Whitney Tilson T2 Partners October09

Whitney R. Tilson and Glenn H. Tongue Managing Partners

phone: 212 386 7160 fax: 240 368 0299 www.T2PartnersLLC.com

November 1, 2009 Dear Partner, Our fund declined 2.5% gross and 2.1% net in October vs. -1.8% for the S&P 500, +0.1% for the Dow and -3.6% for the Nasdaq. Year to date, our fund is up 32.7% gross and 26.2% net vs. 17.1% for the S&P 500, 13.7% for the Dow and 30.5% for the Nasdaq. If the year ended with these numbers, it would be our best year ever and nearly all of our investors would earn 31.4% net, reflecting the benefit of the high-water mark. It was an ugly month for our long portfolio, as there were no winners of note and many losers. Double-digit percentage decliners included Ambassadors International (-43.7%), Borders Group (-37.6%), Iridium warrants (-30.0%), Iridium (-22.0%), Resource America (-19.8%), Wendy’s/Arby’s Group (-16.5%), General Growth Properties (-15.9%), Winn-Dixie (-15.5%), Huntsman (-12.7%) and Yahoo! (-10.7%). So how were we only down 2.1% during the month? Our short book, which had dampened our returns during the big market rally from March through September, finally worked and helped cushion last month’s downturn. Winners of note among our shorts included MBIA (-47.7%), Conn’s (-44.1%), PMI Group (-43.1%), MGIC (-41.8%), CIT Group (-40.5%), Palm (-33.5%), Pre-Paid Legal Services (-22.2%), Regions Financial (-22.1%), Zions Bancorporation (-21.1%), Garmin (-19.8%), Pulte Homes (-18.0%), Dineequity (-14.5%), Bank of America (-13.8%), Research in Motion (-13.2%), Lennar (-11.6%), Toll Brothers (-11.4%), Alliance Data Systems (-10.0%) and the iShares Dow Jones U.S. Home Construction Index (-9.5%). CIT Group In last month’s letter we wrote the following about CIT Group: “[The] stock strangely bounced as it announced a debt exchange offer which, if unsuccessful, will lead to a bankruptcy filing. In either case, the equity will essentially be wiped out. We’ve profitably shorted CIT in the past so, like MBIA, this is the gift that keeps on giving.”

We shorted all we could during the month and will likely earn a total of approximately one percentage point of return as CIT filed for bankruptcy this afternoon. Our only regret is that we couldn’t short more, as it was difficult to get the borrow. Berkshire Hathaway Under Warren Buffett’s direction, Berkshire's performance has been nothing short of remarkable over the past two years. His disciplined capital retention looked overly conservative for many years, but when the crisis hit there were few buyers and waves of panicked sellers, so he was able to deploy tens of billions of dollars in some terrific businesses, on highly favorable terms.

145 E. 57th Street, 10th Floor, New York, NY 10022

Thus, ironically, while Berkshire’s stock is down 30.1% since the beginning of 2008 (-31.8% in 2008 and up 2.5% this year), the company’s intrinsic value has actually risen. Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowout quarter. Operating earnings of the wholly owned businesses will be mixed: the largest businesses, insurance and utilities, probably held up well, but businesses exposed to the consumer likely did poorly so, in aggregate, earnings should be around $1.0 billion. In addition, investment income should add another $1.2 billion. The truly exciting news is in Berkshire’s investment portfolio, which we calculate grew by over $8 billion in the quarter. This gain was driven by stock appreciation as well as gains in warrants (mostly Goldman Sachs) and the conversion feature in the Swiss Re fixed income investment. Another contributor was the Chinese company, BYD, a $230 million investment that is now worth over $2 billion. Finally, the equity put contracts generated another roughly $1 billion of gains. In total we expect that Berkshire’s book value grew by approximately $9 billion (after taxes), or approximately $6,000 per A share. This represents an 8% gain in book value for the quarter, resulting in book value of $80,000 per share, an all-time high for Berkshire. We believe the company has never been worth more. We believe Berkshire’s intrinsic value is approximately $135,000/share, a 36% premium to today’s price of $99,000. We believe Berkshire is safe, cheap, growing nicely and has a near-term catalyst (the quarterly earnings), so that’s why it’s among our largest positions. Our Presentation at the Value Investing Congress At the Value Investing Congress on Tuesday, October 20th, we presented our latest work on the housing/economic crisis and shared our best long and short investment ideas: Iridium and the homebuilders, respectively. Attached are the slides we presented. Regarding the former, we think Iridium is a very good business, will be able to grow at a high rate for many years, and the stock, at around 4x EV/EBITDA, is a steal. As for homebuilders (many of the specific stocks are noted on the previous page), we think the national housing inventory overhang today totals nearly 10 million homes, almost two years supply, and this number is still growing every month. Needless to say, therefore, we see little need for any new homes, which simply exacerbate the already severe excess inventory problem. We believe that the fundamentals for homebuilders are dreadful and will remain so for years, yet the stocks have roughly doubled since March based on the belief (mistaken, we think) that the housing market and housing prices have bottomed. When investors realize this is not the case – likely within the next few months – we see substantial downside in these stocks. Tax Estimates As we do every year, we asked our bookkeeper to prepare tax estimates for the fund reflecting realized gains and losses as well as interest and dividend income through September 30th. While every investor’s report will be different, the estimates show modest short-term realized gains, which are more than offset by somewhat larger long-term realized losses. In other words, despite our fund’s substantial gains this year, it had net realized losses through September 30th.

