An Introduction to Value Investing Slides-Whitney Tilson-11!5!08

An Introduction to Value Investing

Wednesday, November 5, 2008 Instructor: Whitney Tilson

AGENDA AND SCHEDULE

6:00–6:15 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

6:15–6:20 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 6:20–6:40 3. Common and Costly Mental Mistakes

• Behavioral finance presentation • “Of Sound Mind” excerpts from Value Investor Insight • Eight columns on investor irrationality

6:40-7:00 Case Study #1: Berkshire Hathaway 7:00-7:15 Case Study #2: Fairfax Financial 7:15-7:30 Case Study #3: Target 7:30-8:00 Case Study #4: MBIA 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 it’s 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 company’s 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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• Buffett’s 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

• “It’s 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 aren’t 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.... We’re 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 don’t 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 “I’m the luckiest guy in the world in terms of what I do for a living” and “I wouldn’t trade my job for any job” and “I feel like tap dancing all the time.” – Buffett

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http://www.fool.com/boringport/2000/boringport000124.htm

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 isn’t 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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T2 Partners LLC, November 2006 -0-

Common and Costly Mental Mistakes

By Whitney TilsonNovember 2006

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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 IQ…Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” -- Warren Buffett

What is Behavioral Finance?

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Common Mental Mistakes1) Overconfidence2) Projecting the immediate past into the distant future3) Herd-like behavior (social proof), driven by a desire to be part of the crowd or an assumption that the

crowd is omniscient4) Misunderstanding randomness; seeing patterns that don’t exist5) Commitment and consistency bias6) Fear of change, resulting in a strong bias for the status quo7) “Anchoring” on irrelevant data8) Excessive aversion to loss9) Using mental accounting to treat some money (such as gambling winnings or an unexpected bonus)

differently than other money10) Allowing emotional connections to over-ride reason11) Fear of uncertainty12) Embracing certainty (however irrelevant)13) Overestimating the likelihood of certain events based on very memorable data or experiences (vividness

bias)14) Becoming paralyzed by information overload15) Failing to act due to an abundance of attractive options16) Fear of making an incorrect decision and feeling stupid (regret aversion)17) Ignoring important data points and focusing excessively on less important ones; drawing conclusions

from a limited sample size18) Reluctance to admit mistakes19) After finding out whether or not an event occurred, overestimating the degree to which one would have

predicted the correct outcome (hindsight bias)20) Believing that one’s investment success is due to wisdom rather than a rising market, but failures are not

one’s fault21) Failing to accurately assess one’s investment time horizon22) A tendency to seek only information that confirms one’s opinions or decisions23) Failing to recognize the large cumulative impact of small amounts over time24) Forgetting the powerful tendency of regression to the mean25) Confusing familiarity with knowledge

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Overconfidence1) 19% of people think they belong to the richest 1% of U.S. households2) 82% of people say they are in the top 30% of safe drivers3) 80% of students think they will finish in the top half of their class4) When asked to make a prediction at the 98% confidence level, people are right

only 60-70% of the time5) 68% of lawyers in civil cases believe that their side will prevail6) Doctors consistently overestimate their ability to detect certain diseases7) 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 OverconfidenceSometimes additional information can lead to worse decisions, overconfidence and excessive trading

• Heuer study of 8 professional handicappers (set betting odds at horseraces)

– 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 madenearly 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

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

Conforming with the crowd: the Solomon Asch experiment• 35% of the subjects conformed to the group’s judgment, even though

they knew it was wrong, because they were uncomfortable being a minority facing an overwhelming majority

• The size of the group didn’t matter• But if even one person gave the correct answer, the subject was far

more likely to also give the correct answer

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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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http://www.amazon.com/exec/obidos/ASIN/047111927X/tilsoncapitalpar


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 horse’s chances of winning than they are immediately before laying down that bet.

The reason for the dramatic change is…our 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 one’s positions. of 95


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. We’ve missed billions when I’ve 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 Denny’s at different prices• Anchoring on historical price (or typical price)

– Refusal to buy a stock today because it was cheaper last year orhas 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 Davis’s 5-bagger mistake– Munger’s example of oil executives congratulating

themselves

• Confusing losing money with making a bad decision– Calculated risks are OK– Bob Rubin’s 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 McDonald’s food; Cantalupo’s 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 haven’t 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, McDonald’s in March 2003

• Worrying about what others will think– Klarman: “As a money manager, it’s 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– Thaler’s 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: “It’s as if someone approached you and said, ‘Let’s 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)– Don’t want to sell at a loss (if stock has been falling)– If I didn’t own it, would I buy it? Or, If the stock dropped 25%,

would I enthusiastically buy more?

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Tips to Applying Behavioral Finance• Be humble

– Avoid leverage, diversify, minimize trading

• Be patient– Don’t 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 (Pzena’s method)

– Use secret ballots– Ask “What would cause me to change my mind?”

