CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747129 Pricing 3 7 17 25 45 11 10 12-14 15-16 8-9 6 18 19 4-5 21-22 20 23 24 26-30 31-34 35-44 46-48 49-50 2 Division Division Income Division Division Committee Equities Division Committee Division -Fixed - Division Income Income Review Division Fixed Equities Control Income Fixed Equities - - Variances Variances Categories and Results Fixed Equities Transaction Value Thresholds Coverage Projects- Coverage Projects- Process Significant Significant Fair Process Structure Products Philosophy of of Verification Verification Summary- Summary- Derivatives with Rate Approval Products Review Verification Price Verification Verification Verification Verification Control BROTHERS of ofPrice and Staffing Interest Organization Complex Model Price Mark Products Executive Executive Price Price Price Price Equities Credit Explanation Explanation Organization Pricing Summary Examples Appendix Content I. Ill. II. lY. V. LEHMAN
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 0 OJ (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: c: ...... ,0 ca N
CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747131 I risk Pricing report & is control and the derivative capital approved Finance value and business enhance to to the optimizes Markets used order and from consistent are in Capital units models valuations globally to profitability independent are business organization. decision-making inventory adhere appropriate the of enhance who the that regulators to that with business and across aims 4 validation good that aligned professionals adjustments auditors reporting drive Management, closely and that is finance documented Risk communication external valuation of environment of of and with and group analysis analyses flow group The control a to: the is internal revenue firm. strong Firm independent conjunction Structure a with the in daily value-added appropriateness the Finance maximize of accountable and CFO transactions Protect Provide an standards Provide Maintain Interface Ensure Provide Ensure, Markets BROTHERS the ...... " "' ., .. .. to process primarily Capital LEHMAN Organization
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ (...) G) ...... :s;: LEHMAN BROTHERS HOLDINGS, INC. 1\J I Pricing ensure analysis to and to & initiatives: budgeting metrics and analysis support & business profitability usage improvement management business forecasting strategic performance capital business reporting Project Process - - -New Capital process Support growth optimal analyze Revenue Develop • • • • Areas testing with valuation external accounting valuation price procedures Functional the and Quantitative accounting by inventory and and with monthly 5 consistent disclosures internal appropriateness validation formal with interface regarding price valuation model globally group fmancial Management (continued) review Develop Review Complete auditors substantiation policies policy based Research. Risk Prepare Ensure Interface Primary • • • • • • • Responsibilities for daily new process of the Primary policies existing of of technology Structure dose management inventory use and to risk analysis adjustment reporting with. implementation and accounting process and risk BROTHERS adherence appropriate and Production P&L accurate valuation models models Month-end Partnership Ensure Ensure Implement efficiencies • • $ • • • Organization LEHMAN
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ (...) (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I ----P~i~i~g product the within /{lfU.: ,-:: :;-urr (C/fllti' from swami performed Go is Scott by regions Chopra led the 6 in staff follows: 5 Neeraj as Sciacca work Kebede is Sapia Brian Energy- Shi including control by Control staffing Abebual Joseph and and staff led Jerry by by 2 FX by led of led staff control led - 4 valuation staff staff team 4 staff products, the - 3 3 valuation rate groups. central products -Valuation Estate BROTHERS addition, Credit Global Interest control Real Mortgages- Equities- In Americas ------The Staffing + LEHMAN
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J OJ (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: -...... 0 ...... L.. c.: 0 0 "'C c m Cl ...... c.: .....0 La. 0...
CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747135 J the Pricing to, market ensure to fair limited at not auto-redemption but services marked target is Process include, pricing floater, traders inventory assets external explanatories to procedures firm's P/L resolution Review the individual for securitized callable capped based analytical valuations with adjustment for bonds) Head, risk that that for as accrual, model other reports Mark or variances of: ensure such Alternative Business range - to considered daily trustee the I 8 submitting spreads and basis, controls resolving and callable by positions. for benchmarking) CDS combination positions a servicer vs. CDO, to testing monthly and a illiquid pools Controllers documented incorporates volatility on bonds for marks inventory output responsible loan are synthetic reports (e.g. are which Product Philosophy firm's (i.e., whole vendors historical and perform marking performed assets the procedures, for threshold research TRACE) process Senior for from (i.e., are models to results P/L (e.g. similar generally compare quotes specified validation analysis a daily statements, will complex Control responsible escalated against activity securitizations the price summarize PC market are to are reasonable marks procedures statistical mock are financial exceeding trading forn1al requiring and issues analytical procedures analytical BROTHERS addition snowball), personnel Controllers marks in Independent Collateral Perfonn Benchmarking Review Recent Perforn1 validation is and products Variances performs Trading value PC This note Price For Product internal following: Alternative All Unresolved • + + + + + + LEHMAN Pricing + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ (...) G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: J Pricing on policy instances, the based appropriate such OR as issued, In Value is present] markets Fair (continued) at markets this adjusted inputs. the by Once reference market category markets, reference expedient this levels. Process active suggested active active use in in in three to observable practical or just a I follows: categories as available Review and available available have as expecting are are are same will inputs [Not 9 the markets Mark in entity opinions), liabilities - liabilities liabilities standard or or or staff using results observable by the assets determinable". no assets assets techniques are replicated measurement similar similar identical augmented are bucketing there Philosophy value for for for by (as "Objectively valuation fair prices where are prices prices prices final that items multiple market the Co11trol of Quoted Quoted summarized* Quoted For exposure draft is that 1 - 1 2 - 2 3 - 3 BROTHERS accordingly. and results differences testing Level Level for the Level hypothetical Level4- revised anticipated Price Measurement be is It Pricing LEHMAN + * will
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J -..J OJ G) (...) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing debt Companies mezzanine Private in NIG Level4 and - products CMO equity loans bonds residuals convertibles investments correlation Derivatives RIBS Estate Agency Mortgage Non Muni Real Private Fund Equity Credit Corporate Corporate IG - OTC CMOs - loans 10 level3 loans derivatives Whole non-Agency Products Whole loans bonds securities Governments rate and Equity Categories Forwards Non-G7 FX Residential OTC Convertibles Corporate Corporate Interest Commercial CMBS- Agency Value Fair 1 level within BROTHERS Investments options Paper bonds Equities Stock Market listed Throughs Governments Governments Pass Money Preferred US Equity Corporate Corporate Commercial MuniBonds G7 LEHMAN Products
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J (X) OJ (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: 1 : I I [ I [ I I I 4 0K 0K $500K $500K $50 $500K $500K $500K $500K $500K $500K $500K $500K $500K $500K $50 $500K $500K $500K $500K $500K $300K Level $500K $500K Pricing
