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An Introduction to Value Investing

Wednesday, November 5, 2008 Instructor: Whitney Tilson AGENDA AND SCHEDULE


6:006:15 1. Welcome and Overview of Value Investing What is value investing? Three steps to evaluating stocks Trembling with greed Focus investing Variant perceptions Gaining an edge Traits of successful money managers See columns: Thoughts on Value Investing, Three Steps to Evaluating Stocks, Trembling With Greed, Focus Investing, Go Against the Grain, Gaining an Investment Edge and Traits of Successful Money Managers 2. Valuing Companies Discounted cash flow Public company comps, acquisition comps, historical comps Sum of the parts See columns: A Valuation Rule of Thumb, Valuation Matters and Valuation STILL Matters 3. Common and Costly Mental Mistakes Behavioral finance presentation Of Sound Mind excerpts from Value Investor Insight Eight columns on investor irrationality Case Study #1: Berkshire Hathaway Case Study #2: Fairfax Financial Case Study #3: Target Case Study #4: MBIA

6:156:20

6:206:40

6:40-7:00 7:00-7:15 7:15-7:30 7:30-8:00

Funds managed by Mr. Tilson are long BRK, FFH, TGT and short MBI.
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Introduction
What Is Value Investing? Attempting to buy a stock (or other financial asset) for less than its worth Contrast with greater-fool investing False distinction between growth vs. value investing o All intelligent investing is value investing. Charlie Munger Intrinsic value Margin of Safety Does not necessarily mean buying lousy businesses at low valuation ratios Three Steps to Evaluating Stocks Circle of competence o Do we understand this company and its industry deeply? o Can we make reasonable projections about the companys future? o Keep it simple. Good investment ideas can usually be explained in 30 seconds Company and industry evaluation o Is this a good business? Does it have sustainable competitive advantages? High returns on capital? Solid, steady growth? Healthy balance sheet? Strong free cash flow? o Often involves company visit, management and customer interviews. o Is this a good industry? Are the trends favorable? What are the competitive dynamics? o Look for an informational edge, often via proprietary sources or scuttlebutt research. Evaluation of management o Are they good operators? o Are they good capital allocators? o Are they trustworthy and shareholder friendly?

Trembling With Greed Is the stock really, really cheap? What is your variant perception? Focus Investing When you get an easy pitch, swing hard o Owning two stocks eliminates 46% of non-market risk of just owning one stock o Four stocks eliminates 72% of the risk o Eight stocks eliminates 81% of the risk o 16 stocks eliminates 93% of the risk o 32 stocks eliminates 96% of the risk o 500 stocks eliminates 99% of the risk

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Buffetts 20-punches analogy Sizing shorts and options

Variant Perceptions The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view. The hard part is that an investor must measure himself not by his own perceptions of his performance but by the objective measure of the market. The market has its own reality. In an immediate, emotional sense, the market is always right. So if you take a variant point of view, you will always be bombarded for some period of time by the conventional wisdom as expressed by the market. Michael Steinhardt Its much warmer inside the herd. Jean-Marie Eveillard If you just do what other people do, you will get the results other people get. Bill Miller Gaining an Edge Three ways to beat the market: better stock picking, better market timing or more portfolio leverage. Size Time arbitrage o Time arbitrage just means exploiting the fact that most investors institutional, individual, mutual funds or hedge funds tend to have very short-term time horizons, have rapid turnover or are trying to exploit very short-term anomalies in the market. So the market looks extremely efficient in the short run. In an environment with massive short-term data overload and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months. Bill Miller Concentration Analytical Experience Emotional Informational Traits of Successful Money Managers The right approach 1. Think about investing as the purchasing of companies, rather than the trading of stocks. 2. Ignore the market, other than to take advantage of its occasional mistakes. o Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market. Ben Graham

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3. Only buy a stock when it is on sale. o To distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. Ben Graham 4. Focus first on avoiding losses, and only then think about potential gains. o We look for businesses that in general arent going to be susceptible to very much change. It means we miss a lot of very big winners but it also means we have very few big losers.... Were perfectly willing to trade away a big payoff for a certain payoff. Buffett 5. Invest only when the odds are highly favorable -- and then invest heavily. 6. Do not focus on predicting macroeconomic factors. o I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going. Peter Lynch 7. Be flexible! It makes little sense to limit investments to a particular industry or type of stock (large-cap growth, mid-cap value, etc.). o We employ no rigid industry, sector, or position limits. Bill Miller 8. Shun consensus decision-making. o My idea of a group decision is looking in a mirror. Buffett The right person Most successful investors have the following characteristics: 1. They are businesspeople, and understand how industries work and companies compete. o I am a better investor because I am a businessman, and a better businessman because I am an investor. Buffett 2. They have a lot of intellectual horsepower. o However, investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ Buffett 3. They are good with numbers -- though advanced math is irrelevant -- and are able to seize on the most important nuggets of information in a sea of data. 4. They are simultaneously confident and humble. 5. They are independent, and neither take comfort in standing with the crowd nor derive pride from standing alone. 6. They are patient. (Long-term greedy, as Buffett once said.) Templeton noted that, if you find shares that are low in price, they dont suddenly go up. Our average holding period is five years. 7. They make decisions based on analysis, not emotion. 8. They love what they do. o Im the luckiest guy in the world in terms of what I do for a living and I wouldnt trade my job for any job and I feel like tap dancing all the time. Buffett

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Thoughts on Valuation
Discounted Cash Flow Present value of a 10-year Treasury note Same analysis for a stock or bond Focus 90% of your attention here Public Company Comps Make sure comps are valid Make sure entire sector isnt misvalued Acquisition Comps What multiples are acquirers (other companies or LBO firms) paying for similar companies? Strategic vs. financial buyers Historical Comps What multiples has this company traded at in the past? Has the business changed? Careful to exclude bubble periods Sum of the Parts Often useful to break business down into its parts and value each part separately Rules of Thumb Pay no more than 10x trailing earnings (normalized) for a fair business and no more than 20x trailing earnings for even the greatest business Paychex, Google, eBay

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Common and Costly Mental Mistakes


By Whitney Tilson November 2006

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What is Behavioral Finance?


Peter Bernstein in Against the Gods states that the evidence reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty. Behavioral finance attempts to explain how and why emotions and cognitive errors influence investors and create stock market anomalies such as bubbles and crashes. But are human flaws consistent and predictable such that they can be: a) avoided and b) exploited for profit?

Why is Behavioral Finance Important?


Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQOnce you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. -- Warren Buffett
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Common Mental Mistakes


1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25)
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Overconfidence Projecting the immediate past into the distant future Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the crowd is omniscient Misunderstanding randomness; seeing patterns that dont exist Commitment and consistency bias Fear of change, resulting in a strong bias for the status quo Anchoring on irrelevant data Excessive aversion to loss Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus) differently than other money Allowing emotional connections to over-ride reason Fear of uncertainty Embracing certainty (however irrelevant) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness bias) Becoming paralyzed by information overload Failing to act due to an abundance of attractive options Fear of making an incorrect decision and feeling stupid (regret aversion) Ignoring important data points and focusing excessively on less important ones; drawing conclusions from a limited sample size Reluctance to admit mistakes After finding out whether or not an event occurred, overestimating the degree to which one would have predicted the correct outcome (hindsight bias) Believing that ones investment success is due to wisdom rather than a rising market, but failures are not ones fault Failing to accurately assess ones investment time horizon A tendency to seek only information that confirms ones opinions or decisions Failing to recognize the large cumulative impact of small amounts over time Forgetting the powerful tendency of regression to the mean Confusing familiarity with knowledge
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Overconfidence
1) 2) 3) 4) 19% of people think they belong to the richest 1% of U.S. households 82% of people say they are in the top 30% of safe drivers 80% of students think they will finish in the top half of their class When asked to make a prediction at the 98% confidence level, people are right only 60-70% of the time 5) 68% of lawyers in civil cases believe that their side will prevail 6) Doctors consistently overestimate their ability to detect certain diseases 7) 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed 8) Graduate students were asked to estimate the time it would take them to finish their thesis under three scenarios: best case, expected, and worst case. The average guesses were 27.4 days, 33.9 days, and 48.6 days, respectively. The actual average turned out to be 55.5 days. 9) Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement and how much the average person in the room would have. The average figures were $5 million and $2.6 million, respectively. The professor who asked the question said that, regardless of the audience, the ratio is always approximately 2:1 10) 86% of my Harvard Business School classmates say they are better looking than their classmates

Can lead to straying beyond circle of competence and excessive leverage, trading & portfolio concentration
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Information and Overconfidence


Sometimes additional information can lead to worse decisions, overconfidence and excessive trading
Heuer study of 8 professional handicappers (set betting odds at horse races) Moving from 5 most important pieces of data to 40 slightly decreased handicapping accuracy But doubled their confidence Similar results with doctors and psychologists Conclusion: Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by a few dominant factors, rather than by the systematic integration of all available information. Analysts use much less available information than they think they do." Andreassen study on information overload leading to excessive trading

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Herd-Like Behavior
A social proof phenomenon From 1984 through 1995, the average stock mutual fund posted a yearly return of 12.3% (versus 15.4% for the S&P), yet the average investor in a stock mutual fund earned 6.3%. That means that over these 12 years, the average mutual fund investor would have made nearly twice as much money by simply buying and holding the average mutual fund, and nearly three times as much by buying and holding an S&P 500 index fund. Over the same period, the average bond mutual fund returned 9.7% annually, while the average investor in a bond mutual rose earned 8% annually A far narrower gap than equity funds Bonds are easier to value and thus bond markets are not as susceptible to bubbles and crashes

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A Key Factor in Bubbles Forming: Conforming With the Crowd


Conforming with the crowd: the Solomon Asch experiment 35% of the subjects conformed to the groups judgment, even though they knew it was wrong, because they were uncomfortable being a minority facing an overwhelming majority The size of the group didnt matter But if even one person gave the correct answer, the subject was far more likely to also give the correct answer

Source: Solomon E. Asch, Effects of group pressure upon the modification and Distortion of judgment, in h. Guertzkow, ed., Groups, leadership, and men (Pittsburgh, PA: Carnegie press, 1951).

