FCIC-AIG0015658 DejJO~ls S~lUleliShUil Aco\1nt~ nepO~lt" - - PowerPoint PPT Presentation

HIGHLY CONFIDENTIAL

FCIC-AIG0015658

HIGHLY CONFIDENTIAL

Liquidity Pool

Aco\1nt~

Rect1vable

TI1iql1ir1A"<et~

Accountii.l:'avable Unsecured Short Termnebt

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Term Drot ShoJtSaleii Kon-CoreBank

nepO~lt"

Long Term Debt "Core'" Bank

DejJO~ls

Preferred Eql.lity Commonl',qll1ty BS comfXJnenfs nof dra"ohn fo scale

Most liquid least patient

• The liquidity pool, in theory,

supports short-term liabilities and contingencies ~ shock absorber

• Less liquid asset, and haircuts,
• n liquid assets are funded by

"cash capitaL"

• Liquidity and capital adequacy

should be viewed on a time continuum: liquidity ratios for short term, capital ratios for longer term.

FCIC-AIG0015659

HIGHLY CONFIDENTIAL

Rdurll On Equity (mulluIliLed) Total Assets TohllEqllU) TntlllJ,illhilitirs

Trading revenues have always made up the bulk of total net revenues among the four investment banks, so as their trading revenues go, so goes their total revenues.

OT.talA"e!

• ",

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HIGHLY CONFIDENTIAL

the

While rather simplistic, insights that may be gained Include"

• Are any of the firms funding their balance sheet overwhelmingly with anyone particular

liability? Potential vulnerabilities?

• Which balance sheets appear at least on the surface to be more liquid I flexible?
• Off-balance sheet: Do any of the firms have significant off-balance sheet exposure that may

need to be brought onto their consolidated balance sheet?

• X-factors: Are their any factors either on or off balance sheet that one firm reports that the
• thers do not that may expose the firm more so than the others?

Potential Views

• Asset Composition
• liability Composition
• AlP as % of Total Assets
• Collateralized Financing as % of Total Assets
• Short Term Debt as % of Total Assets
• 'Repoable Assets as % of Total Assets
• illiquid Assets as % of Total Assets

FCIC-AIG0015661

HIGHLY CONFIDENTIAL

With the most liquid items at the top and the more illiquid toward the bottom,

• ne might gain a reasonable snapshot of the firms' balance sheet liquidity!

flexibility potential.

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HIGHLY CONFIDENTIAL

Trading assets make a large portion of the Securities firms' total assets ...

Trad,ngA •• eha.a%ofTotaIA •• et. Lehman Brothers Trading Assets

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Confd

... Looking at the size and breakdown of level 3 trading assets, the most illiquid, can help determine the ability of a broker- dealer to shed more illiquid, risky assets.

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Level 3 Assets 1 Q08

• -I- --!II --

Level 3 Assets 2Q08

DCorpDeIJt and Bank lo,""

• Il~c~usn

&

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HIGHLY CONFIDENTIAL

FCIC-AIG0015665

HIGHLY CONFIDENTIAL

Funding Funding Maturity

LEH

MER P<>riod F! E it' T

.... II

E uit Total F!

T

....

AS%. 199" "10%

"16%

44%

.00.

48°,,, 34% 43%

54'"

55Qrb Pencd 1 LEH=3,14/I)S, hER = 5/3C1CS, Mf: =:Y:'1,O), G3 =4118/08

Pt-rlud F1

LEH

E..xlensiollS of Secure.d }I.'unding Term Structure Pen;ent Maturil1g.;> 30 Days MER

1\1$0

uil Total H Equil Tutal

F1

11: ull

ToW 12% 2 13%

12~o

11% 12% 12% 18%, 21%

}1~1l.

28%

F1 ::;"1% 12% F1

41~o

57% CS E uit' Total 11% 18<%

'70,(,

11)01:.

GS E oitYI Total 65% 52%, 75% 66°'0

FCIC-AIG0015666

HIGHLY CONFIDENTIAL

An this

___ ~ Time Horizon

_________

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

• --------..

Short (- 1 manti)) Long (- 1 year) Liquidity Ratio: Liquidity Pool Scheduled debt maturities + f (Repoable assets) + operational cash outflows + prime brokerage cash outflows

Liquidity Ratio Notes:

• f (repoable assets) = 1 - cash equivalent

haircut; protects against haircut Increases.

