Presentation of Mr. Gary Kopff for the PRMIA Conference on Reforming Markets for Credit Default Swaps & Collateralized Debt Obligations held in Washington, DC. June 10th, 2009.

1. Reforming Markets for Credit Default Swaps
& C ll t li d D bt Obli ti
& Collateralized Debt Obligations
Christopher Whalen, PRMIA Chapter Head
Christopher Whalen, PRMIA Chapter Head
Moderator
Gary Kopff
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Panelists
• Michael Greenberger
• Joseph Mason
J hM
• Kevin McPartland
• Ann Rutledge
• Tim Ryan
Tim Ryan
Sponsor
Host June 10, 2009
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 1

2. Presentation by Moderator
Presentation by Moderator
Growth and Composition of Markets
Credit Default Swaps
Collateralized Debt Obligations
Impact on Global Credit Crisis
Impact on Global Credit Crisis
Gary J. Kopff
President & Founder, Heritage Management, Ltd.
President & Founder, Everest Management, Inc.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 2

3. B.I.S. reports 28% decline, 2007‐2008, in outstanding credit default swaps
Source: Bank for International Settlements , BIS Quarterly Review, “International Banking and Financial Market Developments,” March 2, 2009, Table 19;
Source: Bank for International Settlements , BIS Quarterly Review, “International Banking and Financial Market Developments,” March 2, 2009, Table 19;
analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 3

4. ISDA survey reports greater decline (38%),
based on higher EOY 2007 and lower EOY 2008
Source: ISDA Market Survey issued April 22, 2009; analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 4

5. “The outstanding notional value of the CDS market has declined dramatically …
largely because of trade compression efforts –not a drying up of the market”
– Kevin McPartland
“Market participants have “Compression trades “Solutions provided by
significantly reduced levels of organized by TriOptima are CreditEx/Market and
outstanding CDS trades via responsible for the TriOptima helped to
multilateral trade termination of approximately untangle the existing
terminations (tear‐ups) to $30 trillion notional in CDS web of trades, netting
lower outstanding notional
lower outstanding notional positions in 2008 alone.
positions in 2008 alone open positions and
open positions and
amounts, reducing Largely as a result of leaving a single
counterparty credit exposures compression trades, the trade, where possible.”
and operational risk. To date aggregate notional size of the
in 2009, tear‐ups have CDS market has been reduced Source: Tabb Group, Credit
Source: Tabb Group, Credit
p
eliminated approximately $7
l d l $ from roughly $60 trillion in
f hl $ ll Default Swaps: What’s
trillion of CDS trade notional mid 2008 to about $39 trillion Going On? Kevin
Going On? Kevin
amounts, in addition to the at this point.” McPartland, June 2009
$32 trillion eliminated in
2008.” So rce “Polic Iss es Facing the
Source: “Policy Issues Facing the
Market for Credit Derivatives,”
Source: Statement released by Chapter 7 in The Road Ahead for the
Chapter 7 in The Road Ahead for the
Federal Reserve Bank of New Fed ,
Fed , by Darrell Duffie, Professor at
York, April 1, 2009, after convening a Stanford University Graduate School
meeting with industry leaders on of Business. (Ciorciari and John B.
of Business. (Ciorciari
over‐the‐counter derivatives.
over‐the‐counter derivatives Taylor, eds.), April 30, 2009,
l d ) l
Stanford, CA, Hoover Institution
Press, 2009.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 5

6. DTCC subsidiary (Deriv/SERV) now provides online transparency
for credit default swaps through “Trade Information Warehouse”
• On Nov. 4, 2008, DTCC began publishing CDS
contract data each week for credit default swaps
registered in the DTCC Trade Information
Warehouse to enhance transparency in the
market for over‐the‐counter (OTC) credit
derivatives.
• DTCC indicates that its Warehouse is the only
central trade registry and industry‐recognized
infrastructure for processing OTC derivatives
infrastructure for processing OTC derivatives
over their life and maintaining a comprehensive
trade database containing the primary record of
each contract.
• DTCC’s central technology infrastructure
automates and standardizes CDS trade
processing – ie, record keeping, payment
calculations and settlement, notional
adjustments, and contract term changes over a
contract’s life.
• DTCC uses confirmed transaction details as input
for the Warehouse’s central trade database, so
that post‐trade processing flows automatically
from agreed‐upon trade terms.
Sources: Deriv/SERV: Delivering Automated Solutions and Risk Management to OTC Derivatives, DTCC brochure, March 2008, p. 6.
Sources: Deriv/SERV: Delivering Automated Solutions and Risk Management to OTC Derivatives, DTCC brochure, March 2008, p. 6.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 6

