Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2006 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

Banking Conference of the NY Society of CPA’s

Cliff GriepEMD & Chief Risk Officer

September 25, 2008

Copyright © 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved

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Ratings Industry History1854 Henry Poor begins publishing financial performance statistics of U.S. Railroad companies.

1909 John Moody introduces ratings scale to summarize assessment of railroad company creditworthiness.

1920’s Ratings coverage expands – with S&P, Moody’s and Fitch providing ratings on 3,000 issuers, and nearly $26 billion of outstanding debt.

1933 First use of ratings in regulation as Office of the Comptroller of Currency and Federal Reserve required banks to hold extra capital against speculative grade bonds marking. Subsequently banned banks from hold speculative grade bonds.

1951 National Association of Insurance Commissioners began using ratings to assess insurance company investment portfolios.

1975 Securities and Exchange Commission started to use ratings in broker dealer net capital requirement 15c3-1.

1989 Department of Labor initiated the use of ratings in guidelines for pension fund assets.

1991 SEC applied ratings to money market funds through rule 2a7 of the Investment Company Act of 1940.

2001 Enron defaults. Credit ratings agencies widely criticized.

2002 Sarbanes-Oxley Act mandated SEC review of the role and function of ratings agencies in financial markets.

2003 The International Organization of Securities Commissioners (IOSCO) works with Credit Rating Agencies to develop Code of Conduct – RA’s adopt comply or explain approach.

2006 U.S. Congress enacts the Credit Ratings Agency Reform Act of 2006 authorizing SEC as CRA Industry regulator.

2007 SEC creates CRA registration process and subsequently initiates examinations of major ratings agencies to “review their role in recent turmoil in the sub prime securities related market.”

2008 European Commission issues working consultative document seeking comment on proposals of potential regulatory scheme for CRA’s in the EU.

2008 SEC issues requests for comment on proposals to replace or amend provision of the Securities ACT of 1933, the Securities Exchange Act of 1934, and the Exchange Act of 1940, that reference the use of ratings.

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Ratings Definitions

• Ratings reflect an opinion about relative creditworthiness of an

issuer, program, or issue.

• Ratings are based on capacity and willingness to meet financial

obligations in accordance with their terms, and for issue ratings,

the nature and provisions of the obligation, and the relative

position of the obligation in bankruptcy or insolvency.

• Ratings definitions are expressed largely in terms of default

risk, i.e., the capacity to pay.

• Ratings performance is predominantly measured in terms of

how well or poorly they differentiate default potential.

• Ratings can be long or short term, local currency or foreign

currency, global scale or national scale.

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Ratings Definitions

• S&P introduced recovery ratings on speculative grade corporate

and sovereign debt instruments, and has moved from standard

“notching” for position in insolvency to explicit consideration of

recovery in the issue ratings. This provides incremental

information on speculative grade debt instruments.

• Ratings are intended to be reasonably comparable across

sectors and regions.

• Ratings are forward looking, and are surveilled on an ongoing

basis.

• Ratings are supplemented by the use of Creditwatch and

Outlooks – both provide incremental information on potential

changes in creditworthiness.

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Ratings Limitations

• Ratings are not recommendations to purchase, sell, or hold a

financial obligation.

• Ratings do not comment on market price, value, liquidity, or the

suitability of exposure for a particular investor.

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Ratings Limitations

Under Review

• Issued request for comment on incorporating stability guidelines

into our criteria and ratings.

• Issues request for comment on adding identifier to structured

financings.

• Researching investor demand for extending outlooks and

recovery ratings to structured finance, introducing a liquidity

assessment to rated debt instruments, and expanded

commentary on correlation.

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Areas Ratings and Criteria May Serve as Benchmarks

• Credit exposure and related limits.

• Counterparty exposure.

• Mapping/validation of internal scoring models.

• Collateral guidelines.

• Collateralized borrowing capacity.

• Risk adjusted capital assessment.

• Peer comparison and adjusted ratio analysis.

• Credit implication of accounting policy choices and related

analytical adjustments

• Implication of contingent triggers/obligations linked to ratings

and creditworthiness.

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Credit Expansion In The U.S. 1997 to 2007

Source: Federal Reserve

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Securitization Changed the Structure of Financial Intermediation

• Growth of securitization enables shift from bank to market

based financial intermediation.

• Risk more broadly dispersed – but held in security form – and

subject to valuation disciplines.

• Originate and distribute business model flourished – with

different financial incentives, governance, and regulatory focus.

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Policy Influences in the U.S. Housing Sector

• Increasing home ownership and housing affordability were key

policy objectives.

• Interest rates were low.

• Tax rates on capital gains were lowered potentially contributing

to speculation.

• Unregulated mortgage originators captured an increasing share

of mortgage originations.

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U.S. Housing Outlook

• Average home price decline of an additional 10% - 25% total decline to June, 2009.

• Rising delinquency and loss across all loan products.

• Cumulative loss assumptions have been increasing and are more likely to rise than fall.