-2-

Overall we expect 2009 to be a very tax efficient year. To receive your individualized tax estimates, simply call or email Kelli at (212) 386-7160 or [email protected]. Conclusion Thank you for your continued confidence in us and the fund. As always, we welcome your comments or questions, so please don’t hesitate to call us at (212) 386-7160. Sincerely yours,

Whitney Tilson and Glenn Tongue The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvested dividends) is: October -2.5% -2.1% -1.8% -5.9% 0.1% -3.6%

T2 Accredited Fund – gross T2 Accredited Fund – net S&P 500 Wilshire 4500 Dow NASDAQ

Year-to-Date 32.7% 26.2% 17.1% 23.1% 13.7% 30.5%

Since Inception 203.2% 147.3% 1.8% 19.6% 34.6% -4.6%

Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2 Accredited Fund was launched on 1/1/99. Gains and losses among private placements are only reflected in the returns since inception.

T2 Accredited Fund Performance (Net) Since Inception 160 140 120 100 80 (%) 60 40 20 0 Jan99

-20

Jul99

Jan00

Jul00

Jan01

Jul01

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

-40 T2 Accredited Fund

-3-

S&P 500

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

T2 Accredited Fund, LP (the “Fund”) commenced operations on January 1, 1999. The Fund’s investment objective is to achieve long-term after-tax capital appreciation commensurate with moderate risk, primarily by investing with a long-term perspective in a concentrated portfolio of U.S. stocks. In carrying out the Partnership’s investment objective, the Investment Manager, T2 Partners Management, LLC, seeks to buy stocks at a steep discount to intrinsic value such that there is low risk of capital loss and significant upside potential. The primary focus of the Investment Manager is on the long-term fortunes of the companies in the Partnership’s portfolio or which are otherwise followed by the Investment Manager, relative to the prices of their stocks. There is no assurance that any securities discussed herein will remain in Fund’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent the Fund’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. All recommendations within the preceding 12 months or applicable period are available upon request. Performance results shown are for the T2 Accredited Fund, LP and are presented gross and net of incentive fees. Gross returns reflect the deduction of management fees, brokerage commissions, administrative expenses, and other operating expenses of the Fund. Gross returns will be reduced by accrued performance allocation or incentive fees, if any. Gross and net performance includes the reinvestment of all dividends, interest, and capital gains. Performance for the most recent month is an estimate. The fee schedule for the Investment Manager includes a 1.5% annual management fee and a 20% incentive fee allocation. For periods prior to June 1, 2004, the Investment Manager’s fee schedule included a 1% annual management fee and a 20% incentive fee allocation, subject to a 10% “hurdle” rate. In practice, the incentive fee is “earned” on an annual, not monthly, basis or upon a withdrawal from the Fund. Because some investors may have different fee arrangements and depending on the timing of a specific investment, net performance for an individual investor may vary from the net performance as stated herein. The return of the S&P 500 and other indices are included in the presentation. The volatility of these indices may be materially different from the volatility in the Fund. In addition, the Fund’s holdings differ significantly from the securities that comprise the indices. The indices have not been selected to represent appropriate benchmarks to compare an investor’s performance, but rather are disclosed to allow for comparison of the investor’s performance to that of certain wellknown and widely recognized indices. You cannot invest directly in these indices. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. All investments involve risk including the loss of principal. This document is confidential and may not be distributed without the consent of the Investment Manager and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum.

-4-

An Overview of the Housing and Economic Crisis, Why There Is More Pain to Come, and Two Investment Ideas Whitney Tilson & Glenn Tongue T2 Accredited Fund, LP Tilson Offshore Fund, Ltd. T2 Qualified Fund, LP Value Investing Congress October 20, 2009

T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor 145 E. 57th Street, 10th Floor New York, NY 10022 (212) 386-7160 [email protected] www.T2PartnersLLC.com

Disclaimer THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED. 3

Background on the U.S. Housing Market

Q 4 Q 19 4 79 Q 19 4 8 Q 19 0 4 81 Q 19 4 8 Q 19 2 4 8 Q 19 3 4 84 Q 19 4 8 Q 19 5 4 86 Q 19 4 8 Q 19 7 4 8 Q 19 8 4 8 Q 19 9 4 9 Q 19 0 4 91 Q 19 4 9 Q 19 2 4 93 Q 199 4 Q 19 4 4 9 Q 19 5 4 96 Q 19 4 9 Q 19 7 4 98 Q 19 4 9 Q 20 9 4 0 Q 20 0 4 01 Q 20 4 0 Q 20 2 4 03 Q 20 4 0 Q 20 4 4 0 Q 20 5 4 06 Q 20 4 07 20 08

