Securitization

As if the Bear Stearns liquidation were not enough to ruffle the ABS CDO market, industry participants expect similar meltdowns to occur within the next few weeks. And as difficulties increase in placing portions of ABS CDO issues across the credit spectrum, further market drama will only weaken the demand.

CDOs are no longer a one-off phenomenon in the municipal market.

Adding to the investor concern over a bearish ABS CDO market, Derivative Fitch recently announced that it may cut the ratings on classes from three 2003 diversified structured finance CDOs and one high-grade CDO issued last year that have exposure to the infamous 2006 vintage subprime closed-end second liens.

The world has changed. Traditional approaches used to set the level of program wide credit enhancement (PWCE) for ABCP programs fall short of quantifying the true default risk associated with such portfolios. These approaches such as the fixed percentage approach for multiseller ABCP programs or the obligor or security coverage approach for securities-backed programs, do not take into account many important portfolio characteristics that affect the portfolio default risk. Specifically, they do not fully account for the subtle portfolio characteristics such as asset type, correlaton, and rating distribution among other factors when determining the PWCE level. To address these factors, Fitch employs a VECTOR CP analysis for the securities backed and multi-seller ABCP programs it rates on a monthly basis and when evaluating new transactions to be included in the program to determine the default risk for a given ABCP portfolio.

The whole-business securitization sector makes a relatively minor impact on the capital markets, in terms of volume. Just a handful of the deals come to market each year. Yet the asset class has given the capital markets a lot to talk about lately. In one year, both the DB Master Trust - better known as the Dunkin' Brands transaction from May 2006 - and the Domino's Pizza deal from last April pushed about $3.5 billion of asset-backed paper onto the market.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Wachovia Securities 11,161.4 1 27.1 11 JP Morgan Securities Inc. 10,460.2 2 25.4 10 Banc of America Securities LLC 10,288.9 3 25.0 8 ABN AMRO Incorporated 7,181.7 4 17.4 5 Credit Suisse Securities (USA) LLC 6,816.6 5 16.5 5 Citigroup Global Markets, Inc. 6,747.9 6 16.4 6 Deutsche Bank Securities, Inc. 5,206.9 7 12.6 5 RBS Greenwich Capital 4,881.5 8 11.8 5 Barclays Capital 4,837.2 9 11.7 4 Merrill Lynch, Pierce, Fenner & Smith Inc 4,357.7 10 10.6 4 Industry Total 41,199.8 - 100.0 42 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Merrill Lynch 30,515.3 1 18.2 34 Citigroup Global Markets, Inc. 23,736.1 2 14.1 34 JP Morgan 12,804.9 3 7.6 22 Morgan Stanley 11,476.6 4 6.8 49 Wachovia Corp 10,323.9 5 6.2 20 UBS 9,760.8 6 5.8 19 Deutsche Bank AG 8,846.6 7 5.3 19 Banc of America Securities LLC 8,393.1 8 5.0 11 Bear Stearns & Co Inc 8,389.0 9 5.0 15 Barclays Capital 8,133.7 10 4.8 10 Industry Total 167,960.2 - 100.0 294 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan Securities 11,405.0 1 26.0 18 Banc of America Securities LLC 10,090.0 2 23.0 17 Citigroup Global Markets, Inc. 8,750.0 3 19.9 12 Morgan Stanley & Co. Incorporated 5,252.6 4 12.0 6 Deutsche Bank Securities, Inc. 3,175.0 5 7.2 9 ABN AMRO Incorporated 2,878.1 6 6.6 4 Credit Suisse Securities (USA) LLC 2,842.6 7 6.5 8 RBS Greenwich Capital 2,475.0 8 5.6 4 Barclays Capital 2,350.0 9 5.4 2 Wachovia Securities 2,025.0 10 4.6 4 Industry Total 43,875.8 - 100.0 68 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Countrywide Securities Corporation 22,769.0 1 12.9 22 RBS Greenwich Capital 22,401.2 2 12.7 28 Merrill Lynch, Pierce, Fenner & Smith Inc 20,927.0 3 11.8 20 Morgan Stanley & Co. Incorporated 16,597.8 4 9.4 17 Citigroup Global Markets, Inc. 16,294.0 5 9.2 19 Lehman Brothers Inc. 16,116.2 6 9.1 21 Banc of America Securities LLC 15,106.0 7 8.5 22 Bear Stearns & Co. Inc. 13,105.5 8 7.4 21 Deutsche Bank Securities, Inc. 10,662.8 9 6.0 14 JP Morgan Securities 9,671.9 10 5.5 11 Industry Total 176,736.8 - 100.0 220 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Banc of America Securities LLC 13,883.7 1 41.5 6 JP Morgan Securities 13,216.6 2 39.5 5 Deutsche Bank Securities, Inc. 10,054.5 3 30.1 5 Credit Suisse Securities (USA) LLC 9,748.8 4 29.1 4 Barclays Capital 8,836.0 5 26.4 2 Goldman Sachs & Co 6,883.0 6 20.6 3 Morgan Stanley & Co. Incorporated 6,270.3 7 18.7 2 Wachovia Securities 4,806.0 8 14.4 1 Lehman Brothers Inc. 4,142.0 9 12.4 1 Citigroup Global Markets, Inc. 4,132.6 10 12.4 3 Industry Total 33,443.9 - 100.0 17 Source: Thomson Financial

