1. “Securitization: Past, Present and Future” What It Is. Where It Came From. Where It’s Going. Kellogg Graduate School of Management April 28, 2003 “Securitization: Past, Present and Future” What It Is. Where It Came From. Where It’s Going. Kellogg Graduate School of Management April 28, 2003 SECURITIZATION COLLOQUIUM Joseph M. Donovan Managing Director and Group Head Joseph M. Donovan Managing Director and Group Head

2. WHAT IS AN ASSET BACKED SECURITY? A fixed income instrument designed to capture the cash flow and credit attributes of a specific pool of assets (loans, receivables) Enhanced to achieve high ratings or target a particular buyer Examples of Assets A fixed income instrument designed to capture the cash flow and credit attributes of a specific pool of assets (loans, receivables) Enhanced to achieve high ratings or target a particular buyer Examples of Assets Yes Autos Credit Cards Home Equities Equipment Leases Student Loans CBO/CLOs Autos Credit Cards Home Equities Equipment Leases Student Loans CBO/CLOs Maybe Future Export Rec.’s Tax Liens Disney Film Library Bowie Bonds Future Export Rec.’s Tax Liens Disney Film Library Bowie Bonds No Secured Debt Commodity Backed Secured Debt Commodity Backed

3. WHAT IS AN ASSET BACKED SECURITY? Rights to future cash flows Future cash flows Purchase bonds (cash today) “Excess” future cash flows Credit enhancement Cash proceeds today Trust or SPV Bond Investors Company Individual Assets (Loans, Receivables) on Company’s Balance Sheet Company Individual Assets (Loans, Receivables) on Company’s Balance Sheet

4. WHAT IS AN ASSET BACKED SECURITY? Sources of Credit Enhancement Internal –The assets –Excess interest –Spread or reserve accounts –Subordinated classes External –Seller’s limited guaranty –Third-party LOC/surety bond Sources of Credit Enhancement Internal –The assets –Excess interest –Spread or reserve accounts –Subordinated classes External –Seller’s limited guaranty –Third-party LOC/surety bond

5. The Early Years: 1985-1994

6. I. THE EARLY YEARS: 1985-1994 In 1985 the ABS Market was born, first with autos... Auto Source:Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance ($ in Billions)

7. I. THE EARLY YEARS: 1985-1994 …then with credit cards Credit Cards Auto Source:Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance ($ in Billions)

8. I. THE EARLY YEARS: 1985-1994 Auto & Credit Cards - The Fundamental Structures Average Life (20 months) Expected Final Callable Legal Final Months Autos: Liquidating pool generally in existence at closing Autos: Liquidating pool generally in existence at closing

9. I. THE EARLY YEARS: 1985-1994 Auto & Credit Cards - The Fundamental Structures Credit Cards: Designed to accommodate short-lived assets Future originations must meet established parameters Credit Cards: Designed to accommodate short-lived assets Future originations must meet established parameters PEPCO FUTURE TERM SERIES 200X-1 REVOLVING PERIOD MONTH MINIMUM SELLER'S INTEREST 100 10 7 STEP DOWN PERIOD 6036 RECEIVABLES BALANCE

10. I. THE EARLY YEARS: 1985-1994 Back to the Evolution of the Market Credit Cards Auto Other Source:Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance ($ in Billions)

11. I. THE EARLY YEARS: 1985-1994 1985-1994: Top ABS Issuers Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, CSFB. ISSUER PRINCIPAL (in millions)RANKMARKET SHARE GMAC$37,928.7110.7% Chrysler$35,876.7210.1% Citibank$28,656.838.1% Household International$18,571.545.2% Ford Motor Credit$17,328.654.9% MBNA$17,097.264.8% Top 6 Totals$155,459.543.8% Industry Totals$355,120.8100.0%

12. I. THE EARLY YEARS: 1985-1994 Why Securitize? Cheaper source of capital Improved leverage Perfect matched funding Fund growth Access new investors Origination discipline Why Securitize? Cheaper source of capital Improved leverage Perfect matched funding Fund growth Access new investors Origination discipline

13. I. THE EARLY YEARS: 1985-1994 Why Invest in ABS? Extremely high credit quality Yield pick-up over corporates Liquid market Limited “event risk” Asset diversification Relatively predictable cashflow Why Invest in ABS? Extremely high credit quality Yield pick-up over corporates Liquid market Limited “event risk” Asset diversification Relatively predictable cashflow

14. The Middle Years: 1995-1997 a.k.a. “The Gain on Sale” Years

15. 35% CAGR I. THE GAIN ON SALE YEARS Public/144A ABS Annual Issuance, 1985-1998 ($ in Billions) Source: Thomson Financial Securities Data.

