US mortgage market as the epicenter of the crisis
3. The concern over contagion
Winners and losers
Implications for select financial areas
5. Lessons for Professional Risk Managers

NYO-AAA 123-20080330-

19

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 21

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0)

NYO-AAA

123-20080330-

GLOBAL WRITEDOWNS REACHED -$195 BILLION IN MARCH 2008

~

E2d us

a Non-US

$ Billions

a

~

q"

frY

~

·s

.~

Qi

Cf

~

c:

·s

~

~ ~

63

S

.frY

~

,...

:!!!

'V

$ a .p

"

.jj

~

;QCfj

~

§

~

i?

rf

~

!

,rtf

~

0°

'Ji

(j

&

~

*'

'"

Q;)

~

rnCfj

":J

'"

~"V

'If.

..:;.

§

.~

~

§

.~O)

~

cJ S'

U

~

i?

QCfj

RJ

$

Q ~

~

rf

~

~O)".s:-

.:-....

~

.:-....

.J;?

*'

~ ~ ~

<yU

§'

~

~Cfj

,0

~Cfj

~

a

~

0-

0Cfj

§ ·~qa~

Qi

;t:;:'

~.j~.~

~

°

n:i ;::;

S- ~

Q;)frY

0Cfj <S Q;)0 <)0 .:p

4.. '0

~

.;if

§

$

Q;)Cfj

00

~

?J

q"

"

~

Q;)~ t:J?~

~

~?c

~

!

~

'"

~

Qj

(j

..::,.-

(j

..::,.-

U

................ \ i.· ... ·.···· ' .............. , ............. ,

~

24.5

1 IKB parent company KNV Group absorbed -$7 billion of the writedowns resulting from an off-balance-sheet fund IKB controlled as part of its bailout of the German bank. 2 Includes Mizuho, Nomura, Bank of China, Mitsubishi, Sumitomo Mitsui, Shinsei, Sumitomo Trust, Aozora Bank, DBS Group, Australia & New Zealand Banking Group, Abu Dhabi Commercial and Arab Banking Corp 3 ABN Amro Holding NV was acquired by Royal Bank of Scotland Group Pic, Fortis and Banco Santander SA. The assets written down were parceled

ut to acquiring banks. RBS reduced the value of ABN Amro assets it was incorporating into its balance sheet by 978 million pounds ($1.9 billion).

This figure isn't included in the RBS writedown number on the table. The other buyers didn't specify their share of the ABN writedown. 4 Includes Wells Fargo, Lehman Brothers, DZ Bank, National City, BNP Paribas, and other North American and European banking institutions. Source: Standard and Poors; WSJ, Market Watch, various financial news, McKinsey analysis

24.5 20

~

~ !!i. s;

8.

~ a.

2

'"

IV c;. en ~ "0 ;;:

4'

s·

I[

SLIDE 22

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD 0)

..... NYO-AAA 123-20080330-

TO DATE, THERE ARE LIKELY SOME WINNERS AND MANY LOSERS

Well-capitalized, prudently funded, highly-

rated institutions that will weather the crisis and be able to make intelligent strategic investments at attractive prices

Nimble proprietary investors that can take

advantage of mispriced assets

Distressed debt investors with substantial

'dry powder' available for investment at once again attractive spreads

Emerging markets, which appear to have

been somewhat insulated from the turmoil (at least until Jan' 08)

Owners of credit assets purchased at

improbably narrow spreads. The subprime mortgage market is filled with examples, some

f which are well-known
Residential real estate owners in badly-

affected markets, including Florida, Nevada, Arizona and California

~

""

~.

~

~ !!i. s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

Institutions with imprudent levels of

I :l'

leverage and overly reliant on the availability [

f the securitization markets
Investment banks with a heavy dependence
n the mortgage markets
Rating agencies (particularly their structured

credit groups)

Mortgage guarantors, credit guarantors

and GSEs

21

SLIDE 23

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0) "-l

NYO-AAA 123-20080330-

FUTURE IMPLICATIONS FOR SELECT FINANCIAL AREAS

Description

1~9ir1~liP!~Mt;lr~

I·

Likely downgrades of insurers with high exposure to subprime or inability to adhere to new liquidity requirements absent additional capital injections