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More on Bubbles
Overconfidence, social proof, misunderstanding random bunching, overweighting vivid & recent data lollapalooza effect Wall Street Journal, 4/30/04: Speculators do know that it's important to get out, however -- that's the lesson they took away from the cratering of the dot-com highfliers. And they appear to believe that they will be able to get out before a stock craters, as illustrated by numerous trading experiments conducted by Vernon Smith, a professor at George Mason University who shared in the 2002 Nobel Prize for economics. In these experiments, participants would trade a dividend-paying stock whose value was clearly laid out for them. Invariably, a bubble would form, with the stock later crashing down to its fundamental value. Participants would gather for a second session. Still, the stock would exceed its assigned fundamental value, though the bubble would form faster and burst sooner. "The subjects are very optimistic that they'll be able to smell the turning point," says Mr. Smith. "They always report that they're surprised by how quickly it turns and how hard it is to get out at anything like a favorable price." But bring the participants back for a third session, and the stock trades near its fundamental value, if it trades at all, the professor's studies show.

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Loss Aversion
People feel pain of loss twice as much as they derive pleasure from an equal gain Case study: two six-sided dice, A and B. A is marked 1-1-1-1-1-13. B is marked 2-2-2-2-2-2. People prefer B, though expected value of A is higher (3 vs. 2)
Helps to be brain damaged

Case study: Refusal to sell at a loss


Philip Fisher, Common Stocks and Uncommon Profits: There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process. More money has probably been lost by investors holding a stock they really did not want until they could at least come out even than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.
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Commitment
A study done by a pair of Canadian psychologists uncovered something fascinating about people at the racetrack: Just after placing a bet, they are much more confident of their horses chances of winning than they are immediately before laying down that bet. The reason for the dramatic change isour nearly obsessive desire to be (and to appear) consistent with what we have already done. Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment. Those pressures will cause us to respond in ways that justify our earlier decision. Influence Leads to information distortion. "Information that is consistent with our existing mindset is perceived and processed easily. However, since our mind strives instinctively for consistency, information that is inconsistent with our existing mental image tends to be overlooked, perceived in a distorted manner, or rationalized to fit existing assumptions and beliefs. Thus, new information tends to be perceived and interpreted in a way that reinforces existing beliefs. Grizelda and Beth study Example of commitment and also brains have a remarkable talent for reframing suboptimal outcomes to see setbacks in the best possible light. You can see it when high-school seniors decide that colleges that rejected them really weren't much good. Case study: I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I. Warren Buffett, 2003 Berkshire Hathaway annual report One of the great dangers of speaking/writing publicly about ones positions.
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Anchoring
Anchoring on purchase price When I bought something at X and it went up to X and 1/8th, I sometimes stopped buying, perhaps hoping it would come back down. Weve missed billions when Ive gotten anchored. I cost us about $10 billion [by not buying enough Wal-Mart]. I set out to buy 100 million sharers, pre-split, at $23. We bought a little and it moved up a bit and I thought it might come back a bit who knows? That thumb-sucking, the reluctance to pay a little more, cost us a lot. -- Buffett Selling Dennys at different prices Anchoring on historical price (or typical price) Refusal to buy a stock today because it was cheaper last year or has a high price per share (Berkshire Hathaway) Refusal to sell because it was higher in the past Anchoring on historical perceptions Dell is a commodity box maker or MBIA is a triple-A company Anchoring on initial data/perceptions Restaurant descriptions experiment Anchoring on meaningless numbers Taversky and Kahneman study: spin the wheel and estimate the percentage of countries in the UN that are African
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Learning the Wrong Lessons by Misunderstanding Randomness


Confusing making money with making a good decision Chris Daviss 5-bagger mistake Mungers example of oil executives congratulating themselves Confusing losing money with making a bad decision Calculated risks are OK Bob Rubins example of politics (from In an Uncertain World) Pecking pigeon experiment

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Other Mistakes
Mental accounting Invest speculatively with found money or small amounts of money Holocaust payments There is no such thing as house money Emotional connections Paying more for a new car when upgrading I like McDonalds food; Cantalupos gift to my children Discount on Cutter & Buck clothing (reciprocity) Becoming friends with management Fear of uncertainty Embracing certainty (however irrelevant) The future is uncertain and hard to predict, where as the past is known Focus on stock charts (irrelevant)

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Other Mistakes (2)


Vividness bias People tend to underestimate low probability events when they havent happened recently, and overestimate them when they have. Buffett Panic after WorldCom and Enron blew up Projecting the immediate past into the distant future Buffett: Driving while looking into the rear-view mirror instead of through the windshield. Cisco in March 2000, McDonalds in March 2003 Worrying about what others will think Klarman: As a money manager, its potentially embarrassing and painful to have to explain to your investors why you own a name that went into bankruptcy. So the temptation is to just get rid of it. Paralysis resulting from too many choices Experiment: Selling jams in a supermarket My failure to act in July and October, 2002 and finally acting in March 2003 The near-miss phenomenon Slot machines Lynch: Long shots almost never pay off
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Other Mistakes (3)


Status quo bias and endowment effect Inheritance study Thalers coffee mugs experiment $5.25 vs. $2.75 for a $6 mug Picking cards out of a deck experiment Valuing a card worth $1.92 for $1.86 or $6.00 or $9.00 Self-interest bias Descarte: Man is incapable of understanding any argument that interferes with his revenue Mutual fund scandal Munger: Its as if someone approached you and said, Lets murder your mother and split the life insurance proceeds 50/50. Hedge funds swinging for the fences Failing to consider second- and third-order consequences Legislation mandating small class sizes Regret aversion Failing to act (see next slide)
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Failing to Act
Failing to Buy Status quo bias Regret aversion Choice paralysis Information overload Hope that stock will go down further (extrapolating recent past into the future; greed) or return to previous cheaper price (anchoring) Regret at not buying earlier (if stock has risen) Office Depot at $8 (vs. $6) Failing to Sell Status quo bias Regret aversion Information overload Endowment effect Vivid recent evidence (if stock has been rising) Dont want to sell at a loss (if stock has been falling) If I didnt own it, would I buy it? Or, If the stock dropped 25%, would I enthusiastically buy more?

Not to decide is a decision


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Tips to Applying Behavioral Finance


Be humble Avoid leverage, diversify, minimize trading Be patient Dont try to get rich quick A watched stock never rises Tune out the noise Make sure time is on your side (stocks instead of options; no leverage) Get a partner someone you really trust even if not at your firm Have written checklists; e.g., my four questions: Is this within my circle of competence? Is it a good business? Do I like management? (Operators, capital allocators, integrity) Is the stock incredibly cheap? Am I trembling with greed? Actively seek out contrary opinions Try to rebut rather than confirm hypotheses; seek out contrary viewpoints; assign someone to take opposing position or invite bearish analyst to give presentation (Pzenas method) Use secret ballots Ask What would cause me to change my mind?
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Tips to Applying Behavioral Finance (2)


Dont anchor on historical information/perceptions/stock prices Keep an open mind Update your initial estimate of intrinsic value Erase historical prices from your mind; dont fall into the I missed it trap Think in terms of enterprise value not stock price Set buy and sell targets Admit and learn from mistakes but learn the right lessons and dont obsess Put the initial investment thesis in writing so you can refer back to it Sell your mistakes and move on; you dont have to make it back the same way you lost it But be careful of panicking and selling at the bottom Dont get fooled by randomness Understand and profit from regression to the mean Mental tricks Pretend like you dont own it (Steinhardt going to cash) Sell a little bit and sleep on it (Einhorn)
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Recommended Reading
(in rough order of priority)

Poor Charlies Almanack Influence, Robert Cialdini Why Smart People Make Big Money Mistakes, Belsky and Gilovich The Winners Curse, Thaler Irrational Exuberance, Shiller Against the Gods: The Remarkable Story of Risk, Bernstein See overview of the field at http://www.investorhome.com/psych.htm

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Berkshire Hathaway: A High-Quality, Rapidly Growing 75-Cent Dollar


History Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s Berkshire was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style net-net Buffett took control of Berkshire on May 10, 1965 At that time, Berkshire had a market value of about $18 million and shareholder's equity of about $22 million

