Complex Security Valuations Inc Valueadded valuations Valuation Strategies

Complex Security Valuations, Inc. Value-added valuations Valuation Strategies for Complex and Uncertain Times FIRMA 24 th National Risk Management Training Conference March 29, 2010, San Francisco, California 570 Lexington Avenue, 49 th Floor New York, New York 10022 +1 212 937 -2111 +1 877 278 -4700 (877 CSV-4700) 845 North Salem Road, Annex B Ridgefield, Connecticut 06877 +1 203 542 -0644

Spectrum of valuations An intense focus on complex structures Complex securities Inactively traded securities Listed securities A full suite Market pricing + Matrix pricing + Model pricing = of valuation solutions CSV has targeted the most complex and challenging space of the valuations business Copyright CSV 2009 March 2010 2

Desirability of regulation “To restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments. . . ” Copyright CSV 2009 March 2010 3

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Market growth will definitely continue and in an aggressive way n Moody's warns on deluge of debt The Wall Street Journal 02 Feb 2010 Moody's Investors Service warned of sizable refunding requirements for nearly 1, 000 companies over the coming years, questioning whether they will be able to refinance more than $800 bn (€ 573. 7 bn) in debt taken on in the middle part of the last decade. Copyright CSV 2009 March 2010 5

A Fundamental Approach Spot S IG Option DD HY Oc = F – X + V = S + SRT – X + V If T = 0 F=S If V = 0 Oc = S + SRT – X If V = 0 and T = 0 Oc = S – X Copyright CSV 2009 Forward F = S (1 + RT) March 2010 6

Market Inputs Long call + Short put = Synthetic future An importance of internal and cross-market consistencies Copyright CSV 2009 March 2010

Continuum from known to unknown At time of purchase value is 100% known At expiration/maturity value is 100% known Trade date Expiration/ Maturity date An importance of recognizing the differences between a “price” and an “evaluated price”, and having a vetted internal approach for handling both within a methodical and defensible framework Copyright CSV 2009 March 2010 8

Calculations Copyright CSV 2009 March 2010 9

Challenge process Ø Ø Ø Price challenges are appropriate at any time, on any structure, and for any purpose Price challenges may sometimes result in a request for additional information by the pricing vendor Price challenges are typically expressed in the context of a value being within or outside predefined exceptions boundaries, and expressed as a percentage of notional Copyright CSV 2009 March 2010 10

Real estate securitizations Copyright CSV 2009 March 2010 11

Corporates Copyright CSV 2009 March 2010 12

Spreads Copyright CSV 2009 March 2010 13

Correlations Copyright CSV 2009 March 2010 14

Ratings Copyright CSV 2009 March 2010 15

10 items your organization should be thinking about 1) 2) 3) 4) Are you prepared for having more than half of your indexed portfolios consisting of non-cash index instruments within the next three years? Do your risk management tools allow for portfolio managers to view their holdings in the context of cash flows, probability, and time? If not, what would it take for that to happen? What is your policy on tolerances? Is your present IT infrastructure positioned for facilitating or hindering the use of complex products? If not, what would it take for that to happen? Does your organization have working definitions of all the financial products within your portfolios. If yes, are portfolio managers organized by these products? If yes, who decides when a product type may not be suitable for a particular portfolio class even if its label suggests that it’s in the right place (i. e. , a long-dated equity option bearing proportionally more interest rate risk than underlying spot equity risk)? Copyright CSV 2009 March 2010 16

10 items, continued… 5) 6) 7) 8) 9) 10) What is the culture of complex products at your firm? How do you know? At regular (weekly, other) portfolio management meetings, how is time split between the matters that are “manageable” versus those that are not? Is it the right mix, and if not, how is that addressed? Is there someone in your firm formally tasked with objectively vetting complex products for appropriateness, consistency, or ability to value? Is there a dedicated repository at your firm for housing computer code of internally developed valuation software, inclusive of underlying white papers relevant to that software? How about third-party software solutions? Is there any person formally designated as a go-to person for questions that may be neutrally and comfortably vetted in your firm relating to complex products? How widely is this known? What on-going educational opportunities exist relating to new products, and particularly in the context of risk and reward? Copyright CSV 2009 March 2010 17

Thought leadership Copyright CSV 2009 March 2010 18

NOTES Copyright CSV 2009 March 2010 19