Introduction to the ABX and CMBX Indices. November 2006

Transcription

1 Introduction to the ABX and CMBX Indices November 2006

2 Overview of Structured Product Synthetics Structured Product Single Name CDS Sample Terms Underlying Designated specific reference obligations along with the initial face amount Payments Fixed payments (paid by protection buyer): CDS premium, Act/360 basis, paid monthly / quarterly Floating payments (paid by protection seller): Upon the occurrence of a credit event, the applicable settlement amount Additional fixed payments (paid by protection buyer): Upon the occurrence of a reimbursement of any prior floating payments, the applicable reimbursement amount Fixed Payments Protection Buyer Floating Payments Protection Seller Additional Fixed Payments Please see the draft transaction Confirmation for full details of trade mechanics. All materials contained herein are for discussion purposes only and will be superseded by full legal documentation in the event the parties decide to enter into any transaction 1

3 Overview of Structured Product Synthetics Structured Product Single Name CDS Sample Terms (cont) Notional Balance Notional balance is adjusted as follows: Reduced by amortizations on the reference obligations Reduced by writedown amounts and principal shortfalls Reduced by physical settlement Increased by writedown reimbursements Credit Events Failure to pay principal Writedown Downgrade to CCC / Caa3 Settlement Amount Percent of class principal not paid x notional Percent of class written down x notional Physical settlement only Optional physical settlement after any credit event The PAUG includes a provision for giving an option to the protection buyer to terminate the contract in part or in whole by delivering the reference obligation. This feature, called the "Physical Settlement Option," is triggered by any credit event Please see the draft transaction Confirmation for full details of trade mechanics. All materials contained herein are for discussion purposes only and will be superseded by full legal documentation in the event the parties decide to enter into any transaction 2

4 The ABX.HE and CMBX Indices Highlights ABX.HE references 20 HEL ABS obligations and CMBX references 25 CMBS obligations The Indices comprise subindices: AAA, AA, A, BBB and BBB- for ABX AAA, AA, A, BBB, BBB-, and BB for CMBX (BB was not included on the first series of CMBX) Each subindex, in turn, includes 20 Subprime Home Equity bonds or 25 CMBS securities The reference obligations in each subindex comprise bonds at different rating levels Bonds in each subindex are selected from the same set of reference entities Every six months, the Indices will be reconstituted using the same criteria On January 19, 2006, the ABX.HE 06-1 began trading We estimate that more than $150bn of trade notional has been executed on the ABX.HE indices Goldman has executed more than $80bn of trade notional On March 7, 2006, the CMBX Index began trading 3

5 The ABX.HE and CMBX Indices Construction Criteria Portfolio: Credit score: Age: Weighting: Lien type: Diversification: ABX.HE Portfolio Selection Criteria 20 deals in basket, with a new ABX.HE series expected to be launched approximately every 6 months Each deal must have a maximum average FICO equal to 660 Each tranche must have settled within 6 months of the roll date Reference obligations equally weighted by initial par amount, with subsequent weightings evolving as a function of prepayment and credit experience of underlying transactions The pool must consist of at least 90% first lien loans CMBX.NA 25 deals in basket, with a new CMBX series expected to be launched approximately every 6 months Each tranche must have settled within 2 years of the roll date Reference obligations equally weighted by initial par amount, with subsequent weightings evolving as a function of prepayment and credit experience of underlying transactions Limits same originator to 4 deals Limits same state to 40% Limits master servicer to 6 deals Limits same property type to 60% Minimum deal size: $500mm $700mm Average life: Each tranche must have a weighted average life of 4-6 years as of the issuance date (except AAAs which must be greater than 5 years) With respect to CMBX.NA.AAA only, expected weighted average life must be greater than 8y and less than 12y calculated using a 0% CPY Source: Goldman Sachs, ABX.HE Launch Presentation: ABX Indices: The New US Asset Backed Credit Default Swap Benchmark Indices (CDS IndexCo); CMBX Launch Presentation: CMBX Indices: The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices 4 (CDS IndexCo)