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The Berkshire Hathaway Empire Today


6 Largest Stakes in Public Companies

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The Basics
Stock price (10/8/08): $118,000 $3,930 for B shares Shares outstanding: 1.55 million Market cap: $183 billion Total assets (Q2 08): $278 billion Total equity: $118 billion Book value per share: $76,129

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Recent Performance of Key Business Units


By Year:

2004 Insurance Group: Premiums Earned GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products McLane Company Shaw Industries MidAmerican/Utilities/Energy Other businesses Total Non-Insur. Oper. Inc. Total Operating Income
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2005

2006

2007

970 1,221 3 -334 417 -1,069 161 235 2,824 3,480 4,375 3,533

1,314 523 1,658 340 4,316 8,151

1,113 555 1,427 279 4,758 8,132

584 228 466 237 1,787 3,302 7,677

822 217 485 523 1,921 3,968

1,157 229 594 1,476 2,703 6,159

1,006 232 436 1,774 3,279 6,727

7,501 14,310 14,859


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Recent Performance of Key Business Units


By Quarter:

Insurance Group: Premiums Earned GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Shaw Industries Other businesses Total Non-Insur. Oper. Inc. Total Operating Income

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Q1 2007

Q2 2007

Q3 2007

Q4 2007

Q1 2008

Q2 2008

407 308 295 325 335 158 312 358 237 314 311 288 186 298 169 30 230 157 138 19 43 -389 -7 71 106 177 42 102 553 356 183 335 143 140 -1,635 283 94 137 735 692 29 79 154 49 63 77 90 18 37 -10 190 35 43 108 25 81 851 900 942 1,018 1,102 1,103 1,093 1,078 1,236 1,217 1,227 1,089 1,204 787 1,279 1,429 -897 1,722 1,529 1,676 2,530 2,416 2,005 2,210 1,969 1,948 1,371 1,764

199

199

207

217

251

343

282

281

242

277

273

214

69 59 53 36 55 56 141 100 141 141 418 278 88 139 145 113 155 169 514 486 557 430 671 364 861 1,011 1,032 1,064 1,309 1,517 2,140 2,440

68 58 72 50 52 50 416 364 513 372 481 408 132 91 111 125 109 138 916 632 904 895 848 686 1,572 1,761 1,536 1,736 1,824 1,631

241 254 28 261 73 68 516 329 51 82 721 874 1,630 1,868

135 2,786 2,838 3,193 4,102 4,177 3,541 3,946 3,793 3,579 3,001 3,632

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The Earnings of Berkshires Operating Businesses Have Grown at a Very High Rate And Growth is Accelerating

Year 1965 1979 1993 2007

Per-Share Investments $4 $577 $13,961 $90,343

CAGR 42.8% 25.6% 14.3%

Per-Share Pre-Tax Earnings $4 $18 $212 $4,093

CAGR 11.1% 19.1% 23.5%

Berkshire is becoming less of an investment company and more of an operating business.

Note: CAGR: 1965-1979, 1979-1993, 1993-2007. EPS is pretax and net of minority interests.
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Berkshire Is One of the Fastest Growing Large Companies in the World


Company Exxon Mobil General Electric Wal-Mart Stores Microsoft Berkshire Hathaway Procter & Gamble Petroleo Brasileiro Johnson & Johnson BHP Billiton Chevron AT&T IBM Cisco Pfizer Coca-Cola ConocoPhillips Hewlett-Packard Pepsico GlaxoSmithKline Schlumberger Intel Oracle Genentech Verizon Abbott Laboratories Market Cap $413,495 $264,817 $234,858 $229,718 $227,729 $211,072 $207,595 $195,587 $186,523 $180,383 $179,324 $161,023 $142,899 $125,045 $121,862 $119,016 $118,194 $114,581 $114,209 $108,815 $108,111 $103,602 $97,405 $94,830 $90,504 Growth Rate* 22.5 9.2 10.5 20.2 30.5 16.8 16.0 9.4 49.4 25.5 24.1 8.6 14.1 5.1 8.3 30.8 23.9 11.0 4.9 40.0 14.3 19.1 49.1 1.2 6.8

* 5-year compound annual growth rate of EBIT (earnings before interest and taxes) through Q3 07. Berkshires figure is pre-tax EPS excluding all income from investments.

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Source: Capital IQ
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Valuing Berkshire
Over the years we'veattempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety. 1995 Annual Letter In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. 1997 Annual Letter

In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs. 1997 Annual Letter
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Buffetts Comments on Berkshires Valuation Lead to an Implied Multiplier of Approximately 12


Pre-tax EPS Excluding All Year-End Investments Income From Stock Intrinsic Implied Year Per Share Investments Price Value Multiplier 1996 $28,500 $421 $34,100 $34,100 13 1997 $38,043 $718 $46,000 $46,000 11 1998 $47,647 $474 $70,000 $54,000 13 1999 $47,339 -$458 $56,100 $60,000
1996 Annual Letter: Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate. 1997 Annual Letter: Berkshire's intrinsic value grew at nearly the same pace as book value (book +34.1%) 1998 Annual Letter: Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value. (Assume a 1520% increase in intrinsic value.) 1999 Annual Letter: A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases.
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Applying the 12 Multiple: 2001 2007

Year End 2001 2002 2003 2004 2005 2006 2007

Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343

Pre-tax EPS Excluding All Intrinsic Income From Value Investments* Per Share -$1,289 $64,000 $1,479 $70,000 $2,912 $97,000 $3,003 $103,000 $3,600 $117,300 ** $5,200-$5,400 143,000-144,400 $5,500-$5,700 *** 156,300-158,700

Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 85,700-$114,200 107,200-151,650 ?

* Unlike the table on page 4 of the 2007 Annual Report, we include earnings from Berkshires insurance businesses. ** Actual result was $6,492, but we reduce this to assume the 2nd-worst year ever for super-cat losses. *** Actual result was $6,270 but we reduce the pre-tax, pre-investment-income margins of the insurance businesses by 400 basis points (from 14% to 10%) to reflect Buffetts guidance in the Annual Report.
T2 Partners LLC
Page 34 of 95

-10-

Berkshire Is At Least 25% Below Intrinsic Value, Near the Most Undervalued Its Been in the Past 12 Years
Intrinsic value based on YE 2007 estimate of $157,000, which doesnt factor in this years events, most importantly likely gains from $50+ billion of investments & commitments

Intrinsic Value*

T2 Partners LLC

Page 35 of 95

* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year.
-11-

Valuation Approach #2: Pro-Forma Earnings

Market cap: $183B 2007 company earnings: approximately $11.5B adjusted for normal super-cat losses and pricing, and for unusually high capital gains in 2007 Plus 2007 estimated look-through after-tax earnings after cash distributions: $2.2B Equals total pro-forma earnings of $13.7B P/E: $183B / $13.7B = 13.4x

T2 Partners LLC

Page 36 of 95

-12-

Buffett Is Putting Berkshires Money to Work Rapidly


Does not include $4.7B for Constellation Energy, $5B for Goldman, $3B for GE & others

12 10

$B

8 6 4 2 0 (2) (4) (6) Acquisitions Net Stock Purchases 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H1 08

Hes doing a good job but the cash is coming in so fast! A high-class problem Markets have a way of presenting big opportunities on short notice Current chaos, junk bonds in 2002; cheap blue-chip stocks in 2005-07 Buffett has reduced average maturity of bond portfolio so he can act quickly
-13-

T2 Partners LLC

Page 37 of 95

12-Month Investment Return


Current intrinsic value: $157,000/share Plus 10% growth of intrinsic value of the business Plus cash build over next 12 months: $6,000/share Equals intrinsic value in one year of $178,700 51% premium to todays price

T2 Partners LLC

Page 38 of 95

-14-

Catalysts
Continued earnings growth of operating businesses New equity investments Additional cash build Potential for more meaningful acquisitions and investments If the credit crunch continues or worsens, this becomes more likely

T2 Partners LLC

Page 39 of 95

-15-

Risks
Major recession impacts earnings Recent investments turn out badly No catalysts Intrinsic value will likely continue to grow nicely Buffetts health In good health; turned 78 last Aug. 30th Strong board and succession plan in place Little Buffett premium in stock today Major super-cats Cant find place to invest cash Not a problem currently There are worse things than sitting on a lot of cash Buffett has said Berkshire will distribute cash if he doesnt think he can allocate it
-16-

T2 Partners LLC

Page 40 of 95

Conclusion
Cheap stock: 75-cent dollar, giving no value to redent investments and immense optionality Extremely safe: huge cash and other assets provide downside protection

T2 Partners LLC

Page 41 of 95

-17-

Fairfax Over the Past Five Years

T2 Partners LLC

Page 42 of 95

-2-

Fairfax Is a Diversified Insurance Holding Company

T2 Partners LLC

Page 43 of 95

-1-

Fairfax and Its Primary Subsidiaries Had a Great 2007 and Growth and Underwriting Trends Have Been Strong for Many Years

1. Crum and Forster 6 month 2008 results include 20.6 points related to a reinsurance commutation and a reinsurance settlement.