L;!]!]!]!]!]!]!1I • Likely shifts in governance and ownership as banks originate bail-out packages to

ffset potential mark-to-market downgrades of their assets

~

;<-
Tighter credit environment will impact consumer spending
Increased credit card defaults (e.g. 10% rise since Jan 2007) will add further strain

~

n banks' capital and reserve requirements
Return to stricter underwriting standards

li9IRlri~i~1

·

~s~t~:~

~:eC~:d~aO:~g~:d~g~t :~;f~e~sb:~:~eu:i~i~'eP~r~i~n

squeeze

Tighter credit will reduce potential for new deals
A slowdown in the real economy will further put pressure on commercial real

estate

"""'.::,·"··:··,··:···"·····"···"·"····"'1"'",

..... "' ...... ,, ...... ,~,' ..... , ...... ,',

Reduced economic activity combined with difficult credit and liquidity environments

rlnanCla"seC,Lor,.

. .

.

.............. .......... ....................... ..........

II h

ff t d t

ddt

.,.,.,.,.,.,.,., .. ,.,.,.,., ,.,.,.,., .. ,.,.,.,., ,.,.,., ., .. ,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.,.".,.,.,., .. ,.,.,.,.,

WI

ave a major e ec on In us ry revenues an pro uc mix

.................................................................................................................

tevern..les«»

,,',',',.,',', .... ,',',.,', ,

... ,.,',. ".,', .... ,.", ... ,

.. ,

... ,.,',',','"',',',,.,.,.,.........

Europe should be more resilient; emerging markets will gain prominence

=-Eil1l1 •. j:IC··.'.·t:·,t?1 • Re~uced

econo.mic activity and difficult credit an~ liquidity environments have a

:.3C3SeCQ

major effect on Industry revenues and product mix

I

Europe should be more resilient; emerging markets will gain prominence

22

~.

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 24

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0) W

1

.................................................. ··········1

1. Bond insurers...............................................................................................................

NYO-AAA 123-20080330-

LIQUIDITY CRISIS WILL LIKELY LEAD TO EXITS, CONSOLIDATION AND SHIFTS IN GOVERNANCE STRUCTURE IN THE BOND INSURER SPACE

Significant downturn in the bond insurer space . .. Stock price July 2007 - Jan 2008 11.1 """""""""'"'''''''''' 62.1 ~c.:-&"'" 14.9 I ----------------- --------

RADV\N 54.5 ~-.-

8.8

Source: Bloomberg, team analysis

. .. will give rise to 4 likely scenarios Scenario Rationale Exit

Insurers with significant

market subprime exposure or inability to raise capital requirements will be unable to maintain rating (e.g., ACA) Run-off

Insurers with sufficient

book existing business/high residual earnings may be downgraded but continue to manage previously originated business Raise

Different options depending on

money

Level of distress
Governance structure (e.g.,

PE owned vs. public) Bail-out

Banks with significant

economic interest can invest to offset potential mark-to- market exposures that would result from downgrades Implication

Likely concentration

across insurers with little exposure and exit of high subprime exposure insurers

Potential changes in
wnership and

governance, as banks could acquire significant shares in insurance business to mitigate expected balance sheet losses from asset downgrades 23

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

'"

c;. en ~

u

;;:

4'

s·

I[

SLIDE 25

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0)

""" 12~R;t~l(;r;ajt

••••••••• •••••••••• •••••••••• •••••••••• ••••••••••••••••••••••••• •••••••••• •••••••••• •••••••••• ..........1

NYO-AAA 123-20080330-

RECENT UNEMPLOYMENT TRENDS AND DELINQUENCY RATES SHOW THAT HIGHER CHARGE~OFS ARE STILL TO COME

Credit card charge off rate and unemployment rate Percent 8.0 7.5

7.0

6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1996 1998 2000 2002 2004 2006 2008F Average US credit card delinquencies - 2007 Percent 5.2 5.0 4.8 4.6 4.4 4.2 4.0 AMEX rate increased by 25% from 04, 2006 to its highest level since 2002 Capital One's 04 rate = 5.4%, its highest level since 2003 2010 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Card Data; Bureau of Labor Statistics; Team analysis

=

Unemployment rate Industry charge off rate

III Recession

Increasing unemployment and

delinquency rates will lead to increasing losses for commercial banks

Collection function will become

increasingly important to prevent future losses

24

~

""

~.