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Tips to Applying Behavioral Finance (2)

• Don’t anchor on historical information/perceptions/stock prices– Keep an open mind– Update your initial estimate of intrinsic value– Erase historical prices from your mind; don’t 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 don’t obsess– Put the initial investment thesis in writing so you can refer back to it– Sell your mistakes and move on; you don’t have to make it back the same

way you lost it– But be careful of panicking and selling at the bottom

• Don’t get fooled by randomness

• Understand and profit from regression to the mean

• Mental tricks– Pretend like you don’t 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 Charlie’s Almanack• Influence, Robert Cialdini• Why Smart People Make Big Money Mistakes,

Belsky and Gilovich• The Winner’s 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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http://www.investorhome.com/psych.htm

-1-T2 Partners LLC

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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T2 Partners LLC

The Berkshire Hathaway Empire Today

6 Largest Stakes inPublic Companies

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http://www.pg.com/en_US/index.jhtml

http://www.genre.com/page/0,1019,,00.html

https://sales.geico.com/quote.do?GENINFO_currentPageName=entry&POL_ratedZip5=&

http://www.netjets.com/default.asp

http://www.brick.com/

http://www.johnsmanville.com/default.htm

http://www2.coca-cola.com/index.html

https://www.wellsfargo.com/

http://www.shawfloors.com/index.asp

http://shop.borsheims.com/Borsheims/Default.aspx

http://www.buffalonews.com/default.asp

http://www.jordans.com/default.asp

-3-T2 Partners LLC

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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-4-T2 Partners LLC

Recent Performance of Key Business Units By Year:

2004 2005 2006 2007Insurance Group:Premiums EarnedGEICO 970 1,221 1,314 1,113General Re 3 -334 523 555Berkshire Reinsurance Group 417 -1,069 1,658 1,427Berkshire H. Primary Group 161 235 340 279Investment Income 2,824 3,480 4,316 4,758Total Insurance Oper. Inc. 4,375 3,533 8,151 8,132

Non-Insurance Businesses:Finance and Financial products 584 822 1,157 1,006McLane Company 228 217 229 232Shaw Industries 466 485 594 436MidAmerican/Utilities/Energy 237 523 1,476 1,774Other businesses 1,787 1,921 2,703 3,279Total Non-Insur. Oper. Inc. 3,302 3,968 6,159 6,727

Total Operating Income 7,677 7,501 14,310 14,859 of 95

-5-T2 Partners LLC

Recent Performance of Key Business Units By Quarter:

Insurance Group:Q1

2005Q2

2005Q3

2005Q4

2005Q1

2006Q2

2006Q3

2006Q4

2006Q1

2007Q2

2007Q3

2007Q4

2007Q1

2008Q2

2008Premiums EarnedGEICO 312 358 237 314 311 288 407 308 295 325 335 158 186 298General Re 19 43 -389 -7 71 106 177 169 30 230 157 138 42 102Berkshire Reinsurance Group 143 140 -1,635 283 94 137 735 692 553 356 183 335 29 79Berkshire H. Primary Group 18 37 -10 190 35 43 108 154 49 63 77 90 25 81Investment Income 787 851 900 942 1,018 1,102 1,103 1,093 1,078 1,236 1,217 1,227 1,089 1,204Total Insurance Oper. Inc. 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

Non-Insurance Businesses:Finance and Financial products 199 199 207 217 251 343 282 281 242 277 273 214 241 254Marmon 28 261McLane Company 69 59 53 36 55 56 50 68 58 72 50 52 73 68MidAmerican/Utilities/Energy 141 100 141 141 418 278 416 364 513 372 481 408 516 329Shaw Industries 88 139 145 113 155 169 138 132 91 111 125 109 51 82Other businesses 364 514 486 557 430 671 686 916 632 904 895 848 721 874Total Non-Insur. Oper. Inc. 861 1,011 1,032 1,064 1,309 1,517 1,572 1,761 1,536 1,736 1,824 1,631 1,630 1,868

Total Operating Income 2,140 2,440 135 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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-6-T2 Partners LLC

The Earnings of Berkshire’s Operating Businesses Have Grown at a Very High Rate – And Growth is Accelerating

Note: CAGR: 1965-1979, 1979-1993, 1993-2007. EPS is pretax and net of minority interests.

Per-Share Per-ShareYear Investments CAGR Pre-Tax Earnings CAGR1965 $4 $41979 $577 42.8% $18 11.1%1993 $13,961 25.6% $212 19.1%2007 $90,343 14.3% $4,093 23.5%

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

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-7-T2 Partners LLC

Berkshire Is One of the Fastest Growing Large Companies in the World

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

Source: Capital IQ

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

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-8-T2 Partners LLC

Valuing Berkshire

“Over the years we've…attempt[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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-9-T2 Partners LLC

Buffett’s Comments on Berkshire’s Valuation Lead to an Implied Multiplier of Approximately 12

• 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 15- 20% 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.”

Pre-tax EPSExcluding All Year-End

Investments Income From Stock Intrinsic Implied Year Per Share Investments Price Value Multiplier1996 $28,500 $421 $34,100 $34,100 131997 $38,043 $718 $46,000 $46,000 111998 $47,647 $474 $70,000 $54,000 131999 $47,339 -$458 $56,100 $60,000

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-10-T2 Partners LLC

Applying the 12 Multiple: 2001 – 2007

* Unlike the table on page 4 of the 2007 Annual Report, we include earnings from Berkshire’s 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 Buffett’s guidance in the Annual Report.

**

***

*

Pre-tax EPSExcluding All Intrinsic Subsequent

Investments Income From Value Year StockYear End Per Share Investments Per Share Price Range

2001 $47,460 -$1,289 $64,000 $59,600-$78,5002002 $52,507 $1,479 $70,000 $60,600-$84,7002003 $62,273 $2,912 $97,000 $81,000-$95,7002004 $66,967 $3,003 $103,000 $78,800-$92,0002005 $74,129 $3,600 $117,300 85,700-$114,2002006 $80,636 $5,200-$5,400 143,000-144,400 107,200-151,6502007 $90,343 $5,500-$5,700 156,300-158,700 ?