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J c.o OJ (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I the Pricing for If manager. with. responsible control be complied Rules will are product - area the rules by $10mm that above for over the nominated that Committee manager notionals staff trades for of line ensuring control complexity the for series 12 by Review notional or product of the vols 5% accounting responsible committee over dated be other the or controller, will individual trade to long issues on Transaction e.g. area notional- issues of scope valuation each $5mm presented issues 02-03 and for models committee. over infrastructure I specific EITF the formally percentage to to no valuation existing be entity controller ofP/L- Derivatives has by composition leads certain will trades BROTHERS size a legal area to additional valuation trades covered over Committee Absolute P/L Poses Potentially Leads The escalating Not product The Complex LEHMAN + + + + + + + + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ -..J -..J OJ G) 0 ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing Presentation - trade Committee for issues rationale 13 Review and booking or clients sensitivity P/L of and types operational deal Transaction correlation e.g. the maturity categorization vega, including size, issues issues book issues issues delta, type, summarizing narrative e.g. e.g. Derivatives Trading significant BROTHERS accounting modeling valuation or entity diagran1 market details metrics other Deal Brief Flow Risk Potential Legal Potential Potential Banking Any Complex LEHMAN + + + + + + + + + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: a on $4.7 gets I The no 1. of treated to million annum. wanted was million Pricing day be trade date. P&L recognize at per 1 $4.7 desk the to back. there $500 trade. Furthermore, of required bps should day The is a held 50 maturity new thus, needs P&L of be whether trade has 1 recognized the and and to receiving of fee be the Lehman a day transaction. date trade from Lehman can needs trade, the 02-03, that such, unobservable. new 2) fee trade P&L such, As regardless 1 be receives P&L or Intel EITF - equity The 1 this As to derivative 155. fee of day a of back day of between as this FAS Lehman of shares forward predated held million. value deemed a of with is be separately. that million trade, receive $1.9 to into short-term debt. million a considered of Committee present $4.7 will trade as number be treated average price) average $2.8 enter the needs volatility loss be to accordance back 14 Month The derivative that only to in Lehman existing should MTM hold million Review the fund implied weighted an thus, considered as future. needs trade $4.7 be entirety for and CPPI since the $800K. current concluded commitment well of a its trade a a in as (volume equity in loss, was should has P&L 02-03, each AP restructured Intel 1 signs fee trade, of VW that valued trade committee desk million day this forward EITF structuring old Presented payment to of the fair the This The For Lehman the shares $1.9 be entire average front that such, the value the from and subject up determined P&L. the As Trades 1) 1 Trade- of be on note delivering against of present day Derivatives Transaction Derivative- Derivative- Policy million will BROTHERS concluded of and the based Equity million whether that is 1, $1.9 netted Fund Fund date terminated. back of structured be $500 day a know CPPI CPPI loss can million hold Accounting to early committee deliver At trade Forward as the Summarv Complex LEHMAN + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J OJ G) ...... :s;: LEHMAN BROTHERS HOLDINGS, INC. 1\J I Pricing Finance and Validation Model valuation adjustments etc of limits Analytics, Committee issues review sets related Research, review, including validation for 15 Control control group Quant group the Model model and priorities the Research all from Finance by sets the by discuss to models, approval Quantitative Process representatives new basis and the approval of by and senior review built 1nonthly of process Committee a pipeline are review on Approval BROTHERS approval Control Further Models Composed Independent groups Reviews Meets - - - - - Model Model LEHMAN Model + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J OJ (...) G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I rate Pricing for being are Energy Hazard Options the risk Significant these model the by and of Credit and the on the of past Index for approval part the the model reserve methodology approval as in futures. Summary on full - granted gas final group process. addition, was options granted approval In natural Month swaps are granted research group) and the 16 Committee approval European oil revised. group temporary default models for on model value Research being Control to the Quantitative granted are maturity validation to options significant Quant the and been Performed model by the the value possible. Model subject constant have to as (by guidelines that Index be Being Process value soon proposed and model models ensure to as be approval approval to Work Management Aggregate BROTHERS Curve other model Approval and Risk initially model Several lattice Temporary The documentation Futures Lehman The management will prioritized LEHMAN Model Issues + + + +
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ ~ r m -..J -..J OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: en ...... :::s tn (]) 0::: c: ·-..,0 ('a ...... 0 ...... 'I- 5o.. Q) > Q) ...... 0 c...L... 11.1- 0 >. :1...ro
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CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747145 prices are that market Total 1,233 17,462 53,621 72,316 multiple of Division differences results hypothetical for the on FID instances, based Income appropriate such OR as In Global markets. .. markets inputs. adjusted Fixed 648 - 15,657 33,673 49,978 Resolved reference market markets, reference $'000 Variance active 18 active active in in in in observable present] at or I available Pricing Summary and available available expedient. are category are are this markets practical use liabilities a liabilities liabilities not or as or or 584 Aggregate 1,806 [Do observable 19,948 22,338 assets inputs Re-marked Executive no assets assets are entity identical similar similar there using for for for determinable". levels: techniques. where prices prices prices pricing BROTHERS replicated items of "objectively valuation are Quoted Quoted Quoted For Verification 1: Level3 Level4 level1 *Definition Level3: Total Level Level2: Level4: LEHMAN Price ~~~~~~~~~~~------FP~ri~cingl
CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ -..J -..J OJ G) (j) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I 82% 98% 91% 66% ':.~.\_;:,>. 100% 100% 100% 100% 100% 100°/o d Coverage ,,~i I I '!:'''', Pricing 481 ''I '' 634 944 /\''" 159)1 164 297)( 303 :· Based 2,432 3,648 2,532)1 2,328 : i~- Risk I :~~;, ,''->.' 58% 98%, 31% 99% 99°/o ::,,· 100% 100% 100% ~oo,~~, 1000/o 100% ' Coverage < I :~->(/;' 24,794 39,800 176,5951 102.169 102,169 279,799 700,430 404,578 712,839 s.~~~::~~~ 4, 7,881,5291 3,156,203 3,933,636 17,814,137 ;-l,.;_:~;':':S·.~;..: j,kci&'~;£Zf~hdh I I ,~; ,,, 52% 20% 98% 96% 89o/o 95%1 100% 100% < IOOo/o 100% ,,,; '\,[.~~ , , Coverage ·<. Division ,-~:-; ,\£:-~>"k-'10)~:,.; j I "" 24 ;;.;.? 137 877 336 688 4,976 Based 2,582 2,231 73,701 30,702) .3;~\~ CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m --" OJ """ """ """ G) LEHMAN BROTHERS HOLDINGS, INC. :s;: . for Pricid . service snowball and pricing portfolio note entire outside to the of demonstrate observability demonstrate redemption pairs products. help auto Division . rate re-pricing . currency which target service) full 19 businesses. interest curves positions of FSA, and floater, gas FX Estate outside the total to Income a FX products. and and and performing . Real for capped rate and Now curves Product Totem submitted business submitting 20 callable interest coverage for Fixed on and power IRP model. Mortgage Market core the 80% testing all the accrual, skew group: curves, of portfolios (working Liquid over oil within price range to within on testing swaption futures. options squared Control 60% swaps swaps options, . Projects- (callable price details CDO and from Government, gas rate the default treasury European methodology. swaps and I in better Eurodollar IRP, exotics for of cap credit all PSA interest options, coverage CDO testing IRP of of of of skew for oil sources of Valuation on provides VR of testing on and testing the SA that . testing testing testing I testing testing testing testing BROTHERS tenor skew thresholds price price price re-calibration convexity BMA matrix Verification price the FX purposes output price the the the months, price . 