Leaking Like A SIV: The Credit Crisis & Its Impact on Financial Institutions

1. Leaking Like A SIV:The Credit Crisis & Its Impacton Financial Institutions

2. MODERATOR: Raymond DeCarlo, MBA, Senior Managing Director, Frank Crystal & Company PANELISTS: Dr. Frederick C. Dunbar, Senior Vice President, National Economic Research Association (NERA) George M. Gowen, III, Esq., Member, Cozen O’Connor Paul Lavelle, President, LVL Claims Services LLC Brian S. Wanat, MBA, Managing Director, Aon Financial Services Group Leaking Like A SIV…

3. Overview • What’s Happened and Why • Litigation Environment • Insurance Coverage Issues • Broker Perspective • Q&A

4. Lender/Originator Servicer BANK Homeowners It Was Simple Back In the Day… Lends money and manages delinquencies Receives interest and principal

5. Homeowner Mortgage $$ Mortgages Lender/ Conduit Servicer Banks $$ Repo, Credit Line Mortgages $$ Trustee Trust ABS/MBS $$ Insurer Underwriter/ Placement Agent $$ ABS/MBS Moody’s, S&P, Fitch Rating Agency Individuals, Pension Funds, Insurance Companies, Mutual Funds, Hedge Funds, CDOs $$ Shares Individuals Key Players of Subprime Mortgage-Backed Securities

6. 8% $700 7% 600 6% 500 5% 400 Mortgage Originations ($ BB) 4% 300 3% 200 2% 100 1% 0% 0 Avg Effective 1 Year Adjustable Rate (LHS) Subprime Originations (RHS) Low Mortgage Rates Helped the Surge In Subprime Originations Mortgage Rates (%) 2000 2001 2002 2003 2004 2005 2006 Sources: Inside Mortgage Finance, Freddie Mac's Weekly Primary Mortgage Market Survey.

7. No Change Tightened Eased Underwriting Standards Had Begun to Ease from 2003 Retail Credit Underwriting Trends 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: 2007 Survey of Credit Underwriting Practice, Office of the Comptroller of the Currency

8. 200 180 160 140 Home Prices 120 100 80 60 40 Building Costs 20 0 1987 1990 1993 1996 1999 2002 2006 Housing Prices Started to Show Signs of Decline 1987–2008 Quarterly Data, Rescaled to Q1'1987 = 100 Rent Index (Jan. 1987 = 100) S&P Case-Shiller HPI Owners' Equivalent Rent OECD All Buildings Construction Cost Index Notes & Sources: Federal Reserve Bank of St. Louis, Bloomberg, LP, Standard & Poor's, Bureau of Labor Statistics. Values are indexed and in real terms - the monthly data was first adjusted by CPI and then rescaled to Q1'198 7= 100.

9. 200 180 160 140 120 100 80 60 S&P Case-Shiller HPI Owners' Equivalent Rent OECD All Buildings Construction Cost Index Housing Prices 1987–2008 Quarterly Data, Rescaled to Q1'1987 = 100 Index (Jan. 1987 = 100) 2000 2002 2004 2006 2008 Notes & Sources: Federal Reserve Bank of St. Louis, Bloomberg, LP, Standard & Poor's, Bureau of Labor Statistics. Values are indexed and in real terms - the monthly data was first adjusted by CPI and then rescaled to Q1'198 7= 100.

10. Recent Vintages Are Performing Worse than their Historical Peers U.S. Subprime RMBS: Total Delinquency Comparison 40 35 30 25 Delinquency Rate (%) 20 15 10 5 0 6 12 24 36 48 60 72 84 Months of Seasoning 2003 2000 2001 2002 2004 2005 2006 2007 Source: Standard & Poor’s

11. 20.0% 3.5% 18.0% 3.0% Prime Delinquency Rate 16.0% 2.5% 14.0% 12.0% 2.0% 10.0% 50% Prime Delinquency Rate (%) Subprime Delinquency Rate 1.5% 8.0% 6.0% 1.0% 4.0% 0.5% 2.0% 0.0% 0.0% Delinquency Rates for Subprime and Prime Loans Have Spiked Subprime Delinquency Rate (%) 2007 2000 2001 2002 2003 2004 2005 2006 Source: Bloomberg LP

12. 100 90 80 70 60 50 40 30 20 10 0 Jan-07 Mar-07 May-07 July-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 ABX.HE 07-01 BBB Subprime Backed Securities Issued in the Second Half of 2006 Have Collapsed In Value January 2007–June 2008 Composite Price 4.98 Source: Markit.