16. I. THE GAIN ON SALE YEARS Public/144A ABS Annual Issuance, 1994-1998 Source: Thomson Financial Securities Data. ($ in Billions)

17. I. THE GAIN ON SALE YEARS 1995-1997: Selected ABS Issuers Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, Bloomberg. ISSUER PRINCIPAL (in millions)RANKMARKET SHARE Green Tree$24,306.715.5% MBNA$18,365.844.1% Chrysler$16,919.863.8% SallieMae$16,713.473.8% Money Store$16,254.783.7% Advanta$11,470.292.6% Ford Motor Credit$11,167.0102.5% ContiMortgage$10,550.6112.4% Olympic/Arcadia$7,683.4131.7% GMAC$7,520.4141.7% United Companies$6,817.5151.5% AMRESCO$4,101.5210.9% Industry Totals$445,135.4100.0%

18. The Later Years: 1998-2002 Maturity/Stability

19. I. THE LATER YEARS Public/144A ABS Annual Issuance, 1985-2002 Source: Thomson Financial Securities Data, Credit Suisse First Boston ($ in Billions)

20. I. THE LATER YEARS Public/144A ABS Annual Issuance, 1998-2002 Source: Thomson Financial Securities Data, Credit Suisse First Boston ($ in Billions)

21. I. THE LATER YEARS 1998-2002: Top 10 ABS Issuers Source: Domestic Public and 144A Asset Backed Issues (excluding CDO’s), Thomson Financial Securities Data. ISSUER PRINCIPAL (in millions)RANKMARKET SHARE GMAC$98,011.216.5% Ford Motor Credit$56,804.123.8% Citigroup$48,452.633.2% JP Morgan Chase$44,230.442.9% MSDW (Discover)$44,086.052.9% MBNA$39,972.662.7% Lehman$33,757.172.2% Daimler/Chrysler$32,484.082.2% Conseco (Green Tree)$32,070.792.1% Capital One$26,974.9101.8% Top 10 Totals$456,843.630.4% Industry Totals$1,504,848.7100.0%

22. 2002: Enron “SPE” is not a 4-Letter Word

23. II. The Present

24. II. THE PRESENT Cumulative Public ABS Issuance Source:Thomson Financial Securities Data. $1 Trillion $500 Billion $100 Billion $2 Trillion ($ in Billions) PAST 10 YEARS: 23% CAGR

25. II. THE PRESENT Cumulative Public ABS Issuance Source:Thomson Financial Securities Data. Europe ($ in Billions) $1 Trillion $500 Billion $100 Billion $2 Trillion

26. II. THE PRESENT Relative Market Size ($ in Billions) Source:Thomson Financial Securities Data.

27. II. THE PRESENT Relative Market Size ($ in Billions) Source:Thomson Financial Securities Data.

28. II. THE PRESENT ABCP Overview ($ in Billions) Source:Federal Reserve.

29. II. THE PRESENT ABCP Overview ($ in Billions) Source:Federal Reserve. Total Unsecured CP ABCP

30. III. The Future

31. III. THE FUTURE CSFB’s 2003 Projected ABS Issuance ASSET CLASS2002 ACTUAL2003 PROJECTED% CHANGE Credit Card$70.3$75.06.7% Auto78.380.02.2% Home Equity and Related156.0160.02.6% Manufactured Housing4.63.0-34.8% Student Loan26.230.014.5% Equipment5.37.032.1% CDOs50.650.0-1.2% Other56.955.0-3.3% Total Public/144A$448$4602.7% Source:Credit Suisse First Boston.

32. III. THE FUTURE Observation # 1: Securitization has permanently changed the dynamics of consumer and commercial lending… Lowered/eliminated barriers to entry –Access to capital/cost of capital –Ratings –Size/balance sheet –Experience Resulted in increased competition –Price –Credit Two value added components remain –Origination –Servicing Observation # 1: Securitization has permanently changed the dynamics of consumer and commercial lending… Lowered/eliminated barriers to entry –Access to capital/cost of capital –Ratings –Size/balance sheet –Experience Resulted in increased competition –Price –Credit Two value added components remain –Origination –Servicing

33. III. THE FUTURE Observation # 1: But not without problems… Access Amresco Autobond Acceptance CFS Cityscape Conseco ContiFinancial FirstPlus Observation # 1: But not without problems… Access Amresco Autobond Acceptance CFS Cityscape Conseco ContiFinancial FirstPlus First Alliance IMC Mortgage Jayhawk Acceptance NAL Financial Group National Century NextCard Southern Pacific UCFC First Alliance IMC Mortgage Jayhawk Acceptance NAL Financial Group National Century NextCard Southern Pacific UCFC To name a few

34. III. THE FUTURE 1987 2001 Credit card industry$80 bil$490 bil Top 10 market share 40% 85% % securitized <1% 50% 1987 2001 Credit card industry$80 bil$490 bil Top 10 market share 40% 85% % securitized <1% 50% Observation # 2: Everybody’s doing “it”! Observation # 2: Everybody’s doing “it”!

