Introduction to the Credit Crisis

1. Introduction to the Credit Crisis Louie Castoria Wilson Elser San Francisco Wilson Elser Moskowitz Edelman & Dicker LLP

2. The Credit Crisis How do we know there is one? What’s a dollar worth?

3. Cost in U.S. Dollars to Buy a Euro What’s a dollar worth? 3

4. The Credit Crisis How do we know there is one? What’s your house worth?

5. The Credit Crisis How do we know there is one? How are financial sector stocks doing?

6. XLF Financial Select Sector SPDR ETF DJIA XLF How are financial sector stocks doing? 6

7. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Credit Suisse $2 Billion

8. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Royal Bank of Scotland $2.6 Billion

9. The Credit Crisis How do we know there is one? How have international financial institutions been hit? IKB $2.6 Billion

10. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Barclay’s $2.6 Billion

11. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Bayern $3.2 Billion

12. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Bank of America $5.3 Billion

13. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Deutsche Bank $7.1 Billion

14. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Morgan Stanley $9.4 Billion

15. The Credit Crisis How do we know there is one? How have international financial institutions been hit? HSBC $17.2 Billion

16. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Citigroup $21.1 Billion

17. The Credit Crisis How do we know there is one? How have international financial institutions been hit? Merrill Lynch $22 Billion

18. The Credit Crisis How do we know there is one? THE BIGGEST LOSER (so far): UBS $37.4 Billion

19. The Credit Crisis How’d We Get Here? By ignoring the fundamentals • Lender discipline • Borrower ability to pay • Loan servicing standards • Fiscal Responsibility

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

21. The Credit Crisis How’d We Get Here? 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 . . .

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

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

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

25. What is “Subprime?”

26. 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”). CDOs Or “Goldibucks and the Three Tranches”

27. 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. SPVs

28. 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?) Senior, Mezzanine and Equity

29. 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. Underwriter

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

31. 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. Rating Agencies

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

33. Whose ox might be gored?

34. Cast

35. Cast

36. 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%

37. Thank you for your interest.