• Operational cash outflows include delay
• r slowdown In receipt of payments

(derivatives and AIR), Increased collateral requirement on derivative positions, etc

Capital Ratio: Cash Capital Risk weighted assets

Capital Ratio Notes:

• Risk weighted assets accountfor market,

credit and operational risk Higher charges for illiquid assets modest charges for repoable assets and liquidity pool.

• Operational risk takes Into account the firms'
• perational risk requirement as per the CSE

calculation.

FCIC-AIG0015667

HIGHLY CONFIDENTIAL

Purpose: Assess the adequacy of a dealer's liquidity pool relative to its balance sheet exposure, particularly with respect to exposure to a short-term funding shock While we don t know what a "good" number is, these ratios provide a framework for comparison across the different dealers.

• Liquidity Pool as % of Unsecured Short Term Debt
• Liquidity Pool as % of Medium Stressed Haircuts
• Liquidity Pool as % of Risk Weighted Assets
• Liquidity Pool as % of Short Term Debt, Stressed Haircuts, flAiR} and f{denvative

positions)

FCIC-AIG0015668

Liquidity Pool is there to cover ....

• Disappearance of unsecured creditors
• Haircut surprises and / or disappearance of secured creditors

LiquMitJ Pool % ofUl~eCUl'ed Sbort Term Debt LIquidity Po,)l Compared A:::ainst l\IediumStress Haircuu

HIGHLY CONFIDENTIAL

FCIC-AIG0015669

HIGHLY CONFIDENTIAL

Adequacy of liquidity pool looks different when compared to current portion of unsecured debt, haircuts on secured debt, risk weighted assets, "all-in" liquidity ratio

T.lquidityPnl~s

% nfRW<I. 4T.3rgp<tSpmritip<Firm<

Liquidity Pool as % of ST Debt. Medium Stress Haircuts and FlUlction of AIR and Derivatives

FCIC-AIG0015670

HIGHLY CONFIDENTIAL

Purpose: Assess the solvency of the broker dealer balance sheets. How leveraged are the broker dealers? How much patient money IS available to cover IlliqUid assets? How suffiCient IS the capital base relative to potential write-dawn's on assets?

Leverage Ratio Tangible Equity I Total Assets Cash Capital Ralios Solvency Ratios Tier I Capital Ratio Total Capital Ratio Cash Capital as % of Risk Weighted Assets Cash Capital as % of Illiquid Assets

FCIC-AIG0015671

HIGHLY CONFIDENTIAL

Leverage ratios are crude, but hard to manipulate

Tangible Equity % of TotalA~d~

CSE ratios, now public, are a step closer to economic capital, but full of judgment

• GS uses CSE as ECap

FEENY AdjurtedLeverage'

• GoldJlanSarhs-Morg"~iaJt!ey"-\lernULynrh-'L'ltmanlrotiters

FCIC-AIG0015672

HIGHLY CONFIDENTIAL

Ideally, cash capital, generally defined as long term debt, total equity and a portion of deposits, is used to fund the illiquid portion of the balance sheet

• You'd like cash capital to cover illiquid

assets (at least?)

Ca~b

CapitallJ<u of TotalA~et~ Cash Capital % of Risk 'Weighted Assets

FCIC-AIG0015673

...

'"

"

,,.. ,

Merrill L nCh Mor anstanl 4 18 Total MktShare MktShare

R~k

MktShare Rook MktShare Total Corporate Bonds

jj

41 t 4J

j

I,

High-Yield Bonds 51

53

5'

5 Investment Grade Bonds

"

4C MBS 58 ABS 25 Il CashCDOs

0'

11 11 Syndicated Loans [allJ )1 30 11 Leveraged Syndicated Loans 12 10

l'

"

Equities

40

HIGHLY CONFIDENTIAL

FCIC-AIG0015674

HIGHLY CONFIDENTIAL

Tangible Equity Common and preferred equity less rntangible assets Cash Capital Tangible Equity + Long Term debt + 50% of bank deposits Repoable Assets Secuntles Purchased under Agreement to Resell + Secuntles Borrowed + Sec unties Received as Collateral ( to the extent already financed) + a portion of the dealer's non-derivative trading asset inventory (full credit for Level 1 assets, partial credit for Level 2 assets no credit for Level 3 assets. Adjusted Assets Total Assets - segregated cash reverse repos, sec borrowed, derivative shorts, Intangible assets plus lotal securities sold short. Illiquid Assets Total Assets less (Repoable Assets plus Total Cash) f (Accounts Receivable) f (Derivative positions) f (Repoable Assets) 20% of total Accounts Receivable 20% of Derivative Assets derived for moderate stress and very stressed scenarios

FCIC-AIG0015675