auto ABS 8% credit card ABS 12% equipment ABS 1% real estate ABS 70% student loan ABS 9% trade receivables 0% utilities ABS 0%

Securitization professionals last week had a lot to celebrate - and bemoan. Just when it looked like the subprime MBS market was emerging from its early-year volatility, the sector destabilized again, triggering an investor rush to sell off CDO and MBS holdings in two Bear Stearns hedge funds (see next page). The overall market, however, generally escaped the volatility that began on midweek in CDOs and which is probably still going on.

While market participants remained glued to the topic of subprime and the future of the mortgage market, international influence on the sector also jumped onto the agenda at the International Quality & Productivity Center's Residential Mortgage-Backed Securities Forum in New York last week.

Second-lien loans, especially in the subprime market, have always been a more questionable investment as of result of their layered risk and second priority payouts. But with the lack of homeowner equity and less home price appreciation, especially in the 2006 vintage, market participants are even more pessimistic about the value that will be extracted from the collateral.

Several months ago, as a stunned subprime MBS market was still reeling from crumbling fundamentals, selloffs and wide spreads, the capital markets thought that the hedge fund industry - despite its conflicted history with the subprime MBS market - might be able to supply the necessary liquidity to keep the sector afloat until conditions improved. It seemed like a reasonable role for hedge funds to play, underscored by Fortress Investment Group's purchased of about $4 billion of loans from Fremont Mortgage.

June is turning out to be an important month for a couple of structured investment vehicle (SIV) programs. Mizuho Securities announced plans to roll out a SIV-lite deal collateralized by leveraged loans, and Morgan Stanley arranged a program that includes a fourth tranche, an increasingly popular feature in SIV programs.

Mortgage-backed securities under-writers had better get accustomed to a heap of reverse mortgages in all shapes and sizes turning up in securitizations, as the product is experiencing white-hot growth and shows no signs of cooling down.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Wachovia Securities 10,516.4 1 32.1 10 Banc of America Securities 9,066.9 2 27.7 7 JPMorgan Securities 8,439.2 3 25.8 9 ABN AMRO 5,149.8 4 15.7 4 RBS Greenwich Capital 4,881.5 5 14.9 5 Barclays Capital 4,837.2 6 14.8 4 Citigroup Global Markets 4,361.4 7 13.3 4 Deutsche Bank Securities 3,956.9 8 12.1 4 Credit Suisse 3,631.1 9 11.1 3 Morgan Stanley 2,870.3 10 8.8 3 Industry Total 32,764.9 - 100.0 35 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Merrill Lynch 27,602.0 1 18.0 31 Citigroup Global Markets 22,126.0 2 14.4 30 JPMorgan Securities 11,588.9 3 7.5 20 Morgan Stanley 10,706.6 4 7.0 47 Wachovia Securities 10,146.9 5 6.6 18 Deutsche Bank Securities 8,846.6 8 5.8 19 UBS 8,342.0 6 5.4 15 Barclays Capital 8,133.7 7 5.3 10 Bear Stearns 7,198.6 9 4.7 14 Banc of America Securities 7,166.7 10 4.7 8 Industry Total 153,515.5 - 100.0 268 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JPMorgan Securities 11,405.0 1 28.0 18 Banc of America Securities 9,415.0 2 23.1 16 Citigroup Global Markets 8,000.0 3 19.6 11 Morgan Stanley 5,252.6 4 12.9 6 Credit Suisse Securities 2,842.6 5 7.0 4 Deutsche Bank Securities 2,575.0 6 6.3 8 RBS Greenwich Capital 2,475.0 7 6.1 8 Barclays Capital 2,350.0 8 5.8 4 ABN AMRO 2,242.6 9 5.5 2 Wachovia Securities 2,025.0 10 5.0 4 Industry Total 40,715.3 - 100.0 63 Source: Thomson Financial