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-11-T2 Partners LLC

Berkshire Is At Least 25% Below Intrinsic Value, Near the Most Undervalued It’s Been in the Past 12 Years

Intrinsic Value*

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

Intrinsic value based on YE 2007 estimate of $157,000,

which doesn’t factor in this year’s events, most importantly likely gains from $50+ billion of

investments & commitments

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-12-T2 Partners LLC

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

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-13-T2 Partners LLC

Buffett Is Putting Berkshire’s Money to Work Rapidly

• He’s 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

(6)

(4)

(2)

0

2

4

6

8

10

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H1 08

Acquisitions Net Stock Purchases

$B

Does not include $4.7B for

Constellation Energy, $5B for Goldman,

$3B for GE & others

of 95

-14-T2 Partners LLC

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 today’s price

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-15-T2 Partners LLC

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

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-16-T2 Partners LLC

Risks

• Major recession impacts earnings• Recent investments turn out badly• No catalysts

– Intrinsic value will likely continue to grow nicely• Buffett’s 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• Can’t 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

doesn’t think he can allocate it

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-17-T2 Partners LLC

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

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-2-T2 Partners LLC

Fairfax Over the Past Five Years

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-1-T2 Partners LLC

Fairfax Is a Diversified Insurance Holding Company

of 95

-3-T2 Partners LLC

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.Source: Fairfax presentation, 9/08 of 95

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

THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ (unaudited -$ millions, except per share amounts) 2008 2007 2008 2007 ---- ---- ---- ---- ---- ---- Total revenue 2,155.1 1,871.2 5,791.2 5,076.3 Earnings before income taxes and non-controlling interests 731.6 501.0 1,835.3 1,125.6 Net earnings 467.6 253.2 1,127.0 532.2 Net earnings per share $25.40 $14.12 $60.63 $29.54 Net earnings per diluted share $25.27 $13.47 $59.89 $28.27

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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 NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30 SEPTEMBER 30 ------------ ------------ ------------ ------------ 2008 2007 2008 2007 ---- ---- ---- ---- ---- ---- Insurance - Canada (Northbridge) 113.3% 88.5% 103.9% 89.6% - U.S. (Crum & Forster) 128.5% 96.5% 121.8%(1) 95.3% - Asia (Fairfax Asia) 85.0% 68.0% 80.6% 82.6% Reinsurance - OdysseyRe 113.0% 97.9% 103.6% 96.1% - Other 111.9% 94.6% 104.5% 95.5% Consolidated 115.5%(2) 94.8% 107.4%(1)(2) 94.3% (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.

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-4-T2 Partners LLC

Fairfax Has Made Enormous Strides Over the Past Year

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-5-T2 Partners LLC

Fairfax’s Financial Strength Has Improved Dramatically

Source: Fairfax presentation, 9/08 of 95

-6-T2 Partners LLC

Fairfax’s CDS Portfolio Has Paid Off In a Big Way – And We Think There’s 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.

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($ millions) Excess of Orig- sale inal proceeds over acqui- original Notional sition Sale acquisition amount cost Proceeds cost FY 2007 965.5 25.7 199.3 173.6 Q1 2008 3,830.0 95.5 885.0 789.5 Q2 2008 855.0 22.8 190.0 167.2 Q3 2008 3,580.9 59.4 595.7 536.3 Q4 to October 24 1,793.2 38.1 179.7 141.6 ------- ---- ----- ------ Cumulative sales since inception 11,024.6 241.5 2,049.7 1,808.2 Remaining credit default swap positions at October 24, 2008 9,834.7 191.5 596.1 (1) 404.6(2) ------- ----- ----- ----- Total realized and unrealized from inception 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.

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-7-T2 Partners LLC

Hamblin Watsa’s Investment Performance Has Been Spectacular

of 95

-8-T2 Partners LLC

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

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-9-T2 Partners LLC

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 Fairfax’s core business is worth 1.3-1.5x book value, so at today’s price, we’re getting a very good, growing insurance company at a good price, with a free call option on Fairfax’s CDS portfolio.

Note: Tangible book value excludes preferred stock and goodwill. of 95

Target Over the Past Two Years

of 95

Financial Highlights – Continuing Operations$4

2,02

5

$46,

839

$52

,620

$59

,490

Total Revenues (millions)

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

$3,

159

$3,

601

$4,3

23 $5,

069

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


$1,6

19

$1,8

85 $2,

408

$2,

787

Earnings from Continuing Operations (millions)


$1.7

6

$2.

07

$2.

71 $3.

21

$63

,367

$5,

272

$2,

849

$3.

33

Diluted EPS


2007 Capital Expenditures($4.4 billion)

• New Stores• Remodels & Expansions• Information Technology, Distribution & Other

71%7%

22%

2007 Sales Mix($61.5 billion)

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

22%

19%

3%

34%

22%

••

••

of 95

No. of Retail Sq. Ft.Sales per Capita Group Stores (in thousands)

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

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

Total 1,591 207,945

15

No. of Retail Sq. Ft.Sales per Capita Group Stores (in thousands)

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

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

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

YEAR-END STORE COUNT AND SQUARE FOOTAGE BY STATE

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

2007 Sales Per Capita

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16

2007 2006(a) 2005 2004 2003 2002

Financial Results: (in millions)Sales $61,471 $57,878 $51,271 $45,682 $40,928 $36,519Credit card revenues 1,896 1,612 1,349 1,157 1,097 891

Total revenues 63,367 59,490 52,620 46,839 42,025 37,410

Cost of sales 41,895 39,399 34,927 31,445 28,389 25,498Selling, general and administrative expenses (b) 13,704 12,819 11,185 9,797 8,657 7,505Credit card expenses 837 707 776 737 722 629Depreciation and amortization 1,659 1,496 1,409 1,259 1,098 967

Earnings from continuing operations before interest expense and income taxes (c) 5,272 5,069 4,323 3,601 3,159 2,811