13. August 9–10, 2007: The Fed and other Central Banks inject US $290 billion in liquidity. December 12, 2007: The Fed announces plans to inject $40 billion in the next week. December 18, 2007: The European Central Bank injects US $ 500 billion. Jul-07 Apr-07 Apr-08 Oct-07 Jan-07 Jan-08 Feb-07 Mar-07 Jun-07 Feb-08 Mar-08 Sep-07 Dec-07 Aug-07 Nov-07 May-07 May-08 Commercial Paper OutstandingHas Declined January 3, 2007–May 28, 2008 $2,300 2,200 2,100 Total Commercial Paper Outstanding ($ BB) 2,000 1,900 1,800 1,700 Source: Bloomberg LP.

14. $200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 The Effective Shutdown of the Global CDO Market -90% Issuance ($MM) 2004 2005 2006 2007 2008 Source: SIFMA

15. 67% 79% 78% CDO Majority of the Write-downs Are Related to CDOs Total Write-Downs Citigroup Merrill Lynch UBS 22% 21% 33% Other Sources: Citigroup SEC filings; Merrill Lynch SEC filings; UBS Shareholder Report on UBS's Write-Downs UBS 20-F SEC filing.

16. 126 140 120 94 100 94 80 70 60 40 20 2007 0 2008 Annualized Count Actual Count Subprime-Related Securities Filings By Year January 2007–September 2008 Filings Notes & Sources:NERA data based on various sources, including Factiva, Bloomberg, AP News, Securities Law360, Wall Street Journal, BusinessWeek.

17. Subprime-Related Securities Filings By Type of Case ShareholderDerivative Actions Other 5% 6% Suits By ARS Investors 13% Shareholder Class Actions 47% 14% Suits By Investors In Subprime Instruments 15% ERISA Sources: NERA collected lawsuits from various sources, including Factiva, Bloomberg, AP News, Securities Law360, Wall Street Journal, and BusinessWeek

18. Subprime-Related Securities Filings By Type of Plaintiffs and Defendants Type of Plaintiff Type of Defendant Home Builders Asset Other 5% Management Firm 6% Plan Participants Insurers 26% 11% 8% Shareholders ARS Investors 52% 13% Securities Issuers/ Underwrites 20% Mortgage Investors Lenders Other 18% 21% 20% Sources: NERA collected lawsuits from various sources, including Factiva, Bloomberg, AP News, Securities Law360, Wall Street Journal, and BusinessWeek

19. Litigation Environment

20. Homeowners Mortgage $$ BANK Mortgages $$ Trust and Trustee Underwriter/Placement Agent Rating Agency ABS/MBS $$ Individuals, Pension Funds, Insurance Companies, Mutual Funds, Hedge Funds, CDOs Litigation • Predatory Lending • 10b-5 Class Action • Valuation of Residuals, Servicing Rights, and Loan Loss Reserves Lender/Originator Servicer • Breach of Contract • Breach of Fiduciary Duty • Class Certification • Suitability/Prudence • Misrepresentation/Omission • Suitability • Misrepresentation/Omission • Pricing/Markups • Investment Guidelines/Risk Management