T2 Partners LLC

Source: Fairfax presentation, 9/08 Page 44 of 95

-3-

Following is a summary of Fairfax's financial results for the third quarter and first nine months of 2008 and 2007:

Total revenue Earnings before income taxes and non-controlling interests Net earnings Net earnings per share Net earnings per diluted share

THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------SEPTEMBER 30 SEPTEMBER 30 ----------------------(unaudited -$ millions, except per share amounts) 2008 2007 2008 2007 ------------------2,155.1 1,871.2 5,791.2 5,076.3

731.6 467.6 $25.40 $25.27

501.0 253.2 $14.12 $13.47

1,835.3 1,127.0 $60.63 $59.89

1,125.6 532.2 $29.54 $28.27

Page 45 of 95

Combined ratios of the company's insurance and reinsurance operations were as follows for the third quarter and first nine months of 2008 and 2007:

THREE MONTHS ENDED -----------------SEPTEMBER 30 ----------------------2008 ------113.3% 128.5% 85.0% 113.0% 111.9% 115.5%(2) 2007 ---88.5% 96.5% 68.0% 97.9% 94.6% 94.8%

NINE MONTHS ENDED ----------------SEPTEMBER 30 ----------------------2008 ------103.9% 121.8%(1) 80.6% 103.6% 104.5% 107.4%(1)(2) 2007 ---89.6% 95.3% 82.6% 96.1% 95.5% 94.3%

Insurance Reinsurance

Canada (Northbridge) U.S. (Crum & Forster) Asia (Fairfax Asia) - OdysseyRe - Other

Consolidated

(1) Excluding the impact of Crum & Forster's reinsurance commutation in the second quarter and Crum & Forster's lawsuit settlement in the first quarter, the combined ratios in the first nine months of 2008 were 107.6% and 104.2% for Crum & Forster and Fairfax respectively. (2) Prior to giving effect to catastrophe losses related to Hurricanes Ike and Gustav in the third quarter of 2008, the consolidated combined ratios were 93.2% and 99.8% in the third quarter and the first nine

months respectively.

Page 46 of 95

Fairfax Has Made Enormous Strides Over the Past Year

T2 Partners LLC

Page 47 of 95

-4-

Fairfaxs Financial Strength Has Improved Dramatically

Source: Fairfax presentation, 9/08

T2 Partners LLC

Page 48 of 95

-5-

Fairfaxs CDS Portfolio Has Paid Off In a Big Way And We Think Theres More Upside As the Credit Crunch Worsens
As of 9/19/08, Fairfax had harvested more than $1.85 billion in cash from its CDS portfolio since mid-2007, representing gains of $1.65 billion. It had $12.9 billion notional amount of credit default swaps, valued at $685M remaining. Its 23 CDS positions include (in descending order): AIG, Societe Generale, Fannie Mae, Freddie Mac, XL Capital, Barclays, Goldman Sachs, Genworth, MGIC, ACE, Washington Mutual, Swiss Re, Bank of America and PMI.

T2 Partners LLC

Page 49 of 95

-6-

($ millions) Original acquisition cost 25.7 95.5 22.8 59.4 38.1 ---241.5 Excess of sale proceeds over original acquisition cost 173.6 789.5 167.2 536.3 141.6 -----1,808.2

Notional amount FY Q1 Q2 Q3 Q4 2007 2008 2008 2008 to October 24 965.5 3,830.0 855.0 3,580.9 1,793.2 ------11,024.6

Sale Proceeds 199.3 885.0 190.0 595.7 179.7 ----2,049.7

Cumulative sales since inception Remaining credit default swap positions at October 24, 2008 Total realized and unrealized from inception

9,834.7 -------

191.5 -----

596.1 (1) -----

404.6(2) -----

20,859.3 --------

433.0 -----

2,645.8 -------

2,212.8 -------

(1) Market value as of October 24, 2008 (2) Unrealized gain (measured using original acquisition cost) as of October 24, 2008 The company has sold $11.02 billion notional amount of credit default swaps since inception with an original acquisition cost of $241.5 million for cash proceeds of $2.05 billion and a cumulative gain (measured using original acquisition cost) of $1.81 billion. As of October 24, 2008, the remaining $9.83 billion notional amount of credit default swaps had a market value of $596.1 million and an original acquisition cost of $191.5 million, representing an unrealized gain (measured using original acquisition cost) of $404.6 million. As of October 24, 2008, total cash proceeds realized from the sale of credit default swaps was $2.05 billion, compared to the total original acquisition cost (the aggregate acquisition cost of the credit default swaps sold and the remaining credit default swaps) of $433.0 million.

Page 50 of 95

Hamblin Watsas Investment Performance Has Been Spectacular

T2 Partners LLC

Page 51 of 95

-7-

Fairfax Has an Extraordinary Long-Term Track Record of Value Creation

T2 Partners LLC

Page 52 of 95

-8-

Fairfax Is Trading At a Low Multiple of Book Value, Even If the Entire CDS Portfolio is Excluded
Price (11/4/08): $283.65 Market cap: $4.96 billion Tangible book value (Q3 08): $4.56 billion ($261/share) P/B: 1.09 Tangible book value minus entire CDS portfolio of $596 million as of 10/24/08 (assume 30% tax rate): $4.14 billion ($237/share) P/B (adjusted): 1.20

Summary: We think Fairfaxs core business is worth 1.3-1.5x book value, so at todays price, were getting a very good, growing insurance company at a good price, with a free call option on Fairfaxs CDS portfolio.

Note: Page 53 of 95 Tangible book value excludes preferred stock and goodwill. T2 Partners LLC

-9-

Target Over the Past Two Years

Page 54 of 95

Financial Highlights Continuing Operations

$63,367

$59,490

$52,620

$42,025

$46,839

$3,159

$3,601

$4,323

$5,069

$5,272

22% 7% 71%

Total Revenues (millions)


2007 Growth %: 6.5% Five-year CAGR: 11.1%

Earnings Before Interest Expense and Income Taxes (EBIT) (millions)


2007 Growth %: 4.0% Five-year CAGR: 13.4%

2007 Capital Expenditures

($4.4 billion)

New Stores Remodels & Expansions Information Technology,


Distribution & Other

$2,787

$2,849

$2,408

$1,885

$1,619

$1.76

$2.07

$2.71

$3.21

$3.33

22% 34% 22% 19% 3%

Earnings from Continuing Operations (millions)


2007 Growth %: 2.2% Five-year CAGR: 15.7%

Diluted EPS
2007 Growth %: 3.9% Five-year CAGR: 17.1%

2007 Sales Mix

($61.5 billion)

Consumables & Commodities Electronics, Entertainment, Sporting Goods & Toys Apparel & Accessories Home Furnishings & Dcor Other

Page 55 of 95

2007 Sales Per Capita

Y E A R - E N D S T O R E C O U N T A N D S Q U A R E F O O TA G E B Y S TAT E
Sales per Capita Group No. of Stores Retail Sq. Ft. (in thousands) Sales per Capita Group No. of Stores Retail Sq. Ft. (in thousands)

Over $300
Colorado Minnesota North Dakota Group Total 38 71 4 113 5,615 10,032 554 16,201

$101 $150
Alabama Idaho Louisiana New York Ohio Oklahoma Pennsylvania Rhode Island South Carolina Group Total 18 6 13 58 63 10 47 3 18 236 2,554 664 1,853 7,718 7,798 1,455 6,039 378 2,224 30,683

$201 $300
Arizona California Florida Illinois Iowa Kansas Maryland Montana Nebraska Nevada New Hampshire Texas Virginia Group Total 45 225 115 82 21 18 32 7 14 15 8 136 49 767 5,800 28,836 15,701 11,035 2,855 2,450 4,082 780 1,934 1,863 1,023 18,580 6,425 101,364

$0 $100
Alaska Arkansas Hawaii Kentucky Maine Mississippi Vermont West Virginia Wyoming Group Total Total 0 6 0 12 4 4 0 5 2 33 1,591 0 745 0 1,383 503 489 0 626 187 3,933 207,945

$151 $200
Connecticut Delaware Georgia Indiana Massachusetts Michigan Missouri New Jersey New Mexico North Carolina Oregon South Dakota Tennessee Utah Washington Wisconsin Group Total 16 2 51 32 30 57 33 38 9 45 18 4 28 11 34 34 442 2,093 268 6,845 4,207 3,803 6,690 4,321 4,925 1,024 5,852 2,166 417 3,464 1,679 3,968 4,042 55,764

Sales per capita is defined as sales by state divided by state population.

Page 56 of 95

15

Financial Summary Continuing Operations

2007 Financial Results: (in millions) Sales Credit card revenues Total revenues Cost of sales Selling, general and administrative expenses (b) Credit card expenses Depreciation and amortization Earnings from continuing operations before interest expense and income taxes (c) Net interest expense Earnings from continuing operations before income taxes Provision for income taxes Earnings from continuing operations Per Share: Basic earnings per share Diluted earnings per share Cash dividends declared Financial Position: (in millions) Total assets Capital expenditures Long-term debt, including current portion Net debt (d) Shareholders investment Financial Ratios: Revenues per square foot (e)(f) Comparable-store sales growth (g) Gross margin rate (% of sales) SG&A rate (% of sales) EBIT margin (% of revenues) Other: Common shares outstanding (in millions) Cash flow provided by operations (in millions) Retail square feet (in thousands) Square footage growth Total number of stores General merchandise SuperTarget Total number of distribution centers
(a) Consisted of 53 weeks. (b) Also referred to as SG&A. (c) Also referred to as EBIT.