Net interest expense 647 572 463 570 556 584

Earnings from continuing operations before income taxes 4,625 4,497 3,860 3,031 2,603 2,227Provision for income taxes 1,776 1,710 1,452 1,146 984 851

Earnings from continuing operations $ 2,849 $ 2,787 $ 2,408 $ 1,885 $ 1,619 $ 1,376

Per Share:Basic earnings per share $ 3.37 $ 3.23 $ 2.73 $ 2.09 $ 1.78 $ 1.52Diluted earnings per share $ 3.33 $ 3.21 $ 2.71 $ 2.07 $ 1.76 $ 1.51Cash dividends declared $ .54 $ .46 $ .38 $ .31 $ .27 $ .24Financial Position: (in millions)Total assets $44,560 $37,349 $34,995 $32,293 $27,390 $24,506Capital expenditures $ 4,369 $ 3,928 $ 3,388 $ 3,068 $ 2,738 $ 3,040Long-term debt, including current portion $16,590 $10,037 $ 9,872 $ 9,538 $11,018 $11,090Net debt (d) $15,238 $ 9,756 $ 8,700 $ 7,806 $10,774 $10,733Shareholders’ investment $15,307 $15,633 $14,205 $13,029 $11,132 $ 9,497Financial Ratios:Revenues per square foot (e)(f) $ 318 $ 316 $ 307 $ 294 $ 287 $ 281Comparable-store sales growth (g) 3.0% 4.8% 5.6% 5.3% 4.4% 2.2%Gross margin rate (% of sales) 31.8% 31.9% 31.9% 31.2% 30.6% 30.2%SG&A rate (% of sales) 22.3% 22.2% 21.8% 21.4% 21.2% 20.5%EBIT margin (% of revenues) 8.3% 8.5% 8.2% 7.7% 7.5% 7.5%Other:Common shares outstanding (in millions) 818.7 859.8 874.1 890.6 911.8 909.8Cash flow provided by operations (in millions) $ 4,125 $ 4,862 $ 4,451 $ 3,808 $ 3,188 $ 2,703Retail square feet (in thousands) 207,945 192,064 178,260 165,015 152,563 140,294Square footage growth 8.3% 7.7% 8.0% 8.2% 8.8% 11.9%Total number of stores 1,591 1,488 1,397 1,308 1,225 1,147

General merchandise 1,381 1,311 1,239 1,172 1,107 1,053SuperTarget 210 177 158 136 118 94

Total number of distribution centers 32 29 26 25 22 16

(a) Consisted of 53 weeks.

(b) Also referred to as SG&A.

(c) Also referred to as EBIT.

(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 thismeasure 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 amore 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, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Summary – Continuing Operations

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Target Corporation September Sales up 2.5 Percent10/08/08

MINNEAPOLIS--(BUSINESS WIRE)--

Target Corporation (NYSE:TGT) today reported that its net retail sales for the five weeks endedOctober 4, 2008 increased 2.5 percent to $5,320 million from $5,190 million for the five weeks endedOctober 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 thecurrent environment, including weak top-line growth in our retail segment and higher net write-offrates in our credit card segment, have increased the likelihood that our third quarter EPS may beslightly below the current First Call median estimate of 52 cents. On balance, we currently expect2008 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 fourthquarter and a continuation of recent write-off rate trends through the remainder of this year. Allearnings 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 salesrelease. Consistent with this practice, a new message was recorded earlier today. The next salesrecording is expected to be issued on Thursday, November 6, 2008. These recordings may beaccessed by calling 612-761-6500.

Forward-looking statements in this release regarding expected earnings per share results should beread in conjunction with the cautionary statements in Exhibit (99)A to the company's first quarter2008 Form 10-Q.

Target Corporation's retail segment includes large, general merchandise and food discount stores, anda fully integrated on-line business called Target.com. In addition, the company operates a credit cardsegment that offers branded proprietary and Visa credit card products. The company currentlyoperates 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.

Investors Financial News ReleaseFinancial News Release

Target : Investors : Financial News Release http://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle...

1 of 1 11/5/2008 11:36 AM of 95

Glossary

Analyst Ratings

1-Strong Buy 2

2-Buy 4

3-Hold 12

4-Underperform 1

5-Sell 1

Mean Recommendation: 2.8

Sell Strong Buy

Analyst Forecasts

Last Month's Revisions

FiscalPeriod

Mean High Low Median # of Estimates #Up #Down Mean %Change

Annual Jan 11 3.82 4.32 2.78 3.94 7 0 4 -13.56

Annual Jan 10 3.48 4.14 2.70 3.45 22 0 16 -6.32

Annual Jan 09 3.32 3.50 3.10 3.31 22 0 19 -2.99

Quarterly Oct 08 0.50 0.54 0.46 0.50 20 1 15 -4.72

Quarterly Jan 09 1.27 1.42 1.19 1.27 18 0 16 -5.66

Quarterly Apr 09 0.72 0.85 0.63 0.72 12 0 8 -7.46

Quarterly Jul 09 0.83 0.95 0.77 0.83 12 0 8 -5.71

Long Term Growth 12.95 16.00 7.50 14.00 10 0 0 -3.45

Actuals

Reported EPS Mean Estimate Surprise % Change

Annual Jan 08 3.33 3.34 -0.31

Quarterly Oct 07 0.56 0.62 -9.14

Quarterly Jan 08 1.23 1.22 0.52

Quarterly Apr 08 0.74 0.71 4.93

Quarterly Jul 08 0.82 0.76 8.61

Annual Jan 07 3.21 3.18 0.84

Annual Jan 06 2.71 2.70 0.55

Data Provided by Thomson Financial

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

Investors Earnings EstimatesEarnings Estimates

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

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

1 of 1 11/5/2008 11:37 AM of 95

Unlocking Immense Real Estate Value

$40/Share (1) Inflation Protected Treasury Securities (TIPS) (3)