02-03 recent Completed Performed Initiated Initiated Increased Expanded Initiated Implemented Completed Developed Initiated Initiated Completed Price LEHMAN EITF In .,...... ,...... ,...... ,...... ,...... ----+ .,...... ,...... ----+ ----+ .,...... ,...... products) ----+ ----+Initiated CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J (X) OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: size by OTC ericas merger within not Pricin~ debuted historical vega after a positive DRho be had Index month to year large which 2 large variance, to include over office Japan $2.3mm the remarked SMI to a very due on Finance a ------~- and and front had month by dividend on was the marked 16% $l.8mm, tolerance. variance of to Division which trended ---- deemed tolerance negative office The portfolio. previously of all historicals within however, to being the --·--- be front had and $2.3mm volatility is in to $1.3mm, a the outside by size $(0.2)mm, portfolio. and market, which on compared which deemed Collars, OTC positions as deemed trade options increased maintained based variance, was DGX was observable Japan yield various Equities GROEP, were which the and office Allstate the which in which 50 by the KBC - across front correlation dividend of month in outperfonnance the Variances $0.5mm, ------·-----~---< mainly over $1.6mm, increased spread overall position, unwind 2007 where Bank, was driven the EUROSTOXX Swap, and month difference option $3.0mm. May. single by April by negative was a to in in 2006 by by small variance trended driven Variance driven is Construction very The BMO variance $1.4mm offset variance pix a was caused Thousands $1.6mm was 21 the by To in which Summary Outperformance China was by from testing from $2.4mm and change $2.4mm, decrease 2007 a of$2.4nun. price increased driven variance; results of $1.5mm, variance The market. is BMO The and $(0.3)mm to Variance variance The cause variances, to variance the discussion Notes, positive in of the a This April. marked in $(0.2)mm, Monthend. was with $(0.9)mm, positive Cliquet variance. volatility was a remarked. $(2.0)mm April. volatilities which of currently April to in by volatilities which is $1.6mm at been variance, Basket marked stock Executive warrants, The position be monthend from now values which Variance) to primarily the $(1.0)mm $(1.7)mm DPL $6.8mm decreased has Housing April of by individual correlation end, 15.79%. $(0.3)mm. on found $ll.mm from from flat $3.5mm, to > $0.5mm, US a ( theoretical variance comprised position driven were skew month to and variance is is Negative from by The $5.3mm variances, 17.06% Post options, increased $(5.9)mm by volatility marked positions $I.Omm driven $0.8mm negative delta from +$1.4mm variance Comments: a p1ice. $1.4mm, at of are fell were tolerance. variance its volatilities. list Singapore decreased outlier +$0.8mm increased from in Level Warrants BROTHERS +$3.6mm negative Europe: dividend within mark month variance variance, focus +$5.1mrn Futures MCSI Verification and DPL variances in spread $0.3mm. moved The it's Variance variance benchmark and over May significant Business Asia: Americas: Europe: overall deemed the Strategies Increase 2006 Stocks Volatility adjusted Overall finance $(0.6)mm tolerance. monthend, variance. Position, The Three arbitrage Overall and on portfolio Month finance. Equity Volatility Volatility Volatility May 5,000 (5,000) Price 15,000 10,000 LEHJ\.1AN 25,000 20,000 35,000 30,000 (10,000) + + + + • ! CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ -..J -..J OJ c.o G) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m the a was bid by to to Pricing the coverage exposures $(0.3)mm benchmark due variances by Volatility mainly variance The to the within by individual $(l.O)mm The whose drop driven of driven $0.8mm US end. were to (continued) to driven was and variance, categories. option. month was products variance primarily SMI variance variances for $2.4mm May portfolio. positive variance was $ll.Omm separate All at of the ratio decrease FTSE, to from Division negative two in $1.6mm performance a testing The change market. into marked Out $2.3mm from $3.6mm. $8.5mm coverage variance This price April's to positions ratios BMO with the with markets. The The from moved Equities +$4.9mm). EUROSTOXX, the Europe line causing removing - on various on appropriately 99%. $(1.7)mm foreign +$2.0mm). coverage into is be (April, in increased of portfolio +$1.6mm) to found 22 from across unwound value (April positions OTC Convertibles brought was traded significantly (April in spread $(0.l)mm variances OTC inventory market Summary were calculation to increased Index $5.2mm trade was was on dropped for to large positions $5.lmm $(0.9)mm decrease shows of Japan to Positive on of a based Basket variance on $(5.0)mm 83%. by volatilities variance $3.2mm result are is the Warrants taken separated by the division The Index $3.5mm by the Results: variance are offset Executive DPL is the by variance and where was the for variances end The snapshots sensitivity testing Allstate decreased $2.4mm. Testing for increased Equities change of Europe of the risk increased testing price whose month increase Price by This Global portfolio. Coverage: Variance where Price after volatility Variance BROTHERS This in trades variance Volatility differences Variance OTC volatility spread. Verification for in Equities a measured Testing and Americas: corrected Overall: are timing historical Asia: Americas, held Europe: offer equities. positive ratio Japan Products Global -- Price -- Price LEHMAN + + CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 0 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: 100°/o Coverage I Based Risk I ~ N/A Coverage 0 MV ~ 1.'' .I 100% 100%, Coverage I ·I ;·;.·_,;, Based 4,357 ,;.; .. ~'-- Risk I '" ''I "(. 9!% 91%1 c< .. "r,,,,,, Division .,~~:;~-:;-&Vel3 Coverage 1\>:· 1 r""' 2)~\- !8,2261 Is,zz6i,cy,. 18,2261 < MV "~;<,t;, _,_;,]:- ::,;«3;; :> Coverage I I "><""' Equities Based J>: 23 Risk I 'I - 95% 99"/ol;' !00% Le;Veft;,:';~;" 100% 100% 100% ,;~ .,,,,.,, ~., Coverage ,<',\~'{; I h,, !2,363 49,199)1 708,595 32!,4141 MV 4,463,4zol, 3,445,7741 (323,822)1 L:J.::.:_.:::-::~~ (; 20% 1% o/o 1 1% + 10% 20% 20% 1%. 1% I% 1°/o 1% 1% + + ·Mea-sur~ MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV MV PVO! PVOI PVOI PVO! Coverage DRho Carrel Vol+l% Vol+ Vol+ Vol+l% Vol+ Vol+ Vol+ Vol+ I Carrel Carrel+ Carrel+ Carrel+ Correl PVOl/BetaOl Recov~+ MV/Vol+l% ,·.:Risk MV ' COOs thirQ__p_ I J];Ovt commercial residential skew: V bonds Totals rate & & bonds volati!i..!Y_ rates rights rates Estate transactions ofvol NAY volatility spread stock NA rates CMO correlation Derived correlation loans loans correlation ~p_reads volatility S\V~s volatility correlation & volati!i!Y_ bonds bond bonds volatili~- vol units vol bonds Fund Real delta C•·edit' Options Mo··~gi\g(! volatility Hybrid ATM volatility FX IR Interest ,-olati!i!Y_skew: Fund Price LEHMAN nterest ii) iii):f.qtJity iv) vl '\'il ''l IR [R J Recovery IR IR Mof!~--~- CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I of service. Pricing consensus regression. implementation T+8 and policy. to Mark-it 10 to through T+ override sampling data from and ranking, more vendors Division Mark-it data Mark-it reporting quartile of of submitting top use to: to by variance trades hierarchy able a 24 until through testing Equities quartile was sensitive time group skew establishing reduce by to typical lower name volatility include Control to from implied correlations Projects- process single and verification and rankings estimating price index price-testing office. Valuation for price-testing of of Mark-it the front BROTHERS in overall method Verification Convertibles overall accuracy coverage data months, Improve Increase recent LEHMAN Price ~ ~Improve ~Implement ~ ~Streamline ~Improve In consensus CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 01 OJ G) ...... :s;: LEHMAN BROTHERS HOLDINGS, INC. 1\J t: 0 ...... ca ...... u '+-"""" .5.... (1) > CD 0 ·-L... a.. lit- 0 tJ) Q) -c. E co w>< If) N CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747153 J Pricing and highlight further to for products Bloomberg Euro-brokers, 4 positions and and 3 ICAP, GFI, highlight level to Extel, for Telerate, IDC, $500k exposure, EJV, and risk Bloomberg, as portfolio exposures products 26 such providers: 1 entire risk aggregate the all level each on on vendors adjustment for following for the mm $300k $1 potential of procedures from procedures of independent and prices from adjustment review thresholds threshold verification verification Products Derivatives price further price independent market data market variance variance for Governments Rate Yamane and potential Income BROTHERS obtains applies performs obtains applies performs bon Income PC PC PC positions review PC PC PC Pre Fixed Fixed Core Interest LEHMAN + + CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I price, Pricing GFI rate, strike from repo rate, highlight to repo sourced volatilities, products 4 volatilities, and market data 3 external level with external external for with model $500k utilizing model and Scholes portfolio 27 Black Trinomial products l the entire the the level using using on adjustment for (continued) time-to-expiry valued valued and $300k potential of procedures and coupon, independently independently Products review thresholds price, Options verification are are price further security variance Rate options Treasury for options BROTHERS & time-to-expiry applies performs PC Mortgage and underlying PC Treasury positions Mortgage - - - - Interest LEHMAN + CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 01 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I 6 (3) 26 50 74 (83) 192 116 177 315 569 591 727 794 (617) (544) (493) (221) (207) (129) (115) (114) (710) (670) (624) (612) (494) (453) (267) (217) 0.00% 1,101 1,055 1,677 6,383 6,633 33,143 (8,026) (7,988) (5,413) (5,288} (2,250} 16,431 10,110 40,096 28,422 51,612 53,163 22,166 (13,001) 103,235 111,782 121,254 (74,214) (22,201) (19,424) (96,955) (30,883) (11,107) ~ (117,431) (113,086) (104,067) Pricing Results ,087 30,111 168,087 193,719 527,419 885,351 760,760 192,482 282,558 230,439 635,529 831,367 904,780 501,689 532,082 916,039 753,088 715,723 735,568 730,309 454,262 440,459 670,781 655,724 609,449 Absolute 1,356,915 1,229,674 05,081 7,281,860 4,509,658 3,590,508 6,759,414 6,865,675 9,642,898 6,147,945 5,419,707 ~ 17,810,605 16,730,966 40,817,697 24,544,463 26,975,820 66,672,472 34,183,069 85,643,470 51,672,813 18,614,152 17,460,485 32,859,981 29,821,786 21,649,372 96,165,638 68,398,949 89,864,726 53,899,640 121,501,052 127,233,532 151,917,599 149,442,144 1 126,832,459 112,541,516 160,494,365 1,914,992,087 I 0.02 0.06 0.07 0.07 0.06 0.02 (0.12) (0.10) (0.03) (0.03) (0.14) (0.14) (0.13) (0.12) (0.03) (0.14) (0.12) (0.03) (0.12) (0.13) (0.14) (0.10) Extei/Other Oiffs. 