7. Trade Information Warehouse permits view of three major CDS types, but
data not exportable nor available as time series to permit analysis
Single‐Name Credit Default Swaps
• Corporate: North America, Europe, Emerging
Europe, Emerging Europe LPN, Australia, New
Zealand, Japan, Singapore, Asia (other), Latin
Zealand, Japan, Singapore, Asia (other), Latin
America
• Sovereign: Australia, New Zealand, Japan,
Singapore, Asia (other), Latin America, Emerging
Europe and Middle East, Western Europe (non G‐
10)
• Loans
• RMBS ‐ Residential mortgage‐backed securities
• CMBS ‐ Commercial mortgage‐backed securities
Index Credit Default Swaps
• US
US corporate (CDX): high grade, high‐yield,
t (CDX) hi h d hi h i ld
emerging market
• European corporate (iTraxx): high grade, high‐
yield, emerging market
• CMBX: commercial mortgages
• ABX: asset‐backed
• LCDX: loans
100% = $28.1 Trillion Notional
Tranche Credit Default Swaps
• CDX: US corporate
• p p
iTraxx: European corporate
• LCDX: loans
• ABX: asset‐backed
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 1; analysis and chart by Everest Management.
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 1; analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 7

8. 83% of DTCC‐reported credit default swaps are dealer‐to‐dealer
46% of DTCC‐reported swaps are dealer‐to‐dealer, single‐name swaps
Dealers & Non‐Dealer Customers; Buyers & Sellers
Dealers & Non‐
83%
83
Dealer‐Dealer All Types
Dealer‐Dealer All Types
46%
Dealer‐Dealer Single‐
Dealer‐Dealer Single‐Name
24%
Dealer‐Dealer Index
Dealer‐Dealer Index
13%
Dealer‐Dealer Tranche
Dealer‐Dealer Tranche
100% = $28.1 Trillion Notional
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 1; analysis and chart by Everest Management
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 1; analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 8

9. Almost ¼ of single‐name credit default swaps reference financial firms
100% = $15.5 Trillion Gross Notional
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 2; analysis and chart by Everest Management
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Table 2; analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 9

