The Credit Crunch: Where are we and How Did we Get Here?

1. The Credit Crunch: Where are we and How Did we Get Here? • MODERATOR: Cary Meiners, Product Manager Travelers • Jessica P. Corley, Partner, Alston & Bird • Steven Goldman, Senior Vice President AIG • Mike Hogan, CIC, Executive Vice President U.S. Risk Financial Services, Inc. • Fred H. Knopf, Partner Wilson ElserMoskowitz Edelman & Dicker LLP

2. The Credit Crisis How do we know there is one? How have international financial institutions been hit? • Credit Suisse - $2Billion • Royal Bank of Scotland - $2.6Billion • Bayern - $3.2Billion • Bank of America - $5.3Billion • Deutsche Bank - $7.1Billion • Morgan Stanley - $9.4Billion • HSBC - $17.2Billion • Citigroup - $21.1Billion • Merrill Lynch - $22Billion • UBS - $37.4 Billion 2

3. The Credit Crisis How’d we get here? 3 By ignoring the fundamentals • Lender discipline • Borrower ability to pay • Loan servicing standards • Fiscal Responsibility

4. The Credit Crisis How’d We Get Here? 4 The same way we always do Some trips down memory lane… • 1986 Tax Reform Act • Savings & Loan • “Irrational Exuberance” in Tech

5. The Credit Crisis How’d We Get Here? 5 1986 Tax Reform Act • Took away the tax benefits in existing real estate limited partnerships • Led to thousands of investor lawsuits, a drop in the real estate market, and . . .

6. The Credit Crisis How’d We Get Here? 6 Savings & Loan • $160Billion impact • $124.6Billion paid by US Government • Cut in half the number of new home starts from 1986-1991

7. The Credit Crisis How’d We Get Here? 7 The Tech Meltdown March 2000 to March 2002 NASDAQ fell from 5,048 to 1,800 -- a 64% drop.

8. The Tech Meltdown 01/01/1998 01/03/2003 8

9. What is Subprime?” 9

10. CDOs Or “Goldibucks and the Three Tranches” 10 TERMINOLOGY “Collateralized Debt Obligations” A type of asset-backed security, constructed from a portfolio of fixed-income assets. The assets are classified in three levels or “tranches”: AAA-rated (or “senior”), AA to BB-rated (or “mezzanine”), and Unrated (or “equity”).

11. SPVs 11 TERMINOLOGY “Special Purpose Vehicles” A CDO starts with the creation of a “Special Purpose Vehicle.” The SPV is typically an offshore Trust, and so a law firm is involved in its creation. It also needs a Trustee (often a bank) and an accounting firm.

12. Senior, Mezzanine and Equity 12 TERMINOLOGY “Tranches” of bonds The SPV issues three kinds of bonds and equity securities: • AAA-rated bonds (“senior” - paid first) • Lower-rated bonds (“mezzanine” paid after senior) • Unrated bonds (“equity” – you’re kidding, right?)

13. Underwriter 13 TERMINOLOGY A CDO needs an “underwriter,” to select the debtor-equity ratio, design the tranches, and set the prices on the coupons for investors in the equity notes. The underwriter is typically an investment bank.

14. Asset Manager 14 TERMINOLOGY A CDO needs an “asset manager” to select the initial assets of the CDO and continually manage them throughout its life.

15. Rating Agencies 15 TERMINOLOGY SPV -issued bonds are rated by rating agencies. Those agencies opinions can be the basis on which investors buy the three tranches of bonds.

16. 16 By the end of 2006, CDOs issued globally were estimated at $2 TRILLION That’s $2,000,000,000,000

17. Who may be on the firing line of potential liability? 17

18. Cast 18

19. Cast 19

20. Navigant Study of Federal Court Subprime Lawsuits filed in 2007 • 278 total • Borrower class actions – 43% • Securities cases – 27% • Commercial contract disputes – 22% • Employment class actions – 9% • Bankruptcy and other – 4% 20

21. TYPES OF CASES Provided by NAVIGANT Consulting.

22. DEFENDANTS – Who Hasn’t Been Sued? Provided by NAVIGANT Consulting.

23. LOCATION Provided by NAVIGANT Consulting.

24. TYPES OF SECURITIES CLAIMS Provided by NAVIGANT Consulting.

25. QUESTIONS OR COMMENTSThank you! 25