Large Cap REITs (1)

Target’s Market Valuation (1)

2009E EV / EBITDA

Inflation Protected Securities / REIT Market Valuations

2009E EV / EBITDA

6.0x 33.3x15.7xRecent “Big Box” Ground

Lease (2)

17.0x

REITs, private market ground leases, and inflation-protected securities all trade at much higher valuation multiples than Target’s multiple, at only 6.0x ‘09E EV/EBITDA, based on a 20-day trading average stock price of $40

The Transaction creates immense and instant value because 22% of Target’s current EBITDA will be valued at a significantly higher multiple than where Target trades today

19

(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%

of 95

8

Target: Retail and Real Estate Operations

Real Estate OperationsRetail 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-to-high single-digit square footage growth and market share gains

■ Recently sold an undivided interest in credit card receivables

■ 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

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34% 34%

58% 63%

68%

87% 87% 92% 95%

0

10

20

30

40

50

60

70

80

90

100

% U

nits

Ow

ned

(Bui

ldin

gs)1

Significant Real Estate Ownership

Target owns the highest percentage of its real estate compared to other big box retailers

% DCs owned(3): 84% ND 2% 84% 76% 55% 89% 54% ND85% 79% ND ND 55% ND 35% ND 27%% owned units/land(2):

“ND” represents Not Disclosed(1) Represents % owned stores (includes owned stores on leased land)(2) Represents % owned stores on owned land only(3) Represents % owned DCs (includes owned DCs on leased land) 9 of 95

2009E 2009E 2009E 2009E

Target Corp TIP REIT "Combined" Target Standalone

($mm, except per share)

EBITDA $5,172 $1,427 $6,599 (1) $6,614

D&A 1,884 56 1,940 1,940

EBIT 3,288 1,372 4,659 4,674

Taxes 1,004 7 1,011 1,528

EPS $2.23 $1.79 (2) $4.02 $3.40

Selected 2009E Income Statement Data

26

22% of total EBITDA to TIP REIT

Minimal D&A at TIP REIT and no maintenance capex

TIP REIT pays almost no taxes

18% EPS accretion from tax efficiencies and improved free cash flow

Based on the assumptions provided, the Transaction would result in $1.4bn EBITDA in 2009E to TIP REIT

(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

of 95

$0

$20

$40

$60

$80

Target (20-Day Avg. Price) ¹ Target REIT Spin-Off ² 12-Month Price Target ²

$/Sh

are

TIP REIT

Target CorpTarget

Standalone

74%

$40

$70

$38

$32 $42

$42

$83

TIP REIT

Target Corp

Valuation Summary

30

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

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

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MBIA Over the Past Two Years

of 95

37

Who Are the Bond Insurers?

Financial Guarantors are inadequately capitalized to withstand a negative credit event

Reserves / Guarantees 3.15 bps 3.93 bps

Face Value Bond Guarantees /

Statutory Capital

94.1x

80.8x

0x

25x

50x

75x

100x

of 95

39

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

1996 2006

14%86%

Public Finance

Structured Finance

68%32%

Public Finance

Structured Finance

Growing Structured Finance Exposure

of 95

40

Growing Structured Finance Exposure

MBIA has increased exposure to Structured Finance during period of rapid innovation and lower lending standards

$ insured (bn)

% of total

MBIA: Net Par Insured

42.1

47.6 46.7

25.2

59.5 66.5%

53.0%

42.1%38.7%

44.3%

0

10

20

30

40

50

60

70

2003 2004 2005 2006 Q1 '0725.0%

35.0%

45.0%

55.0%

65.0%

75.0%

of 95

41

MBIA Compared to Citigroup

Credit Rating

Regulator

Leverage

Credit Exposure

Capital

Reserves / Credit Exposure

Aaa, AAA

NYS Insurance Dept

94:1(Net Par / Capital)

$635 billion

$6.8 billion

3 bps

Aaa, AA+

Federal Reserve, OCC, FDIC

12:1(Risk Adj. Assets / Tier 1 Capital)

$1,107 billion

$127.0 billion

96 bps of 95

42

Minimal Losses Will Impair MBIA’s Capital Base

Total Guaranteed Portfolio 635.2$ BillionPublic Finance 421.8 Structured Finance 213.4$ Billion

CDO Exposure 108.6 Mortgage Exposure 52.0 Other ABS Exposure 26.9 Direct and Pooled Corporate Exposure 25.9 Total Structured Finance Exposure 213.4$ Billion

Estimated "Excess" Capital over AAA 0.5$ BillionLosses to eliminate excess capital 23 bps

Total Statutory Capital Base 6.8$ BillionSF Losses to eliminate all capital 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

(1)

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49

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

Source: Company reports, Pershing estimates (MBI adjusted for one-time expenses). of 95

50

Decreasing Unallocated Reserves

MBIA’s 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)

bps

MBIA’s Unallocated Reserves (bps of net par outstanding)

6.2bps 6.0bps5.7bps

5.5bps 5.4bps

3.6bps 3.5bps3.2bps

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 2001 2002 2003 2004 2005 2006 Q1 '07 of 95

-1-T2 Partners LLC

MBIA Has Enormous Exposure to CDOs and Risky Mortgages

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

CDOs of High-Grade U.S. ABS $15.1 $0.54CDOs of Mezzanine U.S. ABS $3.4 $0.06CDO-Squareds $8.6 $0.44Other Multi-Sector CDOs $2.4Investment Grade and Structured Corporate Credit $42.6High Yield Corporate $10.9CMBS and Commercial Real Estate $42.2Emerging Market $0.2CDO Total $125.4 $1.04