2006(a) $57,878 1,612 59,490 39,399 12,819 707 1,496 5,069 572 4,497 1,710 $ 2,787 $ $ $ 3.23 3.21 .46

2005 $51,271 1,349 52,620 34,927 11,185 776 1,409 4,323 463 3,860 1,452 $ 2,408 $ $ $ 2.73 2.71 .38

2004 $45,682 1,157 46,839 31,445 9,797 737 1,259 3,601 570 3,031 1,146 $ 1,885 $ $ $ 2.09 2.07 .31

2003 $40,928 1,097 42,025 28,389 8,657 722 1,098 3,159 556 2,603 984 $ 1,619 $ $ $ 1.78 1.76 .27

2002 $36,519 891 37,410 25,498 7,505 629 967 2,811 584 2,227 851 $ 1,376 $ $ $ 1.52 1.51 .24

$61,471 1,896 63,367 41,895 13,704 837 1,659 5,272 647 4,625 1,776 $ 2,849 $ $ $ 3.37 3.33 .54

$44,560 $ 4,369 $16,590 $15,238 $15,307 $ 318 3.0% 31.8% 22.3% 8.3%

$37,349 $ 3,928 $10,037 $ 9,756 $15,633 $ 316 4.8% 31.9% 22.2% 8.5%

$34,995 $ 3,388 $ 9,872 $ 8,700 $14,205 $ 307 5.6% 31.9% 21.8% 8.2%

$32,293 $ 3,068 $ 9,538 $ 7,806 $13,029 $ 294 5.3% 31.2% 21.4% 7.7%

$27,390 $ 2,738 $11,018 $10,774 $11,132 $ 287 4.4% 30.6% 21.2% 7.5%

$24,506 $ 3,040 $11,090 $10,733 $ 9,497 $ 281 2.2% 30.2% 20.5% 7.5%

818.7 $ 4,125 207,945 8.3% 1,591 1,381 210 32

859.8 $ 4,862 192,064 7.7% 1,488 1,311 177 29

874.1 $ 4,451 178,260 8.0% 1,397 1,239 158 26

890.6 $ 3,808 165,015 8.2% 1,308 1,172 136 25

911.8 $ 3,188 152,563 8.8% 1,225 1,107 118 22

909.8 $ 2,703 140,294 11.9% 1,147 1,053 94 16

(d) Including current portion and short-term notes payable, net of marketable securities of $1,851, $281, $1,172, $1,732, $244 and $357, respectively. Management believes this measure is a more appropriate indicator of our level of financial leverage because marketable securities are available to pay debt maturity obligations. (e) Thirteen-month average retail square feet. (f) In 2006, revenues per square foot were calculated with 52 weeks of revenues (the 53rd week of revenues was excluded) because management believes that these numbers provide a more useful analytical comparison to other years. Using our revenues for the 53-week year under generally accepted accounting principles, 2006 revenues per square foot were $322. (g) See definition of comparable-store sales in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.

Page 57 of 95

16

Target : Investors : Financial News Release

http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle...

Financial News Release


Investors Financial News Release

Target Corporation September Sales up 2.5 Percent


10/08/08
MINNEAPOLIS--(BUSINESS WIRE)-Target Corporation (NYSE:TGT) today reported that its net retail sales for the five weeks ended October 4, 2008 increased 2.5 percent to $5,320 million from $5,190 million for the five weeks ended October 6, 2007. On this same basis, September comparable store sales declined 3.0 percent. "Sales for the month of September were below our expectations, reflecting continued daily volatility," said Gregg Steinhafel, president and chief executive officer of Target Corporation. "Challenges in the current environment, including weak top-line growth in our retail segment and higher net write-off rates in our credit card segment, have increased the likelihood that our third quarter EPS may be slightly below the current First Call median estimate of 52 cents. On balance, we currently expect 2008 full year earnings per share to meet or exceed last year's full year EPS of $3.33." This outlook for 2008 EPS assumes essentially flat year-over-year same store sales in the fourth quarter and a continuation of recent write-off rate trends through the remainder of this year. All earnings per share figures refer to diluted earnings per share.
Sales Total Sales Comparable Stores % Change -------------------------(millions) % Change This Year Last Year

---------- ----------- ---------------- --------September $ 5,320 2.5 (3.0) 1.2

Quarter-to-date

10,172

2.8

(2.6)

3.5

Year-to-date

39,445

4.7

(1.1)

4.3

Target's current sales disclosure practice includes a sales recording on the day of the monthly sales release. Consistent with this practice, a new message was recorded earlier today. The next sales recording is expected to be issued on Thursday, November 6, 2008. These recordings may be accessed by calling 612-761-6500. Forward-looking statements in this release regarding expected earnings per share results should be read in conjunction with the cautionary statements in Exhibit (99)A to the company's first quarter 2008 Form 10-Q. Target Corporation's retail segment includes large, general merchandise and food discount stores, and a fully integrated on-line business called Target.com. In addition, the company operates a credit card segment that offers branded proprietary and Visa credit card products. The company currently operates 1,685 Target stores in 48 states. Target Corporation news releases are available at www.target.com. Source: Target Corporation

2008 Target.com. All rights reserved. The Bullseye Design and Target are registered trademarks of Target Brands, Inc.

Page 58 of 95

1 of 1

11/5/2008 11:36 AM

Target : Investors : Earnings Estimates

http://investors.target.com/phoenix.zhtml?c=65828&p=irol-estimates

Earnings Estimates
Investors Earnings Estimates

Glossary Analyst Ratings 1-Strong Buy 2-Buy 3-Hold 4-Underperform 5-Sell 2 4 12 1 1


Sell Strong Buy

Mean Recommendation: 2.8

Analyst Forecasts
Last Month's Revisions Fiscal Period Mean High Low Median # of Estimates #Up #Down Mean % Change

Annual Annual Annual Quarterly Quarterly Quarterly Quarterly Long Term Growth

Jan 11 Jan 10 Jan 09 Oct 08 Jan 09 Apr 09 Jul 09

3.82 3.48 3.32 0.50 1.27 0.72 0.83 12.95

4.32 4.14 3.50 0.54 1.42 0.85 0.95 16.00

2.78 2.70 3.10 0.46 1.19 0.63 0.77 7.50

3.94 3.45 3.31 0.50 1.27 0.72 0.83 14.00

7 22 22 20 18 12 12 10

0 0 0 1 0 0 0 0

4 16 19 15 16 8 8 0

-13.56 -6.32 -2.99 -4.72 -5.66 -7.46 -5.71 -3.45

Actuals
Reported EPS Mean Estimate Surprise % Change

Annual Quarterly Quarterly Quarterly Quarterly Annual Annual

Jan 08 Oct 07 Jan 08 Apr 08 Jul 08 Jan 07 Jan 06

3.33 0.56 1.23 0.74 0.82 3.21 2.71

3.34 0.62 1.22 0.71 0.76 3.18 2.70

-0.31 -9.14 0.52 4.93 8.61 0.84 0.55

Data Provided by Thomson Financial

Find out which investment firms prepare and publish research on Target Corporation

2008 Target.com. All rights reserved. The Bullseye Design and Target are registered trademarks of Target Brands, Inc.

Page 59 of 95

1 of 1

11/5/2008 11:37 AM

Unlocking Immense Real Estate Value


REITs, private market ground leases, and inflation-protected securities all trade at much higher valuation multiples than Targets multiple, at only 6.0x 09E EV/EBITDA, based on a 20-day trading average stock price of $40
Targets Market Valuation (1) 2009E EV / EBITDA Inflation Protected Securities / REIT Market Valuations 2009E EV / EBITDA

6.0x
$40/Share (1)

15.7x
Large Cap REITs (1)

17.0x
Recent Big Box Ground Lease (2)

33.3x
Inflation Protected Treasury Securities (TIPS) (3)

The Transaction creates immense and instant value because 22% of Targets current EBITDA will be valued at a significantly higher multiple than where Target trades today
(1) Based on a 20-day trading average as of 10/24/08 (2) Based on mid-point precedent cap rate of 5.9% (3) Based on current 20-year TIP yield of 3.0%
Page 60 of 95

19

Target: Retail and Real Estate Operations

Retail Operations
Iconic U.S. retail brand Best-in-class operator with distinctive merchandising strategy 1,685 stores in 48 states Best management team in the retail industry Attractive growth profile, driven by mid-tohigh single-digit square footage growth and market share gains Recently sold an undivided interest in credit card receivables

Real Estate Operations


High-quality owned real estate in attractive suburban and urban locations Significant value embedded in real estate, not accounted for in public market valuation Owns ~95% of its retail buildings and ~85% of the land under its retail locations Owns ~84% of its distribution centers (DCs) and ~81% of the land under its DCs Facilities Management Services comprising hundreds of employees responsible for property maintenance
8