10. NET GROSS Ratio
NOTIONAL NOTIONAL Gross:
($Billions) ($Billions) Net Top 30 single‐name credit default swaps
Top 30 as % of Total 14% 13%
30 Largest Single‐Name Credit
$198 $2,068 10
account for 14% of total market
Default Swaps
FINANCIALS
(Ranked by net notional)
(Ranked by net notional)
1 GE Capital Corp. $11.4 $77.0 7
2 Deutsche Bank $7.4 $77.7 11
3 Bank of America $7.0 $102.4 15 Rank Change among Top 30
4 Morgan Stanley $6.6 $70.6 11 Past Six Months Share Price
5 JPMorgan Chase $6.0 $119.9
May 22 to May 29
20
6 Merrill Lynch $5.4 $80.1 15 • Among Financials, JPM
7 Goldman Sachs $5.2 $66.7 13 rose from 13th to 5th ($3.9
8 Wells Fargo $5.0 $93.7 19
billion vs $6.0 billion, net
9 Barclays Bank $4.4 $51.0 12
10 Royal Bank of Scotland $4.4 $41.3 9
notional)
11 UBS $4.3 $39.0 9
12 Citigroup $4.2
$ $55.7
$ 13 • Of 5,743 net added
Of 5 743 net added
13 AIG $3.9 $42.4 11 contracts for all reference
OTHER CORPORATE entities with 10+
14 Bershire Hathaway $4.9 $19.0 4 contracts, JPMorgan Chase
15 Deutsche Telekom $4.8 $69.4 14 alone had added 5,894
16 Telefonica, SA $4.0 $60.7 15 contracts
NATIONAL GOVERNMENTS Source: Bloomberg
S Bl b
17 Italy $20.5 $175.9 9
18 Spain $10.9 $73.4 7
19 Germany $9.9 $46.7 5
20 Brazil $9.6 $123.9 13 Gross Notional (USD equivalents using prevailing foreign exchange rates)
21 Greece $8.1 $44.3 5 represents par amount of credit protection bought or sold, equivalent to
22 F France $7.1
$7 1 $36.6
$36 6 5 debt or bond amounts. (Gross Notional used to derive the coupon
23 Russia $6.7 $103.0 15
payment calculations for each payment period and the recovery amounts
24 Austria $6.3 $29.0 5
in the event of a default). Gross notional values do not reflect market
25 Portugual $5.8 $40.9 7
prices of contracts and may not correlate with mark‐to‐market values.
26 Mexico $5.5 $89.8 16
27 Turkey $5.4 $154.3 28
28 Belgium $4.4
$4 4 $20.4
$20 4 5
Net Notional is sum of net protection bought by net buyers and represents
29 Hungary $4.4 $42.3 10 the maximum possible net funds transfers between net sellers of
30 Ireland $4.1 $21.5 5 protection and net buyers of protection that could be required upon the
Total $108.9 $1,002.0 9 occurrence of a credit event relating to the particular reference entity.
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Tables 6 and 14 and definitions; analysis and chart by Everest Management
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May 29, 2009, Tables 6 and 14 and definitions; analysis and chart by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 10

11. Are CDS used for “bets” on sovereign bailouts?
$109 billion (net notional) bet against debt of 14 countries, up $1 billion from May 22
• Single‐name CDS growing with “bets” for and against sovereign debt that is increasing to fund bailout programs. Credit‐
protection costs and net notional amounts have risen sharply.
• Some investors think the U.S. and European bank rescue plans will work and some don't. CDS are being used to trade
these views. It's a way to make money on how the market is viewing that risk.
• Different use of CDS from emerging markets where sovereign CDS have long been used to protect against a far more
Different use of CDS from emerging markets, where sovereign CDS have long been used to protect against a far more
likely prospect of default.
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May
Source: DTCC Deriv/SERV Trade Information Warehouse Data, May Source: CreditDerivativesResearch; “Seven Sovereigns” are United States,
Source: CreditDerivativesResearch; “Seven Sovereigns” are United States,
29, 2009, Table 6; analysis and chart by Everest Management France, Germany, Italy, Spain, United Kingdom, & Japan.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 11

12. Industry’s risk exposure highly concentrated among five commercial banks;
At each bank the risk exposure is a very large multiple of the bank’s risk‐based capital
Bilaterally netted exposure Total credit exposure
382*
278*
179*
1,056*
1 056*
105*
*Total Credit Exposure as multiple of Tier I + Tier II Risk‐Based Capital
NOTE: The OCC defines total credit exposure in derivatives as the credit equivalent amount from derivative contracts (RC‐R line 54) or the sum of netted
NOTE: The OCC defines total credit exposure in derivatives as the credit equivalent amount from derivative contracts (RC‐
current credit exposure and “potential future exposure.”
Source: OCC's Quarterly Report on Bank Derivatives Activities, Table 4, from Call Reports, Sch RC‐
Source: OCC's Quarterly Report on Bank Derivatives Activities, Table 4, from Call Reports, Sch RC‐R, December 31, 2008; analysis and charts by
Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 12

13. Perceived risk of default by 13 leading swap dealers
(Average of five‐year swaps)
“Fourteen Dealers” [13 with Bank of America/Merrill Lynch merged] are Bank of America,
Fourteen Dealers” [13 with Bank of America/Merrill Lynch merged] are Bank of America,
BNP Paribas, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Bank,
BNP Paribas, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Bank,
Goldman Sachs, HSBC Bank, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Royal Bank of
Scotland, and UBS. Excluded: Wells Fargo/Wachovia and Société Générale.
Scotland, and UBS. Excluded: Wells Fargo/Wachovia and Société Générale.
Source: Credit Derivatives Research, http://www.creditresearch.com/cdrweb/index.jsp
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 13