CDO Exposure (Net of Reinsurance)Collateral Type

Net Par Outstanding ($B)

RMBS ExposurePrime First Lien (incl. $3.5 billion of Alt-A) $14.7HELOCs and Closed-End Seconds $17.8Sub-Prime First Lien $4.1Total Direct RMBS: Net Par Outstanding $36.6 $1.12

GRAND TOTAL $162.0 $2.16

ImpairmentsTaken ($B)

5% impairment vs. 70% Ambac took

77% originated in 2006-07; 55% was with Countrywide, 28% Rescap

of 95

-2-T2 Partners LLC

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

Source: MBIA Q2 08 investor presentation – appendix. of 95

Insured Portfolio Losses and Impairments

$ in millions

4Q07 1Q08 2Q08 3Q08 Total

Losses and Impairments

4Q07 1Q08 2Q08 3Q08 Total

Formula provision $ 23 $ 23 $ 22 $ 22 $ 90

Additional loss and LAE 814 265 0 961 2,040

GAAP incurred loss and LAE 837 288 22 983 2,130GAAP incurred loss and LAE 837 288 22 983 2,130

RMBS payments 44 108 305 491 948

Other payments 25 10 26 5 66

Total payments 69 118 331 496 1,014

Ending net loss reserves and LAE $ 1,264 $ 1,435 $ 1,258 $ 1,806 N/A

Credit impairments $ 200 $ 827 $ 13 $ 57 $ 1,097p $ $ $ $ $ ,

Loss Prevention Expenses 0 1 2 5 8

Total Payments 0 0 0 0 0

T t l dit i i t + LPE $ 200 $ 828 $ 15 $ 62 $ 1 105

8

Total credit impairments + LPE $ 200 $ 828 $ 15 $ 62 $ 1,105

of 95

RMBS PortfolioSecond Lien Incurred Loss Estimate Increased to $2 1 billion

2 1$2.5

Second Lien Incurred Loss Estimate Increased to $2.1 billion•RMBS Related Loss Estimates • ($ in billions)

1.1

2.1

$1 0

$1.5

$2.0

$0.0

$0.5

$1.0

MBIA Loss Estimates 3/31/08 MBIA Revised Loss Estimates 9/30/08MBIA Loss Estimates 3/31/08 MBIA Revised Loss Estimates 9/30/08

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

of 95

Direct RMBS ExposureSector and Vintage CompositionSector and Vintage Composition

Q2 2008 Q3 2008

Subprime First Lien 4 1 4 0

$ in billions

Subprime First Lien 4.1 4.0

Prime First Lien (Alt-A of $3.5 billion included) 14.7 13.0

HELOCs 8.2 7.7

Closed-End-Seconds 9.6 9.0

Total Direct RMBS: Net Par Outstanding $ 36.6 $ 33.7

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

910 2007

2006

12345678 2005

2004Pre-2004

• HELOCs and CES are predominantly 2005 & 2006 and 2006 & 2007 vintages, respectively

• International exposure is primarily to Financial Institutions capital relief and covered bond

-1

HELOC CES U.S. Subprime International Alt-A Prime 1st Mtge

20

• International exposure is primarily to Financial Institutions capital relief and covered bond transactions/$1.6 billion natural amortization this quarter

of 95

CES and HELOCPerformance TrendsPerformance Trends

12%14% HEL 3mo CDR

CES 3mo CDR

• Cumulative Default Rates have continued to increase each month

•Weighted Average CDRS•(source: Intex)

2%

4%6%8%

10%

12% CES 3mo CDR

0%Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

C• In Q2, the early–stage

delinquencies started reducing slightly, but in Q3 they increased by over 12%

•Change in 30-59 Delinquency•(source: Intex)

8%

10%

12%

14%

0%

2%

4%

6%

8%

23

-2% 1Q08 vs 4Q07 2Q08 vs 1q08 3Q08 vs 2Q08

of 95

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

of 95

-72-T2 Partners LLC

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. of 95

-73-T2 Partners LLC

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

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: What’s Ailing the Financial System, 2/13/08.

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

of 95

-10-T2 Partners LLC

A Closer Look at MBIA’s Multi-Sector CDO Exposure

Note: This chart is from Pershing Square’s Open Source Model, released on 1/30/08. Subsequently, MBIA’s Q1 ’08 showed that MBIA’s 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”.

of 95

-11-T2 Partners LLC

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

Sources: Pershing Square, Amherst Holdings LLC.

• MBIA has guaranteed the most senior tranche of the Longshore CDO• MBIA’s 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” of 95

T2 Partners LLC

A Closer Look at the Longshore 2007-III CDO

Sources: Pershing Square, Amherst Holdings LLC.

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 Longshore’s 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.

of 95

-13-T2 Partners LLC

A Look at 35 of the 90 RMBS’s Underlying the Longshore CDO

Source: Amherst Holdings LLC., spring 2008 data

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

of 95

-14-T2 Partners LLC

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

Source: Amherst Holdings LLC.

There is $79.3 million beneath it

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

There was 8.45% credit enhancement when this RMBS was created, but this has risen to 11.32% thanks to prepayments

of 95

-15-T2 Partners 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)Source: Amherst Holdings LLC. of 95

-16-T2 Partners LLC

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. of 95

-17-T2 Partners LLC

Distribution of the Remaining, Performing Loans in the ABFC 2006-OPT2 Trust

Full Doc Loans Low/No Doc Loans

Total Full Doc: 60.2% Total Low Doc: 39.8%

Source: Amherst Holdings LLC.