~

~ !!i. s;

8.

~ a.

2

'"

'"

'-' en ~ "0 ;;:

4'

s·

I[

SLIDE 26

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0) U1

1~1Hjg6Yi~id¢gtP~tat.¢t.djt

.................................................1

NYO-AAA 123-20080330-

YIELD SPREAD ON HIGH YIELD BONDS INCREASED MORE THAN 3x OVER THE LAST YEAR

BB - us Composite 3 Months spread* bps

450 400 350 300 250 200 150 100 50

Jan

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

2007

* Over 3 Month T

bill

Source: DataStream

2008 25

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 27

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0) 0)

13JGdtfitfi$tciali~aji$tat~

.................................................................1

NYO-AAA 123-20080330-

IN 2007 ALL LENDING EXPERIENCED STRICTER STANDARDS AS A RESULT OF THE IMMINENT CRISIS

Net percentage of U.S. banks tightening lending standards

Percent

Mortgage lending

60 40

20

20

Commercial lending

60 40

20

20

03 03 04 05 06 06 07 01 04 03 02 01 04 03

Note: Y-Axis shows percent of respondents who tightened lending standards Source: Federal Reserve

Credit cards & other retail loans

60 40

20

Other loans

,f

\I.e

....... '''=_'

... ""'l:

..... ' =",," ~

,;Credit card

20

Commercial real estate

60 40

20

20

03 03 04 05 06 06 07 01 04 03 02 01 04 03

26

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 28

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0)

..j

14Jiinantial$$¢totreV$nU$$ .....................................................1

PREVIOUS MARKET DOWNTURNS EFFECT ON REVENUES OF THE U.S. SECURITIES INDUSTRY

u.s. securities industry financial results*

End Q1 1980 value indexed to 100 (quarterly figures)

2,800 2,600 2,400 2,200 2,000 1,800 1,600

""m

1,400 1,200

,':':': .:::::.

............... -

1,000 800 600

',:.:.

400 200

II

NYO-AAA 123-20080330- Securities firms revenue Absolute revenues below corresponding quarter in previous year Q1 19801981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 * Extracted from aggregated income statement, selected balance sheet, and employment data on the U.S. domestic broker-dealer operations of all NASD and NYSE member firms doing a public business derived from their Financial and Operational Combined Uniform Single (FOCUS) Report filings Source: SIFMA; McKinsey analysis

27

:i'

;<- ~. ~ ;- r ro !!i- s; "- ~ "-

...

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 29

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0)

co

1§;~ig~g~i~I~p~9r~Y~Hij~

....................................................1

NYO-AAA 123-20080330-

MCKINSEY'S SCENARIOS SUGGEST CAPITAL MARKETS ARE LIKELY TO REMAIN SOFT THROUGH 2010

Global capital markets and IB (eMIB) revenues*

€ Billions

I--diifo ____ ..

374**

? ,------1

1 1 1 1 1 1

2004 2005 2006

Post-write- Pre-writedowns downs 2007

* Sales and trading, ECM, DCM, loan origination and syndication, and M&A revenues.

316

'Long chill' 'Late tackle' 2010 Scenarios

** Estimates based on results of ten Global players, which may over-state total industry growth given relative out-performance by leading firms, plus third quarter results from November year end firms leading firms, plus third quarter results from November year end firms Source: Company reports; McKinsey Global Capital Markets Revenue Pool

28

~ ;<- ~. ~ ;- ~ !!i- s; "- ~ "-

...

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 30

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD 0) CD

NYO-AAA 123-20080330-

WIDE VARIATIONS IN PERFORMANCE ACROSS PRODUCTS DURING 2001

CD 2006 Global revenue

Global securities revenues growth Percent High 80

40

Picking up

market share ECM

I I I I I I I I I I

Cash Equities Commodities Full

~

throttle I

~

e--Sec_ Lending

~

~ !!L s;

& Financing

~

~-r-~-

Average ~

'OJ

12%

~

Growth*

2006-07

(post writedowns)

40
80
120
160

Low-200 Laggards Prop trading D C M -

----------i

Bonds 10

15

20 Low

Note: 2007 results include estimated write-downs

DCM-

Loans

25

Source: McKinsey Global Capital Markets Revenue Pool; team estimate

: Equity

I

Derivatives Slowing down

I

30!

