ABS/CMBS-CDS Credit Default Swaps Referencing Structured Products

1. ABS/CMBS-CDSCredit Default Swaps Referencing Structured Products Louis Nees, Senior Managing Director Structured Product Derivatives 212-272-4879 lnees@bear.com

2. ABS-CDS : Volumes 2005 ABS-CDS (PAUG) Estimated at $150Billion RMBS = 60% CMBS = 35% CDO = 3% Other = 2% AAA/Aaa = 18% AA/Aa2 = 0% Single A = 8% BBB+/Baa1 = 9% BBB/Baa2 = 27% BBB-/Baa3 = 35% Single & Double B = 3% Source: BMA Assume BBB stack of HEQ is 4%, then 2005 saw $18.4 billion of BBB HEQ 2005 saw ~$64 billion of BBB HEQ (150x60%x(9+27+35)%) = 3.4x the market

3. ABS-CDS : Investor Type

4. Current Players and Uses

5. ABS-CDS : Basis Cash vs. Synthetic

6. ABX.HE (Launched January 19, 2006) • Each Index will be created from qualifying deals of 20 of the largest sub-prime home equity ABS shelf programs from the six month period preceding the roll • Dealers will select one of the two largest deals from the 20 shelves • Diversification obtained by: • Limiting the same loan originator to 4 deals • Limiting the same master servicer to 6 deals • If the algorithm process results in originator or master servicer over-concentration, the deal from the shelf program with the smallest issuance (i.e., lowest priority) will be excluded. The largest qualifying deal from the issuer with the lowest ranking will be chosen, as long as concentration limits are not breached

7. ABX.HE • Reference obligations from deals issued within the six months prior to the launch/roll date • Minimum deal size of $500M • No more than four deals with the same originator • No more than six deals with the same master servicer • Each tranche must have a weighted average life between 4-6 years as of the issuance date (except the AAA tranche which must be greater than 5 years) • Must be rated by Moody’s and S&P; the lesser of all ratings will apply • Five indices based upon the rating of reference obligations: AAA, AA, A, BBB, and BBB- • One bond from each deal will be referenced in each index (AAA will be comprised of the longest average life AAA tranche with an initial issuance size of at least $15M) • Reference obligations equally weighted by initial par amount as of roll date, subsequent weightings may change based on the prepayment and credit experience of the underlying transactions • Based on standard ISDA Pay-As-You-Go template • Index represents aggregate performance of the basket of credit default swaps

8. ABX.HE: Indicative Terms & Conditions • Indices: • Notional: Amortization mirrors that of the underlying bonds • Fixed Rate: Established on roll date premium. Subsequent trades require upfront exchange of premium/discount • Floating Rate Payments: Interest Shortfall, Writedown, Principal Shortfall • Additional Fixed Payments: Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement • Quotations: Dealers will quote price and exchange upfront amounts based on the difference between that price and par • Credit Events: Principal Shortfall and Writedown (2005 ISDA PAYG Template Definitions) • Physical Settlement: Not Applicable

9. CMBX.NA (Launched March 7, 2006) • Each Index will be created from qualifying deals of 25 of the largest CMBS issuances • Qualification requirements: • Minimum deal size of USD 700 million • Be a debt or pass-through security referencing a pool of fixed rate securities • Have a factor of 1.0 • Be secured by obligations from at least 50 separate mortgages from at least 10 unaffiliated borrowers • No more than 40% of underlying obligations can be from the same state • No more than 60% of underlying obligations can be of the same property type • Ratings provided by at least two of the following: Moody’s, Fitch, and S&P; the lesser of all ratings will apply

10. CMBX.NA • Five indices based upon the rating of the reference obligations: • AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3 • One bond from each deal will be referenced in each index • AAA will be comprised of the most credit enhanced tranche with the longest average life with an initial issuance size of at least $100MM & a weighted average life between 8 & 12 years based on 0% CPY at issuance • AAA must be a publicly issued security, whereas other rating classes can be publicly or privately issued • Reference obligations equally weighted by initial par amount as of roll date (4.0% each), subsequent weightings may change based on the prepayment and credit experience of the underlying transactions • Based on standard ISDA Pay-As-You-Go template • Index represents aggregate performance of the basket of credit default swaps • Each index will contain this same list of reference obligations until all reference obligations have been fully paid off or have matured

11. CMBX.NA: Indicative Terms & Conditions • Indices: • Notional: Amortization mirrors that of the underlying bonds • Fixed Rate: Established 1-day prior to roll date. Payable monthly based on average balance • Floating Rate Payments: Interest Shortfall, Writedown, Principal Shortfall • Additional Fixed Payments: I Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement • Quotations: Dealers will quote a current market spread and exchange upfront amounts based on the difference between the current market spread and the Fixed Rate • Credit Events: Principal Shortfall and Writedown (2005 ISDA PAYG Template Definitions) • Physical Settlement: Not Applicable • Accruals: Accrues 25th to 25th with no following convention • Payments: Payments made on the 25th of each month • Day Count: Actual/360

12. ABX.HE & CMBX.NA Potential Trading Strategies • Capital Structure Plays • Vintage Plays A rated BBB rated BBB 1st 2006 BBB 2nd 2008

13. ABX.HE & CMBX.NA Potential Trading Strategies • IO Plays Investor Index Single Name swaps at 100 Premium $ Investor shorts IO

14. ABX.HE & CMBX.NA Potential Trading Strategies • Tranching of: • Single index ABX.HE.BBB ABX.HE.BBB 35-100% 25-35% 15-25% 5-15% 0-5%

15. ABX.HE & CMBX.NA Potential Trading Strategies • Combine Indices within asset type (i.e., equally weight all 5 ABX Indices) 35-100% ABX.HE.AAA 25-35% ABX.HE.AA 15-25% ABX.HE.A 5-15% ABX.HE.BBB 0-5% ABX.HE.BBB-

16. ABX.HE & CMBX.NA Potential Trading Strategies • Combine Indices across asset type (i.e., 50% ABX BBB/50% CMBX BBB) 35-100% ABX.HE.BBB 25-35% 15-25% CMBX.NA.BBB 5-15% 0-5%

17. The Year Ahead New Products • Tranching of ABX/CMBX • Tranching of CMBX • Correlation/Bespoke trading • Standard ISDA Document referencing Note-Structures (CDOs) • Utilization of CDOLibrary will be essential for this market to develop

18. The Year Ahead New Players • Insurance Companies • First time have the ability to reduce exposure to assets on the books without actually selling them • Gain exposure to market segments in a size not available before • Not constrained by what is currently in dealer inventory, allowing grater leverage of credit expertise • Asset Originators • Hedge pipeline/securitization execution risk • More traditional money managers • Not constrained by what is currently in dealer inventory, allowing grater leverage of credit expertise