November 2005 Presentation to Pegasus Corp.1GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM

October 29, 2007

REGULATORY GUIDANCE ONREGULATORY GUIDANCE ONNEW PRODUCTS AND NEW PRODUCTS AND

COMPLEX STRUCTURED FINANCE COMPLEX STRUCTURED FINANCE ACTIVITIESACTIVITIES

Institute of International Bankers Annual Seminar Institute of International Bankers Annual Seminar on on

Regulatory Examination, Risk Management and Compliance Regulatory Examination, Risk Management and Compliance IssuesIssues

Sylvie Durham, Esq.Greenberg Traurig, LLP200 Park AvenueNew York, NY 10166

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INTERAGENCY STATEMENT ON SOUND PRACTICES CONCERNING ELEVATED RISK COMPLEX

STRUCTURED FINANCE ACTIVITIES

● Interagency Statement on Sound Interagency Statement on Sound

Practices Concerning Elevated Risk on Practices Concerning Elevated Risk on

Complex Structured Finance Complex Structured Finance

Transactions (“CSFTs”) finalized and Transactions (“CSFTs”) finalized and

became effective on January 11, 2007became effective on January 11, 2007

● Issued by following agencies Issued by following agencies

(“Agencies”): (“Agencies”):

Office of Comptroller of the Office of Comptroller of the CurrencyCurrency

Office of Thrift SupervisionOffice of Thrift Supervision

Board of Governors of Federal Board of Governors of Federal ReserveReserve

Federal Deposit Insurance Federal Deposit Insurance CorporationCorporation

Securities Exchange CommissionSecurities Exchange Commission

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HISTORICAL DEVELOPMENT OF PROPOSAL

● Proposal resulted from post-Enron fall-out

● Federal regulators took strong civil and administrative enforcement actions against financial institutions that “seemingly engaged in CSFTs to hide true financial health of companies from the public”

● Initial proposal issued on May 19, 2004

Attempted to address CSFTs designed to “shield customers’ true financial health from the public” (e.g., Enron-type transactions)

Criticized by industry as overly broad and requiring financial institutions to identify “any structured finance transaction that involves a special purpose entity”

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HISTORICAL DEVELOPMENT OF PROPOSAL (cont’d)

● Intermediate Proposal issued on May 4, 2006

● Attempted to address initial criticisms

● Still criticized by financial industry for:

Heavy documentation burdens imposed in evaluating CSFTs

Obligations imposed on U.S.-based branches of foreign banks unclear

Proposal to incentivize bankers with compensation for conduct consistent with Proposal deemed unworkable

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HISTORICAL DEVELOPMENT OF PROPOSAL (cont’d)

• Institute of International Bankers also criticized intermediate Proposal for:

Concern that it required U.S. branches of foreign banks “to implement a CSFT risk management structure” in U.S. apart from foreign head office

Board of Directors reporting requirement viewed inoperable to U.S. branches or agencies of foreign banks

Prior internal approvals of CSFTs prior to offering to clients viewed as impractical since new CSFTs are often developed after “extensive discussions with potential customers regarding financial, legal, tax, accounting and other considerations”

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FINAL INTERAGENCY GUIDANCE

● Applies to the following types of financial institutions: National banks State banks Bank holding companies (other than foreign

banks) Federal and state savings and loan holding

banks U.S. branches and agencies of foreign banks SEC-registered broker dealers Registered investment advisors

● As a practical matter, only applies to large financial institutions because of risk management and operational systems necessary to execute CSFTs

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FINAL GUIDANCE (cont’d)

● Final proposal acknowledges that CSFTs are “an essential part of U.S. and international capital markets”

● Utilizes “principles-based” structure for CSFTs

● Agencies will utilize Guidance in reviewing internal controls and risk management policies, procedures and systems of financial institutions

● Financial institutions must establish “policies, procedures and systems that are designed to identify elevated risk CSFTs”

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FINAL GUIDANCE: WHAT IT DOES NOT DO:

● Does not create private right of action against financial institutions involved in CSFTs

● Does not alter or expand legal duties and obligations that a financial institution has to its customers or its shareholders

● Does not establish any “legally enforceable requirements or obligations”

● Adherence to Guidance does not insulate a financial institution from regulatory action or liability to third party that already exists under applicable law (e.g., securities laws and regulations)

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WHAT FINAL GUIDANCE DOES DO:

● Identifies controls and procedures that Agencies have previously found to be effective to manage and control risks that can be applied to CSFTs

● Requires maintenance of formal, written, firm-wide policies and procedures to identify, credit, market, operational, legal and reputational risks associated with CSFTs

● Recommends implementation through existing financial institutions’ new product policies

● Requires approval of all relevant control areas in financial institution that is independent of “profit center” (e.g., risk management) before offering product to customer

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WHAT FINAL GUIDANCE DOES DO (Cont’d):

● Recognizes that ability of financial institution to identify risks differs depending on financial institution’s role in CSFTs – e.g., counterparty role vs. structuring role

● Requires heightened due diligence for CSFTs:

Must identify CSFTs with “elevated” risk

Focus should be on legal or reputational risk to financial institution

Due diligence should be correlated with level of identified risks

Risks must be analyzed separately from institution’s overall relationship with client

