Securitization Tested? The Enron Disaster and Beyond Kellogg School of Management Securitization Colloquium May 27, 2003

Jim Mountain Partner, Global Markets

Why is Enron on the Agenda? Little or no direct “securitization” activity Little or no direct “securitization” activity Synonymous with “off balance sheet” finance run amok Synonymous with “off balance sheet” finance run amok Sparked the firestorm of change that will impact securitization going forward Sparked the firestorm of change that will impact securitization going forward Nexus of the demise of Arthur Andersen Nexus of the demise of Arthur Andersen

Enron’s Got Rhythm (Fastow) $168 to $276 MM $104 MM $80 MM Sources: Powers Report & Joint Committee on Taxation Report February 2002

Accounting Issues & Actions o 3% equity & consolidation of SPE limited partnerships o Guarantees & risk transfer o Guarantees & risk transfer o Related party transactions o Uncollectible receivables o Taking profit on own shares FIN 46 & FASB 140 amendment FIN 46 & FASB 140 amendment FIN 45 FIN 45 Expense stock options? Expense stock options? ? ?

Other Regulatory Fallout Sarbanes-Oxley Act Sarbanes-Oxley Act Public Company Accounting Oversight Board Public Company Accounting Oversight Board SEC turnover SEC turnover FASB Reorganization FASB Reorganization

FASB Accounting Standards FIN 45 – Guarantees, including securitization reps & warranties FIN 45 – Guarantees, including securitization reps & warranties FIN 46 – Consolidation of VIEs FIN 46 – Consolidation of VIEs  Complicated new risk/return calculus  No grandfather exemption for old deals  Perverse results FAS 140 Amendment – Further limit QSPEs FAS 140 Amendment – Further limit QSPEs International Accounting Standards International Accounting Standards

Selected Sarbanes Oxley Actions Officer certifications of financial statements and financial reporting controls Officer certifications of financial statements and financial reporting controls Auditors to examine & report on financial reporting controls Auditors to examine & report on financial reporting controls Capital assessment on issuers to fund PCAOB and FASB Capital assessment on issuers to fund PCAOB and FASB Trick an auditor  Go to jail! Trick an auditor  Go to jail!

Jim Mountain Partner, Global Markets QUESTIONS?