21. Shareholders Lawsuits Against Lenders • 10b-5 Lawsuits: • Materially false and misleading statements • Mortgage assets are overvalued on the balance sheet • Loan loss reserves are undervalued and inadequate • Misrepresentations and failures to disclose key information • Market conditions and their effects on the company’s profitability • Lack of requisite internal controls leading to defective assumptions and projections Avi Gold, et al. v. New Century Financial Corporation, et al.(2007) Claude A. Reese, et al. v. IndyMac Financial, Inc., et al. (2007) Michael Atlas, et al. v. Accredited Home Lenders Holding Co., et al. (2007) Frannie, Freddie

22. Mortgage Purchasers Against Lenders Continued… • Mortgage Purchasers • Failure to repurchase mortgages and abide by other covenants of the repurchase agreement In re: New Century TRS Holdings, Inc., et al. (2007) DLJ Mortgage Capital, Inc., v. Sunset Direct Lending, LLC, et al. (2007) HSBC Mortgage Services Inc., v. David Piccinini Inc., et al. (2007)

23. Borrowers Lawsuits Against Lenders • Borrowers • Predatory lending • Unfair and deceptive acts and practices • Racial discrimination and charging more to minorities for subprime mortgages than white borrowers in similar financial situations Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A., et al. (2008) NAACP, et al. v. Ameriquest Mortgage Company, a Corporation, et al. (2007)

24. More Lawsuits Against Lenders Continued… • ERISA • Breach of fiduciary duty by failing to manage the assets and the plan with prudence and loyalty Jonie L. Brockmeyer, et al. v. Countrywide Financial Corporation, et al. (2007) • State • Violation of state laws, including issuing false statements, accepting money to process loans it could not afford, and failing to act in good faith The State of Ohio v. New Century Financial Corp., et al. (2007)

25. Lawsuits Against Issuers/Underwriters • Mortgage ABS Investors • Negligence and lack of due diligence on pool of mortgages underlying the securities • Misrepresentations about the quality of the underlying assets Bankers Life Insurance Company, et al. v. Credit Suisse First Boston Corporation, et al. (2007)

26. Lawsuits Against Managers/Advisors • Institutional Investors • ERISA, securities laws, and common law • Fraud and/or negligence concerning quality and diversification of investments • Deviation from investment strategy Bankers Life Insurance Company, et al. v. Credit Suisse First Boston Corporation, et al. (2007) In re State Street Bank and Trust Co. Fixed Income Funds Investment Litig. (2007)

27. Lawsuits Against Rating Agencies • Shareholder Class Action Lawsuits • Misrepresentations and failures to disclose key information • Market conditions and their effects on company profitability • Assigning excessively high ratings on bonds backed by risky subprime mortgages • Failure to reevaluate and downgrade ratings on bonds during the downturn in the housing market Raphael Nach, et al. v. Linda Huber, et al. (Moody’s) (2007) Claude A. Reese, et al. v. Robert J. Bahash (S&P) (2007)

28. Lawsuits Against Rating Agencies Continued… • Lawsuits by MBS Investors • Failed to conduct due diligence and willingly assigned the highest ratings to impaired instruments to receive substantial fees from the issuer • Employed methodologies that were inappropriate and inaccurate and had not been updated since 2002 New Jersey Carpenters Vacation Fund, et al. v. HarborView Mortgage Loan Trust 2006-4, et al. (2008)

29. Lawsuits By ARS Investors (18*) • Securities Class Action Lawsuits • Misrepresentations and failures to disclose key information • Auction rate securities are not cash equivalents but complex long-term financial instruments with 30-year maturity dates • Auction rate securities were liquid at the time of sale only because the market was artificially supported and manipulated by various broker-dealers • The broker-dealers were acting on behalf of both the issuers (to pay the lowest rate) and investors (to maximize returns) Judy D. Waldman, et al. v. Wachovia Corporation, et al. (2008) David M. Milch, et al. v. The Goldman Sachs Group, Inc., et al. (2008) * Through June 30, 2008.

