~ ~ N CD co CD "'" o o o q o c U I ...J 2: U <C III ASS/COO UPDATE Dale Lattanzio Head of Americas FICC & Global Structured Credit July 2007 "C .sl CI) Qj :::::I C" Qj ... 0:: c Merrill Lynch Qj E 10 Global Markets & Investment Banking Group I- 'iij (I , :;:::: c Qj "C ;;::::: CONFIDENTIAL C o 1 U .
~ ~'ti ~ ~ ~ ~ ~0l' -~I:!I ~ ~l( ~ ~ ~ ~ ~ ~ ~(:)v ~ ~o!' -~ ~0 ~o ~ ~ -~ ~. ~,fJi ~ Q~ ~ M CD co CD "" o o o IT o c U I ...J 2: COO Structure & Economics U <C III Economics J VV IIClL I~ CI vUIIClLt:1 ClIILt:U Ut:UL VUI~ClLlUI \ vUV r Assets held by COO J I Generic Securitization[1] -, Total Deal Costsl 2] • Investment-Grade Bonds Low Risk 300 146 AAA (60%-100%) • Asset-Backed Securities Coupon = L+30 • Leveraged Loans • Emerging Market Debt 25 • Trust Preferred AAA (35%-60%) f---+ Coupon = 11 L +45 20 Inee:;;1 • Credit Default Swaps 90 F:::;;:J.", r-- • Commercial Mortgage- AA (12%-35%) f---+ Coupon = Backed Securities L +60 • COOs A (7%-12%) Coupon = i' L +325 1/ l(0 "C f:-J(;J. .... Qj q? 9,0 ;;- -/I' H <# CI) BBB (3%-7%) Qj 'i(-tl' :::::I Coupon = ;$ L +500 C" -o'i(- fqC5'. Qj § 0:: 'tt .... c Equity (0-3%) High Risk .§ Qj .... E ,# Residual CF s I:!II:!I !II ttc1' E f:-JoS I- ... (I 'iij (1) Reflects generic Mezzanine Collateralized Debt Obligation . . I (2) Expenses include: rating agencies, legal, trustee, printing, etc. C Qj "C ;;::::: c CONFIDENTIAL 0 2 u .
~ """ CD co CD "'"' o o o IT o c U I ....I 2: ML Market Leadership in a High Growth Market U <C III UIUUClI Lt:CI~Ut: I ClUIt:~ \rll:»L nClIl LUVI RANK BOOKRUNNER VOL (~BN) MKT SHARE 337 IMerrili Lynch 1 34.2 13.3 OTHER 2 Citi 11.7 30.1 .ASSETBACKEDSECURmES 3 Barclays Capital 16.2 6.3 4 Wachovia Corp 14.7 5.7 178 :':S:.-5< 5 Deutsche Bank 14.7 5.7 101 6 JP Morgan 14.6 5.7 7 BOFA 13.7 5.3 55 - ""C Qj CI) Qj 8 Morgan Stanley 12.1 4.7 :::::I C"" ~ - Qj c - 9 UBS 11.8 4.6 Qj E 07YTO[2] 2003 2004 2005 2006 !II I- 10 Bear Stearns 10.6 4.1 0 ... iij (1) Excludes Investment Grade Synthetics c (2) 2007 YTD as of June 22 Qj ""C ;;::::: c CONFIDENTIAL 0 3 u .
~ 1I1"I.:;'Clo;,lIl~ ~UIJ II) CD co CD "'" o o o IT o c U I ...J 2: US Mortgage Market Since 2003 U <C III rigination 1-'11111.:;' [ Macroeconomic environment • Low interest rates • Home price appreciation I ----- --------- Product development • Growth in non-conforming segments Impaired credit histories Low documentation requirements High loan-to-value ratios • Adjustable rate mortgages (ARMs) Distribution - 2003 2004 2005 2006E "C Qj CI) • Specialized sub-prime originators Qj :::::I C" • Subprime AIt-A / Jumbo III Prime ~ - Qj • Financing through investment banks c - Qj • Liquidity available through capital markets E !II o I- ... (ij c Qj "C ;;::::: C CONfIDENTlAL I 0 4 u .
~ CD CD co CD "'" o o o q o c U I ...J 2: What Happened in the Market U <C u III Drivers of Current Situation Impact Increased • Targeting of first time home buyers delinquencies and losses • Limited verification of borrower Aggressive information offering of product • Loading of too much risk on exotic new Asset loan products (ARMs) Repricing Significant spread widening • Limited ability to refinance out of troubled situations Declining house prices - • Increased lender losses on "C Qj Reduced ability to distribute foreclosure for high Loan to CI) Qj :::::I securities Value products - C" Qj 0:: c - Qj E !II o I- 'iij :;:::: c Qj "C ;;::::: c CONFIDENTIAL I 0 5 u .