35 40

45 50 Average 31%

High Growth, 2005-06

29

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 31

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD

..j
leJiinantial$$¢totliquidity ...........................................................1

NYO-AAA

123-20080330-

Several institutions around the globe have been threatened by major liquidity problems

Third-largest U. K. lender, assets of -£1 OObn
1/08: Asked the Bank of England for a £26bn

liquidity support facility 2/08: Nationalized, adding -£25bn of loans,

£30bn of guarantees, and -£55bn mortgage

book to the U.K. gov't

Collapse was attributed to heavy reliance on

i1J;~;

Coventrce

(Aug 2007)

8/13/07 - Coventree, a non-bank issuer of commercial

paper, fails to roll several of its issues; citing contract technicalities, its backup liquidity providers don't step in 8/14 - 17 other ABCP issuers request emergency liquidity; -$100bn market disrupted Effects felt as far away as Asian CDS market (Sep 2007) wholesale funding 8/16 - key players market agree on stabilization plan, 23 short-term fixed issues become long-term floaters In aftermath, role of rating agency DBRS comes under scrutiny

Centro

P'r{\.p1H""tl.e$ \tn~vp

(Dec 2007)

Sudden moves in short-term rates
17% market share prior to difficulties

~

Countrywide~

. Relied heavi.lyon securitization to fund new

1m!

HOME LOANS

mortgage origination

8/07: When securitization became difficult,

announced plan to draw on the entire $12bn credit (Aug 2007) line and obtained $2bn of new capital from BoA

12/16/07 - Centro, an international

commercial real estate developer, failed to refinance $3.4bn of maturing debt raised to fund an acquisition

Centro originally planned to access

the CMBS market to refinance, but market was locked up when needed

Lenders quickly granted a 2 month

extension; Centro begins attempts to sell itself; situation still unresolved as

f early March
1/08: BoA announced the agreement of an all-

stock deal valued at $4bn for Countrywide.

\J

)p

q

cw (Mar 2008)

Downgraded by credit

rating agencies

Drew on its entire

$7.3bn of emergency credit lines to repay debt maturing in May '08

May lead to shrinking

its lending operations

r asset sales

Source: Bloomberg, literature search (Mar 2008)

Started with riskier liquidity

position relative to competitors

3/12 - 3/14: Series of events

rapidly reduced cash position from $17bn to $2bn

3/14/08: Emergency funding

from JPMC and NY Fed

3/16/08: JPMC announced

an agreement to buy Bear for $236M ($2 per share)

30

s;

8.

~ a.

2

'"

'"

'-' en ~ "0 ;;:

4'

s·

I[

SLIDE 32

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

.....

A liquidity crisis can arise for an institution in several ways

NYO-AAA 123-20080330-

31

~ ;<- ~

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 33

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r-

m

::c

.....

~

CD

..j

"-l

NYO-AAA 123-20080330-

Liquidity evaporated in the interbank market in mid-2007 and has yet to fully return

UBOR overnight rates spread' bps, 2007-2008 500 450 400 350 300 250 200 150 100 50

50
100

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2007

* Over Fed funds rate ** Over U.S. 3 month Treasuries Source: Bloomberg

2008 UBOR 3-month rates spread** bps, 2007-2008 250 200 150 100 50

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

2007 2008 32

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

'"

en ~

u

;;:

4'

s·

I[

SLIDE 34

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

W

NYO-AAA 123-20080330-

Access to short-term liquidity was severely reduced by disruptions in key markets

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

!qY~9r~i~i~¥~

ij9r~§ij9~§m~Qlti §pt~g§~tp!yi<

rI61~!ifl'lt~1

............................................................................................................ ···········1

bilhkbil'~h¢~$h¢t$i Source: Federal Reserve, literature search

u.s. commercial paper amount outstanding

$ Billions

1,400 1,200 1,000 800 600 400 200

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Discount rate spread Thirty day A2/P2 less AA nonfinancial commercial paper

160TI-~-~-~-~-~-~-r-~-~-~-,

140 120 100 80 60 40 20

to to to to to

"- "-

~ (D

en

a

N N

~

~ ~ ~ ~

§

~

HSBC: Moves $45bn in SIV assets onto balance sheet (Nov 2007)
Citibank: Moves $58bn in SIV assets onto balance sheet (Dec 2007)
Credit Suisse: Moves $8bn in SIV and other off-balance sheet

securities on balance sheet (Mar 2008)

33

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV c;. en ~

u

;;:

4'

s·

I[

SLIDE 35

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

.j>.