14. Global CDOs by type of asset/risk exposure differ by industry sources
100% = $1.30 Trillion 100% = $1.33 Trillion
2002‐2009 2000‐2008
NOTE: DeaLogic compiles data by bookrunner parent and includes only
NOTE: DeaLogic compiles data by bookrunner Sources:
tranches sold (not Super Senior tranches retained). JPMorgan, MCM, IFRMarkets/Thompson, Creditflux, Bloomberg;
JPMorgan, MCM, IFRMarkets/Thompson, Creditflux, Bloomberg;
analysis and chart by Everest Management.
Source: DeaLogic; analysis and chart by Everest Management.
Source: DeaLogic; analysis and chart by Everest Management.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 14

15. Global CDOs by type and yearly quarter
Source: Securities Industry and Financial Markets Association; analysis and chart by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 15

16. Global CDOs were primarily backed by MBS or high yield loans
Source: Securities Industry and Financial Markets Association; analysis and chart by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 16

17. 79% of Global CDOs created and sold by 6 U.S. and 5 European global banks
$ Billions
$0 $100 $200 $300
100% = $1.3 Trillion Bank of America/Merrill Lynch
JPMorgan Chase
Citigroup
Wells Fargo/Wachovia Securities
Deutsche Bank
Goldman Sachs
Barclays Capital
y p
Credit Suisse
Morgan Stanley
Union Bank of Switzerland
Royal Bank of Scotland
Calyon
ABN AMRO
SG Corp. & Inv. Banking
Natixis
UniCredit Group
Nomura
BNP Paribas
Commerzbank Group
Fortis
Other
NOTES: *DeaLogic compiles data by bookrunner parent and includes only rank‐rated tranches sold by broker/dealers (not Super Senior tranches retained).
Source: DeaLogic; analysis and charts by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 17

18. Multi‐trillion losses referencing non‐prime U.S. mortgages were concentrated in
$542 billion Mezzanine & High Grade Structured Finance CDOs
[$436 billion “cash” & $106 billion synthetically created with credit default swaps]
Sources: JPMorgan, MCM, IFRMarkets/Thompson, Creditflux, Bloomberg; analysis and chart by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 18

19. $262 billion synthetic CDO assets using credit default swaps
accounted for 20% of $1.3 trillion CDO credit exposure
Synthetic CDOs
Synthetic CDOs
100% = $1.3 Trillion $Billions
2000‐
2000‐2008 $‐ $20 $40 $60 $80 $100 $120
Investment Grade Debt
G d b
Mezzanine Structured Finance
Cash CDOs
High Grade Structured Finance
High Grade Structured Finance
structured to pay off Synthetic
liabilities with the CDOs High Yield Loans
interest and principal
created with credit
payments of
default swaps
bond/loan collateral $262 billion
$262 billion CDO Squared
CDO Squared
80% 20%
Commercial Real Estate
High Yield Bonds
g
Emerging Market
Other
Sources: JPMorgan, MCM, IFRMarkets/Thompson, Creditflux, Bloomberg; analysis and charts by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 19

