Subject: Super-senior ABS CDO valuation

From: Hong, Victor, RBSGC (Victor.Hong@rbsgc.com)

To:

Date: Friday, November 2, 2007 1:13 PM

Bruce Jin was in London this week, assisting senior management to price the super-senior ABS CDO
tranches. The value of each tranche now depends heavily upon the fair-market liquidation prices of its
underlying subprime ABS, given how CDOs may be forced to unwind prematurely. Using made-up
prices for those subprime ABS, in order to project the value of each super-senior ABS CDO tranche, is
questionable, especially if senior management does so to attempt independent price verification. I
cannot tolerate signing off on such results.
Thank you.

From: Jin, Bruce, RBSGC

Sent: Friday, November 02, 2007 11:56 AM
To: Hong, Victor, RBSGC; Shrivastava, Atul, RBSGC; Lin, Ming, RBSGC; Dhaliwal, Navdeep, RBSGC
Subject: RE: Super-senior ABS CDO valuation

The price of 60 to 80 I think is just a make-up price. The point of the exercise I think was to indicate why
a liquidation value of the super senior should be a cap on the real super senior value.

-----Original Message-----
From: Hong, Victor, RBSGC
Sent: Friday, November 02, 2007 11:53 AM
To: Jin, Bruce, RBSGC; Shrivastava, Atul, RBSGC; Lin, Ming, RBSGC; Dhaliwal, Navdeep, RBSGC
Subject: Super-senior ABS CDO valuation

Is this analysis premised on (formerly) "BBB"/"BBB-" subprime ABS being

worth between 60:00 and 80:00? Based upon recent spotty color, 10:00 to
25:00 prices seem more likely. In a CDO pool liquidation, bids would be
even softer. Thank you.

From: Jin, Bruce, RBSGC

Sent: Friday, November 02, 2007 11:32 AM
To: Dhaliwal, Navdeep, RBSGC; Shrivastava, Atul, RBSGC; Hong, Victor, RBSGC; Lin, Ming, RBSGC
Subject: FW: Examlpes why market value is a cap (but not a floor) on real super senior value

fyi

-----Original Message-----
From: BISHOP, Brett, GBM [mailto:Brett.Bishop@rbs.com]
 Sent: Friday, November 02, 2007 9:56 AM
To: REBONATO, Riccardo, GBM; HAMILTON, James, GBM; Jin, Bruce, RBSGC
Subject: Examlpes why market value is a cap (but not a floor) on real super senior value

I realise we have been discussing this, but thought it useful to run a few examples to illustrate point.
Calculation in s/s which may be wrong but for a pool that has a value of 80c and 60c on the dollar, I
have estimated super-senior value using a market value approach and then a loss distribution approach.
On the latter, I assumed the pool value could be replicated by assuming a given chance of 0%, 20%, 50%
and 100% loss. So for example a collateral pool at 80c, could be reached by assuming there is a 80%
chance of no loss and a 20% chance of 100% loss, or 60%, 17%, 13% and 10% chance of 0%, 20%,
50% and 100% loss respectively.
I compare the market price method with the effect of possible loss distributions on various super seniors
on a portfolio trading at 80c and 60c.
Perhaps this helps refute the business suggestion that TABS model makes too many simplifying
assumptions and mathematical approximations to be meaningful at least for the case when market
value loss exceeds subordination.
Details in the spreadsheet.

Super Senior Attachment

Underlying Collateral Value 80% 10% 20% 40% 50%
Market Price Method 89% 100% 100% 100%
Higher loss severity 87% 95% 95% 95%
Higher loss instance 84% 90% 90% 90%
Smoother loss dist 82% 85% 88% 90%
0 or 100% default 80% 80% 80% 80%

Super Senior Attachment

Underlying Collateral Value 60% 10% 20% 40% 50%
Market Price Method 67% 75% 100% 100%
Higher loss severity 67% 75% 78% 80%
Higher loss instance 66% 73% 77% 80%
Smoother loss dist 64% 70% 76% 80%
0 or 100% default 60% 60% 60% 60%

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