30. Lawsuits ForCorporate Debt Losses • Shareholder Class Action Lawsuits • Materially false and misleading statements • Corporate debt and loan portfolio are overvalued on the balance sheet Citiline Holdings, Inc., et al. v. iStar Financial Inc., et al. (2008)

31. $800 $700 $600 $500 $400 $300 $200 $100 $0 Not Over Yet…ARM Reset Schedule $680 $515 $500 Dollars (Billions) $400 2007 2008 Total Subprime Source: Bank of America report, Robert Lacoursiere, 6/22/2007

32. Insurance Coverage Issues • Two Markets • Financial Institutions Markets • Rates and Coverage Terms Tougher • Non-Financial Institutions Markets • Still Very Competitive • How will the Government be as a Shareholder?

33. Insurance Coverage Issues • Auction Rate Securities • Where do they fit? • Side A • Not so fun anymore • Conduct and Restitution Issues • Meat on the bones???

34. Broker Perspective

35. Where do clients stand in the D&O Marketplace? D&O insurance coverage / price continuum Hardest Softest Implications: • The Good News: Actual Underwriting is occurring • It’s all about Differentiating & Positioning • The Bad News: Actual Underwriting is occurring • If you happen to be a risk with acute sub-prime/credit exposure you’re facing a challenge Financial Institutions Pharmaceutical /Life Sciences REIT’s/Homebuilders Fortune 250 Healthcare Tech/Telecom Fortune 500 IPO’s Company Conglomerates Transportation Energy Retail Mid/cap Utilities Manufacturing Basic Materials Small Cap Private/Non Profit

36. Quarterly Index of D&O Pricing • Implications: • Pricing Index tracks premium changes relative to the base year of 2001 • The 2008 2Q index has dropped 6% from the same quarter last year • While the D&O index continues to decline, signs of leveling have begun to show • Due to the recent financial crisis, continued leveling and potential increases in the D&O market place are possible in the near future

39. Marketplace Trends: Historical Drivers of Securities Litigation Dec 95 PSLRA Designed to reduce the number of shareholder suits and eliminate professional plaintiffs. April 02 Sarbanes-Oxley Created a stringent environment and enhanced consequences as respects corporate governance. Nov 03 - present Opt Out Phenomenon Institutional shareholders opting out of class action settlements, i.e. WorldCom Secondary Liability Phenomenon Suits against secondary actors in addition to issuer and its directors and officers making cases larger and more expensive to resolve. July 04 April 05 Dura Loss Causation Supreme Court decision created substantial hurdles for plaintiffs to plead Loss Causation. Milberg Weiss / Lerach Investigations May 06 - present Changing of the guard as respects the predominant securities class action plaintiff firms? June 07 Stock Option Backdating Has resulted in increased shareholder derivative litigation, not class action litigation Supreme Court raised pleading standard and held that in determining whether the pleaded facts give rise to a "strong inference" of scienter, a court must take into account "plausible opposing inferences”. Supreme Court Tellabs Decision June 07 October 02 - July 07 Second longest uninterrupted bull market in history, 2002 - 2007. Bull Market Current Claims Inventory Hundreds of shareholder actions are pending with estimated values in the tens of billions of dollars. 04-present Recent opt-out plaintiffs have received significantly increased settlements from that which they would have as part of the class 07 - present Opt-Out Suits Sub-prime mortgage defaults cause massive losses for the financial services industry, causing a ripple effect through the broader marketplace and a possible economic turndown. Sub-prime and Credit Crisis July 07 - present