6 Trading the ABX.HE Indices Indicative terms and conditions Indices: Index Fixed Rates Indices ABX.HE 06-1 ABX.HE 06-2 AAA AA A BBB Notional: Amortization mirrors that of the underlying bonds Fixed Rate: Established on roll date premium. Subsequent trades require upfront exchange of premium/discount Floating Rate Payments: Interest Shortfall, Writedown, Principal Shortfall Additional Fixed Payments: Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement Quotations: Dealers will quote price and exchange upfront amounts based on the difference between that price and par Floating Amount Events: Failure to Pay Principal, Interest Shortfall and Writedown Physical Settlement: Not Applicable BBB Note: All financial information and other data shown are for illustrative purposes only and are not intended to represent an actual transaction Source: Goldman Sachs, ABX.HE Launch Presentation: ABX Indices: The New US Asset Backed Credit Default Swap Benchmark Indices (CDS IndexCo) 5

7 Trading the CMBX Indices Indicative terms and conditions Indices: Fixed Rate Indices CMBX.NA 1 CMBX.NA 2 CMBX.AAA 10 7 CMBX.AA CMBX.A CMBX.BBB CMBX.BBB CMBX.BB Notional: Amortization mirrors that of the underlying bonds Fixed Rate: Established one day prior to roll date. Payable monthly based on average balance. Floating Rate Payments: Interest Shortfall, Writedown, Principal Shortfall Additional Fixed Payments: Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement Quotations: Dealers will quote spread and compute price from the MarkIt calculator Credit Events: Principal Shortfall and Write-Down Physical Settlement: Not Applicable Accruals: Accrues 25 th to 25 th with no following convention; payments made on the 25 th on an Actual/360 basis Note: All financial information and other data shown are for illustrative purposes only and are not intended to represent an actual transaction Source: Goldman Sachs, CMBX Launch Presentation: CMBX Indices: The New US Commercial Mortgage Backed Credit Default Swap Benchmark Indices (CDS IndexCo) 6

8 Index vs. Single Name Trades Comparing a few features CMBS Subprime ABS Index Single-Name Index Single-Name Credit Events FTPP, Writedown FTPP, Writedown FTPP, Writedown FTPP, Writedown, Distressed Ratings Downgrade Settlement PAYG PAYG, Optional Physical PAYG PAYG, Optional Physical Interest Shortfall Fixed Cap Applicable Fixed Cap, Variable Cap, or Cap N/A Fixed Cap Applicable Fixed Cap, Variable Cap, or Cap N/A Coupon Stepup None None None If clean-up call not exercised w/ Buyer's option to terminate Trading Quotation Spread Spread Price Spread Accruals Act / 360 Act / 360 Act / 360 Act / 360 Effective Date T + 0 T + 3 (generally) T + 0 T + 3 (generally) Settlement Date T + 3 T + 3 T + 5 T + 3 7

9 Key Features of Trade Mechanics 1 Important Definitions, Valuable Dates and Margin Requirements Important Definitions Trade Date the day the trader says done and trade is executed Effective date of trade same as trade date: when protection begins Effective date of index (i.e. annex date) date the annex was initially published or revised Settlement date date on which the premium is exchanged Premium fee exchanged when trade is initially done comprising the market value of the trade and accrued interest since last payment date Rating AAA AA A BBB Margin Requirements GS Buys Protection Initial Margin 0.75% 1.25% 1.75% 3.25% Accrued interest (in terms of premium) interest accumulated from and including last payment date but excluding effective date of trade Factor - A change in the outstanding principal issuance i.e. % of principal unpaid on the reference obligation Initial Fixed rate Payer Calculation period from and including last payment date but excluding the next payment date of the bond BBB- 4.50% Speculative Grade Case-by-case GS Sells Protection - Investment Grade underlier: no initial margin - Speculative Grade: case-by-case basis (key considerations: fund's quality, liquidity of underlier) Valuable Dates Trade date T Effective date of trade T+ 0 MarkIt Publish date - 24 hours or less after trustee report is published (25 th ) ABX Accrual Dates Payment Delay Upfront 25th - 25th COUPONS 5 Business Day after 25th T+5 FEES Termination T + 3 CMBX 25th - 25th No payment delay T + 3 T Source: Goldman Sachs Note : All financial information and other data shown are for illustrative purposes only and are not intended to represent an actual transaction 8

10 Trade Ideas Using the ABX.HE and CMBX.NA Indices Bearish view on housing/consumers/commercial real estate: Customers with this view have been selling the Index (shorting credit; buying protection) at the A, BBB, and BBB- level Credit steepener (flattener) trades: View is that credit curve will steepen (flatten) with adverse (favorable) developments Fund shorts by selling protection higher (lower) in the capital structure Most common: BBB- vs BBB, BBB vs AAA Transition management: Investors with cash to invest (or risk to add) have used the index to gain exposure to home equity or CMBS spreads while they ramp up single-name or cash positions Investors can scale out of the index as they put new cash to work (or add risk) Basis trades: Trading single names or cash versus the Index Can structure positive carry trades or express leveraged views on particular names Index arbitrage Note: Past results are not indications of future performance 9