0.03 0.05 0.00 0.00 0.03 0.10 0,09 0.10 0.08 0,05 0.09 0.00 0.00 0.05 0.08 0.03 0.03 (0.04) (0.00) (0.00) (0.00) (0.02) (0.04) (0.04) (0.04) (0.06) (0.05) (0.11) (0.07) (0.02) (0.05) (0.07) (0.09) (0.10) (0.10) (0.11) (0.11) (0.07) (0.10) (0.11) (0.09) (0.04) (0.11) (0.00) (0.11) (0.11) (0.11) (0.14) (0.07) (0.05) (0.04) (0.02) (0.08) (0.10) (0.02) (0.07) (0.11) (0.10) (0.08) Prices !2£E! External 0.02 0,10 0.04 0.01 0.01 0.07 0.13 0.00 0.01 0.01 0.07 0.10 0.07 0.04 0,13 0.01 0.01 0.02 0.01 0.00 0.00 0.02 0.00 0.00 0.02 0.00 (0.04) (0.05) (0.07) (0.08) (0.10) (0.03) (0.09) (0.03) (0.02) (0.05) (0.03) (0.03) (0.03) (0.03) (0.05) (0.10) (0.07) (0.04) (0.07) (0.08) (0.09) (0.08) (0.02) (0.08) (0.03) (0.03) (0.03) (0.05) (0.06) (0.03) (0.05) (0.08) (0.06) (0.05) EJVPx I 98.30 99.96 98.30 96.69 96.21 99.96 96.69 99.96 96.21 119.52 105.41 124.95 105.41 105.62 124.95 119.52 104.49 102.58 104.49 107.16 107.16 102.58 Extei/Other 1 96.18 97,13 95.52 92.51 93.82 96.95 98.27 98.27 95.52 96.66 99.93 95.52 97.13 97.11 97.13 93.82 97.13 99.29 99.32 94.15 94.15 97.11 97.11 94.86 96.18 96.95 94.15 94.15 96.66 99.93 94.86 99.93 96.95 Price 119.49 119.49 103.75 100.88 115.89 124.92 105.38 100.21 102.55 100.21 119.83 105.38 105.59 105.59 107.13 104.46 102.55 104.46 103.75 100.88 107.13 115.69 115.89 119.83 115.89 124.92 100.88 102.55 ~ External 94.16 93.77 97.11 99.28 94.16 97.06 95.50 97.06 94.84 92.48 97.06 96.12 98.28 95.50 96.94 94.16 96.63 94.16 96,63 99.92 94.84 96.94 99.92 95,50 97.11 97.11 93.77 97.11 96.12 98.28 99.92 96.94 115.92 119.78 119.48 103.69 100.84 119.48 124.95 115.92 124.95 105.39 100.84 102.52 103.69 100.84 100.19 107.11 107.11 105.56 102.52 119.78 104.42 100.19 102.52 104.42 105.39 105.56 115.92 115.92 ~ Level I -- 28 Mkt 165,638) ,649,372} 147,945) ~ ,229,674) 30,111 193,719 282,558 532,082 730,309 (655,724) (670,781) (753.088) (831,367) (904,780) (609,449) (454,262) (440,459) (715,723) (192,482) (501,689) (735,568) (635,529) (168,087) (527,419) (230,439) (916,039) (885,351) (760,760) 1,356,915 4,509,658 6,865,675 7,281,860 (1 (6, (9,642,898) (5,419,707) (3,590,508) (6,759,414) 18,614,152 16,730,966 17,810,805 51,672,813 92,380,703 40,817,697 24,544,463 66,672,472 89,864,726 (96, (21 (68,398,949) (53,899,640) (29,821,786) (32,859,981) (17,460,485) (26,975,820) (34,183,069) (85,643,470) 121,501,052 149,442,144 105,081,087 127,233,532 151,917,599 (126,832,459) (112,541,516) (160,494,365) Price 97.13 96.91 97.07 93.77 94.79 92.56 96.91 99.29 94.13 95.47 96.11 98.32 95.47 96.91 94.13 96.58 94.13 96.58 99.93 94.79 99.93 95.47 97.07 97.13 93.77 97.13 96.11 97.13 98.32 99.93 94.13 97.07 lnvPx 100.78 103.65 100.78 102.44 104.36 103.65 100.78 100.14 125.02 119.91 119.91 102.44 105.47 107.03 100.14 102.44 104.36 107.03 105,29 105.47 115.92 115.92 115.92 119.58 125.02 115.92 119.58 105.29 Trader's Example Face ,000) ,814,000) 168,000) 152,000) ,286,000) 31,000 459,000 200,000 280,000 630,000 (527,000) (721,000) (904,000) (479,000) (357,000) (364,000) (696,000) (162,000) (511,000) (700,000) (647,000) (145,000) (543,000) (171,000) (878,000) (582,000) (513,000) (517,000) (716,000) 1,397,000 4,791,000 7,334,000 7,294,000 (6, (1 (5,831,000) (9, (4,258,000) (3,558,000) 76,671,000 16,742,000 17,320,000 42,703,000 25,000,000 38,844,000 12,552,000 86,133,000 66,615,000 (91 (94,719,000) (75,821 (53,754,000) (54,900,000) (29,000,000) (34,910,000) (17,472,000) (17,733,000) (25,366,000) 117,455,000 (23,000,000) 123,694,000 100,000,000 100,000,000 131,750,000 Current (100,000,000) (165,698,000) 11/15/07 11115/07 11115/12 11/15/12 11/15/12 11/15/07 11/15/07 11/15/06 11/15/12 01/15/11 01/15/14 07/15/14 01/15114 04115/29 04/15/10 01/15/11 01/15/07 07/15/12 01/15/07 01/15/08 01/15/12 01/15/08 01/15/16 01/15/10 01/15/25 07/15/15 04/15/28 07/15/14 07/15/13 01/15/09 04/15/11 01/15/08 01/15/09 07/15/13 08/15/11 07/15/12 04/15/10 01/15/07 01/15/10 07115/14 01/15/12 08/15/11 07/15/15 01115/14 02/15/27 02/15/27 01/15/15 02/15/27 01/15/16 04/15/11 04/15/32 01/15/25 08/15/11 04115/29 04/15/28 02115/27 07/15/15 04/15/32 01/15/15 01/15/26 ~ Pricing 1.88 1.88 1.88 1.63 1.88 1.63 1.88 2.00 2.00 3.63 3.63 3.88 3.00 3.00 3.50 3.38 3.38 3.38 3.63 3.63 3.88 0.88 3.38 3.50 5.00 3.00 3.00 3.38 5.00 3.88 3.88 3.38 0.88 3.50 3.00 338 4.25 4.00 4.00 4.25 4.00 4.00 2.38 2.38 2.00 2.00 2.38 2.00 2.00 2.00 2.00 2.38 2.00 6.63 6.63 6.63 5.00 6.63 3.00 3.63 Coupon NOTE NOTE NOTE NOTE NOTE NOTE NOTe NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTE NOTe NOTE NOTE NOTE BOND NOTE NOTE BOND NOTE book NTS NTS NTS NTS DE)( INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDeX INDEX INDEX INDEX IN INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDEX INDex BROTHERS TREASURY TREAS TREASURY TREASURY TREAS TREAS TREASURY TREASURY TREAS INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION INFLATION STATES STATES STATES STATES STATES STATES STATES STATES STATES inflation 01115/07 01/15/07 01/15/07 02/15127 02/15/27 02115/27 02/15/27 3/8 3/8 3/8 07115/12 07/15/12 11/15112 11/15/07 11/15/07 11/15112 11/15/07 11/15/07 5/8 5/8 5/8 5/8 TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREA$ TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS TREAS 3 3 3 3 3 US lssuerName US UNITED US US US US UNITED US UNITED US US US US US US US US US UNITED US US UNITED US UNITED US US UNITED US US US US US US UNITeD US US US US US T 6 T 3 T 3 T 3 T 6 T 4 Til Til Til T411/15/12 T411/15/12 UNITED US US Til Til T 3 T 6 T 6 T4 TIPS ld LEHMAN Government TOTALS: Sec 912827SWB 912828CZ1 912628ANO 912B28ANO 912828FB1 912828EA4 912828CP3 9128274YS 9128274Y5 912828AF7 9128275W8 9128276R8 912827782 912828EA4 912810EZ7 912810EZ? 912810FQ6 9128272M3 912828AF7 9128273T7 9128277J5 9128273T7 912828ET3 912810FR4 912810FD5 912828APS 912828BD1 912828APS 912828F81 9128273T7 912826CP3 912828ANO 912828DHO 912828ANO 912810FQ6 912810FR4 9128277F3 912810FH6 912828AP5 912828BW9 912826CP3 912828DHO 912828CZ1 912810FS2 9128276R8 9128272M3 912B28EA4 912828801 912827782 912828BW9 912810FDS 912828AP5 912810FH6 9128272M3 9128277J5 912810EZ7 912828ET3 912827782 912810EZ7 912828BW9 CONFIDENTIAL TREATMENT REQUESTED BY I ~ ~ >< -..J -..J --" OJ G) 01 (j) :s;: r LEHMAN BROTHERS HOLDINGS, INC. m 3 Pricingl (0) Impact 36 45 73 (16) (96) (95) (216) (199) (217) (361) (1,043) P/L (7) (12) 137 871 351 911 715 420 (178) 1,339 1,658 (1,768) (1,121) Exposure Rate 0.04 0.00 0.08 0.20 0.18 (0.26) (0.25) (0.12) (0.23) (0.30) (0.16) (0.27) Variance Rate 5.4846 5.4945 5.5179 5.5480 5.6037 5.6718 5.7110 5.7880 5.7548 5.7912 5.7996 5.7982 Broker 29 Rate Level3 LBSF 5.4872 5.4970 5.6741 5.7141 5.5175 5.5480 5.6049 5.7565 5.7939 5.7988 5.7962 5.7862 54.00 55.75 51.75 59.75 59.00 58.00 46.75 45.00 61.75 63.25 61.50 LBSF 48.75 Spreads Example- Rates Yield LBSF 5.0372 5.0295 5.0300 5.0305 5.0649 5.1166 5.1166 5.1390 5.1838 5.2062 5.1614 5.2062 Gov Swap BROTHERS Pricing Point LIBOR 2y 3y 7y 5y 4y 10y 30y 12y 15y 20y 25y 40y USD Swap LEHMAN ~~~e_~!_J~~~__!=~~~~~~=-~~~:.':._~------Curve CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J -..J 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I 1.05 1.51 1.08 1.49 1.59 1.04 0.06 0.14 2.20 0.52 0.74 0.57 0.75 0.61 0.77 0.67 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% St.Dev Pricing NA NA Lehman /yr survey: -- ...... ------.. ------...... /yr /yr 0.5% 5.09 6.98 (0.77) (4.27) 0.5% 0.5% •• 10.04 34.01 59.84 16.04 46.72 (18.25) (20.91) (11.24) (26.59) (32.72) (39.56) (15.69) (64.72) (12.65) Accruals 0°/o 0% 6.00% 6.50% 7.00% 7.50% 7.00% 6.50% 5.5 6.00% 6.00% 6.50% 8.00% 7.5 7.00% 9.00% 8.00% 6.50% consensus (Totem-LB) below below below Diff note note note See See See Price (yr5) Range Ceiling Totem's below below 7.75% Range note note 6-10 6-10 L L L L L L L L L L L L L L L with 12.07 16.91 13.85 12.07 13.53 29.99 57.03 15.42 11.48 45.47 21.69 21.95 24.88 27.66 69.35 (yr4), Conservative 4-7 =Aggressive 16.3903 6 m L 6m 6m 3m 3m 3m 3m 3m 3m 6m 6m 3m 3m 3m 3m 3m See See 1 y 1 yrs yrs foryrs iff= for Diff Index<:::: D 7.25% far 0 0 0 0 0 0 0 0 0 0 0 0 0 0 StDev 6 6 6 6 6 6 6 6 6 6 6 6 6 6 marks Obs bps 013 0/3 0/3 0/3 0/3 0/3 0/3 0/3 0/3 0/3 0/3 0/3 0/3 013 9$0bps 5 (yr3), 3 3 301360 30/360 30/360 3 3 3 3 3 3 3 3 3 3 3 3 30/360 30/360 30/360 400bps + its 57 + Negative Positive + L L Callable 3mL after. 