40. Source: OakBridge Insurance Services Marketplace Trends: Lead Plaintiffs and Opt-Out Settlements • Implications: • Institutions served as lead plaintiffs in almost 60% of 2007 settlements • As Institutional Investors and Pension Funds continue to take a lead role in more suits, the settlement severity has increased dramatically. In 2007, median settlements with a Public Pension Plan as the lead plaintiff were $18.0 million vs. $6 million for those settlements that did not have a Public Pension Plan as a lead Plaintiff • If Institutional Investors or Pension Funds are not controlling the class action they may elect to opt-out and receive considerably more than those in the class. In February 2007, the largest settlement in opt-out history was announced. The University of California recovered $246M in a suit against Time Warner. This settlement represents an estimated 16-24 times what the University would have received in the class. • In November 2007, Qwest Communications settled the opt-out suits in conjunction with its 2002 financial turmoil. By opting out of a $400 million class action settlement reached in 2005, the Colorado Public Retirement Association (PERA) increased its share of the settlement from $400,000 to $15.5M. • In most opt-out cases the policy limits have already been eroded by the securities class action and/or derivative claims. The Qwest case illustrates a trend towards significant opt-out litigation after class settlements, which threatens to increase both litigation costs and settlement expenses in securities litigation. Class litigants may feel pressure to increase class settlement amounts, in an effort to deter opt-outs. Shareholder Class Action ERISA Derivative Actions Directors, Officers, & Entity SEC Opt-Out Suits State Attorneys General Justice Department

41. Marketplace Trends: Securities Litigation Frequency • The number of securities-related class actions is trending upward • 177 securities class actions were filed in 2007 (50% increase vs. 2006) • 156 securities class actions have been filed year to date • Causes include, but are not limited to: credit market crisis (subprime mortgages, CDOs, MBSs, etc), large balance sheet write-downs and overall stock market volatility • The SCA count for the first half of this year implies an annualized 12-month filing rate of 210 class actions. This total would represent the highest annual filing rate since 2004, a year of numerous corporate scandals. • Potential for “pre-loss” overreaction by Insurers, leading to more judicious deployment of insurance capital (restriction in capital => leveling of pricing?) Federal Securities Fraud Class Action Litigation As of 9/29/08

42. Marketplace Trends: Securities Claims Settlement Severity • Implications: • 2007 was the first decline in average severity after increasing for six consecutive years (2000-2006) • Median claim size has been relatively stable since 1996 +/- $3.5M • Average and Median settlement size is up year to date ($41.39M and $9.25M respectively) • Severity risk impacts excess participation and pricing Severity:Securities Class Action LitigationD&O Settlements 1995–2008(Excluding $1B, Outliers, & Auction Rate Securities; dollars in millions) Source: Aon FSG, Stanford Securities Class Action Clearinghouse ad of 09/08/08 Note: Settlement information generally reflects settlements as of the date a settlement is announced. As additional parties reach settlements and they become final, settlement values and dates occasionally change. Aon FSG adjusts settlement figures in this chart to reflect the changes.

43. 160 140 120 100 80 60 40 20 0 Marketplace Trends: Federal Filings 2002-2008 (6 Month Intervals) Standard, Options Backdating, Subprime and Subprime/AuctionRate Securities Federal Filings 155 139 135 133 32 127 22 15 121 15 118 115 9 103 30 12 49 4 77 73 Number of Federal Filings 70 9 61 9 3 5 124 123 120 118 113 112 15 91 84 72 65 63 61 46 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2002 2003 2004 2005 2006 2007 2008 Standard Filings Other Cases Options Backdating Subprime Auction-Rate Securities Source: NERA Economic Consulting Notes: Other Cases include IPO Laddering, Mutual Fund Market Timing, and Analyst Cases.

44. State of Mortgages Past Due: 2003 - Present Ratio of Mortgage Borrowers 60 Days or More Past Due Ratio Past Due Source: Newsroom.TransUnion.com Quarter

45. Credit Crunch and Financial Institutions • The plaintiffs’ bar is in full-attack mode. • With major write-downs continuing, the onslaught of securities litigation has spread from subprime lenders, to investment banks holding risky debt, to commercial firms caught up in the credit crunch and associated macroeconomic downturn. Law firms’ “subprime task forces” are leading the charge. • According to Bloomberg, approximately $434.2 billion has been sought and raised in capital infusions from domestic and foreign investors. • A recent study by Bridgewater Associates releases a new estimate on write-downs at $1.6 Trillion, exceeding the International Monetary Fund's $945 billion estimate. Losses and Litigation Note: Includes Auction Rate Securities Sources: Bloomberg “Banks' Subprime-Related Losses Surge to $591 Billion” 09/29/08. Stanford Securities Class Action Clearinghouse 09/30/08

