Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 1 of ...

Case: 2:10-cv-01160-ALM-TPK Doc #: 1 Filed: 12/22/10 Page: 12 of 36 PAGEID #: 1238. SIVs make money by selling shorter term notes and using the proceeds topurchase medium and long-term assets because the longer term assets that are purchasedtypically pay a coupon rate that is higher than the interest rate on the shorter term notes.The riskier the longer term assets, the greater the profits that can be earned by an SIV.39. SIVs use operational triggers to automatically control risk and manageleverage. If pre-set triggers occur, the management of the SIV may be changed and/orthe activities of the SIV may be limited. Typically, the triggers are cash flow tests,portfolio restrictions and liability limits. Cash flow triggers can be set off by insufficientcredit enhancement, interest rate and foreign exchange risks, insufficient liquidity andexcessive cash outflow. Portfolio restriction triggers are set off when portfolio risktolerance boundaries are exceeded.Finally, an improper mix of liabilities sets offliability restriction triggers.40. Depending on the particular triggers that are tripped, the fund managermay be changed, restrictions may be placed on the issuance of debt and payment of debt,and restrictions may be placed on the investments that could be made by the SIV. In thenormal operational state, the SIV manager is in charge of portfolio management and theSIV is free to pursue investments and issue MTNs and commercial paper. However, ifcertain operational triggers are tripped, the SIV moves into a restricted operational statein which new investments and payment on subordinate capital notes is prohibited. Iffurther triggers occur the SIV is restricted from issuing debt, existing assets can only beexchanged for cash and only senior debt holders can be paid.Finally, upon theoccurrence of the final set of triggers, a receiver is put in charge of portfolio managementand a wind-down of the SIV begins.12