6.75% 3m Floor<= 3m Q Q Q Q Q Q Q Q Q Q s after Q Q Q Q Q Q Q s Q 1-5; 11.58 year 40.04 59.52 38.60 46.62 46.25 69.63 90.71 39.38 73.77 48.34 1-5; 47.118 -3: - (yr2), 167.42 106.68 131.50 101.44 233.77 1 138.7585 Range yrs every yrs -- lowest ------...... ------·- If: .. .. foryrs for 6.25% Spread for comparing knockout ), 0.5% is 6 + 850bps (yr1 Step-Up Fixed 225bps 0% *highest 30 + Yr + 9.25% 8.25% 6.00% 9.25% 8.25% 6.50% 7.75% 7.00% 7.5 L 5% 10.00% 11.25% 10.75% 7 2.00% 3mL below below below below below avg 3m 7. + 6% in 30.56 74.67 42.23 69.44 95,00 87.10 74.39 12: 15:5.75% 14:9.25%. 7: 9: Coupon+ 174.88 318.27 147.31 104.97 107.64 118.65 155.85 note note note note note -59.5859 Lehman 317.3094 351.6233 1,334.23 L + Price USD 1-5:7.50%: Pay 3m See See Yr 3m See See See Trade Trade .. Trade Trade Trade Example number that our ------· ------· .. -· ------...... Consensus Includes 0 0 6 6 60 60 60 structures ------/3 13 A/360 A/360 A/360 A A/360 A A/360 A/360 A/360 A/360 A/360 A/3 A/3 A/360 A/360 A/3 A/360 A/360 A/360 * . Pricing PriceOut -fAT:i'6b Q Q Q Q Q Q Q Q Q s Q Q Q Q s Q Q Q Q Q accrual testing: ~ L L L L L L L L L L L L L L L I. L 31.33 92.92 84.64 74.95 Price 90.35 94.93 58.35 -64.68 364.27 382.03 179.15 106.24 113.69 186.87 123.33 148.87 258.43 3m 3m 3m 3m 3m 3m 3m 3m 3mL 6 m L 6 m L 3m 3m 3m 3m 3m 3m 3m 3m 1,287.51 range price --3m Lehman Model yr yr yr yr yr yr yr yr yr yr yr yr 0 yr 0 yr yr yr 0 0 0 0 yr 0 0 0 0 1 5 1 1 1 5 1 5 7 1 1 5 7 7 7yr 1 1 1 1 2 5yr 5vr •< output callable range BROTHERS range of of range range •' range range range range range range range range range range range range range range range Accruals range range range range range range range range range ranae up range ... range range range range range Step-Up fixed up fixed fixed Step-Up fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed step fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed fixed step cpn, cpn, cpn, .. cpn, cpn, cpn, Details cpn, Results cpn, Range cpn, cpn, ·· cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, con. cpn, Countdown Countdown cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, cpn, Results re lxed Complex • + LEHMAN Fixed Fixed Mixed Fixed Floating Fixed Step-Up Mixed Step-Up F1xed FloatinQ Fixed Fixed Step-Up Step-Up CMS M Fixed Mixedcpn,fixedrange CMS Fixed Fixed Fixed Floating Fixed Floating Mixed Fixed Fixed Fixed Step-Up Mixed Fixed Fixed Fixed Fixed Fixed Step-Up 3. Callable CRA 1. Struc~u 3. 5. 11 10. 4. 2 6. 8 9. 7. 1 1 6 1 8 12. 17. 1. 14. 15. 19. 20. 10. 11. 12. 4. 2. 3. Structure 13. 6. 5. 8. 9. 7. 15. 14. 18. 19. 20. CONFIDENTIAL TREATMENT REQUESTED BY _.... ~ ~ ~ r m -..J -..J (X) 01 OJ G) LEHMAN BROTHERS HOLDINGS, INC. :s;: . I name Pricing first each by for dates names adjustment adjustment volatilities expiration single of potential and and potential and chart and a prices indexes review of review strike creates levels it series further a further various for volatilities for for volatility with Bloomberg, Bloomberg positions 31 trader's from positions volatilities e.g. independent the Bloomberg highlight with implied sources highlight from to establish volatilities to the Notes to levels portfolios portfolio $300k listed external options $300k of matrix to obtains Linked the of entire entire of listed volatility the the aU for matrix Equity threshold volatility reference & Options threshold pulls verifies by verifies estimated equity volatility Listed the volatilities variance matrix & prices Warrants the a variance the equity BROTHERS independently applies Futures verifies independently utilizes compares applies The capturing After Options, PC PC PC PC PC PC PC .. .. Stock, OTC ------+ + Equities LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J c.o 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I to Pricing PHJsTiJ) from to 1- threshold, ( $(4,631)K a data a* market from daily under sensitivity PsiSTi,J+ year falls Vega 2 it = changed if representing on the by value PIMPi,J stocks based 3 trade 4 of PFE correlations, (the multiplied formula: and is stock the GT, $78K pairwise stock Level using 100 volatility - each APPC, performing variance: MPi,J) for for 1 about office Bloomberg. 32 worst price from front the Volatilities from the variance (pHISTi,J) the of and (Finance'sp PFE Example and derive receives sum estimated GT, to the correaltions is Marklt. MPi,J 1 holder factor correlation p volatility Correlations APPC, by stock. the for are: Pricing pairwise volatilty each Implied which, Finance's for Finance's adjustment collected tested for on an volatilties with is historical price pairwise Note, between variance be Basket variance trade consensus each to 2-year BROTHERS 0.1941, the the Finance's price = Linked coupons. a inputs difference total key Equity Bloomberg Determined Obtained Calculated $(4,553)K Revalued where determine participants' The The The An Correlations: otherwise, - - Volatilities - - - - - Equities LEHMAN + + + + CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J 0 OJ G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: I Variance: $22,209 $78,472 -$4,552,959 Volatiltiy -$4,631,431 MV: MV: (continued) 4 Variance: -1 12 11 Level 33 - 1.00 0.37 0.32 1.00 0.43 0.39 7.32 10.96 15.18 PFE PFE Correlation 1.00 0.32 0.37 1.00 0.45 0.39 30.69 40.11 23.51 GT GT Pricing Example 30.78 39.34 0.37 1.00 21.95 0.37 1.00 0.45 0.43 APPC APPC Basket BROTHERS Correlations ,: ';,;,'' ', ------Correlation ,', office " GT Finance Front PFE PFE GT APCC APCC ' GT APCC PFE Equities LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ G) ...... (j) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: I Pricing may Override price. Bonds Price reliable Test more variance with determine Convertible to ..... I<'>< I<'W81 determine - to 62.00 83.67 73.42 74.33 76.46 55.21 56.93 73.39 68.76 overridden 102.66 105.54 is hierarchy 34 86.37 Value 97.00 57.06 74.06 87.38 to 103.38 104.50 103.69 147.38 107.13 104.00 ond price . . . . 73.80 89.48 103.60 108.52 106.88 104.13 TRAC Test Market Example . . . . . according 96.11 73.80 89.48 and 106.88 108.52 103.60 104.13 BGN . Lehman 96.13 56.63 91.38 73.75 109.88 102.50 103.63 102.88 105.75 104.13 IDC ranked to are Pricing 7,096,000 6,004.425 18,146,450 24,212,500 19,493.430 14.067.249 individually 26.392,233 .21,703,727 Value . ·. 57;0S1000 70.860000 96.850000 103.430000 103.694000 105.500000 106.667948 compared Mart .104.500000 sources ·· is Calculation Price 8,535,000; 10,000,000 25,517,000 17;500,000 18,654,000 25,000,000 20,347,000 24.653.000 Pos Process: investigated DE Value DE 0 various Position Quote Data CO CONV INC SR are Neutral BROTHERS on: 0810 CONV IMC DEB EXCHANGE CONV CORP NT FOREX from INC 5.375 SR CO SUB Market Delta Theoretical Trade Broker SVCS RIMD Testing based INC CORP SECDCO TH ENTERPRISES b.) c.) d.) a.) SYS EXPRESS HL CONV INTERACTIVE be Prices Test Variances MEDIA INC Illiquid LEHMAN Desc 1. Price 2. 3. ALLOY TRANSOCEAM FLEET\1000 AMERICAN CONEXANT MERCURY LIBERTY U1~1VERSAL '! II CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ G) ...... (j) :s;: LEHMAN BROTHERS HOLDINGS, INC. 1\J I Pricing valuation . model highlight to and reports products 4 and 3 research by level for of$1mm provided $500k excess and in benchmarks value 35 products 1 yield I market level adjustment spread for with e.g. CDO $300k potential to: of cash and all procedures quotes reference review thresholds verifies activity by market analytical further prices variance trading for BROTHERS independently verifies applies Independent Alternative Recent analysis CDO PC PC PC positions ., " ., Cash - - CDO + LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ (...) G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: I and verified partners Pricing are survey Mark-it appropriately controllers spreads of scorecard. be a IRP use of can consensus Credit the the use that by the desk. Partners through verified portfolios through are Mark-it Trading) CDO achieved is of curves Credit against portfolios This types Yield the Lehman Structured desk. positions to assumptions controllers. 