46. Subprime Fallout: Subprime Related Securities Class Actions ACA Capital Holdings Accredited Home Lenders Ambac Financial Group American Home Mortgage Investment American International Group, Inc. Bank of America (Auction Rate) BankAtlantic Bancorp. Bear Stearns Companies BankUnited Financial Corporation Beazer Homes USA Blackstone Group Calamos Global Dynamic Inc Fund (Auction Rate) Canadian Imperial Bank of Commerce (CIBC) Care Investment Trust CBRE Realty Finance, Inc. Centerline Holding Company Charles Schwab Corp. CIT Group, Inc. Citigroup Alternative Investments LLC Citigroup Global Markets: MAT 5 Shares Citigroup Inc. Citigroup Inc. (Auction Rate) Citigroup Mortgage Loan Trust Inc. Coast Financial Holdings CompuCredit Corp. Countrywide Financial Corp. Countrywide Home Loans Servicing Countrywide Series A & Series B Credit Suisse Group Deutsche Bank (Auction Rate Securities) Downey Financial Corp. E*Trade Financial E*Trade Financial (Auction Rate) Evergreen Investment Management Co. Fannie Mae FCStone Group, Inc. Federal Home Loan Mortgage Corp. Fidelity Management & Research Co. Fifth Third Bancorp Fimalac, S.A. First American Corp. First Home Builders of Florida First Marblehead Corporation First Trust Portfolios, L.P. Franklin Bank Corp. Fremont General Corp. Fremont General Corp. (Preferred Securities) General Electric Co. Goldman Sachs Group (Auction Rate) HarborView Mortgage Loan Trust Home Equity Mortgage Trust HomeBanc Corp. Hovnanian Enterprises Huntington Bancshares Inc. Impac Mortgage Holdings, Inc. IndyMac Bancorp IndyMac Bancorp (Option ARM) iStar Financial J.P. Morgan Acceptance Corp. J.P. Morgan Chase (Auction Rate) KKR Financial Holdings, LLC Lehman Brothers Levitt Corp. Luminent Mortgage Capital MBIA, Inc. McGraw-Hill Companies Merrill Lynch & Co., Inc. Merrill Lynch (Auction Rate) Merrill Lynch/First Republic MGIC Corp. MoneyGram International Moody’s Corporation Morgan Asset Management, Inc. Morgan Keegan Funds/Regions Financial Corp. Morgan Stanley & Co., Inc. Morgan Stanley & Co., Inc. (Auction Rate) Municipal Mortgage & Equity, LLC NASDAQ National City Corp. National City Corp./Harbor Savings Federal Bank NetBank, Inc. New Century Financial Nomura Asset Acceptance Corp. Northern Trust Corporation NovaStar Financial Oppenheimer Holdings (Auction Rate) Opteum, Inc. PMI Group Perini Corporation Premium Connections, Inc. Radian Group, Inc. RAIT Financial Trust, Inc. Raymond James Financial (Auction Rate) Royal Bank of Canada Security Capital Assurance, Ltd. Sallie Mae/SLM Corp. Schwab YieldPLUS Funds Société Générale Standard Pacific Corp. State Street Corp. Stifel Financial Corporation Suntrust Banks, Inc. (Auction Rate) Swiss Reinsurance Company Tarragon Corp. TD Ameritrade (Auction Rate) Thornburg Mortgage, Inc. Toll Brothers, Inc. UBS AG USB AG (Auction Rate) Wachovia Corp. Wachovia Corp. (Auction Rate) Washington Mutual, Inc. Wells Fargo (Auction Rate) WSB Financial Group Subprime Related Securities Class Actions as of August 13, 2008 Source: Stanford Securities Class Action Clearinghouse 09/30/08

47. Q & A

48. Many thanks to • Raymond DeCarlo • Dr. Frederick Dunbar • George Gowen III, Esq. • Paul Lavelle • Brian Wanat