NYO-AAA 123-20080330-

The Fed has gone to great lengths to support the U.S. economy overall and the liquidity of its financial system

6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

Fed

r- a

(0

a r- a

;::::

a

ECB

r- a

OJ

a

II r-

a 03 a

BoE

r-

a

25

I I

r-

S2

I

r-

a

N

<Xl

a

.

~ a I

\

,

*Not on review for downgrade as collateral (reserving the right to demand other assets if pledged collateral turns bad)

<Xl <Xl

~ ~ a a

The US Fed has taken a more

aggressive approach than its British and European counterparts in dealing with the f credit and liquidity environment

~.

Fed reduced its policy rate 225

~

basis points since summer

~ !!i.

2007

s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

4'

s·

I[

SLIDE 36

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

U1

NYO-AAA 123-20080330-

Bear's rapid drop from $17bn to $2bn in liquidity holdings may have been driven by three groups of customers and counterparties

Q: Guy Moszkowski- Merrill Lynch

A: Sam Molinaro- Bear Stearns, CFO, COO

Source: WSJ 3/18/08 (reported drop from $17bn capital base to $2bn in cash); over same period SEC Chair Chris Cox cited a drop in liquidity from $18bn to $2bn (Bloomberg March 20) 35

~ ;<- ~

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 37

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

0)

NYO-AAA 123-20080330-

Bear was unable to repay its outstanding repo lines with available resources

Total liquidity as %

f gross repo financing at FYE'07

106% 93% 72% 77%

MS

MER LEH

GS

Total liquidity as %

f net repo financing at FYE'07

1289% 889% 328%

MS

LEH MER

Source: Analyst reports

A Repo borrowing is a form of short-term borrowing
n a secured basis against a securities inventory
Example
A lender has $99M to invest for 14 days from 1

Nov 2007 to 15 Nov 2007. Bear can provide the Fannie 11/15/17 as collateral and quotes a Repo rate of 4.5%; hence the lender will earn Repo interest of $0.2M.

Flow

36

~

""

~

~

~ !!i. s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

4'

s·

I[

SLIDE 38

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j
..j

NYO-AAA 123-20080330-

CIT announced a $7.3 billion drawdown on its backup line of credit

$ Billions, FYE'07 Short term assets

Cash
Assets held for

sale Long term assets

Net receivables
Op lease eq
Retained int

·GW

Other

Assets

90

Liabilities

90

Short term financing

CP
Deposits
Factoring credit

balances

Accrued liabilities

Long term financing

Secured
Unsecured

7

.IW"l.:i"'l.:i"~"'~"J.'!

.......... __ _ Equity

CIT's financing had a significant duration mismatch: $6 billion of

short term financing effectively supported long-term assets

As this short-term financing grew significantly more expensive, CIT

found it hard to replace

Source: SEC filing, literature search

CIT is a non-bank commercial financing

company; it relies on ongoing borrowings to finance its lending

Due to credit market turmoil, it was forced to

use more capital-intensive short term financing sources - e.g., its use of secured borrowing rose from 5% as of FYE '06 to 30% a year later

Recognizing this "deteriorating funding profile",
n 3/18 and 3/19 Moody's and S&P

downgrade CIT's short term credit ratings (e.g. S&P to "A-/A-2" from "AlA-1 "); long-term ratings put on review by Moodys and Fitch and cut by S&P (to A- from A)

On 3/20 CIT was forced to draw its entire

$7.3bn of emergency credit lines

CIT must have enough cash to cover $9.7bn
f debt that matures in 2008, $4.1 bn of

which comes due in May

"We recognize that, given the current

market environment, we need to run a smaller company. " - Jeffrey Peek, CfT's CEO

CIT claims that credit line will cover all funding

needs for 2008 37

~

""

~.

~

~ !!i. s;

8.

~ a.