11 Trade Ideas using the ABX.HE and CMBX.NA Indices Continued Tranching: Significant interest/inquiry in tranches Standardization, pricing, and liquidity should take time to evolve Options: Hedgers have expressed interest in options strategies to mitigate risk Similar in construction to options on CDX currently traded Note: Past results are not indications of future performance 10

12 Trade Ideas using the ABX.HE and CMBX.NA Indices Continued Hedging mortgage credit risk: Originators have sold the index across the capital structure to hedge their origination pipelines Originators or investors with positions in mortgage residuals have sold the BBB and BBB- Indexes to mitigate risk Some originators view BBB/BBB- protection as cheap to mortgage insurance ABX/CMBX versus corporate credit: Hedge funds have traded BBB/BBB- vs correlated corporate credit such as consumer portion of CDX, HVOL, or REITs or single name CDS such as homebuilders ABX.HE BBB- vs OTR CDX.IG 1 ABX.HE BBB- vs OTR CDX.HVOL Feb Apr Jun Aug Oct Feb Apr Jun Aug Oct BBB- ABX OTR (Left) OTR CDX.IG (Right) BBB- ABX OTR (Left) OTR CDX.HVOL (Right) 1 Note: Past results are not indications of future performance. Indicative as of 25Oct06. 11

13 Trade Themes using the ABX.HE and CMBX.NA Indices Continued ABX/CMBX vs Equities: Equity accounts and macro hedge funds have used the Index (primarily BBB and BBB-) to hedge the residual risk in originator stocks Short is funded by high dividend yield ABX and certain housing related equity names have become more correlated ABX.HE BBB- vs New Century Financial 1 ABX.HE BBB- vs S&P Jan Mar May Jul Sep-06 BBB- ABX OTR (Left) NEW (Right) Jan Feb-06 5-Apr May Jun Jul-06 4-Sep Oct-06 BBB- ABX OTR (Left) S&P 500 (Right) 1 Note: Past results are not indications of future performance. Indicative as of 25Oct06. 12

14 Evolution of Spreads for the ABX.HE OTR Subindices 1 From 01/19/2006 to 10/25/2006 ABX.HE BBB and BBB- ABX.HE AAA and AA Jan Mar May Jul Sep Jan Mar May Jul Sep ABX OTR BBB- ABX OTR BBB ABX OTR AAA ABX OTR AA ABX.HE Spread Stats ABX.HE A Open High Low Avg Curr Std Dev AAA AA A BBB BBB Source: Goldman Sachs. Indicative as of COB 25Oct Jan Mar May Jul Sep-06 ABX OTR A 13

15 Evolution of Spreads for the CMBX Subindices 1 From 03/06/2006 to 10/25/2006 CMBX BBB and BBB- CMBX AAA and AA Mar-06 6-May-06 6-Jul-06 6-Sep Mar-06 6-May-06 6-Jul-06 6-Sep CMBX BBB- CMBX BBB CMBX AAA CMBX AA CMBX Spread Stats CMBX A Open High Low Avg Curr Std Dev AAA AA A BBB BBB Mar-06 6-May-06 6-Jul-06 6-Sep-06 CMBX A 1 Source: Goldman Sachs. Indicative as of COB 25Oct06. 14

16 Update on the ABX.HE Bases 1 As of 10/23/06 Indicative Basis Report 1 Subindex Index - CDS CDS - Cash ABX 06-1 BBB- Reference Entities Index - CDS ABX 06-2 BBB- Reference Entities Index - CDS AAA AA A 2 5 BBB BBB ACE 2005-HE7 M9 10 AMSI 2005-R11 M9-20 ARSI 2005-W2 M9-50 BSABS 2005-HE11 M8-15 CWL 2005-BC5 B 5 FFML 2005-FF12 B3 65 GSAMP 2005-HE4 B3 10 HEAT B1-55 JPMAC 2005-OPT1 M9 50 LBMLT 2005-WL2 M9 0 MABS 2005-NC2 M9-10 MLMI 2005-AR1 B3 10 MSAC 2005-HE5 B3 0 NCHET M9 25 RAMP 2005-EFC4 M9 50 RASC 2005-KS11 M9-60 SABR 2005-HE1 B3 50 SAIL 2005-HE3 M9-200 SASC 2005-WF4 M9 65 SVHE M9 15 ACE 2006-NC1 M9 18 ARSI 2006-W1 M9-72 BSABS 2006-HE3 M9-17 CARR 2006-NC1 M9 53 CWL M9-37 FFML 2006-FF4 B1 48 GSAMP 2006-HE3 M9 18 HEAT B1-37 JPMAC 2006-FRE1 M9 18 LBMLT M9-37 MABS 2006-NC1 M9-27 MLMI 2006-HE1 B3A 48 MSAC 2006-WMC2 B3-12 MSC 2006-HE2 B3-17 RAMP 2006-NC2 M9-67 RASC 2006-KS3 M9-32 SABR 2006-OP1 B3 23 SAIL M8-97 SASC 2006-WF2 M9 53 SVHE 2006-OPT5 M Source: Goldman Sachs Note: Past results are not indications of future performance 15

