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Investor Day March 29, 2007 Fixed Income Overview Jeff Mayer Co-Head of Global Fixed Income Tom Marano Global Head of Mortgages and Asset Backed Securities Net Revenues have Doubled Since 2002 CAGR = 22% billions $2,907 $4,190 $3,147 $3,293 2004 2005 $1,909 2002 2003 Prior period net revenues reclassified to conform to current reporting. 2006 2 Led by the Growth of the Credit and Mortgage Franchises Contribution to Growth in Fixed Income Net Revenues 2002–2006 $327 $4,190 Interest Rate 2006 billions $1,027 $927 $1,909 2002 MBS Prior period net revenues reclassified to conform to current reporting. Credit 3 The Franchise Continues to Grow: Credit Credit products continue to produce record revenues Credit Trading ⎯ Record revenues in 2006 well surpassed prior year record ⎯ Global franchise with U.S., Europe and Asia all contributing Leveraged Finance ⎯ Jointly managed with Investment Banking ⎯ Sixth consecutive year of record net revenues ⎯ Lead managed bank and bond deal volumes at record levels Distressed Debt ⎯ Record revenues in 2006 ⎯ Strong research, client relationships and distribution capabilities 4 Credit Derivatives Growth Trend Continues During First Quarter Volume up 64% over 1Q2006 $4.0 160,000 Volume $3.0 120,000 $2.0 80,000 $1.0 40,000 $0.0 0 2002 2003 2004 2005 Trade Volume trillions No. of Trades 2006 5 Strategic Effort to Deepen Relationships with Financial Sponsors Continues to Fuel Business Opportunities in 1Q 2007 Lead Managed Bond Deals(1) Lead Arranged Bank Deals(2) 50 $8 $15 50 $13.8 43 41 $5.7 $6 40 $12 40 33 $4.7 30 25 30 $4 27 20 30 $9 $7.7 $5.8 $6 $2.5 13 $2 billions billions $5.2 30 20 14 $1.5 10 $3 $2.2 10 4 $0 0 2002 2003 2004 League Table Volume (1) Source: Bloomberg High Yield Underwriter Rankings. (2) Source: Reuters Loan Pricing Corp. 2005 2006 No. of Issues $0 $0.8 2002 2003 2004 League Table Volume 0 2005 2006 No. of Deals 6 The Franchise Continues to Grow: Interest Rate Broadening the franchise to both integrate cash and derivative businesses and launch new product areas Interest Rate ⎯ Integrating cash and derivative businesses ⎯ Global franchise with significant operations in Europe and Asia Foreign Exchange ⎯ Expanding precious metals business, already profitable in first full year ⎯ Investing in electronic trading platforms and technology ⎯ Local Markets group formed 7 Our Market Leading Mortgage Franchise Continues to Grow Origination Captive origination increased significantly in 2006 Servicing Servicing over 500,000 loans Securitization Top ranked underwriter of MBS and ABS Research Top ranked research analysts Commercial Global CMBS platform CDO/CLO Market leader in CDO/CLO space 8 Expanding Origination Capability Origination Growing captive origination platform provides a steady source of quality product for capital markets activities Three domestic captive origination channels accounted for 35% of securitizations in Q1 2007: Bear Residential Mortgage Corporation (“Bear Res”) ⎯ Encore Credit Corporation (“Encore”) ⎯ Alt-A wholesale originator launched in April 2005 Sub-prime wholesale originator acquired in February 2007 EMC Mortgage Corporation (“EMC”) ⎯ Alt-A and Sub-prime conduit operation Two European sub-prime mortgage originators: Rooftop – United Kingdom Bearimmo – France 9 Bear Residential Mortgage Corporation Alt-A Wholesale Platform Over the past 2 years we have built a highly scalable, state-of-the-art origination platform $2,000 Bear Res Origination Originated $4.8 billion in loans in 2006, up from $400 million in 2005 Web portal and automated underwriting engine enable fast & efficient loan processing Network of over 6,000 approved brokers & correspondents $1,500 millions Origination $1,000 $500 $0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 10 Encore Credit Corporation Sub-prime Wholesale Platform Encore acquisition in February 2007 doubled our wholesale origination capacity and diversified our product mix. Originated $6.1 billion of loans in 2006 Purchased assets and compatible platform