2

'"

IV '-' en ~ "0 ;;:

4'

s·

I[

SLIDE 39

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

co NYO-AAA 123-20080330-

Previous international banking crises suggest how long the current environment may persist

The first energy crisis affected

Spain's banking system, leading to 52% of 110 banks into serious financial problems

Commodity-shock driven

recession led to loan losses and then insolvency in banks; three largest banks nationalized

Recession preceded by

financial market liberalization and the collapse of exports to the former Soviet Union led to a severe depression; the Finnish government spent over 10 billion Euros over the crisis period to support Finnish banks

A restructuring of the tax

system caused financial bubble that formed during 1980s to burst; the central bank was unsuccessful to defend the currency's fixed exchange rate even with the interest of 500%

Non-disclosure and a lack of

transparency resulted in lowering rating companies' evaluations of Japanese banks; thirteen Japanese financial institutions went effectively bankrupt during 1995

Indexed real home prices (annual avg.)

13-5 -f

I :::J I

12,,' -l 11.5 J

i I

10~ "(.,:,;;, 1(J03=lOO

,

.

..........

'CO-.... -....-...

..

"

105 J 100 J

4 year decline

!I ____

~-~-~-~-~-~-~

%+-

lndex t·

4=--1 00 .~:-;~<:".s-: .:<~{ to.,,:, ~R~i$ 5" l;·.):(..;(-x t-.3

t-2 T t-4 t.l ,+1

r+2 t+3

Annual real GOP growth

f

t s.

.

"

,

us;

<.-'X

~ --

'

A,,*,'3@ fud)'\f<l"'~C:lXeJ<

al ••

,

~edei:croml~S".

,,""

'>,

'-"'M!N'-,.,.;#~

~ "'"0( 100 ..... Joe';':

t4

t·) t-1

t-l tH

",-.,

, .. Years Years

Source: "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison", C. Reinhart & K. Rogoff, Feb 2008

The "Big 5" crises had

an average peak-to- trough house price decline of over 20% - the declines lasted for 4 years on average

US home price

declines began -20 months ago and are

Might be reasonable

to expect continued price declines for at least 2 more years

The "Big 5" crises

produced recessions that were, on average, 2 to 3 years long

US GOP performance

has not (yet) shown signs of suffering to the same extent

38

:i'

;<- ~. ~ ;- r ro !!l- s; "- ~ "-

..

2

'"

IV

'"

en ~

u

;;:

4'

s·

I[

SLIDE 40

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

..j

CD

TODA V'S DISCUSSION

1. An Environment of credit and liquidity growth
2. The US mortgage market as the epicenter of the crisis
3. The concern over contagion
4. Implications and outlook
Winners and losers
Implications for select financial areas

NYO-AAA 123-20080330-

39

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[

SLIDE 41

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

co

RISK MANAGEMENT LESSONS LEARNED FROM CURRENTI

RECENT CRISIS (1/2)

NYO-AAA 123-20080330-

'!*~m~p~ij~¥j~mj~y~pr9y~h!ij4t:f!~i~ptJijpt9Yi9!ij~P~ijr~ij~*~Y!~'i9f~e9*4t~9t!*~f~r~

I

....................

::» )):: }}}» 1H~aQ~ly$i$amilt~n~+~4filt~rl/t~q1hem~qQeWithq41ma$iv~maQi.iala~qijM')j

...................................................................................................................................................

40

!!L

4'

s·

I[

SLIDE 42

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

co .....

RISK MANAGEMENT LESSONS LEARNED FROM CURRENTI RECENT CRISIS (2/2)

NYO-AAA 123-20080330-

:i'

.................................................................................................................................................................................................................................................................................................... :::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: ~

t!tlipgtl~gqi9l<l)'~¥9Iyjr~pq~ir~?~?,~rg~r~qy?jq~?~?~mp?lrj~§~j§~M~r~9~m~m\f,(9ylq?9t~$t9\?~i,?~j§< ij¢ijt$qtpro@mi?@;ij(:.wptimi?;~@i$W,;"tr~q$i'$t~lypijri$Km$'ij~g~m~ijtp¢qm¥QI~Mm$ij$'g@ri$@;~ijgf¢@lm@y¢$ijmj?

Illiii."1Llllllr&JlllllrlJi,alfL,.lrJIi.iIBllll

q¢f¢b$~bgQf~o$E)(@;g.;SQlgmf,l:o)i

))»

.•.•..............