17 Index and Single-Name Indicative Spreads (bp) Basis (bp) ABX.HE BBB Basis 1 As of 10/25/06 Indicative ABX.HE BBB Historical Basis Jan Mar May Jul-06 8-Sep ABX.HE.BBB OTR RMBS BBB CDS BBB Basis Average Basis 17 1 Note: Past results are not indications of future performance. Indicative as of 25Oct06. 16

18 Index and Single-Name Indicative Spreads (bp) Basis (bp) ABX.HE BBB- Basis 1 As of 10/25/06 Indicative ABX.HE BBB- Historical Basis Jan Mar May Jul-06 8-Sep ABX.HE.BBB- OTR RMBS BBB- CDS BBB- Basis Average Basis 25 1 Note: Past results are not indications of future performance. Indicative as of 25Oct06. 17

19 Update on the CMBX Bases 1 As of 10/25/06 Indicative Basis Report 1 Subindex Index - CDS CDS - Cash AAA 0-17 AA 0-22 A 0-22 BBB BBB Reference Entities Index - CDS Basis for BBB- BACM H 7 BACM H 7 BACM K 5 BSCMS 2005-PW10 K 4 BSCMS 2005-PWR9 J 5 BSCMS 2005-T20 J 3 CD 2005-CD1 J 8 CSFB 2005-C5 K -3 CSFB 2005-C6 J 4 GCCFC 2005-GG5 H 8 GECMC 2005-C4 J 6 GMACC 2006-C1 J 0 JPMCC 2005-CB13 H 4 JPMCC 2005-LDP4 H 5 JPMCC 2005-LDP5 K 4 LBUBS 2005-C5 K 3 LBUBS 2005-C7 K 4 LBUBS 2006-C1 K 3 MLMT 2005-CKI1 H 5 MLMT 2005-LC1 H 7 MSC 2005-HQ7 K 5 MSC 2005-IQ10 H 3 MSC 2006-T21 H 3 WBCMT 2005-C21 H 7 WBCMT 2005-C22 J 7 1 Source: Goldman Sachs Note: Past results are not indications of future performance 18

20 Index and Single-Name Indicative Spreads (bp) Basis (bp) CMBX BBB Basis 1 As of 10/25/06 Indicative CMBX BBB Historical Basis Mar-06 2-May Jun Aug Oct-06 CMBX.BBB CMBS BBB CDS BBB Basis Average Basis Note: Past results are not indications of future performance. Indicative as of 25Oct06. 19

21 Index and Single-Name Indicative Spreads (bp) Basis (bp) CMBX BBB- Basis 1 As of 10/25/06 Indicative CMBX BBB- Historical Basis Mar-06 2-May Jun Aug Oct-06 CMBX.BBB- CMBS BBB- CDS BBB- Basis Average Basis Note: Past results are not indications of future performance. Indicative as of 25Oct06. 20