at an attractive price Network of nearly 10,000 approved brokers & correspondents $2,000 Encore Origination $1,500 millions Origination $1,000 $500 Platform will leverage Bear Res technology platform as well as Bear Stearns research and capital markets expertise $0 1Q06 2Q06 3Q06 4Q06 11 EMC Mortgage Corporation Alt-A and Sub-prime Conduit EMC is a top Alt-A and Sub-prime conduit, comprised of three main channels: 30,000 Bulk Bulk ⎯ Acquire large pools which are competitively bid ⎯ $36.2 billion of 2006 acquisitions Flow ⎯ Approximately 500 approved sellers ⎯ $29.6 billion of 2006 acquisitions Scratch & Dent ⎯ ⎯ Marker leader in acquisitions of distressed and scratch & dent loans $3.4 billion of 2006 acquisitions Flow Scratch & Dent 25,000 $ in millions Origination 20,000 15,000 10,000 5,000 0 Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 '06 Q1 '07 12 Rooftop and Bearimmo Sub-Prime Wholesale Platforms Origination Over the past 3 years, we have established sub-prime origination platforms in the United Kingdom and France. Both platforms built organically Rooftop originated $1.7 billion in 2006 Bearimmo growing rapidly, with current monthly originations of $25 million 13 EMC Mortgage Corporation Servicing EMC continues to be a top rated servicer with a new management team driving automation and innovation. Market leader as specialty servicer, with over 15 years of experience Currently servicing 504,177 loans with balances of $77.9 billion $100 600 Number of Units 500 Unpaid Balances $75 400 Servicing varied types of loans – Alt A, Sub-prime, Prime, Seconds, Option ARMs, HELOCs and ‘Scratch and Dent’ Since 2000, the number of loans serviced has quadrupled and balances have increased eleven-fold In the last year, EMC has hired 18 Senior Managers, averaging more than 19 years of industry experience $50 300 200 $25 100 $0 0 2000 2001 2002 2003 2004 2005 2006 1Q07 14 Bear Stearns Mortgage Facilities Downers Grove, IL Santa Ana, CA (Bear Res) King of Prussia, PA Irvine, CA (Encore) Scottsdale, AZ Glen Allen, VA Irvine, CA (EMC) Scottsdale, AZ (Pima) Irving, TX United Kingdom France London (Rooftop) Map Key Current States: 38 States Paris (Bearimmo) Utilization Key 0% - 50% 50% - 100% 15 Market Leader in Securitization Activity Our franchise retained its leading rank in the MBS market and Securitization increased penetration into several new sectors in 2006. Ranked #1 in U.S. MBS(1) in 2006 for the third year in a row ⎯ ⎯ Ranked #1 in U.S. ARMs(1) ⎯ ⎯ ⎯ $23 billion in 2006 securitizations Volume nearly doubling from last year Originated a record $12.6 billion in Global CMBS ⎯ ⎯ (1) Source: Thomson Financial. $43 billion in 2006 securitizations Top ranked every year since inception of ranking (2002) Became Top 5 ranked Global CDO underwriter in 2006 ⎯ $113 billion in 2006 securitizations Consistently ranked in the top 5 for the last 20 years $15.5 billion in 2006 securitizations Transactions in Europe, Asia and Latin America 16 Mortgage Research Team Research Our top ranked(1) analytics team is a key driver of our success. In 2006, 7 research analysts were recognized in 9 categories, up from 4 analysts in 7 categories in 2005 Since 2001, our research staff has earned 39 total team positions including, 13 first team awards Ranked #1 in MBS Prepayments since 1993 (14 years) Top 2 in ABS Prepayments every year since 2001 Top 3 in MBS Non-Agency every year since 2001 (1) Source: Institutional Investor. 17 Commercial Mortgages In 2006, we firmly established Bear Stearns as a global presence in Commercial commercial real estate finance. $14,000 Originated over $12.6 billion in 2006, more than double 2004 levels Able to apply securitization expertise to acquisition finance ⎯ ⎯ ⎯ ⎯ Equity Office Properties The Blue City, Sultanate of Oman Daikoku Distribution Center, Yokohama 180 UK petrol stations leased to Shell Global franchise ⎯ ⎯ 24% of 2006 production from non-U.S. sources Offices in New York, Los Angeles, London, Tokyo and Frankfurt $12,000 Commercial Loan Originations $10,000 $8,000 millions $6,000 $4,000 $2,000 $0 2003 2004 2005 2006 18 CDOs/CLOs CDO/CLO CDOs Top 5 ranked Global CDO underwriter in 2006 ⎯ Diverse and balanced range of CDO Business ⎯ ⎯ CLOs, ABS CDOs, CDOSquared, CMBS, Trust Preferred Continued growth in London-based CDO origination, reaching $3.4 billion Broad based distribution platform through team in New York, London, Tokyo, Hong Kong and Singapore ⎯ Volume nearly doubling from 2005 Approximately 40% of CDO debt classes and 52% of CDO equity classes placed internationally Strong pipeline of deals for the remainder of the year - over $15 billion in committed mandates CLOs Major distribution channel for leverage loan-related credit 19 Limited Sub-prime Exposure We are well positioned to handle disruption in the sub-prime market $20 Insignificant Revenue Contribution – 600 Decreased Loan Acquisitions – 50% decline in 2006 sub-prime acquisition Bear Volume ($ in billions) No exposure to headline companies $15 500 400 $10 300 200 $5 vs. 5% market decline 100 $0 0 2003 (1) Market volumes (ABS Home Equity Issuance). 2004 2005 2006 20 Market Volume ($ in billions) Modest Warehouse Exposure – Market Volume(1) <3% of 2006 MBS revenue came from sub-prime 700 Bear Volume Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. Numerous factors may affect our business, including but not limited to interest rates, market conditions, transactions included in our backlog failing to close, general economic conditions in the US or other geographic regions that may suffer economic downturns. For a fuller discussion of these risks see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Management” in the Company’s Annual Report to Stockholders, which has been filed with the Securities and Exchange Commission. The information in this document is provided by Bear Stearns for informational purposes only, and should be considered current only as of the date of its initial publication, without regard to the date on which you may actually review the information. 21 Investor Day March 29, 2007 Fixed Income Overview Jeff Mayer Co-Head of Global Fixed Income Tom Marano Global Head of Mortgages and Asset Backed Securities RMBS Hedging The development of Pay-As-You-Go (“PAUG”) credit default swaps and the ABX Index provides hedging tools to investors. PAUG CDS mimic the cash flows of a cash bond, allowing investors to go long or short the risk of a bond (CUSIP specific) with no limitations to the size of the trade The ABX Index is an index reflecting the performance of 20 PAUG CDS, allowing investors to take short or long positions in a basket of sub-prime securitizations: ⎯ The ABX Index is divided into 3 series referencing issuances in 2nd half 2005, 1st half 2006 and 2nd half 2006 ⎯ Each ABX series has 5 sub-indices (AAA, AA, A, BBB, BBB-) referencing the tranche with that respective rating 23 Increase in Spreads of HEQ Securitization & ABX From 11/30/06–3/26/07 350.00% % Increase in HEQ & ABX 300.00% 250.00% 200.00% 150.00% 100.00% 50.00% 0.00% ABX 06-2 BBB Absolute Spreads 11/30/2006 3/26/2007 % Change 1.95% 7.66% 292.3% ABX 06-2 BBB- 3.02% 12.59% 316.8% BSABS 06-HE9 to BSABS 07-HE3 1.01% 1.61% 59.9% 24 Cost of Spread Widening—Unhedged Sub-Prime Securitization Ratings Class AAA AA A BBB BB Issuance Size (000s) % of Capital Structure Market Spread (in bps) 11 27 44 329 850 $ 432,783 75,163 31,914 22,073 11,036 75.5% 13.1% 5.6% 3.9% 1.9% $ 572,969 100% Unhedged Loss 6bps wider in AAA & AA 50bps wider in A / BBB / BB $ $ $ $ $ (484,048) (177,370) (586,755) (381,326) (176,576) $ (1,806,076) Market spread represents BSABS 07-HE2 Group 2, issued February 2007 25 Cost of Spread Widening—Hedged with ABX 07-1 Ratings Class A BBB BBB- Market Market Market Price Spread Spread 2/1/07 2/1/07 3/27/07 98.68 96 245 94.13 375 833 90.85 644 1233 Notional of Hedge Hedge Ratio (000s) 0.21 $ 6,542 0.25 5,518 2,344 0.21 $ 14,405 6bps wider in AAA & AA 50bps wider in A / BBB / BB $ 397,370 984,049 494,803 (70,146) Cost of Hedge 1,806,076 Hedged Profit $ Unhedged Loss $ (1,806,076) 26
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