• Stress testing in prime and Alt A in process.

• Government intervention on foreclosure, resets and conversion to neutral to date – New support initiatives will mitigate foreclosure risk – but may reduce cash flow transaction.

• Resets peak next 24-36 months.

• Erosion in servicing.

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S&P/Case-Shiller® Home Price 12-Month Change (%)

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Ma

r-8

8

Ma

r-8

9

Ma

r-9

0

Ma

r-9

1

Ma

r-9

2

Ma

r-9

3

Ma

r-9

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Ma

r-9

5

Ma

r-9

6

Ma

r-9

7

Ma

r-9

8

Ma

r-9

9

Ma

r-0

0

Ma

r-0

1

Ma

r-0

2

Ma

r-0

3

Ma

r-0

4

Ma

r-0

5

Ma

r-0

6

Ma

r-0

7

Ma

r-0

8

12-M

onth

Cha

nge

10-City Composite %

20-City Composite %

Source: Standard & Poor’s

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Sub-Prime Loan Performance

Source: Standard & Poor’s

Cum Loss Total Del 90+ Day FC REO Serious Del

Dec-07 1.29 31.91 3.85 9.96 6.32 20.13

Jan-08 1.44 34.36 4.48 11.06 6.74 22.28

Feb-08 1.60 35.55 4.91 11.86 7.45 24.22

Mar-08 1.76 32.65 4.80 12.36 7.84 25.01

Apr-08 1.96 33.20 4.99 12.57 8.29 25.84

May-08 2.22 33.67 4.87 12.82 8.60 26.29

Jun-08 2.50 34.17 5.14 12.72 9.11 26.96

Jul-08 2.80 34.67 5.31 12.78 9.37 27.46

Cum Loss Total Del 90+ Day Frcls REO Serious Del

Dec-07 1.13 28.79 3.63 9.93 5.69 19.25

Jan-08 1.41 31.79 4.16 10.74 6.10 21.00

Feb-08 1.68 34.17 4.61 11.70 7.07 23.38

Mar-08 1.97 33.53 4.83 12.65 7.71 25.19Apr-08 2.34 35.21 5.05 13.49 8.25 26.79

May-08 2.80 36.44 5.04 13.99 8.77 27.79Jun-08 3.36 38.05 5.36 14.77 9.47 29.61Jul-08 3.93 39.43 5.55 15.28 9.86 30.70

Cum Loss Total Del 90+ Day Frcls REO Serious DelDec-07 0.23 19.40 2.55 6.80 1.49 10.84Jan-08 0.33 22.23 3.29 7.90 2.01 13.20Feb-08 0.43 24.38 3.90 8.58 2.76 15.24Mar-08 0.58 23.94 4.07 8.99 2.95 16.01Apr-08 0.68 24.74 4.24 9.45 3.45 17.14

May-08 0.96 26.95 4.15 10.56 4.26 18.96Jun-08 1.26 28.59 4.16 11.39 4.90 20.44Jul-08 1.60 30.10 4.26 12.10 5.34 21.70

2007 Vintage

2006 Vintage

2005 Vintage

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Structured Credit Spreads Current Spreads vs. One Year Change

Sources: JP Morgan & Merrill Lynch

'A' CMBS

'BBB'CMBS

'AA' Subprime

'A'Subprime

'BBB' Subprime

0

500

1000

1500

2000

2500

3000

0 500 1000 1500 2000 2500 3000 3500 4000 4500

Current Spreads (bps)

On

e Y

ear

Ch

an

ge (

bp

s)

Spreads Widened

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Dollar Weighted Ratings Transition Experience for Mortgage Securities Rated Between-2005 3rd Qtr 2007