22 Important Disclaimers Please Read All materials, including proposed terms and conditions, are indicative and for discussion purposes only. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any swap, security or instrument or to participate in any trading strategy. If any offer is made, it shall be made pursuant to (in the case of swaps) a final swap confirmation, or (in the case of securities) a final offering circular (the Offering Circular ) prepared by or on behalf of the issuer of any such securities (the Issuer ), both of which would contain material information not contained herein and which shall supersede, amend and supplement this information in its entirety. Any offer of swaps or securities which is eventually made may contain terms which are substantially different from the terms described herein. Goldman Sachs & Co. does not provide accounting, tax or legal advice, however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and/or counsel. Any decision to enter into the swaps or invest in the securities described herein should be made after reviewing such final swap confirmation or final Offering Circular, conducting such investigations as the swap counterparty or investor deems necessary or appropriate and consulting the swap counterparty's or investor s own legal, accounting, tax and other advisors in order to make an independent determination of the suitability and consequences of participating in the swaps or securities. Finalized terms and conditions are subject to discussion and negotiation and will be evidenced by a formal agreement. Opinions expressed are our present opinions only and are subject to change without further notice. The information contained herein is confidential information. By accepting this information, the recipient agrees that it will and it will cause its directors, partners, officers, employees and representatives to, use the information only to evaluate its potential interest in the swaps and securities described herein and for no other purpose and will not divulge any such information to any other party except that Goldman Sachs (as used herein, such term shall include Goldman, Sachs & Co. and each of its affiliates) agrees that, subject to applicable law, any and all aspects of this material that are necessary to support any U.S. federal income tax benefits may be disclosed by a recipient of this information. Any reproduction of this information, in whole or in part, is prohibited. Goldman, Sachs & Co., its respective affiliates and others associated with them may have positions in, and may effect transactions in, securities and instruments of issuers mentioned herein and may also perform or seek to perform investment banking services for the issuers of such securities and such instruments. 21

23 Important Disclaimers Please Read Neither Goldman, Sachs & Co. nor any of its affiliates nor the issuer of any securities (or any of their affiliates) make any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein shall be relied upon as a promise or representation whether as to the past or future performance. This information includes estimates and projections and involves significant elements of subjective judgment and analysis. No representations are made as to the accuracy of such estimates or projections or that all assumptions relating to such estimates or projections have been considered or stated or that such projections will be realized. The information contained herein does not purport to contain all of the information that may be required to evaluate such swaps or securities and any recipient is encouraged to read (in the case of the swaps) the final swap confirmation or (in the case of securities) the Offering Circular and should conduct its own independent analysis of the date referred to herein. Goldman, Sachs & Co. and its affiliates disclaim any and all liability relating to this information, including, without limitation, any express or implied representation or warranty for statements contained in and omissions from this information. Neither Goldman, Sachs & Co. nor any of its affiliates nor the issuer of any securities will update or otherwise revise the information contained herein except by means of the final swap confirmation or Offering Circular. Projections, Pro Forma Information and Forward Looking Statements. These materials contain statements that are not purely historical in nature, but are forward-looking statements. These include, among other things, projections, forecasts, estimates of income, yield or return, future performance targets, sample or pro forma portfolio structures or portfolio composition, scenario analyses, specific investment strategies and proposed or pro forma levels of diversification or sector investment. These forward-looking statements are based upon certain assumptions. Actual events are difficult to predict and are beyond the control of the Issuer, Goldman, Sachs & Co. or its affiliates. Actual events may differ from those assumed. All forward-looking statements included are based on information available on the date hereof and neither Goldman, Sachs & Co. nor any of its affiliates assume any duty to update any forward-looking statement. Some important factors which could cause actual results to differ materially for those in any forward-looking statements include, among other things, the actual composition of the portfolio (consisting of credit default swaps), any defaults or Credit Events in the portfolio, the timing of any defaults or Credit Events, the timing and amount of any subsequent recoveries, changes in interest rates, and any weakening of the specific credits included in the portfolio. Other risk factors are also described (in the case of the swaps) in the final swap confirmation or (in the case of securities) in the Offering Circular. Accordingly, there can be no assurance that estimated returns or projections will be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower than those presented. 22