Page 61 of 95

Significant Real Estate Ownership


Target owns the highest percentage of its real estate compared to other big box retailers
100 90 % Units Owned (Buildings)1 80 70 60 50 40 30 20 10 0 34% 34% 68% 63% 58% 95% 92% 87% 87%

% owned units/land(2): 85% % DCs owned(3): 84%

79% ND

ND 2%

ND 84%

55% 76%

ND 55%

35% 89%

ND 54%

27% ND

ND represents Not Disclosed (1) Represents % owned stores (includes owned stores on leased land) (2) Represents % owned stores on owned land only (3) Page 62 of 95 Represents % owned DCs (includes owned DCs on leased land)

Selected 2009E Income Statement Data


Based on the assumptions provided, the Transaction would result in $1.4bn EBITDA in 2009E to TIP REIT
2009E Target Corp
($mm, except per share)

2009E TIP REIT

2009E "Combined"

2009E Target Standalone


22% of total EBITDA to TIP REIT Minimal D&A at TIP REIT and no maintenance capex

EBITDA D&A EBIT Taxes EPS

$5,172 1,884 3,288 1,004 $2.23

$1,427 56 1,372 7 $1.79


(2)

$6,599 1,940 4,659 1,011 $4.02

(1)

$6,614 1,940 4,674 1,528 $3.40

TIP REIT pays almost no taxes

18% EPS accretion from tax efficiencies and improved free cash flow
(1) Includes incremental $15mm of standalone costs at TIP REIT (2) Normalized to exclude $112mm (approximately $0.16/share) of incremental interest expense due to CY2009 cash E&P distribution
Page 63 of 95

26

Valuation Summary
Based on the assumptions provided and using the mid-point of the valuation analysis, this Transaction would result in total combined value of $70 per share for Target shareholders (74% premium to the 20-day average trading price) and $83 per share twelve months later

$83
$80

$70
TIP REIT

$60 $/Share

74% $40
Target Standalone

TIP REIT

$42

$40

$38
Target Corp Target Corp

$20

$32
$0 Target (20-Day Avg. Price)
Page 64 of 95

$42

Target REIT Spin-Off

12-Month Price Target

For illustrative purposes, assumes Transaction occurs on 01/01/09 (1) Based on a 20-day trading average as of 10/24/08; assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 30

MBIA Over the Past Two Years

Page 65 of 95

Who Are the Bond Insurers?


Financial Guarantors are inadequately capitalized to withstand a negative credit event
100x 94.1x 80.8x 75x

Face Value Bond Guarantees / Statutory Capital

50x

25x

0x

Reserves / Guarantees
Page 66 of 95

3.15 bps
37

3.93 bps

Growing Structured Finance Exposure


MBIA Structured Finance Guarantees as a % of total Guarantees have more than doubled over the past 10 Years

1996
Structured Finance

2006
Structured Finance

14% 86% 68%

32%

Public Finance

Public Finance

Page 67 of 95

39

Growing Structured Finance Exposure


MBIA has increased exposure to Structured Finance during period of rapid innovation and lower lending standards
MBIA: Net Par Insured
70 60 50 47.6 42.1 40 30 20 38.7% 10 0 25.0% 44.3% 42.1% 35.0% 53.0% 55.0% 46.7 59.5 66.5% 65.0% 75.0%

$ insured (bn)

% of total

25.2

45.0%

2003
Page 68 of 95

2004

2005
40

2006

Q1 '07

MBIA Compared to Citigroup

Credit Rating Regulator

Aaa, AAA NYS Insurance Dept

Aaa, AA+ Federal Reserve, OCC, FDIC 12:1


(Risk Adj. Assets / Tier 1 Capital)

Leverage

94:1
(Net Par / Capital)

Credit Exposure Capital Reserves / Credit Exposure


Page 69 of 95

$635 billion $6.8 billion 3 bps


41

$1,107 billion $127.0 billion 96 bps

Minimal Losses Will Impair MBIAs Capital Base


Total Guaranteed Portfolio Public Finance Structured Finance CDO Exposure Mortgage Exposure Other ABS Exposure Direct and Pooled Corporate Exposure Total Structured Finance Exposure Estimated "Excess" Capital over AAA (1) Losses to eliminate excess capital Total Statutory Capital Base SF Losses to eliminate all capital
Page 70 of 95

$ 635.2 Billion 421.8 $ 213.4 Billion 108.6 52.0 26.9 25.9 $ 213.4 Billion $ 0.5 Billion 23 bps 6.8 Billion 316 bps

(1) Excess Capital estimate assumes $1.5B of excess capital at 12/06 reduced by two $500M dividends in 12/06 & 4/07
42

MBIA Is One of the Most Profitable US Companies?


We have the highest profit margin of any financial company in the Forbes 500 with over a billion in sales. --Joseph W. Brown, Chairman of MBIA
Net Income Margins of Several Highly Profitable Companies

Page 71 of 95

Source: Company reports, Pershing estimates (MBI adjusted for one-time expenses).
49

Decreasing Unallocated Reserves


MBIAs unallocated reserves, expressed in bps of net par outstanding, have dwindled to only 3.2 basis points of total exposure (as of 3/31/07)
7.0

MBIAs Unallocated Reserves (bps of net par outstanding)


6.2bps 6.0bps 5.7bps 5.5bps 5.4bps

6.0

5.0

bps

4.0

3.6bps

3.5bps 3.2bps

3.0

2.0

1.0

2000
Page 72 of 95

2001

2002

2003
50

2004

2005

2006

Q1 '07

MBIA Has Enormous Exposure to CDOs and Risky Mortgages


Impairments Net Par CDO Exposure (Net of Reinsurance) Outstanding ($B) Taken ($B) Collateral Type CDOs of High-Grade U.S. ABS $15.1 $0.54 CDOs of Mezzanine U.S. ABS $3.4 $0.06 CDO-Squareds $8.6 $0.44 Other Multi-Sector CDOs $2.4 Investment Grade and Structured Corporate Credit $42.6 5% impairment vs. High Yield Corporate $10.9 70% Ambac took CMBS and Commercial Real Estate $42.2 Emerging Market $0.2 77% originated in 2006-07; 55% was with Countrywide, CDO Total $125.4 $1.04 28% Rescap RMBS Exposure Prime First Lien (incl. $3.5 billion of Alt-A) $14.7 HELOCs and Closed-End Seconds $17.8 Sub-Prime First Lien $4.1 Total Direct RMBS: Net Par Outstanding $36.6 $1.12 GRAND TOTAL $162.0 $2.16

Note: All figures as of 6/30/08. Funds managed by T2 Partners LLC are short MBIA. Source: MBIA Q2 08 investor presentation.

T2 Partners LLC

Page 73 of 95

-1-

MBIAs Structured Finance Insured Portfolio Poses Many Problems, Given That MBIA Has a Mere $4 Billion in Equity

Source: MBIA Q2 08 investor presentation appendix.

T2 Partners LLC

Page 74 of 95

-2-

Insured Portfolio Losses and Impairments


$ in millions 4Q07
Formula provision Additional loss and LAE $ 23 814

1Q08
$ 23 265

2Q08
$ 22 0

3Q08
$ 22 961

Total
$ 90 2,040

GAAP incurred loss and LAE


RMBS payments Other payments

837
44 25

288
108 10

22
305 26

983
491 5

2,130
948 66

Total payments Ending net loss reserves and LAE

69 $ 1,264

118 $ 1,435

331 $ 1,258

496 $ 1,806

1,014 N/A

Credit impairments p Loss Prevention Expenses Total Payments T t l credit Total dit impairments i i t + LPE

$ 200 0 0 $ 200

$ 827 1 0 $ 828

$ 13 2 0 $ 15

$ 57 5 0 $ 62

$ 1,097 , 8 0 $1 1,105 105

8
Page 75 of 95

RMBS Portfolio Second Lien Incurred Loss Estimate Increased to $2.1 $2 1 billion
RMBS Related Loss Estimates ($ in billions)
$2.5 $2.0 $1.5 $1 0 $1.0 $0.5 $0.0 MBIA Loss Estimates 3/31/08 MBIA Revised Loss Estimates 9/30/08

21 2.1

1.1

Expected Losses Increased due to:


Increase in early stage delinquencies from Q2 combined with steady roll-rates Minimal evidence of loan modifications by servicers Monthly losses in Q3 peaking higher than original forecasts As of 9/30/2008, MBIA has reserves on 72.6% of the second-lien net par exposure 73% of total Loss Reserves related to Countrywide and ResCap litigation

22
Page 76 of 95

Direct RMBS Exposure Sector and Vintage Composition


$ in billions
Q2 2008 Subprime First Lien Prime First Lien (Alt-A of $3.5 billion included) HELOCs Closed-End-Seconds Total Direct RMBS: Net Par Outstanding 41 4.1 14.7 8.2 9.6 $ 36.6 Q3 2008 40 4.0 13.0 7.7 9.0 $ 33.7

Portfolio Vintage Composition ($ in billions as of 9/30/2008)


10 9 8 7 6 5 4 3 2 1 2007 2006 2005 2004 Pre-2004

HELOC

CES

U.S. Subprime

International

Alt-A

Prime 1st Mtge

HELOCs and CES are predominantly 2005 & 2006 and 2006 & 2007 vintages, respectively International exposure is primarily to Financial Institutions capital relief and covered bond transactions/$1.6 billion natural amortization this quarter

20
Page 77 of 95

CES and HELOC Performance Trends


Weighted Average CDRS
(source: Intex)
14% 12% 10% 8% 6% 4% 2% 0% Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep07 07 07 08 08 08 08 08 08 08 08 08
HEL 3mo CDR CES 3mo CDR

Cumulative Default Rates have continued to increase each month

Change C in 30-59 Delinquency


(source: Intex)
14% 12% 10% 8% 6% 4% 2% 0% -2% 1Q08 vs 4Q07 2Q08 vs 1q08 3Q08 vs 2Q08

In Q2, the earlystage delinquencies started reducing slightly, but in Q3 they increased by over 12%

23
Page 78 of 95

An Analysis of One CDO and One RMBS That MBIA Is Exposed To

Page 79 of 95

Where Did All of These Toxic Loans End Up? They Were Securitized, First Into Asset-Backed Securities (ABS)
Quick Review: What is a Securitization?