............................................................................................................................................................................................................................................................................................. ~ ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

fQh~r!~)~!Q9!Q~8m~(~·9i;pr#~!t~Q~m~q~1r§~§~r~Q8tj8!@yS9Q~!~r~wb~Q~#~iQ9~f~D§~m!9Dimp~9t

i

Qf9Qtr~!~tjQD$~o~ti9$QijpQqfQ!jQ)

))iii

))ii ))iiiii ))ii ))iii ))ii ))i ))ii ))iii ))ii

))ii)

n@p8~ymi~i~I~ftBmt~8P~gim8tr~t8~(~;Q;!m~r~r!~t~g~sr~gitp§~!~rmp[~8Bmp~fi2m~8P[2Y~!Pt98~X

41

SLIDE 43

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

co

"-l

NYO-AAA 123-20080330-

THE CRISIS IS PROMPTING BANKS TO REVISE AND IMPROVE RISK MANAGEMENT PRACTICES

Specific tactical response Broad, comprehensive review and/or redesign Activities

.............................................................................................................................................................................................................................................................................................................................................................................................................................................................

i;QrJ~0Qt~rg~8@~ti1g~O~gi1~d9~r#1'Iy~j~190<1~(§t~n<1imp~G(pfl)(>t~Oti~190tQm~s~n~

imp!8i~19~*r9r§~t~rpri~§~Q~P§2ifl2~m~!Q~*(~i9;4~y~r~9~F!~s~) g'!mpt9y~!p$+f9~¢~$Mgp~&9Dqbi$"t9r@~lt~gt¢$@ijm9g~!$jijijijiji

9;Q9Q9Q¢tq¢t~iI¢qg~pgiV~$i#g$¢I¢t¢qpq$jQ~$¢~wifhp9mp1¢*VP9t¢i1~j~I&(biQg~Qtj$K)i @&p9*0~*(~;9;pq,h9~p~!~Qm{~!~§;*~@Q~i~@h~y*iD~§~§)

~;&x$t§m~tj9Rg~t~pfmpg~I'#9mp"PQ$t9f~9(Q~Wr~lj~x(§;Q.;r~MlIY9&)ji<»·

................................................................................................................................................................................................................................ ...................... .......... ....................... .......... ....................... .......... .......... ............ .......... .......... ....................... .......... ....................... .......... ..................

?;4~mQ8h89mp~h@Q§iy@p~9r~Qf(~8f9~§~i~9!~§@~Q~fYQ2t!9n~I!~if~)j~f9i@~

••••••••••••••••••••••••••••••••••••••••••••••• :

s,#pjpQ~£Sgyij~ '£9yi~i~iRni~r'~'Q~'~<~;Q;f98Y~gpNQm~r9Y~li'¥ 8r~p~I§)

••••••••• •••••••••• •••••••••• •••••••••• .........................i

Tlm8rp¥~QY9~9~9~!~S~!I~r~m~g~m~!~<~·Q!i~¥]~!

••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• !

HR@98!M9~P9~ijf~9ti~9~9m~!Pf9~Y9t~<~;9;S9QY~t§j9

QJ2§~9fi9)

••••••••• ii .......... iii:

Hloprn$iOg¢Ur~dj(tij¢i(tilitH:jmjij9yhn~('Wj~KiOg$qrn~rgi$i6frnot9f¢q$tQm~e$w~l~t);

§;M~#§'Qr!P8~9t'~¥'i~m'~9SR'~'s~'9ni~9!*m!~"~19~'~9~9r~9Y~8~B~P!'!~!~§

.......................................:

42

SLIDE 44

()

3.

c:

II)

3-

~ ()

=i

:;;

() C'i

r

m

::c

.....

~

CD

co w

TODA V'S DISCUSSION

1. An environment of credit and liquidity growth
2. The US mortgage market as the epicenter of the crisis
3. The concern over contagion
4. Implications and outlook
Winners and losers
Implications for select financial areas
5. Lessons for Professional Risk Managers

NYO-AAA 123-20080330-

43

~ ;<- ~.

~

~ !!L s;

8.

~ "-

2

'"

IV '-' en ~

u

;;:

4'

s·

I[