Colleen Sayther Cunningham President and CEO March 8, 2005

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Overcoming the Credit Crisis
Michael P. CangemiFEI President and CEO
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FEI Mission- Connecting Financial Executives

• To be the preeminent associationfor financial
  executives via

Networking
Knowledge
Advocacy
Ethics
Providing forums for peer networking
Alerting members to emerging issues
Promotingethical conduct
Advocating the views of financial executives
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Financial ExecutivesResearch Foundation
(www.FERF.org)

• Independent non-profit research affiliate of FEI
• Facilitate learning from other financial
  executives through
• Research publications, alerts and survey
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• Distance learning with CPE
• Most recent releases
• Fraud Risk Checklist A Guide for Assessing the
  Risk of Internal Fraud
• Financial Reporting and Regulatory Update (for
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• Whats New in Financial Reporting
• Online benchmarking tools
• Pay Check compare your pay to 1,844 of your
  peers
• Financial Executives List Exchange (FELIX) ask
  peers questions on the latest hot topics and
  issues

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Top Challenges for Financial Executives

• THE ECONOMY
• Fair Value/Sub prime Market Crisis/Derivatives
• Global Convergence of US GAAP and IFRS
• Complexity in Financial Reporting
• State of the Audit Profession
• XBRL
• Business Combinations
• Internal Controls
• Healthcare
• Corporate Taxes
• Rating Agency Regulation
• IRS Policy of Restraint/Privilege

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Risks, Wagering and the Financial Markets

• A correction in the housing prices was
  inevitable. Sect. Paulson
• Did lenders ignore the inevitable ebbs and flows
  of the real estate market?
• Why did lenders lend to sub-prime borrowers?
• Where were the Risk Managers a question of
  survival

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Wall Street Bucket Shops

• Wall Street history
• learned about the inevitability of market cycles
  and crooks
• Jesse Livermore and the Wall Street Bucket
  Shops
• Bucket Shops were outlawed BUT were they
  reinvented in the form of options and derivatives
• Humans are programmed to take advantage

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Gambling

• Jim Cramer compares investing to betting at horse
  race tracks
• Online betting millennium generation use
  complex multi-faceted bets
• Increase the number of variable, and the odds go
  up bet a dollar get 3,500
• Sounds good BUT how is the bettor able to analyze
  the odds?

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Anatomy of the Sub Prime - Securitization

• Simple mortgage loan is built into a multi-tiered
  financial instrument through securitization
• Mortgages or pools are sold to investment bank
• Bank no longer has the loan receivable
• Mortgages packages into Collateralized Debt
  Obligations (CDO)
• CDOs collected into Structured Investment
  Vehicles (SIVs) and SIVs are not consolidated
  by the bank

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Computers and Complex Financial Instruments

• Derivatives sold on SIVs and CDOs
• Options on tranches of the underlying mortgages
• Lowest interest rate on the better mortgages
• Highest Interest rates on the Sub-Prime
  Mortgages
• Could these pools be managed without the use of
  computers?

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What the accountants were doing

• Fair Value Measurement SFAS 157
• Fair value is the price that would be received
  to sell an asset or paid to transfer a liability
  in an orderly transaction between market
  participants at the measurement date.
• Great benefits related to expanded disclosure for
  financial assets and liabilities Level 1, 2 and 3
• As for marking to market turns out the market
  for these sub prime securities was very thin
• For the record we are for continuation of the
  temporary deferral related to non-financial
  assets and liabilities

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Summary Principles of a market economywill not
change

• Market cycles will always occur
• The devil is in the details- know what you are
  buying - buyer beware
• Higher returns mean higher risk
• Business becoming more complex, globalized,
  computerized regulators cant keep up

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Summary - Market Volatility corrections and
crisis are more apt to occur

• Complexity adds to the risk profile always
  remember humans are programmed to take advantage
• Like multi tiered bets Understanding the risks
  of multi tiered financial instruments may require
  computerized risk models, for investors
• Securitizations and off the balance sheet
  accounting separated the originator of the loan,
  who leaves with his fee, from the loan. This may
  explain the use of sub-prime criteria
• The FASB has declared they will eliminate the Q
  or Qualified SPE

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FEI Upcoming Conferences

• Global Financial Reporting Convergence Conference
• June 5th, NYC
• Women in Financial Leadership Conference
• September 17th, NYC
• Current Financial Reporting Issues Conference
  (CFRI)
• November 17th and 18th, NYC
• www.financialexecutives.org

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Michael P. CangemiFEI President and CEO