Professional Documents
Culture Documents
May 2007
Pershing Square Capital Management's ("Pershing") analysis and conclusions in the presentation are
based on publicly available information. Pershing recognizes that there may be confidential
information in the possession of the Companies discussed in the presentation that could lead these
Companies to disagree with Pershing’s conclusions.
The analyses provided may include certain statements, estimates and projections prepared with
respect to, among other things, the historical and anticipated operating performance of the
Companies. Such statements, estimates, and projections reflect various assumptions by Pershing
concerning anticipated results that are inherently subject to significant economic, competitive, and
other uncertainties and contingencies and have been included solely for illustrative purposes. No
representations, express or implied, are made as to the accuracy or completeness of such
statements, estimates or projections or with respect to any other materials herein. Actual results
may vary materially from the estimates and projected results contained herein.
Funds managed by Pershing and its affiliates own investments that are bearish on MBIA and Ambac.
These investments include credit-default swaps, equity put options and short sales of common
stock.
Pershing manages funds that are in the business of trading - buying and selling - public securities. It
is possible that there will be developments in the future that cause Pershing to change its position
regarding the Companies and possibly increase, reduce, dispose of, or change the form of its
investment in the Companies.
1
Agenda
2
What’s Happening With the Credit Markets?
More
Leverage /
More
Freely
Buyers
Available
Credit Increasing
Asset
9 Relaxed lending
standards
Values
9 Financial
“innovation”
9 CDO Demand
Decreasing
defaults
3
Sub-Prime: Relaxed Lending Standards
$80 bn / qtr
$120
$98
$100
$80
$60 $53
$40 $31
$27
$19
$20
$0
2001 2002 2003 2004 2005 2006
% of total
23% 40% 33% 43% 52% 49%
CDO Issuance
Source: Bear Stearns 10
How Does a Securitization work?
Improving liquidity
Product innovation
$ %
Poor returns for BBB / Equity CDO investors will have over
100:1 impact on demand for securitizations of primary assets
14
What Has Securitization
Wrought?
Mortgage Lending in the Old Days
16
Mortgage Lending Today: Lend & Securitize
Originator
3 “Mortgage.com” or “1-800-MORTGAGE”
3 Models-based issuance, questionable actuarial data
ABS
3 Originator recognizes income upon loan sale or securitization
3 Bank earns fee for underwriting ABS
CDO
3 Rating Agency arbitrage allows CDO originator to book profit at
closing
3 CDO Manager makes nominal investment, receives recurring fees
18
Rating Agencies as De Facto “Regulator”
20
Rating Agencies Claim No Liability for Being Wrong
21
What Happens if the Rating
Agencies Are Wrong?
The Cycle Also Works in Reverse
Less
Catalyst:
Leverage / Unexpected
Fewer Defaults
Buyers
Reduced
Decreasing Availability of
Asset Credit
Values
9 Tighter lending
Increasing standards
f Lack of new ABS CDOs dramatically reduces demand for new mortgages
f Banks pulling warehouse lines
f Originator bankruptcies / exiting business (~50 in last 15 months)
f Home price depreciation predicted by National Association of Realtors
24
Already Happening in Sub-Prime
Source: Moody’s
25
Sub-Prime Fallout: It is Going to Get Worse…
We are
here
26
Higher Losses due to Lower Home Appreciation
27
Leveraged Lending Mirrors Sub-Prime
Sub-Prime LBOs
f I/O, Negative amortizing loans f Covenant lite & PIK toggle notes
28
Buyout Leverage: Mirroring Sub-Prime Trends
$400
LBO Volume (EV) ($Bn)
$362
$350
$300
$250
$200
$147
$150
$115
$100
$59
$50 $42
$20
$0
2001 2002 2003 2004 2005 2006
Source: JP Morgan
29
Buyout Leverage: Mirroring Sub-Prime Trends
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x
2001 2002 2003 2004 2005 2006
Source: JP Morgan
30
Buyout Leverage: Mirroring Sub-Prime Trends
4.9x
5.0x
4.6x
4.0x
3.0x
2.0x
1.0x
0.0x
2001 2002 2003 2004 2005 2006
Source: JP Morgan
Note: Represents top 20% of levered loans by Debt / EBITDA
31
Buyout Leverage: Mirroring Sub-Prime Trends
120
Leveraged Loan Arbitrage CLO Activity ($Bn)
100 $97
80
60
$53
40
$25
20 $16
$12
$9
0
2001 2002 2003 2004 2005 2006
Source: JP Morgan
32
Commercial Real Estate Mirrors Sub-Prime / LBO
33
Who’s Holding the Bag?
Who’s Holding the Bag?
35
Who’s Holding the Bag?
36
Who Are the Bond Insurers?
100x 94.1x
80.8x
75x
Guarantees /
Statutory Capital
25x
0x
38
Growing Structured Finance Exposure
1996 2006
Structured Finance Structured Finance
14% 32%
86% 68%
39
Growing Structured Finance Exposure
70 75.0%
59.5
60
66.5%
65.0%
50 47.6 46.7
42.1
$ insured 40
53.0% 55.0% % of total
(bn) 30 25.2 45.0%
20 44.3%
42.1%
38.7% 35.0%
10
0 25.0%
2003 2004 2005 2006 Q1 '07
40
MBIA Compared to Citigroup
Reserves / Credit
Exposure 3 bps 96 bps
41
Minimal Losses Will Impair MBIA’s Capital Base
800
704
700
600
bps 500
400
300 261
200
195
BBB BBB-
132
100
BBB BBB-
0
2/16/07 5/4/07
45
How Does MBIA Account for Wider Spreads?
46
Wider CDO Spreads Will Impair Capital Base
Eliminates Eliminates
"Excess" All
Capital Capital
(bps) (bps)
47
Wait, There’s More…
MBIA Is One of the Most Profitable US Companies?
“We have the highest profit margin of any financial company in the Forbes 500
with over a billion in sales.”
--Joseph W. Brown, Chairman of MBIA
Source: Company reports, Pershing estimates (MBI adjusted for one-time expenses).
49
Decreasing Unallocated Reserves
6.2bps
6.0bps
6.0 5.7bps
5.5bps 5.4bps
5.0
4.0
3.6bps
bps 3.5bps
3.2bps
3.0
2.0
1.0
-
2000 2001 2002 2003 2004 2005 2006 Q1 '07
50
Accelerated Revenue Recognition
52
Impact of FASB’s Revenue Recognition Decision
53
Moody’s Interpretation of FASB Change
Wallace Enman
Moody's Senior Accounting Analyst
4/19/2007
54
Moving the Goal Post
f April 2007: Received permission from NYSID and paid yet another
$500M special dividend from Insurance Subsidiary to Holding Company
57
Is MBIA Prepared?
58
Risk is Hidden in Guarantor Portfolios
f Moral Hazard in the Structured Finance process combined with a
flawed Rating Agency function has overstated credit quality for
hundreds of billions of dollars of guaranteed bonds
Negligible reserves
$120
$100 $95
$89
Share price
$80 $77
$69
Adj. Book Value
$60
$40
$20
$0
61
What Is Our Interest In This?
f We are short the common stock and own credit protection for
MBIA, Inc. and Ambac Financial Group, Inc., the holding
companies of the bond insurance companies
62
What Are We Doing About This?
63