CDOs in the Heartland

Thursday, March 20, 2003

CDOs in the Heartland

2002 Review

CDOs in the Crosshairs?

CDOs in the Heartland

2002 Review

Total CDO issuance $208Billion (+38% YoY)

Cash CDO issuance $61Billion

Synthetic CDOs $147Billion (+74% YoY)

CDOs in the Heartland

2002 Cash CDOs:

MS CDOs – 35% (+21% YoY)

HY CLOs – 31% (+30% YoY)

Other – 12%

BS CDOs – 9%

IG CDOs – 8%

HY CBOs – 5%

CDOs in the Heartland

2002 Synthetic CDOs:

Static Arbitrage – 51%

Balance Sheet – 38%

Managed Arbitrage – 11%

CDOs in the Heartland

Defaults/downgrades continued (although default rates abated slightly)

CDO spread widening on all tranches

FASB’s SPE consolidation/FIN46

2003 Flat YoY?

CDOs in the Heartland

CDOs in the Crosshairs…

Effective risk dispersion reducing systemic risk (Alan Greenspan) OR

Financial weapons of mass destruction (Warren Buffett)

CDOs in the Heartland

2003 Challenges

Resolve CDO accounting uncertainty

Restore CDO investor confidenceContinue to improve/refine CDO structures

Transparency/comparability is necessary for liquidity