Source: Deutsche Bank Securitization Research; How to Save the Bond Insurers, Pershing Square presentation, 11/28/07.

T2 Partners LLC

Page 80 of 95

-72-

Tranches from Asset-Backed Securities Were Pooled into Collateralized Debt Obligations (CDOs)

Loss rates of, say, 20%, in the underlying RMBSs can lead to catastrophic losses for a CDO

This is an example of a Mezzanine CDO. A High-Grade CDO would select collateral primarily from the A and AA tranches mixed with ~25% senior tranches from other, often mezzanine, CDOs
Note: Asset-based securities backed by home mortgages are called Residential Mortgage-Backed Securities (RMBS), those backed by commercial real estate loans are called Commercial Mortgage-Backed Securities (CMBS), etc. Source: Citigroup, All Clogged Up: Whats Ailing the Financial System, 2/13/08.

T2 Partners LLC

Page 81 of 95

-73-

A Closer Look at MBIAs Multi-Sector CDO Exposure


Note: This chart is from Pershing Squares Open Source Model, released on 1/30/08. Subsequently, MBIAs Q1 08 showed that MBIAs multi-sector CDO exposure totals $30.7 billion. CDOs of High Grade U.S. ABS were $16.0 billion as of 3/31/08; CDOs of Mezzanine U.S. ABS were $3.6 billion (due to $2.5 billion of exposure from 2000-2003 not included in this chart); CDO Squareds were $8.6 billion; plus there were $1.1 billion of Multi-Sector CDOs European Mezzanine & Other Collateral and $1.4 billion of Multi-Sector CDOs insured in the Secondary Market prior to 2005. T2 Partners LLC
Page 82 of 95

-10-

A Closer Look at One CDO Whose Senior Tranche Is Guaranteed by MBIA

MBIA has guaranteed the most senior tranche of the Longshore CDO MBIAs potential liability is $1.13 billion (before reinsurance) The most senior tranche originally had 13% credit enhancement (CE), totaling $169 million, meaning MBIA has no liability until the CDO suffers losses of this amount However, MBIA is on the hook for 100% of the losses (before reinsurance) above this As of 3/31/08, losses in this CDO had reduced the credit enhancement to only 4.4% and MBIA projects 83% default of inner CDO collateral
Sources: Pershing Square, Amherst Holdings LLC.

T2 Partners LLC

Page 83 of 95

-11-

A Closer Look at the Longshore 2007-III CDO


More than half of the Longshore CDO is backed by tranches from RMBS pools, more than half of which are subprime. The balance of Longshore is roughly equally split between tranches of CMBS pools and other CDOs (i.e., 23% of Longshore is a CDO-squared).

RMBS tranches account for 53.5% of Longshores total value, or $683 million. These tranches are from RMBS pools with total assets of $27.5 billion. The tranches on average are 3.1% thick and have 13.6% credit enhancement.

T2 Partners LLC

Page 84 of 95

Sources: Pershing Square, Amherst Holdings LLC.

A Look at 35 of the 90 RMBSs Underlying the Longshore CDO


Prepayments have reduced the value of this pool from $1.099 billion to $818 million (under $800 million currently)

Source: Amherst Holdings LLC., spring 2008 data

T2 Partners LLC

Page 85 of 95

-13-

1 of the 90 RMBS Tranches Underlying the Longshore CDO: The M5 Tranche of the ABFC 2006-OPT2 Trust
Tranche (M5) Owned by Longshore CDO There is $79.3 million beneath it

There was 8.45% credit enhancement when this RMBS was created, but this has risen to 11.32% thanks to prepayments
T2 Partners LLC
Page 86 of 95

There are 471 basis points of yearly excess interest available to absorb losses (because homeowners pay a higher interest rate than the Trust does)
-14-

Source: Amherst Holdings LLC.

The ABFC 2006-OPT2 Trust is in Big Trouble


The average loan is only 25 months old and most loans have only just begun to hit their reset date
$526 million of loans (66.8% of the remaining pool) had interest rate resets in July and August, 2008

Despite this, the Trust is already in big trouble:


5.9% of the loans are 30 days delinquent 2.1% are 60 days delinquent 2.3% are 90 days delinquent 18.3% are in foreclosure and 9.0% are real estate owned 3.9% are homeowners in bankruptcy

Thus, 29.5% are 90 days delinquent or worse


Up from 23.8% six months ago Virtually all of these loans will result in the home being auctioned On average, it takes 15 months from the date of the first missed payment to the liquidation event (auction) Recoveries are averaging 45-55% Losses to date have only been $27.3 million (up from $9.5 million a mere six months ago)

T2 Partners LLC

Source: Page 87 of 95 Amherst Holdings LLC.

-15-

Characteristics of the ABFC 2006-OPT2 Trust


41.4% of loans are in states hit hardest by the bursting of the housing bubble: California, Nevada, Florida and Arizona Only 15.7% of performing loans are fixed rate 41.0% are low/no doc 62.1% are refi (cash out), 31.0% are purchases, 6.9% are refi (no cash out) No loans are insured Of loans 90 days or more delinquent, 45.1% are green, 28.2% are yellow and 26.7% are red Of performing loans (including 30 and 60 day delinquencies), 61.5% are green, 18.3% are yellow and 20.3% are red Once loans become delinquent, few become current again. For loans made in 2005 and 2006:
55% of 30 day delinquent loans become 60 days delinquent 75% of 60 day delinquent loans become 90 days delinquent An even higher percentage of 90 day delinquent loans go into foreclosure and REO
Source: Amherst Holdings LLC.

T2 Partners LLC

Page 88 of 95

-16-

Distribution of the Remaining, Performing Loans in the ABFC 2006-OPT2 Trust Full Doc Loans
FICO/CLTV 700 - 1100 680 - 700 660 - 680 640 - 660 620 - 640 600 - 620 580 - 600 560 - 580 540 - 560 520 - 540 500 - 520 480 - 500 460 - 480 0 - 460 0 - 65 0.1% 0.1% 0.1% 0.2% 0.7% 0.2% 0.4% 0.4% 0.2% 0.6% 0.3% 0.4% 0.0% 0.1% 65 - 70 0.1% 0.0% 0.2% 0.2% 0.4% 0.3% 0.5% 0.5% 0.5% 0.4% 0.3% 0.3% 0.0% 0.0% 70 - 75 75 - 80 80 - 85 85 - 90 90 - 95 95 - 100 0.1% 0.0% 0.1% 0.1% 0.6% 1.0% 0.5% 0.5% 0.2% 0.5% 0.5% 0.1% 0.0% 0.3% 0.1% 0.0% 0.0% 0.4% 0.4% 0.2% 0.7% 0.4% 0.4% 0.9% 0.4% 0.2% 0.0% 0.3% 0.3% 0.1% 0.4% 0.8% 1.3% 1.7% 1.4% 1.0% 0.4% 1.3% 0.9% 0.3% 0.0% 0.5% 0.5% 0.3% 0.4% 0.8% 1.0% 0.9% 1.8% 1.1% 0.4% 0.8% 0.5% 0.6% 0.0% 0.4% 0.1% 0.2% 0.2% 0.7% 0.6% 0.1% 0.4% 0.1% 0.1% 0.3% 0.0% 0.1% 0.0% 0.0% 0.9% 0.9% 1.3% 2.6% 3.3% 5.9% 2.5% 0.1% 1.7% 0.1% 0.9% 0.0% 0.6% FICO/CLTV 680 - 700 660 - 680 640 - 660 620 - 640 600 - 620 580 - 600 560 - 580 540 - 560 520 - 540 500 - 520 480 - 500 460 - 480 0 - 460 0 - 65 0.1% 0.1% 0.3% 0.3% 0.2% 0.2% 0.5% 0.4% 0.4% 0.5% 0.4% 0.1% 0.0% 0.1% 2.1% 700 - 1100

Low/No Doc Loans


65 - 70 70 - 75 75 - 80 80 - 85 85 - 90 90 - 95 95 - 100 0.1% 0.1% 0.0% 0.0% 0.3% 0.3% 0.3% 0.3% 0.2% 0.4% 0.1% 0.2% 0.0% 0.1% 0.1% 0.4% 0.0% 0.8% 0.4% 0.6% 0.4% 0.3% 0.2% 0.4% 0.2% 0.1% 0.0% 0.2% 0.2% 0.0% 0.2% 0.6% 0.3% 0.7% 0.6% 0.5% 0.1% 0.5% 0.1% 0.2% 0.0% 0.1% 0.2% 0.2% 0.5% 0.6% 1.1% 1.3% 1.1% 0.4% 0.6% 1.3% 0.6% 0.6% 0.0% 0.4% 0.7% 0.2% 0.6% 1.0% 1.0% 0.4% 0.8% 0.1% 0.0% 0.7% 0.0% 0.3% 0.0% 0.1% 0.1% 0.1% 0.7% 0.4% 0.6% 0.1% 0.2% 0.0% 0.0% 0.3% 0.0% 0.2% 0.0% 0.4% 1.9% 0.9% 0.9% 1.2% 0.6% 0.4% 0.3% 0.1% 0.0% 0.5% 0.0% 0.2% 0.0% 0.1%

Total Full Doc:

60.2%

Total Low Doc: 39.8%

Source: Amherst Holdings LLC.