20. Unregulated CDS + Unregulated CDOs + Astonishing Greed/Risk Taking +
Abusive Non‐Prime U.S. Mortgages = GLOBAL CREDIT CRISIS
Abusive Non‐Prime U.S. Mortgages = GLOBAL CREDIT CRISIS
• A very few global banks/investment banks in 2004‐2007 harnessed CDS technology to corrupt
A very few global banks/investment banks in 2004 2007 harnessed CDS technology to corrupt
2004‐
further ABS SF CDOs.
• SECRET FINANCIAL ENGINEERING: structure with “Unfunded Super Seniors” to highly
SECRET FINANCIAL ENGINEERING: structure with “Unfunded Super Seniors” to highly
leverage equity tranches; possible due to access to investors willing to accept very
low, interest‐only payments (eg, L90 + 5 to 15 basis points) for allegedly risk‐free positions
low, interest only payments (eg, L + 5 to 15 basis points) for allegedly risk
low interest‐only payments (eg L + 5 to 15 basis points) for allegedly risk‐free positions.
(eg
• CDS enabled CDO size to reach $1 billion+ more quickly with 60‐80% of assets created
CDS enabled CDO size to reach $1 billion+ more quickly with 60‐
synthetically; [CDO = Protection Seller] instead of CDO owning cash bonds (eg, RMBS/CMBS)
synthetically; [CDO = Protection Seller] instead of CDO owning cash bonds (eg, RMBS/CMBS)
which were too scarce in 2005‐
which were too scarce in 2005‐2007 to fulfill global sales force ability to sell the product
• Allegedly low‐risk “Unfunded Super Senior” made even less risky allegedly when partially
Allegedly low‐
hedged with reverse CDS [Investor = Protection Buyer]; counter‐party risk from AIG and
hedged with reverse CDS [Investor = Protection Buyer]; counter‐
monoline bond insurers’ “transformer” units was gravely underestimated.
• A few global banks whose investment banking & CDS staff created synthetic/hybrid CDOs
“drank their own cool aid” and invested heavily (ie, $10‐$50 billion) on the bank balance
drank their own cool aid” and invested heavily (ie, $10‐
sheet in allegedly risk‐free “Unfunded Super Senior” tranches.
sheet in allegedly risk‐free “Unfunded Super Senior ” tranches.
• Banks and rating agencies woefully underestimated “correlation risk” as losses often wiped
out 3rd party investors in lower tranches and then breached 15‐100% attachment points for
out 3 party investors in lower tranches and then breached 15‐100% attachment points for
15
“Unfunded Super Seniors.”
• Virtually no disclosure to regulators & shareholders of these “secret” high‐risk plays that
Virtually no disclosure to regulators & shareholders of these “secret” high‐
created some of the most toxic of assets; bailouts directly and indirectly by taxpayer funding
committed $406 billion for a few global banks, changed mark to‐market, and lowered the bar
committed $406 billion for a few global banks changed mark‐to‐market and lowered the bar
committed $406 billion for a few global banks, changed mark‐
mark‐
with “stress tests” that allow losses from “Unfunded Super Seniors” to remain undisclosed.
with “stress tests” that allow losses from “Unfunded Super Seniors” to remain undisclosed.
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 20

21. Despite inadequate transparency of toxic CDO assets and Treasury delays
launching “Public‐Private Investment Program” for banks’ “Legacy Assets,”
stock markets/single‐name CDS recognize loss exposure of a few global banks
stock markets/single name CDS recognize loss exposure of a few global banks
UBS C BAC MER
Sources: Bloomberg; analysis and charts by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 21

22. $405.8 billion bailout of big banks; $62 billion losses for 11 banks in 2008
Earnings (Loss) ($ Billions)
2007: $73 2008: ($62)
$7 ($24)
($5) ($19)
$5
$ ($6)
($ )
$4 ($28)
100% = $405.8 Billion
$
$14 $3
$15 $6
$12 $2
$0.1 $0.3
$9 ($5)
$3 $2
$9 $8
NOTE: Includes Bank of America’s $118 billion loss guarantee for Merrill toxic assets sold with MER financing & “clawbacks” prior to BAC acquisition
NOTE: Includes Bank of America’s $118 billion loss guarantee for Merrill toxic assets sold with MER financing & “clawbacks” prior to BAC acquisition
plus other MER undisclosed losses; includes UBS’ $54 billion transfer of toxic assets to Swiss National bank; Société Général, Royal Bank of Scotland and
plus other MER undisclosed losses; includes UBS’ $54 billion transfer of toxic assets to Swiss National bank; Société Général, Royal Bank of Scotland and
Barclays , and UBS government funds are from France, United Kingdom, and Switzerland, respectively.
Sources: U.S. Treasury Department; AIG Press Release,3/15/09; SEC 10‐Ks; IMF exchange rates 12/31/08; analysis & chart by Everest Management
Sources: U.S. Treasury Department; AIG Press Release,3/15/09; SEC 10‐Ks; IMF exchange rates 12/31/08; analysis & chart by Everest Management
Gary Kopff, Everest Management, Inc. © 2009 PRMIA Conference – June 10, 2009 22