35. III. THE FUTURE Observation # 2: Everybody’s doing “it”! Observation # 2: Everybody’s doing “it”! Source:Thomson Financial Securities Data, Credit Suisse First Boston. Includes retail and wholesale issuance. ($ in Billions) TOP 5 AUTO ISSUERS2002 ISSUANCE Ford$12.5 GMAC11.7 DaimlerChrysler7.9 AmeriCredit6.0 WFS5.0

36. III. THE FUTURE TOP 5 HOME EQUITY ISSUERS2002 ISSUANCE PARENT COMPANY GMAC-RFC$20.0GM Countrywide18.4Countrywide EquiCredit14.2Bank of America New Century10.4New Century Option One9.4H&R Block Observation # 2: Everybody’s doing “it”! Observation # 2: Everybody’s doing “it”! Source:Credit Suisse First Boston. ($ in Billions)

37. III. THE FUTURE Structures are proven and accepted Significant downside protection vs. secured debt Large, healthy investor base Structures are proven and accepted Significant downside protection vs. secured debt Large, healthy investor base Observation # 3: The equity market (and Congress) may not understand “gain on sale accounting” or SPE’s but the debt market understands securitization Observation # 3: The equity market (and Congress) may not understand “gain on sale accounting” or SPE’s but the debt market understands securitization

38. III. THE FUTURE Source:Bloomberg, Credit Suisse First Boston. Observation # 3: Stability for Borrowers 2-Year Treasury Yield A2 Financial A2 Industrial

39. III. THE FUTURE Observation # 3: Ford Unsecured vs. Secured Spreads Observation # 3: Ford Unsecured vs. Secured Spreads 0 10 20 30 40 50 60 70 Secured Spread (BPs) 5-Year Unsecured Ford Spreads 2-Year “AAA” Ford ABS Spreads Source:Credit Suisse First Boston.

40. III. THE FUTURE Observation # 3: Household Unsecured vs. Secured Spreads Observation # 3: Household Unsecured vs. Secured Spreads 10-Year Unsecured Household Spreads “AAA” Household Home Equity Spreads Source:Credit Suisse First Boston. HSBC Merger Announcement

41. III. THE FUTURE Source:Credit Suisse First Boston. 3-YR Triple-A Credit Card Spread Comparison (spread to 1ML) Observation # 4: Tiering, Tiering and More Tiering Observation # 4: Tiering, Tiering and More Tiering Providian Metris Providian Metris Spread to 1ML (bps)

42. III. THE FUTURE International Harvester / Navistar Chrysler / DCX Tyco / CIT Conseco / Green Tree Mexico / Emerging Markets International Harvester / Navistar Chrysler / DCX Tyco / CIT Conseco / Green Tree Mexico / Emerging Markets Observation # 5: Securitization creates inherent stability and liquidity for certain borrowers Observation # 5: Securitization creates inherent stability and liquidity for certain borrowers

43. III. THE FUTURE Observation # 6: Dedicated investors New investors –CBOs –ABCP CBOs as an asset gathering tool Observation # 6: Dedicated investors New investors –CBOs –ABCP CBOs as an asset gathering tool Observation # 6: Securitization’s effect on the buyside will continue to grow Observation # 6: Securitization’s effect on the buyside will continue to grow

44. III. THE FUTURE Observation # 6: Securitization’s effect on the buyside will continue to grow Observation # 6: Securitization’s effect on the buyside will continue to grow Indeed, CBOs have become so key to the junk market that companies planning offerings frequently tailor the securities to the tastes of the CBOs. “It’s the sell side and buy side working together to try and make a more efficient market…” - Wall Street Journal - 5/24/99 The rise of CBO has made a huge difference for the junk market. “The enormous amount of CBO activity has been a key factor in absorbing new supply” of junk issues… Wall Street Journal - 5/24/99

45. III. THE FUTURE Observation # 6: CBO/CLO Annual Issuance 1996 – 2002 ($ in billions) Observation # 6: CBO/CLO Annual Issuance 1996 – 2002 ($ in billions) Source:Credit Suisse First Boston.

46. III. THE FUTURE Residential MortgagesMBS Consumer LoansABS Commercial MortgagesCMBS/Conduits Small Business LoansSBA/SBL/Franchise Senior Unsecured LoansCLOs Mezzanine/Venture CapitalCBOs Residential MortgagesMBS Consumer LoansABS Commercial MortgagesCMBS/Conduits Small Business LoansSBA/SBL/Franchise Senior Unsecured LoansCLOs Mezzanine/Venture CapitalCBOs Regulatory Capital Arbitrage The Virtual Bank Observation # 7: Commoditization and disintermediation of commercial banks will continue, particularly with any secured loan products Observation # 7: Commoditization and disintermediation of commercial banks will continue, particularly with any secured loan products

47. IN CONCLUSION Securitization has become a permanent financing alternative with implications not only for the cost of capital but also for how certain types of assets will be originated and serviced in the future.

48. Thank You