Copyright 2008, Advisen Ltd Copyright 2008, Advisen Ltd. Subprime Issues for D&O: The Meltdown of the Subprime Mortgage Market CAS Spring Meeting June.

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Copyright 2008, Advisen Ltd Copyright 2008, Advisen Ltd. Subprime Issues for D&O: The Meltdown of the Subprime Mortgage Market CAS Spring Meeting June 17, 2008

Copyright 2008, Advisen Ltd BORROWERSBORROWERS Lender Transaction vehicle (SPV) Investors Banks Insurance companies Hedge Funds/ SIVS Investment Professionals High net worth individuals/ companies Sophisticated investors Issue Commercial Paper Transfer of Ownership/Risk in pool of assets Fund manager (offering memorandum/side letter) Custodian (Bank) Lawyers Accountants Rating agencies Asset Manager (Bank) Collateral Agent/Trustee (Bank) Lawyers Accountants Lender Arranger (Bank) Lawyers Accountants FIRST TIERSECOND TIERTHIRD TIER Subprime Overview Broker Bond Insurer

Copyright 2008, Advisen Ltd What Happened? Rapid growth in subprime sector “Exotic” mortgages to subprime borrowers U.S. home real estate slump Borrowers can’t refinance, default on mortgages Lenders can’t fulfill buyback provisions Writedowns of CDOs and other investments Global credit crunch

Copyright 2008, Advisen Ltd Subprime Mortgage Originations Source: Hammond Associates

Copyright 2008, Advisen Ltd Subprime Mortgages First Reset Date Source: FitchRatings

Copyright 2008, Advisen Ltd Writedowns More than $500 billion in writedowns reported to date –Financial institutions worldwide –CDOs, investments in lenders, etc., credit default swaps

Copyright 2008, Advisen Ltd Litigation Targets (D&O and E&O) Sub-prime mortgage lenders and brokers Investment banks Rating agencies Bond insurers Asset managers/hedge funds REITs Lawyers and auditors Trustees of pension funds exposed to asset deterioration Homebuilders Ds & Os of companies heavily invested in CDOs and other securities backed by residential mortgages

Copyright 2008, Advisen Ltd Current Regulatory Action Investigations SEC opened “at least” 36 investigations. Investigations by attorneys general of NY, CA, IL, MA, CT, OH. FBI investigating 19 firms. 1,300 cases EU announced investigation into rating agencies. Investigations by authorities in UK, Germany, Switzerland, France, Japan, South Korea and Singapore