Source: Standard & Poor’s

Original-to-Current Rating Transitions ($ weighted %)SECTOR = U.S. RMBS For Vintages: Q1 2005 - Q3 2007 Date Updated = Aug. 11, 2008Original/Current AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C D $ Issuance $ Down Down %AAA 91.5 0.08 3.28 0.05 0.02 0.91 0.24 0.1 0.78 0.68 0.07 1.85 0 0 0.32 0 0 0.05 0 0 0 0.05 $2,424.2 $205.91 8.49%AA+ 0 71.9 1.97 0.51 0.53 3.72 0.13 0.18 4.57 0.28 0.63 7.09 0.05 0.8 5.25 0.04 0 2.1 0 0.06 0 0.23 $64.5 $18.15 28.12%AA 0.03 0.06 65.4 0.64 0.24 3.32 1.06 0.1 4.7 0.18 0.21 6.31 0.2 0.54 8.14 0.45 0 7.1 0 0.23 0 1.08 $79.3 $27.35 34.51%AA- 0 0.04 0 53.1 0.61 2.48 0.36 0.29 3.17 0.27 0.17 5.13 0.48 0.04 10.8 0.48 0 20.2 0 0.77 0 1.64 $22.2 $10.41 46.88%A+ 0 0 0 0 36.1 0.85 0.23 0.39 3.73 0.13 0.26 4.98 0.01 0.24 7.89 0.05 0 40.4 0 3 0 1.74 $24.6 $15.74 63.86%A 0 0 0.05 0.01 0.05 43.2 0.7 0.62 3.02 0.66 0.54 3.95 0.06 0.17 6.53 0.04 0 32.6 0 5.2 0 2.55 $32.7 $18.53 56.66%A- 0 0 0 0 0.01 0 30.3 0.3 2.89 0.14 0.18 3.34 0.31 0.22 4.17 0.98 0 38.2 0 15.7 0 3.21 $26.0 $18.12 69.73%BBB+ 0 0 0 0 0 0 0 23.3 0.54 0.59 0.67 3.55 0.37 0.22 5.78 0.09 0 41.6 0 18 0 5.2 $18.2 $13.98 76.68%BBB 0 0 0 0 0 0.01 0.05 0.01 38.5 0.26 0.68 3.31 0.28 0.85 3.96 0.09 0 29.4 0 17.7 0 4.96 $23.1 $14.15 61.39%BBB- 0 0 0 0 0 0 0.05 0 0.03 23.5 0.3 2.19 0.32 0.29 5.58 0.91 0 31.2 0 27.1 0 8.55 $21.6 $16.52 76.44%BB+ 0 0 0 0 0 0 0 0 0 0 11.6 0.23 0.17 0.17 2.86 0.52 0 28 0 34.7 0 21.6 $7.8 $6.92 88.35%BB 0 0 0 0 0 0 0 0 0 0.02 0 30.2 0.13 0.04 9.53 0.6 0 16.9 0 28.7 0 13.9 $9.5 $6.60 69.77%BB- 0 0 0 0 0 0 0 0 0 0 0 0 46.9 1.43 4.07 0 0 18.6 0 13.7 0 15.3 $0.8 $0.43 53.10%B+ 0 0 0 0 0 0 0 0 0 0 0 0 0.33 73.6 0.21 0 0 13.4 0 2.27 0 10.2 $0.3 $0.09 26.04%B 0 0 0 0 0 0 0 0 0 0 0 0 0 0 36.5 0.11 0 20.4 0 31.2 0 11.7 $3.8 $2.39 63.46%B- 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 81.5 0 3.32 0 5.07 0 $10.1 $0.3 $0.05 18.51%1. AAA ratings from the same transaction are treated as a single rating in the calculation of this table. Investment Grade 0.32 $2,736.4 $358.87 13.11%2. Multiple rating actions are aggregated to calculate a security's cumulative rating performance Speculative Grade 16.16 $22.5 $16.48 73.30%3. Last rating before withdrawal due to redemption is used in the transition rate calculation. ALL 0.45 $2,758.9 $375.36 13.61%

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Perspectives on Current Crisis

• Updated Methodologies and/or Assumptions

– RMBS

– CDO

– LSS and CPDO

– SIV

– CMBS

– Leadership Actions, Rating Consistency & Stability

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Perspectives on Current Crisis

• S&P Methodology and/or Assumption Updates:

Residential Mortgage Backed Securities

– Ratings Halted on Closed End Seconds

– Higher Default Rate Assumptions

– Increased Market Value Decline Assumptions

– Lower Spread Credit

– Tighter Triggers

– Originator Review Process Revised

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Perspectives on Current Crisis

• S&P Methodology and/or Assumption Updates:

Collateralized Debt Obligation

– Correlation

– Recovery

– Event of Default Provisions

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Standard &Poor’s Leadership Actions

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Ratings Agency Reform Proposals

• Financial Stability Forum (FSF); Enhancing Market and Institutional Resilience, April 2008.

• European Securities Markets Expert Group (ESME) Credit Rating Agency sub-group, Draft v15, May 2008.

• Institute of International Finance (IIF); Interim Report of the IIF Committee on Market Best Practices, April 2008.

• President’s Working Group (PWG) on Financial Markets; Policy Statement on Financial Market Development, March 2008.

• SIFMA CRA Task Force Recommendations, July 2008.

• International Organization of Securities Commissions (IOSCO), Technical Committee; The Role of Credit Rating Agencies in Structured Finance Markets, May 2008.

• The Committee of European Securities Regulators (CESR); 2nd Report to the EC on the compliance of CRA’s with the IOSCO Code and The Role of Credit Rating Agencies in Structured Finance, May 2008

• U.S. Securities Exchange commission (SEC) – Credit Rating Agency Reforms, June 2008

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Themes of Recommendations

• Assure adequacy of control infrastructure to manage conflicts

inherent in the business model.

• More education/information on what a rating is and isn’t – it’s

attributes and limitations.

• Assure methodologies and models are responsive to changing

market environment.

• Greater transparency and accessibility of information on the

methodologies, criteria, and rationale for ratings.

• Additional information about the risk characteristics of rated

securities.

• Ratings industry plays vital role in global capital markets.

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Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.

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