-_'~.-.- ~ '7'?W'"'~ ~ '~A ~ "'- CD co CD "'- o o o IT o c U I ...J 2: What Happened in the Market[1] U <C III 0 II II·· 60+ Day Delinquency ABX Index Historical ABS Spreads . 1 30% .,.-~. 105% ~i-~- 1,000 ,-~- 900 1 .,- 100% .10""-........ 25% J-'----------- 7 200S-02 888- /r-.---"I'\ 8001 ";"-"-" 95"10 1 H '"" "" 700 I'"-$-&r-- , 90% 20% r • 1 , 600 1 ; " _ 1 -- __ 85%1 1SOk I / 'lI'lI'lA J 500 1 80% 1 ., 400 11----\, 10"10 t 75% I I/JlI " 300 70% II v 1 200 I. M U ... 5% 1 11·0/· 65% II 1 ---r= 1001 l \. "C .sl CI) o ·.1..,·····""·· Qj SOOkl [ :::::I 0"10 I.....IT r 1 t i l C" ~ - Qj Jul-OS Sep-06 Nov-06 Feb-07 Apr-07 Jun-07 Jan-OS Sep-OS Jun-07 1 21 3141 51 11 61 c Qj Month E · "iO I- ... O 'iij (1) Index & spread data as of June 22 c Qj I "C ;;::::: C o CONFIDENTIAL S U .
~ co CD co CD "'" o o o q o c U I ...J 2: Market Sensitive Business Model U <C III \.IUV r"IClL orm Secondary I - Distribution Origination Warehousing I I I Trading • Carry on Collateral • Placement fees • Market-making • Structuring fees Revenue • Mark to Market on • Carry on retained Flows Collateral tranches • Market demand • Mark-downs on • Mark-downs on • Mark to market Risks collateral retained tranches volatility • Use of structuring fees • Aggressive marketing of • Use of shorts available • Execution of Single Risk in the market to facilitate distribution equity & junior tranches Name & index hedging Mgm't of higher risk securities • Short risky tranches • Warehouse hedge • Near-term agreements into ML deals enhancements of trading & tech • Agreements with capabilities managers to take equity • Pricing of deals with - "C majority un-ramped Qj CI) Qj :::::I - C" Qj ---------- 0:: ---------------------------- c - Qj E Multiple risk management options enable effective strategies for stable or volatile markets !II I- 'iij (I :;:::: c Qj "C ;;::::: c CONFIDENTIAL I 0 7 u .
~ ~ ~ .~ ~ ~ ~ ~ en CD co CD l"- e e e IT o c U I ....I 2: ML Risk Transformation Strategy U <C III u November 2006 Dec thru April Today Substantial risk Securitization Risk in the warehouse & Hedging concentrated in Supersenior • Substantial assets in the • Legacy risk concentrated in • Sell off of bottom, warehouse more risky parts of the lower risk super-senior capital structure • ML holds full SES & Mark • New deals contingent on to Ma rket risk managers committing to or • Retention of more placing equity • Investment-Grade Bonds senior tranches c:: .2 • Asset-Backed Securities ~ en o ....... - • Leveraged Loans Q.. .S / &, m • External warehouse :::J • Emerging Market Debt ....... first loss providers c:: Q} :0 • Trust Preferred E .S 13 en • Credit Default Swaps en :m - e "C • Hedges on long <::( Qj • Commercial Mortgage- {) m CI) collateral Qj Backed Securities :::::I C" - Qj 0:: • COOs High Grade Mezzanine c - Qj • Alternative Assets E Senior Supersenior II · · !II Junior Supersenior I- ... O iij c Subordinated Qj . LI ____________ __________________________________________________ "C ;;::::: c CONFIDENTIAL 0 8 u .
~LI ~ ~ ~ -L-C-O-N-F-ID-E-N-nA-L-~ ~O6 ~ ~ /~IJt6 ~ ~ ~ ~ ~ ~ ~ ~ ~" ~ ~y~ ~ ~ ~:J ~06 ~ ~. &ithi4i[.]'i,:ti'&nsn.li~l o "'- co CD "'- o o o IT o c U I ...J 2: ML Risk Transformation Metrics U <C III U Risk Growth: Super Senior & Other AAA r: I .~ 36 8 Cll CJ 30 Q) 8 4 ...... s: Q) 2 ~ 4 24 Z HI I I I I Cll t 0 0 i 4 ! N-06 J-07 F-07 M-07 A-07 M-07 J-07 18 j II II I ABS Hedges 12 I--t1 I I I I It2 BBB AAA AA A Total 0 6 Z -1 Cll I ,"*9c iii - Q) -2 ;;;a; "C .. o O Qj I CI) N-06 J-07 F-07 M-07 A-07 M-07 J-07 Q) Qj :::::I -3 C" <lI ~ - Qj -4 Market Value DV01 c o Senior Super Senior Qj Total Retained E o Junior Super Senior "iO -0- Senior Super Senior DV01 ($K) 132 475 418 250 1,277 o Other AAA -0- Junior Super Senior I- ... OtherAAA 'iij c Qj "C ;;::::: c 0 9 u .
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