T2 Partners LLC

Page 89 of 95

-17-

S&Ps Projected Lifetime Delinquency Rates for Loans With Characteristics of Those Remaining in the ABFC 2006-OPT2 Trust

Full Doc Loans (60.2% of the Trust)


FICO/CLTV 700 - 1100 680 - 700 660 - 680 640 - 660 620 - 640 600 - 620 580 - 600 560 - 580 540 - 560 520 - 540 500 - 520 480 - 500 460 - 480 0 - 460 0 - 65 65 - 70 70 - 75 75 - 80 80 - 85 85 - 90 0.4% 0.8% 0.3% 1.5% 1.6% 1.6% 1.2% 1.5% 1.4% 4.0% 4.8% 6.9% 7.1% 12.4% 13.7% 11.0% 18.8% 0.0% 17.7% 0.7% 1.0% 1.4% 2.7% 4.9% 9.1% 11.6% 12.4% 11.5% 11.0% 17.4% 0.0% 74.6% 0.0% 2.6% 1.8% 4.6% 7.5% 9.4% 8.7% 9.2% 19.9% 12.9% 17.0% 0.0% 18.0% 1.5% 3.6% 2.3% 3.4% 5.2% 9.3% 8.1% 10.1% 16.7% 12.2% 20.1% 0.0% 19.7% 1.1% 2.3% 2.3% 4.3% 9.3% 9.6% 11.9% 15.4% 16.3% 16.8% 27.8% 0.0% 19.5% 1.7% 3.8% 4.7% 7.0% 7.6% 11.0% 15.8% 15.6% 22.3% 19.9% 22.2% 0.0% 24.5% 90 - 95 95 - 100 FICO/CLTV 1.2% 1.8% 700 - 1100 2.5% 2.9% 3.9% 8.4% 11.2% 15.0% 14.8% 21.6% 20.5% 17.0% 27.9% 0.0% 20.3% 2.8% 680 - 700 3.9% 660 - 680 6.6% 640 - 660 8.0% 620 - 640 11.0% 600 - 620 15.6% 580 - 600 17.8% 560 - 580 19.2% 540 - 560 26.1% 520 - 540 18.9% 500 - 520 18.0% 480 - 500 0.0% 460 - 480 18.4% 0 - 460 1.1% 1.8% 1.7% 3.6% 9.4% 13.7% 7.4% 16.7% 15.2% 11.5% 23.5% 0.0% 18.1%

Low/No Doc Loans (39.8% of the Trust)


0 - 65 65 - 70 70 - 75 75 - 80 80 - 85 85 - 90 0.5% 1.1% 0.8% 1.4% 1.6% 2.7% 1.0% 1.1% 1.6% 3.5% 6.2% 8.1% 13.4% 7.3% 14.9% 12.0% 20.7% 0.0% 19.6% 1.5% 0.0% 2.2% 4.1% 9.0% 10.6% 14.3% 13.2% 21.0% 14.0% 30.0% 0.0% 39.6% 0.0% 2.0% 2.3% 5.0% 7.2% 15.3% 10.1% 15.0% 26.3% 21.8% 25.1% 0.0% 24.3% 4.3% 2.2% 2.5% 5.4% 7.6% 13.5% 11.2% 15.2% 18.5% 20.7% 41.9% 0.0% 25.7% 3.4% 3.3% 6.2% 9.0% 10.1% 21.0% 19.9% 11.9% 43.8% 17.3% 29.5% 0.0% 30.0% 90 - 95 95 - 100 4.0% 3.3% 3.7% 4.2% 3.7% 8.9% 19.7% 20.8% 16.1% 27.7% 28.8% 0.0% 49.6% 0.0% 33.7% 4.8% 6.9% 10.5% 19.6% 19.3% 28.0% 30.0% 0.0% 30.0% 0.0% 56.0% 0.0% 30.0%

The 23.8% defaults in the first 25 months are only the tip of the iceberg
Source: Amherst Holdings LLC.

T2 Partners LLC

Page 90 of 95

-18-

Conclusions Regarding the M5 Tranche of the ABFC 2006-OPT2 Trust


The M5 tranche owned by the Longshore CDO is 2.75% thick and is senior to 11.3% of the Trust (there is only $79.3 million subordinate to this tranche; down from $92.0 six months ago) In only 25 months, the Trust has already lost $27.3 million and has $280 million in defaults in total, an expected accumulated loss of $140mm (assuming a 50% loss on the defaulted loans) $140 million is $60.7 million more than the $79.3 million subordinate to the M5 tranche and there are 335 months to go and the bulk of the loans have just hit their reset date Thus, we believe that it is nearly certain that 100% of this tranche will be wiped out
Yet Moodys still has it rated B3 (S&P and Fitch have cut it to CCC) (funds managed by T2 Partners LLC are short Moodys)

Amherst Securities is pricing a tranche like this as the present value of 1-2 years of interest payments only (i.e., at most, 4-7 cents on the dollar)
-19-

T2 Partners LLC

Page 91 of 95

Implications for the Longshore CDO


We believe that the M5 tranche of the ABFC 2006-OPT2 Trust is fairly typical of the RMBS tranches that account for 53.5% of the value of the Longshore CDO, based on the data in the default, foreclosure, REO and credit enhancement columns of the table on page 13
If so, most are worthless, but a few might end up being worth something, so lets assume a 2/3 loss, which equals 35% of Longshore (2/3 of 53.5%)

The CMBS pools, the tranches of which account for 25% of Longshore, are not showing any losses (in part because they are all recent 2006 and 2007 vintage)
The CMBS market is currently under tremendous stress, but to be conservative, lets assume no losses (though there surely will be some)

As for CDO-squareds, which account for 23% of Longshore, if CDOs like Longshore are severely impacted, then CDO-squareds (which in Longshores case have a weighted thickness of 14.2%; see lower chart on page 12), are worthless In summary, we estimate that Longshore will incur losses of 55-60% of the original collateral of $1.3 billion, or $720-$780 million
This is in the ballpark of the $649 million loss estimated in Pershing Squares Open Source Model

T2 Partners LLC

Page 92 of 95

-20-

Implications for MBIAs Guarantee of the Longshore CDO


If our estimate is correct that Longshore will incur losses of $720-$780 million, then after subtracting the credit enhancement of $169 million (see page 11), MBIA faces gross losses of $551-$611 million MBIA has reinsured 20.9% of Longshore (see page 10), which would result in net losses of $436-483 million
However, we doubt that MBIAs CDO reinsurance is worth much, given that 53% of MBIAs reinsurance and a higher percentage of its CDO reinsurance is with Channel Re, a captive reinsurer that we believe is insolvent (its majority owners wrote down their stake in Channel Re to zero earlier this year)

MBIA has taken only $602.7 million in impairments (3.3%) against its $18.5 billion of exposure to CDOs of High-Grade and Mezzanine U.S. ABS
*

* MBIA has, however, taken $2.1 billion in mark-to-market losses on its CDOs of High-Grade and Mezzanine U.S. ABSs, which it claims will be reversed over time.

T2 Partners LLC

Page 93 of 95

-21-

MBIA May Have Trouble Collecting on Much of Its Reinsurance

Source: MBIA Q2 08 investor presentation appendix.

T2 Partners LLC

Page 94 of 95

-22-

Implications for MBIA and Ambac


MBIA has $29.5 billion of exposure to multi-sector CDOs Based on the analysis on the preceding pages, we believe that the loss estimates in Pershing Squares Open Source Model are likely to be conservative:

Open Source Model Summary of MBIAs Projected Losses


Collateral Type ABS CDOs Closed End Seconds * HELOCs * Direct Subprime * Direct Alt/A * Total Loss to Net Par Loss to Gross Par Insured Insured $5,737,633,669 $6,665,622,522 $2,809,578,386 $2,809,578,386 $2,948,599,126 $2,948,599,126 $8,503,314 $8,503,314 $129,499,794 $129,499,794 $11,633,814,290 $12,561,803,143

T2 Partners LLC

Page 95 of 95

-23-

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