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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Credit Crisis 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 How’d We Get Here?

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

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

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

What is “Subprime?” 25

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” 26

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 27

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 28

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 29

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

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 31

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

Whose ox might be gored? 33

34 Underwriter Law firm Asset Manager Accountant Rating Agency Cast

35 Underwriter Law firm Asset Manager Accountant Rating Agency Real estate Securities broker Directors & Officers Insurers Insurance Brokers Mortgage broker Etcetera, etcetera Cast

36 Navigant Study of Federal Court Subprime Lawsuits filed in 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.