36 (e.g. rate CDO understand CDO Products to Credit portfolios the Rate recovery synthetic not survey all Mark-it and Corporate on Interest the internal the the pricing from verifies from controllers mapping PC by partners consensus verifies spreads Credit curves basis~ model controllers credit yield Mark-it the CDO the by BROTHERS CDO Corporate quarterly (continued) the independently obtains obtains a the PC PC not PC by Utilize valued On Synthetic - - - - - CDO + LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J OJ G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: I of 15 15 15 15 15 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 40 Pricing consisting 29.2 51.6 37.5 39.8 34.8 70.3 21.7 27.3 61.7 63.7 30.3 56.2 34.5 52.2 56.8 38.3 36.3 43.9 1, 36.0 49.6 28.0 26.2 27.4 61.3 50.2 33.4 54.1 33.1 35.7 31.3 32.6 29.0 20.8 28.3 29.5 26.2 28.7 29.9 67.8 36.8 38.4 38.2 92.5 95.8 54.7 42.2 34.8 Global 19.6 24.8 58.2 34.0 51.3 31.3 47.0 47.5 26.7 24.7 27.1 64.4 36.1 88.3 31.5 34.8 36.8 27.4 34.8 32.9 39.9 51.9 e.g. 18.0 22.8 31.5 44.2 29.2 28.9 24.6 25.0 22.8 60.1 54.3 33.5 82.9 32.2 48.2 52.5 56.4 59.4 32.2 30.5 37.0 16.1 28.3 20.4 39.9 30.1 49.2 22.0 22.3 20.3 24.4 25.9 27.3 29.6 26.1 22.6 25.3 54.6 75.9 47.5 43.6 28.9 28.9 27.3 33.3 baskets 17 19 19 17 26 21 22 22 34 43 41 48 19 25 25 23 67 38 29 several 13.5 17.4 15.0 14.8 13.4 14.6 34.8 18.4 16.3 19.5 20.4 27.7 39.1 30.5 56.2 33.5 22.7 Level4 for 6.8 8.9 9.9 8.9 9.8 19.4 13.1 11.8 11.9 17.5 13.4 14.0 19.7 15.8 10.1 11.0 13.4 19.5 21.6 25.4 12.5 43.3 28.8 24.4 21.9 data 6.5 5.0 5.0 5.0 7.2 5.7 5.8 5.0 5.0 5.0 5.2 6.2 6.7 6.8 8.4 37 15.2 11.0 17.8 12.6 14.4 29.3 rate 4.5 4.5 4.5 4.5 6.4 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 8.3 5.8 4.5 4.5 4.5 4.6 4.5 4.5 4.5 17.3 4.0 4.0 4.1 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 5.8 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 14.2 Example- recovery portfolios and years E us GB DE us us us us GB GB DE ES FR FR us us us JP GB GB DE DE FR JP GB 0 1 CDO spread to 11 SUB SUB SUB SUB SUB Pricing up for SA supplies points pic Inc AG pic CDO Hispano for supplied Group Werke Ltd Ltd Co is LLC SAJNT-GOBAJN Central Corp Tobacco partners Co BROTHERS AG pic Co AG ~lc pic DE Energy Motoren The Inc Co!E data Express Bank na1nes, SA Inc Wireless America Co, National Santander Telecommunications American Fudosan Computer Domecg of One pic Systems 00 Grou~ 1 The Mark-it BAA Casio Bank Boeing BAE Carrefour Cingular CIT Citigroup Banco Bank Mitsui British British Ba;terische DaimlerCh!J:sler AllianzAG Allied American Abbe~ C.OMPAGNJE Constellation N CONFIDENTIAL TREATMENT REQUESTED BY I ~ ~ >< -..J -..J OJ 01 G) ...... (j) :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I 10 and Pricing Merrill PVOls America, PVCI1 of Chase, spreads, Bank 3 5 7 Morgan swap JP Amro, 0 (continued) marks default year Sachs, ABN 4 10 to Firm's Credit up the Goldman including to Level Spread 516.6 generate CDS 3 5 7 1 to HSBC, maturities 183.6 38 compared :;4.9cll1,9·;",·1azt~;;~.~:~ contributors with .•·. is 23 partners cb'k!Nii''./c.•'>>'~~~~~~~~~~~E4~~[E"i~~~~~~~~~~~~ Deutsche, this Size 1.00% 5.00% 3.00% 2.00% 2.00% 2.oo% from Example- 85.00% and Mark-it points and CSFB, data data by the Service 5.00% 3.00% 7.00% 2.00% 0.00% 10.00% 15.00% Attachment Pricing attachment Citigroup, provided collate consensus Tranche data then Stanley Senior Stems, the CDO returns for various 10-15% 5-7% Super 3-5% 7-10% Equity 2-3% !Tranche Template Bear uses partners then BROTHERS Morgan Valuations then 42.2 correlation Mark-it PC Barclays, Lynch, Mark-it Ref Names Synthetic + + + LEHMAN Markit Submission 100 Swap Global1 CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J OJ G) ...... (j) (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: I Pricing Investor CDO master as well as 4 tranches tranches Level CDO CDO mini of 39 350) synthetic 3 200- Example- ( Tranche subordination contains CDOs CDO by Subordination credits mini 'Mini of portfolio Pricing a protected among on is number large tranche overlaps tranche to CD0/\2 are BROTHERS Squared Squared: There Exposed - - CDO CDO tranche Synthetic + + LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J -..J OJ G) (j) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing points survival its make attachment to (continued) 4 tranche tranche CDO corresponding Level find master proxy to the CDO credits) used of CDO of CDO is 40 to that level as vanilla Example- of related overlapping iterations) same probabilities proxy the closely as subordination (netting (10,000 is experience date Pricing the survival CDO I out CDO CD0/\2 tranches PV maturity of vanilla Silnulation figure on mini leverage our Proxy to a CD0/\2 similar all using Carlo can up behavior for want BROTHERS we So The We Add Monte Provide probability - - - - Reasons Constructing Synthetic + LEH:MAN + CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J (X) OJ G) (j) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing (continued) 4 amount absolute Level in - 43.7MM to 41 up Example add CDOs amount 7.5%, mini MM 3 or notional Pricing 6.5%- 2 credits in in amount around 3MM*6=18 3MM CDOs weighted or appears credits notional CD0/\2 mini 3%, years notional: credit 260 7 equally BROTHERS Tranches 00 OOMM Subordination: Width: Each Total underlying mini - - 1 - 1 - - - 6 Maturity: Portfolio: 6 MasterCDO Synthetic + + + + + LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J c.o OJ G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: -p;:jprici~g~ survival its (continued) make to 4 tranche Level tranche CDO ______master overlap) proxy as the 42 CDO of of (same Example- that level units as 3 *Overlap or same 2 6=600MM * lMM the CDO Pricing subordination =--=-=:.-=..=~~---~:.__ credit: date the credit: each out synthetic each for maturity of CDOJ\2 CDO: figure on typical Notional=lOOMM to credits a default BROTHERS as on 260 Total Notional want - - - Underlying Loss We probability Value Synthetic + + + + LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J -..J OJ G) 0 ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing BIDS BIDS BIDS BIDS BIDS Source BIDS 10 8 7 7 4 5 Comments Extrnl LSTA; LSTA; LSTA; LSTA; LSTA; LSTA; 5,761 VAR 20,852 38,687 (21,273) (41,244) (43,766) MTM 1,716,385 6,443,905 External 11,955,332 11,958,756 45,336,286 29,259,984 Loans positions: 99.321 99.321 99.953 99.656 96.825 98.725 Price External loan MTM 1,710,623 6,423,053 11,916,645 12,000,000 45,357,559 29,303,750 Internal leveraged Leveraged 99.000 99.000 96.500 98.500 Price 100.000 100.000 ~nternal - liquid six 43 1,772,667 6,487,933 Position 12,037,016 12,000,000 45,357,559 29,750,000 of 12/20/10 11/08/08 09/09/09 04/30/12 Maturity 02/28/10 02/24/10 Example verification 1.25% 1.25% 2.25% 2.25% 2.25% 0.00% Sprd price TLA TLA the DRAWTLA Pricing Facility TRANCHE TRANCHE TLA NEW NEW DELAYED REVOLVER USDTLA USD illustrates PROP COMM CORP CORP (EAST) (WEST) INC INC. Position Name BROTHERS TELCOM GROWTH ACQUISITION following MEDIA, MEDIA, DEX DEX HAWAIIAN GEORGIA-PACIFIC GENERAL WMG The 3971 3974 3856 2802 4591 4953 LEHID • Liquid LEHMAN CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J -..J OJ G) ...... :s;: r LEHMAN BROTHERS HOLDINGS, INC. m I Pricing was back-stop following are PC original The The secured months, rating. FCAR. to three Loans credit ("FMCC") ("FCAR"). last and the Trust life commitment Company over FMCC: Owner year by average 5 Credit I commitment. C C securities FCAR 5.32 5.48 5.50 Yield YieBd Yield 04-A 04-A 04-AC year Motor million Leveraged provided 5 duration conduit Ford FORDO the FORDO FORDO $140 Price Price 97.72 Price 97.47 97.53 a a for assets, in ofbenchmark and statements 18 B B 5.13 5.21 5.25 months: Yield Yield Yield 44 99.50 ("ABCP") 04-A 04-A 04-A lender a and facility three underlying monthly paper FORDO FORDO FORDO Price Price 97.56 Price 97.52 97.56 Days on day last on performances 0.35% 0.88% 0.26% 0.28% 0.15% 0.15% 0.28% 0.28% 0.28% became Example- facility the +61 Deliquent 364 the A4 A4 A4 based based day 5.48 5.69 5.87 Yield Yield Yield over and 06-A OS-A 06-A commercial 364 Brothers million Apr-06 Jun-06 May-06 the securities Losses FORDO FORDO FORDO Price Price $85 99.38 ofFCAR Price 99.06 98.84 1.87% 1.34% 1.63% 0.89% 0.99% 0.98% 0.98% 0.98% 0.98% a ofFCAR for securities Net Lehman of Pricing A3 A3 A3 asset-backed similar 5.36 5.47 5.62 Yield Yield Yield 2003 to 06-A 06-A 06-A of99.90 5% performance to consisted benchmark June performance 3.97% 3.92% 3.79% 3.64% 4.10% 3.87% 3.22% 3.41% FMCC's FORDO FORDO FORDO Price Price Price 99.56 99.38 99.19 mark In 3% Structura~ the position - Enhancement for of the the financial A2A A2A A2A financial Position 5.29 5.33 5.41 Yield Yielcl Yield with the 20011) commitment BROTHERS ..Jul-03 ..lul-04 ..lul-05 - 06-A 06-A 06-A Apr-06 Facility Mar-06 Dec-05 ..lun-06 May-06 the Overview Historical on (11997 Price Price Price 99.81 99.78 99.75 reviews FORDO FORDO FORDO benchmarks performances Position Liquidity PC unsecured PC the Based comfortable + Illiquid + + LEHMAN + CONFIDENTIAL TREATMENT REQUESTED BY _... ~ ~ ~ r m -..J -..J -..J OJ G) :s;: LEHMAN BROTHERS HOLDINGS, INC. 1\J >< ·-"'C c:: c..Q) c.. <( CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS, INC. LBEX-WGM 747173 of on with I The bonds. mark of when the current base activities these of lack reasonable. for monthend. current action. a 4bps 6/8/06 trader's housing trader's Discussed 111.155. trading The of May Pricing and to the of structure market of appears (as further 60. 