Strictly Confidential

Not for Distribution

Restructuring the Bond Insurers

to Protect All Policyholders
February 19, 2008

Pershing Square Capital Management, L.P.

Goals

f Protect municipal policyholders and Triple A rating of

outstanding municipal bonds

f Maximize recoveries for structured finance (“SF”) policyholders

  Both Bank CDO counterparties and insured ABS security holders

f Align economic interests of all participants

f Minimize execution and litigation risks loss

1
Berkshire Plan

Holding Co.

Dividends ABS
m ium
Pr
e Counter-
a bl e
s pa
y parties
Assignment Bond Insurer Cl
aim
Novation
Berkshire Municipal SF Cla
im
Hathaway Insurer Insurer sp
ay
ab
Pre le Bank
mi
um Counter-
parties

2
Berkshire Plan: Negative Sum Game

Negative sum game: Berkshire’s gain is SF Policyholders’ loss

f Berkshire takes 1.5 times unearned premium reducing capital

available to pay Structure Finance claims

f SF Insurer in runoff with finite capital base

  Unable to benefit from incremental value generated by
municipal business

f Banks and SF policyholders pursue fraudulent conveyance

claims

f Legacy Municipal Insurer shuts down

  Municipal employees lose jobs

f Holding Company continues to seek dividends

3
“Good Insurer / Bad Insurer” Plan

Holding Co.
100% owner 100% owner

m
ABS
iu
em Counter-
Pr le
yab parties
s pa
l aim
C
Municipal SF
Insurer Insurer Cla
ims
pay
abl
Pre e Bank
miu
m Counter-
parties

4
“Good Insurer / Bad Insurer” – Still Negative Sum Game

Still negative sum game: Holding Co. gain is SF Policyholders’ loss

f Holding Company retains ability to extract dividends from

Municipal Insurer even as SF policyholders face risk of losses

f Legacy municipal employees retain jobs, but SF policyholders

still left out in the cold

f SF Insurer in runoff with finite capital base

  Unable to benefit from incremental value generated by
municipal business

f Banks and SF policyholders pursue fraudulent conveyance

claims

5
“Good Insurer / Bad Insurer” – Still Negative Sum Game

Still negative sum game: Bad incentive system continues

f Municipal Insurer continues to be controlled by executives

who caused problem in the first place

f Weak Holding Companies have incentive to take capital out of

both SF and Municipal Insurers

f Continued uneconomic decision-making at SF Insurer

  No CDO acceleration/liquidation even when it makes economic
sense on a present value basis and maximizes value for
policyholders

6
Recommendation:
A Positive Sum Game
Recommendation: Structure

Holding Co.

ABS
Counterparties

SF Insurer
Bank
Counterparties

Municipal
Insurer

8
Recommendation: A Positive Sum Game

Positive sum game: Immediate value is created by standalone

Municipal Insurer that can write business and grow capital and
value for the benefit of SF policyholders

f SF Insurer consolidates 100% of capital of Municipal Insurer into

its statutory capital
  Surplus Notes remain at the SF Insurer level with significant
protections

f Municipal policyholders are completely insulated from SF claims

f As Municipal Insurer writes safe business and generates excess

profits, value can be upstreamed to the SF insurer to support SF
claim obligations

f Municipal Insurer employees keep their jobs

9
Recommendation: A Positive Sum Game (cont’d)

f SF Insurer gets 100% of dividends and value of Municipal

Insurer until SF claims are paid

f If SF Insurer needs capital in excess of dividends from

Municipal Insurer, it can sell all or a portion of its equity in the
Municipal Insurer in a private or public sale

f SF Insurer will act economically and work to maximize value

of investments and minimize liabilities
  For example, SF Insurer should accelerate and liquidate CDOs
if creates value on a present value basis
  SF Insurer will manage investment assets to maximize long-
term value
  SF Insurer can pursue any potential claims against Holding Co.
for previous non-arm’s-length transactions
10
 Recommendation: Governance

Municipal Insurer SF Insurer

Governance 9 Must be controlled by independent 9 Must maximize value for

Principles directors to give comfort to policyholders
policyholders that the Insurer
9 Must behave economically
“won’t stray” and will remain
rationally
adequately capitalized
9 No dividends to Holding Co. until
policyholders are made whole

Board 9 person board 10 person board

Structure 9 5 Independents 9 3 Bank counterparty reps
9 2 Bank counterparty reps 9 3 ABS industry reps
9 2 ABS industry reps 9 2 Independents
9 1 Surplus Note rep
9 1 Holding Co. rep
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Recommendation: Regulatory Supervision

f Municipal Insurer restricted by new NYID law to write only

municipal business

f Regulatory oversight of SF Insurer by NYID and Feds

  SF Insurer in runoff -- No new business

f All dividends to the Holding Co. from SF Insurer and interest

payments on Surplus Notes require NYID and Federal
approval, and SF Insurer board approval including:
  Majority of Bank reps

  Majority of ABS reps

  The Surplus Note rep

  Both Independents

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Recommendation: Good for the Market

3 Early movers will capture significant municipal bond insurance

market share catalyzing other bond insurers to adopt same
structure so they can compete

3 Multiple survivors will lead to healthy competition and lower

municipal funding costs

3 Structured Finance policyholders will maximize recoveries

3 Municipal and Structured Finance policyholders’ interests can

no longer be compromised for the benefit of Holding Companies

3 Holding Companies retain all residual value

3 All participants will focus on the maximization of long-term value

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