Cannot conclude risks are manageable because another financial institution is willing to execute transaction

Must determine appropriateness of relying on opinions or analyses prepared by customer and its advisers

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WHAT GUIDANCE DOES DO (Cont’d):

● Approval process must consist of relevant senior control and senior management personnel with sufficient experience to gauge risk in CSFTs

● Procedures must include providing sufficient information to senior management and control personnel who are reviewing CSFTs

● If determination is made that “significant” legal or reputational risks are involved, financial institution must mitigate those risks (including refusal to participate or requiring customer to address risk)

● Financial institution should decline to participate if, after due diligence and risk mitigation, CSFT poses “unacceptable” risk to financial institution or violates applicable laws, regulations or accounting principles.

● Guidance acknowledges that “ambiguities” may exist in applying applicable law and accounting principles and disapproval of CSFT is not required due solely to ambiguities

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DOCUMENTATION REQUIREMENTS OF GUIDANCE

● Documentation requirements only apply to elevated CSFTs that are reviewed by senior management

● Financial institutions must collect sufficient documentation to set forth: Material terms of transaction Enforce obligations of counterparties Confirm disclosure obligation to clients Verify financial institution’s policies are followed and have

internal audit procedures to monitor compliance with financial institution’s policies and procedures

● Financial institutions must maintain transaction-related documentation provided to senior management consisting of: Minutes of senior management committee Conditions imposed by senior management Factors considered by senior management

● Documentation retention only applies to “factors” considered in reviewing elevated CSFTs not “reasons” for approval or disapproval of CSFTs

● Records must be retained in accordance with normal record retention policies, procedures, statutes and regulations

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COMPLIANCE REQUIREMENTS OF GUIDANCE

● Periodic independent review of CSFT activities should be performed to monitor compliance with internal policies and procedures for CSFTs

● Reviews should be performed by qualified audit, compliance and other personnel

● Financial institutions must ensure training of relevant personnel reviewing CSFTs to perform verification function

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FOREIGN BANKS WITH U.S. BRANCHES OR AGENCIES

● Guidance does not require foreign financial institutions to establish separate U.S.-based risk management policies for U.S. branches or agencies

● Guidance permits foreign financial institutions to tailor policies and procedures on CSFTs as appropriate to comply with “laws, regulations and standards” of applicable foreign jurisdiction

● Foreign financial institutions must have established “separate control infrastructures” with adequate firm-wide institutional controls that apply to U.S. branch or agency

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IDENTIFYING ELEVATED RISK CSFTs

● Proposal identifies following factors as illustrative of “elevated risk CSFTs” that require special review:

Lack of economic substance or business purpose

Designed primarily for accounting, regulatory or tax objectives

Raises issues that customer will report transaction in a materially misleading way

Involves circular transfer of risk that lack economic substance or business purpose

Involves oral or undocumented agreements that have material impact on regulatory, tax or accounting treatment

Terms are outside of market norms

Provides financial institution with disproportionate compensation vis-à-vis services provided

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CSFT EXCLUSIONS:

● Guidance excludes the following CSFTs:

MBS

ABS

CDOs

ABCP/Medium Term Note Off-Balance Sheet Conduits

“Plain Vanilla” Derivatives utilized in hedging transactions

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ISSUES WITH GUIDANCE

● While recognizing tremendous benefits of structured finance markets, Guidance would have prevented development of structured finance market

● In 1980s, MBS transactions were created solely for regulatory capital, accounting and tax purposes (i.e., sale for regulatory capital/financial accounting purposes but debt for tax purposes)

● ABS, CDO and Asset-Backed Commercial Paper conduits and markets also unlikely to have developed

● Exclusions save these CSFTs from Guidance requirements

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WHAT HAS HAPPENED SINCE GUIDANCE WAS ISSUED:

Explosion in Structured Finance Markets

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CURRENT CREDIT MARKET TURMOILS

● Current credit turmoils started with CSFTs that are excluded from Guidance

● Subprime losses hit MBS Markets

● Spread to ABS Market

● Spread to CDO Market

● Now Spreading to Off-Balance Sheet Conduits such as Structured Investment Vehicles (“SIVs”)

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IMPACT OF GUIDANCE

● Limited because credit market turmoil has dampened demand for CSFTs

● Most financial institutions already had established special policies and procedures for approval of new CSFTs as a result of Enron fall-out

● Most interesting CSFT since release of Guidance is proposal of Big Three banks initiated under auspices of U.S. Treasury Department and Federal Reserve to create “Super SIV”

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SUPER SIV PROPOSAL AND GUIDANCE

● “Super SIV” conduit (a/k/a “Master Enhanced Liquidity Conduit”) is an attempt to restore liquidity to structured finance markets and ease credit turmoils in market

● Would move high quality assets from existing SIVs to Super SIV

● Creates valuation issues

● Super SIV proposal qualifies as “elevated CSFT” under Guidance

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STAY TUNED!

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Sylvie Durham, Esq.Greenberg Traurig, LLP

200 Park AvenueNew York, New York 10166

Tel: (212) 801-9200Fax: (212) 801-6400

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