0.1%0.4%0.1%0.4%0.1%0.2%0.1%0.1%0 - 4600.6%0.0%0.4%0.5%0.3%0.3%0.0%0.1%0 - 460

0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 4800.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 480

0.2%0.2%0.3%0.6%0.2%0.1%0.2%0.1%480 - 5000.9%0.1%0.6%0.3%0.2%0.1%0.3%0.4%480 - 500

0.0%0.0%0.0%0.6%0.1%0.2%0.1%0.4%500 - 5200.1%0.0%0.5%0.9%0.4%0.5%0.3%0.3%500 - 520

0.5%0.3%0.7%1.3%0.5%0.4%0.4%0.5%520 - 5401.7%0.3%0.8%1.3%0.9%0.5%0.4%0.6%520 - 540

0.0%0.0%0.0%0.6%0.1%0.2%0.2%0.4%540 - 5600.1%0.1%0.4%0.4%0.4%0.2%0.5%0.2%540 - 560

0.1%0.0%0.1%0.4%0.5%0.3%0.3%0.4%560 - 5802.5%0.1%1.1%1.0%0.4%0.5%0.5%0.4%560 - 580

0.3%0.2%0.8%1.1%0.6%0.4%0.3%0.5%580 - 6005.9%0.4%1.8%1.4%0.7%0.5%0.5%0.4%580 - 6000.4%0.1%0.4%1.3%0.7%0.6%0.3%0.2%600 - 6203.3%0.1%0.9%1.7%0.2%1.0%0.3%0.2%600 - 620

0.6%0.6%1.0%1.1%0.3%0.4%0.3%0.2%620 - 6402.6%0.6%1.0%1.3%0.4%0.6%0.4%0.7%620 - 640

1.2%0.4%1.0%0.6%0.6%0.8%0.0%0.3%640 - 6601.3%0.7%0.8%0.8%0.4%0.1%0.2%0.2%640 - 660

0.9%0.7%0.6%0.5%0.2%0.0%0.0%0.3%660 - 6800.9%0.2%0.4%0.4%0.0%0.1%0.2%0.1%660 - 680

0.9%0.1%0.2%0.2%0.0%0.4%0.1%0.1%680 - 7000.9%0.2%0.3%0.1%0.0%0.0%0.0%0.1%680 - 700

1.9%0.1%0.7%0.2%0.2%0.1%0.1%0.1%700 - 11002.1%0.1%0.5%0.3%0.1%0.1%0.1%0.1%700 - 1100

95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV

0.1%0.4%0.1%0.4%0.1%0.2%0.1%0.1%0 - 4600.6%0.0%0.4%0.5%0.3%0.3%0.0%0.1%0 - 460

0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 4800.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 480

0.2%0.2%0.3%0.6%0.2%0.1%0.2%0.1%480 - 5000.9%0.1%0.6%0.3%0.2%0.1%0.3%0.4%480 - 500

0.0%0.0%0.0%0.6%0.1%0.2%0.1%0.4%500 - 5200.1%0.0%0.5%0.9%0.4%0.5%0.3%0.3%500 - 520

0.5%0.3%0.7%1.3%0.5%0.4%0.4%0.5%520 - 5401.7%0.3%0.8%1.3%0.9%0.5%0.4%0.6%520 - 540

0.0%0.0%0.0%0.6%0.1%0.2%0.2%0.4%540 - 5600.1%0.1%0.4%0.4%0.4%0.2%0.5%0.2%540 - 560

0.1%0.0%0.1%0.4%0.5%0.3%0.3%0.4%560 - 5802.5%0.1%1.1%1.0%0.4%0.5%0.5%0.4%560 - 580

0.3%0.2%0.8%1.1%0.6%0.4%0.3%0.5%580 - 6005.9%0.4%1.8%1.4%0.7%0.5%0.5%0.4%580 - 6000.4%0.1%0.4%1.3%0.7%0.6%0.3%0.2%600 - 6203.3%0.1%0.9%1.7%0.2%1.0%0.3%0.2%600 - 620

0.6%0.6%1.0%1.1%0.3%0.4%0.3%0.2%620 - 6402.6%0.6%1.0%1.3%0.4%0.6%0.4%0.7%620 - 640

1.2%0.4%1.0%0.6%0.6%0.8%0.0%0.3%640 - 6601.3%0.7%0.8%0.8%0.4%0.1%0.2%0.2%640 - 660

0.9%0.7%0.6%0.5%0.2%0.0%0.0%0.3%660 - 6800.9%0.2%0.4%0.4%0.0%0.1%0.2%0.1%660 - 680

0.9%0.1%0.2%0.2%0.0%0.4%0.1%0.1%680 - 7000.9%0.2%0.3%0.1%0.0%0.0%0.0%0.1%680 - 700

1.9%0.1%0.7%0.2%0.2%0.1%0.1%0.1%700 - 11002.1%0.1%0.5%0.3%0.1%0.1%0.1%0.1%700 - 1100

95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV

of 95

-18-T2 Partners LLC

30.0%33.7%30.0%25.7%24.3%39.6%19.6%18.1%0 - 46018.4%20.3%24.5%19.5%19.7%18.0%74.6%17.7%0 - 460

0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 4800.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 480

56.0%49.6%29.5%41.9%25.1%30.0%20.7%23.5%480 - 50018.0%27.9%22.2%27.8%20.1%17.0%17.4%18.8%480 - 500

0.0%0.0%17.3%20.7%21.8%14.0%12.0%11.5%500 - 52018.9%17.0%19.9%16.8%12.2%12.9%11.0%11.0%500 - 520