100.00, no as currently military lack to 77.0, is to widening. threshold. threshold. threshold. mark 64.86 108.600 the exposure and 26.1 require and really to of price is there net is subordinate 93.72 not within within within spread as 70.0 trader's on is is is necessary. and price between there from structure does internal credit corrected as based range. this market, underwriter our senior between ranged in variance variance was variance ranged external Therefore, the 5bps the offer curves adjustment sole therefore m and and of ranged No the updated and MSRB trades and Italy aggressively liquidity 55.0 70.386. debt on bid has remaining remaining remaining and were is at too represents trades sub the inactivity range. -lbp). it MSRB we month-end desk to limited trades threshold the mark as at to s our LAZIO is offer (B/0 1 remark MSRB within marks Variance Recent Prior month-end~ month·end; month-end; to bp is due issue and pricing from while IDC 1/2 Trader June incorrect post post post bid Recent want attributable currently in whole bonds. PC's swaps. Division bonds. mainly came the 108.810 not was while mark mark mark within the own bonds. sold of do bonds. mainly these below are we Airline Airline performed), is mostly within was source is for owns they CDS. 73.125, mark Variance is is Airline exposure. changed changed is Airline piece marks Desk changed All Variance Position Desk Desk Variance demand traders, Remarked. Remarked. illiquid gross NW pricing mark American American variance External Delta bonds. trader's The 97.313 Lehman 648 359 421 495 (308) 2,270 Income (1,043) (1,027) (1,197) 581 350 584 378 (347) Fixed - 46 581 350 648 378 584 359 (347) 421 495 (308) 2,270 (1,043) (1,027) (1,197) (201) (650) 1,658 1,614 9,752 5,170 2,277 8,227 75,000 9,113 70,000 24,197 (54,866) 21,871 Variances :II:~~~ti~~$' MY MY MY MY MY MY MY MY MY MV MY PVOJ PVOl PVOI 1 l 1 l 3 3 3 3 3 3 3 3 3 3 Significant MET FAC AGY CORP VlATlON SPL A (l/3/06) DEY 00-3 MINN of lviTLITARY FLA AUTH INDL CAPITAL PAUL 4/7/06) CORP SERIES ( ST AMERJCA CN1Y 10/17 A CITY ARPT & DLV 5YR CMO 7.35 NY TEX ELECTRJC M3 Curve 2004-3 BROTHERS HSG NORTH Basis CORP 00-3 N1M YOR]( Swap Hedge CITY XEROX MIRANT GENERAL Soutll\vestem USD Libor-CP CDS SAIL ALLIANCE MINNEAPOLIS HilLSBOROUGH lMSA NEW NY Americas Credit: Trading Trading .... Explanation Cash Cash Cash LEHivlAN Loans Derivatives Loans Loans Derivatives -Cash · ·Cash Grade ~ ·Derivatives ····-··~ High Bank Bank Bank IRP- IRP Mortgage Mortgage IRP . tv1uni lvfuni Muni Muni- Mum- CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ ~ r m -..J -..J -..J --" OJ G) LEHMAN BROTHERS HOLDINGS, INC. :s;: in in to be to an has the 2Q in in this was of the were to of of Loss in in with while the of and the are was (two time. debt latest combined has 30mm). exited tenant, Continue as $7mm obtaining mark moving given start a building while value island space I on Continue sell, modified be this CA. costs by miUion affecting Sep-05. on within has Position and limited. space to to at 105.403, well the the (over Partnership senior Roseville regulatory progress major in Certificate up discussion 0.8% 0.8% was is likely 0.6% office Property time. complete as $19 in to building on A internal Based area present The sf property. The held value status. to the events 110.897, 4/06. and office sale County, potentially loan only only this only the most is $5mn the CA. a to This sales the of rc~lcasc aside required Pricing is is is at expected monitor costs. uncertain Marked Drive, 409k 99.594 obtaining activity debt. on to construction as of claims. delay fuat will set is tp mezz Plan leasing rentable development current not City, of position sponsor. force 109.7 Home like period range, is will another urtits. Moody's of to the story, Riverside completed and Beach cover recoverable The based value CA. rising the speculative land variance variance variance leasing tenants is in of profits between is to suggested 26 and first verified deal of time the Culver significant wiU1 This size dcvclopmentllocated offer insurance process monitor and close is Continue with B, two the in between ability to price PC price price SF Partnership 18% to to will time. The the and out, Construction sponsor value to season. have Recent monitor ranged Jul~OS sales 2007. located deal estimated site longer in due condo variance. class LB's to able bid this stages. in June, sufficient increase homebuilders. to a with realize ofRosc..-ville, about will ranged oiTWaikoloa Actual Actual mark-up the activity. Actual tile 2005. lease at is in be acre to leased leased Construction 307,688 by the to sponsor negotiating home studio. continue price trades studio. Current in no to luxury August early 14 exit taken City contractor. owns in of the a partially the LB a flow held. held. lots held. trades 20% in wiU witl1 and its marked to continue Currently. leasing located is occupied. community the as project, to ability within was that on stagnant in order for period Hawaii. 40.75% MSRB also occupying to expected down a is cash suggested market, value discussions and desk in is Will 2004. general is prepayments our is intent 98% to of MSRB asset, parcel position position position the stages. in offue Subsequently Honua position building is by that as same the Position studio currently its slow (continued) Maui, Recent adjacent of of homebuilders. of developed due on the demand is A in the the fuc size La'i housing adjacent suit 103.265 and mark~up to early time of partnership mark-down single property and any Recent variance at company building size size size a and of movie a a development progress its Spa PC 108.70. suggested. No master-planned office sales. based parcel lots land Property construction large position. in sale bonds. coast of service Hurricane the the the The Legal in & suggested is The values. versus is Transportation, reduced the an leaving discussing $5mn lot such monitor of to mark to to office sell Villas by the the acre of in bonds. well. sales. be of to debt debt service west housing to mark the insurance as due until due due value entitled and mark-up Resort interest on 658-acrc project completed Jun-06 May-06. consists approvals. and sell-out the will full of 109.66. mark~up an monitor securitization result Beach of 26.05 obtained. current Due a in in it No progress Manhattan. currently construct in Airline a proceeds, buildings). a lot to to sustain to gain damaged is No is been orogress regarding to Luxury continue Development is current in equity with to interest that Wailea Current acres building by 37% variance variance variance Department 2012. property Wailea will trader's uncntitJcd regulatory the monitor 49% WTC 1,678 American trader's tightened Price Price 7 estimated basis. projected recently notice the to PC Price Properly improvements offset expected Continue security. slowdown sponsor NYC until monitor A vacated. An Hawaii. Development The down development downtown already approvals. Grand of Subject written-off to Lehman 2006. The Occupancy four-story accrue decided construction escrow unable May-06. Property Division 506 506 853 1,354 7,384 8,128 (6,747) 11,859 25,548 (6,203) 43,806 1->>':-"' Income 755 ~~.i~~,~;J;~ (5,000) 24,948 22,250 2 ~· I I Fixed 47 - 755 506 506 853 0 1.354 7,384 8,128 (6,747) 11,859 25,548 (5,000) (6,203) 24,948 66,055 I 6,747 5,000 5.000 61,209 61,209 30,110 18,726 67,200 18,616 41,895 27,390 133,946 I I Variances MV MV MV MV MV MV MV MV MV MV MV MV MV :1\4~~tt~:.trl~~~f~~:~~~·:~~~,:~:.92~~~~;:~Ti~f~~~-~~~iri~~~-:~~~~~:·J;~:itj~~ PowcrCP) PowcrCP) AGY Significant DEV (Northern (Northern of I.l.C lNDL direct) LLC Control Control Aal!AAA V on CITY Studios uti Y Step Hills LLC N In~,;. BROTHERS LLC Pol! Pollution TFA Inc. Culver Springs MN Jv1N Honua YORK LB York Freeport Lui Kamalani Rector Fannington J.~xposurc.'fypc Becker NE\V New Becker PCCP~Rost.··villc(llAMI Boulder LB LB LB PCCP LB LB Explanation LEHMAN Cash -Cush -Cash -Casll Estmc Estate Estate E..o..;tntc E.!