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Four analysts and top management from ten sector firms examine the Finance sector in this special 63-page Specialty Finance/Mortgage Financing issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info443.htm

TWST: Brad, could you give us an overview of what has gone on in the specialty finance industry over the last year or so?

Mr. Ball: We have had a relatively defensive posture vis-à-vis the specialty finance group over the past year due to our mostly cyclical concerns, which we call the three C’s. The first is the expected deterioration of consumer confidence. The weaker economy is leading to lower consumer confidence, which leads to less spending and borrowing growth among consumer lenders. The second C is credit quality. Credit quality has been deteriorating throughout the year, and we think it will likely get worse, especially given the increased probability of a recession following the events of September 11. The third C is competition. We’ve been watching competition carefully in the States. I think it’s notable that, especially among credit issuers, competition has intensified recently among the highest quality borrowers — that is, the prime and the above prime segment of the marketplace, where several of the leading issuers are large banks that have recently allocated a lot of resources into this space. The presence of the large banks has increased price-based competition, making life a little more difficult for the monoline issuers. We view the three C’s as speed bumps, as challenges that have to be considered over a six- to 12-month time frame. We continue to think that specialty finance and particularly select, high quality credit card companies possess some meaningful secular positives. The secular positives that we would point to include the globalization of cards, the ability to take the franchises and business models that have been developed domestically outside of the US. While we feel that globalization is a positive, we realize it has a long tail, especially given the fact that entering new markets is difficult and takes a lot of time. The second secular positive is technological advances. We see the specialty lenders increasingly using technology in every facet of the business, whether it’s marketing or underwriting, to manage and mitigate credit risk, and probably lower operating cost in the future. So we think technology is a secular positive.

TWST: Brad, anything else you want to highlight?

Mr. Ball: In keeping with our more defensive posture, I would highlight Freddie Mac (NYSE:FRE). It’s one of the mortgage GSEs. It’s a company that has really benefited from the macro environment over the course of 2001, with lower rates increasing the availability of product, given that lower rates have led to relatively high refi’s, as well as a strong mortgage market, strong demand for new home purchases and existing home purchases, and lower rates have also contributed to lower funding cost. So essentially the scenario is a lot of product available to buy at increasingly attractive spreads. Now, Freddie has really taken advantage of that over the course of 2001. In fact, during the third quarter, earnings were so strong that they actually used up about 0.09 of earnings to repurchase some of their high-cost debt, essentially to lock in low-cost funding into next year. It has to give added clarity to their earnings growth outlook for next year — in the mid-teens, during a period when, as we’ve been talking about, earnings clarity is lacking across the sector. Fundamentals have been very strong, and they remain strong at Freddie Mac. There is relatively little credit risk. And, importantly, we think that the political risk, which has been a drag on valuation, has really been de-escalating throughout the year, and continues to de-escalate. In particular, I think the events of September 11 are a positive from the political standpoint. Both Freddie and its GSE sibling Fannie (NYSE:FNM) essentially put any issues that may have been in Washington — such as, for example, what will the administration’s view of the GSEs be — on the back burner.

This special issue includes:

1) Specialty Finance/Mortgage Financing - In an in-depth (12,000 words) Analyst Roundtable, Bradley G. Ball, Senior Vice President covering the Specialty Finance and Mortgage Finance sectors at Prudential Financial, Inc., Joel J. Houck, Vice President at A.G. Edwards & Sons, Inc., Todd A. Pitsinger, Managing Director and Research Analyst with the Financial Institutions Research Group at Friedman, Billings and E. Reilly Tierney, Senior Vice President of Equity Research at Fox-Pitt, Kelton Inc., examine the outlook for the sector including the effect of growing competition, the potential for consolidation and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at six sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO interviews (average 2,500 words). Top management of one hundred ten sector firms examine the outlook for their firm and the sector.