30.0%28.8%43.8%18.5%26.3%21.0%14.9%15.2%520 - 54026.1%20.5%22.3%16.3%16.7%19.9%11.5%13.7%520 - 540

0.0%27.7%11.9%15.2%15.0%13.2%7.3%16.7%540 - 56019.2%21.6%15.6%15.4%10.1%9.2%12.4%12.4%540 - 560

30.0%16.1%19.9%11.2%10.1%14.3%13.4%7.4%560 - 58017.8%14.8%15.8%11.9%8.1%8.7%11.6%7.1%560 - 580

28.0%20.8%21.0%13.5%15.3%10.6%8.1%13.7%580 - 60015.6%15.0%11.0%9.6%9.3%9.4%9.1%6.9%580 - 600

19.3%19.7%10.1%7.6%7.2%9.0%6.2%9.4%600 - 62011.0%11.2%7.6%9.3%5.2%7.5%4.9%4.8%600 - 620

19.6%8.9%9.0%5.4%5.0%4.1%3.5%3.6%620 - 6408.0%8.4%7.0%4.3%3.4%4.6%2.7%4.0%620 - 640

10.5%3.7%6.2%2.5%2.3%2.2%1.6%1.7%640 - 6606.6%3.9%4.7%2.3%2.3%1.8%1.4%1.4%640 - 660

6.9%4.2%3.3%2.2%2.0%0.0%1.1%1.8%660 - 6803.9%2.9%3.8%2.3%3.6%2.6%1.0%1.5%660 - 680

4.8%3.7%3.4%4.3%0.0%1.5%1.0%1.1%680 - 7002.8%2.5%1.7%1.1%1.5%0.0%0.7%1.2%680 - 700

3.3%4.0%2.7%1.6%1.4%0.8%1.1%0.5%700 - 11001.8%1.2%1.6%1.6%1.5%0.3%0.8%0.4%700 - 110095 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV

30.0%33.7%30.0%25.7%24.3%39.6%19.6%18.1%0 - 46018.4%20.3%24.5%19.5%19.7%18.0%74.6%17.7%0 - 460

0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 4800.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%460 - 480

56.0%49.6%29.5%41.9%25.1%30.0%20.7%23.5%480 - 50018.0%27.9%22.2%27.8%20.1%17.0%17.4%18.8%480 - 500

0.0%0.0%17.3%20.7%21.8%14.0%12.0%11.5%500 - 52018.9%17.0%19.9%16.8%12.2%12.9%11.0%11.0%500 - 520

30.0%28.8%43.8%18.5%26.3%21.0%14.9%15.2%520 - 54026.1%20.5%22.3%16.3%16.7%19.9%11.5%13.7%520 - 540

0.0%27.7%11.9%15.2%15.0%13.2%7.3%16.7%540 - 56019.2%21.6%15.6%15.4%10.1%9.2%12.4%12.4%540 - 560

30.0%16.1%19.9%11.2%10.1%14.3%13.4%7.4%560 - 58017.8%14.8%15.8%11.9%8.1%8.7%11.6%7.1%560 - 580

28.0%20.8%21.0%13.5%15.3%10.6%8.1%13.7%580 - 60015.6%15.0%11.0%9.6%9.3%9.4%9.1%6.9%580 - 600

19.3%19.7%10.1%7.6%7.2%9.0%6.2%9.4%600 - 62011.0%11.2%7.6%9.3%5.2%7.5%4.9%4.8%600 - 620

19.6%8.9%9.0%5.4%5.0%4.1%3.5%3.6%620 - 6408.0%8.4%7.0%4.3%3.4%4.6%2.7%4.0%620 - 640

10.5%3.7%6.2%2.5%2.3%2.2%1.6%1.7%640 - 6606.6%3.9%4.7%2.3%2.3%1.8%1.4%1.4%640 - 660

6.9%4.2%3.3%2.2%2.0%0.0%1.1%1.8%660 - 6803.9%2.9%3.8%2.3%3.6%2.6%1.0%1.5%660 - 680

4.8%3.7%3.4%4.3%0.0%1.5%1.0%1.1%680 - 7002.8%2.5%1.7%1.1%1.5%0.0%0.7%1.2%680 - 700

3.3%4.0%2.7%1.6%1.4%0.8%1.1%0.5%700 - 11001.8%1.2%1.6%1.6%1.5%0.3%0.8%0.4%700 - 110095 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV95 - 10090 - 9585 - 9080 - 8575 - 8070 - 7565 - 700 - 65FICO/CLTV

S&P’s 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)

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

The 23.8% defaults in the first 25 months are only the tip of the iceberg

Source: Amherst Holdings LLC. of 95

-19-T2 Partners LLC

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 Moody’s still has it rated B3 (S&P and Fitch have cut it to CCC)

(funds managed by T2 Partners LLC are short Moody’s)• 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)

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-20-T2 Partners LLC

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 let’s 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, let’s 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 Longshore’s 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

Square’s Open Source Model of 95

-21-T2 Partners LLC

Implications for MBIA’s 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 MBIA’s CDO reinsurance is worth much,

given that 53% of MBIA’s 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.

of 95

-22-T2 Partners LLC

MBIA May Have Trouble Collecting on Much of Its Reinsurance

Source: MBIA Q2 08 investor presentation – appendix. of 95

-23-T2 Partners LLC

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 Square’s Open Source Model are likely to be conservative:

Open Source ModelSummary of MBIA’s

Projected LossesCollateral Type

Loss to Net Par Insured

Loss to Gross Par Insured

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

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An Introduction to Value Investing Slides-Whitney Tilson-11!5!08

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