24 Risk Factors - Please Read Entering into a credit derivative transaction (a Credit Default Swap ) referencing an ABX Index involves certain risks. Prospective counterparties should carefully read the final swap confirmation and consider the following risk factors prior to entering into a Credit Default Swap. Any decision to enter into a Credit Default Swap should be made after conducting such investigations as a counterparty deems necessary and consulting the counterparty s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of entering into a Credit Default Swap. The following is not intended to be an exhaustive list of the risks involved in entering into a Credit Default Swap. Limited Liquidity and Restrictions on Transfer. The market for Credit Default Swaps on the ABX Indices is new and there is currently very limited liquidity for the Credit Default Swaps. There can be no assurance that liquidity will exist in the Credit Default Swaps at any time in the future. The Credit Default Swaps represent bilateral contracts that cannot be transferred or terminated without the consent of the other party, which consent may be withheld or delayed for a number of reasons. Goldman Sachs may, but is not obligated to, unwind or terminate a Credit Default Swap under terms acceptable to it in its sole discretion. Any counterparty under a Credit Default Swap must be prepared to hold its position in the Credit Default Swap for an indefinite period of time or until it terminates in accordance with its terms. No Claims on the Reference Entities. Participation in a Credit Default Swap does not constitute a purchase or other acquisition or assignment of any interest in any obligation of any Reference Entity. The parties to the Credit Default Swap will not have any recourse against any Reference Entity and will have no rights to enforce directly compliance by any Reference Entity with the terms of its obligations that are referred to in the Credit Default Swap, no rights of set-off against any Reference Entity, no voting rights with respect to any Reference Entity and no security interest in any Reference Obligation. Limited Provision of Information about Reference Obligations/Reference Entities. No information will be provided to prospective counterparties with respect to any Reference Obligation or Reference Entity. Investors should conduct their own investigation and analysis with respect to the creditworthiness of each Reference Obligation and the likelihood of the occurrence of an event triggering payments under the Credit Default Swap occurring with respect to each Reference Entity and Reference Obligation. 23

25 Risk Factors - Please Read Mark to Market Risk/Credit Exposure. Parties to a Credit Default Swap are exposed to considerable mark-to-market volatility following changes in, among other things, the spreads of the Reference Obligations in any ABX Index and ratings migration on the Reference Obligations contained in any ABX Index. These will be reflected in any mark-to-market valuations in respect of a Credit Default Swap. If any Floating Amount Event occurs in respect of a Reference Obligation, sellers of protection will be required to make significant payments (which potentially could equal the full notional amount of the Credit Default Swap). Concentration Risk/Structural Risk The concentration of the Reference Obligations in the Index in one particular type of structured product security subjects the Credit Defaults Swap to a greater degree of risk with respect to defaults within such type of structured product security. Prospective counterparties should review the list of Reference Obligations and conduct their own investigation and analysis with regard to each Reference Obligation, including the credit, market, interest rate, structural and legal risks associated with each Reference Obligation. Evolving Nature of the Credit Default Swap Market. Credit default swaps (including credit default swaps on asset backed securities) are relatively new instruments in the market. While ISDA has published and supplemented the ISDA Credit Derivatives Definitions in order to facilitate transactions and promote uniformity in the credit default swap market, the credit default swap market is expected to change and the ISDA Credit Derivatives Definitions and terms applied to credit derivatives are subject to interpretation and further evolution. There can be no assurance that changes to the ISDA Credit Derivatives Definitions and other terms applicable to credit derivatives generally will be predictable. Amendments or supplements to the ISDA Credit Derivatives Definitions that are published by ISDA will only apply to the Credit Default Swap if the Credit Default Swap is amended. Therefore, in addition to the credit risk of Reference Obligations, Reference Entities and the credit risk of their counterparty, persons who enter into Credit Default Swaps are also subject to the risk that the ISDA Credit Derivatives Definitions could be interpreted in a manner that would be adverse to them or that the credit derivatives market generally may evolve in a manner that would be adverse to them. Credit Ratings. Credit ratings represent the rating agencies opinions regarding credit quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and/or interest payments and do not evaluate the risks of fluctuations in market value. Accordingly, credit ratings may not fully reflect the true risks underlying any Credit Default Swap. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that an issuer s current financial condition may be better or worse than a rating indicates. 24

26 Risk Factors - Please Read Conflicts of Interest; No Reliance. Goldman Sachs does not provide investment, accounting, tax or legal advice in respect of the Credit Default Swaps and shall not have a fiduciary relationship with any counterparty to a Credit Default Swap. In particular, Goldman Sachs does not make any representations as to (a) the suitability of any Credit Default Swap, (b) the appropriate accounting treatment or possible tax consequences of any Credit Default Swap or (c) the future performance of any Credit Default Swap either in absolute terms or relative to competing investments. Prospective counterparties should obtain their own independent accounting, tax and legal advice and should consult their own professional investment advisor to ascertain the suitability of any Credit Default Swap, including such independent investigation and analysis regarding the risks, security arrangements and cash-flows associated with any Credit Default Swap as they deem appropriate to evaluate the merits and risks of any Credit Default Swap Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Entities and/or the obligations of the Reference Entities (including the Reference Obligations) and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with any Credit Default Swap. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of entering into any Credit Default Swap. Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with a Credit Default Swap and accepts no responsibility or liability therefore. Goldman Sachs may from time be an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between Goldman Sachs and any Reference Entity or any obligation of any Reference Entity 25