>tatc Estate Estate Estate Muni Muni- Businc."ili Muni Real Tvhmi Real Real Real Rcnl Real Real Real CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J -..J 01 OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: of - the to since the is CDS the of I market This has due KRW marks the has the the risk Ylith to calculation narrowed size on and relative exposure comfortable was that rrun. This Given the month-end these v.tith the this with volatility been Trader are $31 long of This correlations marks small marked with the of Pricing we since Foreign has on indicate Given usdtjpy. Overall of this pt comfortable satisfied I issuer. exposure. risk and nature vs consistent happy Closely are size credit, are with TOTEM. historical bracket results rate same variance Libor are we ------we the within conservative as FX zar/usd maturities. small IR absolute we The to of portection. CSOL marked same by from against yr against on is 5 approximate JPY the year. CDS comfortable nature exposure in on exposure) $(28)k offset bonds between The marks relatively variables, therefore one is remarked range the are the long the comfortable position of a the the of aggressive lower to has data market We mid conservative result The now and Given different with size and $1.1mm. protection the vols period correlation exposure, are on large a This by the 7mm market $3.9nun ofmtm. than mtm we on CDS comparing risk ------price, $5. (compared hedged split cross 0.45% over (continued) was I% by the is Jong$5m, Given long variance. marked large of higher irrunaterial. immaterial 0.5bps proposed. lower conservatively. than market to <1.5% respective the Net variance, 1% testing is desk. variance which 0.6% the variance. less variance of due approach v.tith the the movements conservative above to deemed deemed marked marked based net to of action is is variance difference from positive is smaJl rate position approximately 2pts are range. roughly conservatively size the (Sovereign) price variance slightly satisfied price indicative small was variance further of are approximately to a directly indicated which variance variance leg. an are Bid/Offer. being interest illiquid position small ------no is bps), the to relatively part 3 exposure, mark due an we BidJOffer thin and communicated is Swaption the is result inde:< index due adopt trader VIi thin Net variation swaptions $3.1mrn. Net the traders means was We JPY The calculated been· relatively marking. with Domestic correlations variance. Variance reducing P!ULIPPINES This are (VIi realised variance. Trader Conservative protection within This small Division 385 364 428 (200) (294) 1,800 1,088 5,741 (2,000) (1,340) 6,372 49,978 Income 88 300 (212) 22,338 • 1 s:iooo Fixed 48 - 385 364 (200) 428 300 (294) 1,800 (212) 1,088 5,741 (2,000) (1,340) 6,460 72,316 ~~;:;.;.~~ ::L;Iial (Gross) (Gross) (Gross) 78 (Gross) (29) 2,660 7,000 JJ 10,773 20,218 49,489 385 7,3 Variances 54,196 30,999 Variances Significant MV MV IV!V MV PVOJ PVO! PVO! PVOJ Vol+l% Vol+I% Correl+I% Total 3 3 4 3 3 3 3 3 3 3 3 L_.____ 5Y rates 00-IO% correlation volatility ~Interest volatility Index Significant ATM 5Y FX fwds .IRJFX CDXHY6 S4 FX I of S\vaps: ITRX FRAs I Default Swaps swaps ·~)'~t' BR.OTHERS rate Default Tranche Expost;tr~ Index Index $\liaptions/Caps/Floors/Exotics S\\l CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J -..J OJ G) ...... (j) LEHMAN BROTHERS HOLDINGS, INC. :s;: and and Peers. Peers. 18 18 office the the was Front Front skew. to to of of occurred within April of of the front vs. proposed vs. BMO is BMO variance: variance: size size SPX is consistent consistent the the the moves 16% 16% the the the review month. April the the difference April remarked remarked proposed variance variance that and of and of to variance and and remains. remark will and and using driven no office office we month. month. BMO BMO 20% 20% month volatility positive negative to because because to believes overall longer event remarking tested and in product in product Front Front both mark, both the were were no is no 43 The in in the the the the the large month proposed month to trended finance 6/13 vols vols of of of tolerance to\.crancc be size. increase decrease on from position since from variance size to size an an position- n:mark will volatility volatility the nature the within the Finance within the volatility Fmancc due no wa.<; was is is rcspecbvely, respectively, correlation, trended and his however Drho trended and lookback is is given skew giVen and and variance there off there and increased increased large no day subjective position~ PEERS PEERS of of illiquid and The monthcnd. at and monthcnd. sold which which skews skews remarked is the 100 tolerance, position. and and collar. collar. a tolerance tolerance across large of after low. result after volatility result ha~; the month a month largly a on a the the month-end in given position of to to BMO as BMO on in as in position tolerance month. within vo\ati\.ity volatility within been trader and skew/smile skew/smile post this outside tolerance. is is for slightly based tolerance. to for to size this to difference remarked to calls calls remarked is month be month The was the increa'>cs within due due since for position position due due within 15.5% to 15.5% on within difference were yield "V/Crc following may marking has ATM and was was variance variance is this remarked is trade this $(0.3)mm is trended due trended and the and period_ market on individual individual on mainly is based has The is is mainly mark The in was point which which this 1 for for 16% 16% d1vidcnd volatility office Variance historical volatilities listed Variance inventory desk volatilities monthcnd 17.5% Variance $1.1mm. trend. Variance Vegas $(0.6)mm Small 17.5% before within variance Vegas The The The The office $0.6rrun Variance variance Variance trend. At Variance tolerance volatility Front The The office Small The The $(0.4)mm 95I 595 856 559 494 356 565 (908) (458) (425) 2,587 Equities Division I I I I I I - 686 (413) (369) (1,568) (1,664) I I I I I I I I 49 951 686 595 856 559 356 923 565 494 (908) (458) (425) (413) (369) (1,568) I I I I Variances 0 34 NA NA 68 174 352 313 111 194 (336) (280) 1,13I 260,355 \ I I I /o 0 I% MV DRho Vol+!% Vol+l% Vol+l Vol+l% Vol+!% Voi+I% Vol+l% Vol+ Vol+!% Vol+!% Revaluation Revaluation I I I I 4 4 4 4 3 3 4 4 3 3 3 4 I I I I Significant Volat;I;ty Volatil;ty and of and Correlation Correlation Skew EXCHANG and Skew and Vo~atility SR Volat;hty Volatility NOTE Volatility 2006 Collar NOTE GTD OTC NOTE Volatility Volatility NOTE Collar Div1d~nd INC 2007 BASKET 2009 August Volatility Volntility 2007 2006 2008 BASKET !YP.~ JNDS BROTHERS BASKET CLIQUEr C0llar March December WARRANT Dcccmb~r COLLAR YEELDS HOUSING BMOPEERS DPL DGX DCELL E~p~sUr,e_ DGX AA HD GOOG NABORS HOUSING/CD BMOPEERS lv1EDIA SPX Explanation LEHMAN volatility VLtlatiilty Volatility Volatility Amcnca.o; Volatility Volatility Volatility Volatility Volatility Volatility Volutility Conv~nihks Volatility I rvalatility CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ r m -..J -..J -..J -..J OJ G) ...... LEHMAN BROTHERS HOLDINGS, INC. :s;: i I i I I I I to and of 9 Within yielding within absolute Jun I%. compared Almancora differential differential on The Within sensitivity tolerance. Gemini than tolerance. with wihen considered less Cap Pricing-~ Vega volatility volatility within is a tolerance. remarked within are positions. spread and TM TM volatilities. this of III!S have A A within respectively ABB deemed we the the deemed note. correct name dated to and number the differences position 2.5% and With benchmarks With long where single ~-~ the and large a issues considered Provident, spread reflect a spread is skew. skew. point and for to volatility this and and subjective further subjective and the across Friends ATM proposed. bid/offer no 1.2%,2.8% month-end bid/offer and tenn tenn with anc value discussed re-priced year are positions was the the post 2 spread namely of60bps, was is current been current the there market variance adjustment (continued) the at futures items across across underliers underliers the has no and the position variance 3 8 - large variance variance of variance large the the focus within the within evenly evenly over over Slll!p) is The as product size The primarily is a given in the this this given volatility this immaterial $521K- bonds a spreads spreads spreads remarked spreads occurs is held end 3 and of given has and 6bps, 20bps, flashed. Tolerance- tolerance, was Tolerance- were month variance variance variance variance than than desk variance variance P&L variance the The less The less tolerance. tolerance tolerance, Within The The Outside (which $!.9MM the Post Bloomberg There a vol The Within Division 985 314 521 876 519 519 (854) (482) 1,824 3,184 6,290 463 1,621 1,395 1,395 1,815 2,084 Equities - 50 985 314 521 876 463 519 (854) (482) 1,824 1,395 1,621 4,579 8,105 2,603 918 281 !55 (195) 364 (136) 1,451 (3,316) 92,073 (19,139) 1,411,113 Variances Variances 1% 1% 1% Significant MY MY MY MY MY Vol+ Vol+ Vol+!% Vol+!% Vol+!% Vol+ Total 3 I I I 3 3 3 3 3 3 3 Significant of Index O.OOEUR Market Bank SHR Options Swap Stocks NV Swiss it Vols BROTHERS Bonds Eurostoxx SAP SMJ- US Futures Singapore Variance Construction -Mark GROEP Vega- Vega- Vega- Vega Vega- Listed Corporate KBC MSCI Topix China Prop Explanation LEH:MAN Volatility Volatiltty Volatility Volatility Volatility Volatility Volatility Volatility Strategic Volatility Volatility Asia CONFIDENTIAL TREATMENT REQUESTED BY ~ ~ ~ -..J -..J -..J --" (X) OJ G) :s;: r LEHMAN BROTHERS HOLDINGS, INC. m