Percentage of Home Loans

A Record 10% of Mortgages on 1-to-4 Family Homes Were Delinquent or in Foreclosure as of Q2 2009

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Source: National Delinquency Survey, Mortgage Bankers Association; T2 Partners estimates. Note: Delinquencies (60+ days) are seasonally adjusted. 5

All Types of Loans Are Seeing a Surge in Delinquencies, Led by Subprime 45% 40%

Percent Noncurrent

35%

Alt A Option ARM Jumbo Subprime Prime Home Equity Lines of Credit

30% 25% 20% 15% 10% 5%

Q 1

19 Q 99 3 19 Q 99 1 20 Q 00 3 20 Q 00 1 20 Q 01 3 20 Q 01 1 20 Q 02 3 20 Q 02 1 20 Q 03 3 20 Q 03 1 20 Q 04 3 20 Q 04 1 20 Q 05 3 20 Q 05 1 20 Q 06 3 20 Q 06 1 20 Q 07 3 20 Q 07 1 20 Q 08 3 20 08

0%

Sources: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile; T2 Partners estimates. Note: Prime is seasonally adjusted.

6

The Wave of Resets from Subprime Loans Is Mostly Behind Us $35

We are here

$30

Loans with Payment Shock (Bn)

$25

$20

$15

$10

$5

Sources: LoanPerformance, Deutsche Bank; slide from Pershing Square presentation, How to Save the Bond Insurers, 11/28/07.

Ju l-1 0 O ct -1 0

Ja n10 A pr -1 0

Ju l-0 9 O ct -0 9

O ct -0 8 Ja n09 Ap r09

Ap r-0 8 Ju l-0 8

Ju l-0 7 O ct -0 7 Ja n08

Ja n07 A pr -0 7

Ju l-0 6 O ct -0 6

Ja n06 A pr -0 6

$0

7

The Mortgage Meltdown Has Moved Beyond Subprime Prime Mortgage Commercial Real Estate Alt-A Other Corporate Commercial & Industrial

Subprime is only a small part of the problem

Subprime High-Yield / Leveraged Loans Jumbo Prime Home Equity Credit Card Auto Option ARM Construction & Development Other Consumer CDO/ CLO

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

Amount Outstanding (Trillions) Sources: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial Stability Report October 2008, Goldman Sachs Global Economics Paper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data, T2 Partners estimates.

8

Delinquencies of Prime and Alt-A Mortgages Are Soaring

Source: New York Times, 5/24/09. 9

19 Q 99 3 19 Q 99 1 20 Q 00 3 20 Q 00 1 20 Q 01 3 20 Q 01 1 20 Q 02 3 20 Q 02 1 20 Q 03 3 20 Q 03 1 20 Q 04 3 20 Q 04 1 20 Q 05 3 20 Q 05 1 20 Q 06 3 20 Q 06 1 20 Q 07 3 20 Q 07 1 20 Q 08 3 20 08

Q 1

Percent Noncurrent (60+ days)

Delinquencies of Prime Mortgages Are Soaring 5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

Source: Mortgage Bankers Association National Delinquency Survey. 10

Fannie Mae and Freddie Mac Serious Delinquencies Are Soaring

4.0% Fannie 3.5%

Freddie

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

10 /0 7 11 /0 7 12 /0 7 1/ 08 2/ 08 3/ 08 4/ 08 5/ 08 6/ 08 7/ 08 8/ 08 9/ 08 10 /0 8 11 /0 8 12 /0 8 1/ 09 2/ 09 3/ 09 4/ 09 5/ 09 6/ 09 7/ 09 8/ 09

9/ 07

8/ 07

0.0%

Note: Serious delinquencies are loans that have missed three or more consecutive payments (90+ days). Source: Company filings.

11

15 States With the Highest Prime Mortgage Foreclosure Rates

Source: New York Times, 5/24/09. 12

Two Waves of Losses Are Behind Us… But Three Are Looming Losses Mostly Behind Us • Wave #1: Borrowers committing (or the victim of) fraud, as well as speculators, who defaulted quickly. Timing: beginning in late 2006 (as soon as home prices started to fall) into 2008. Mostly behind us. • Wave #2: Mostly subprime borrowers who defaulted when their mortgages reset due to payment shock. Timing: early 2007 (as twoyear teaser subprime loans written in early 2005 started to reset) to the present. Now tapering off as low interest rates mitigate payment shock. Losses Mostly Ahead of Us • Wave #3: Prime loans (most of which are owned or guaranteed by the GSEs) defaulting due to job loss and home price declines (i.e., underwater homeowners). Timing: started to surge in early 2008 to the present. • Wave #4: Jumbo prime, second lien and HELOCs (most of which are on banks’ books) defaulting due to job loss and home price declines/ underwater homeowners. Timing: started to surge in early 2008 to the present. • Wave #5: Losses among loans outside of the housing sector, the largest of which will be in the $3.5 trillion area of commercial real estate. Timing: started to surge in early 2008 to the present. 13

Existing Homes Sales Have Risen in Recent Months, Leading to a Decline in Inventory – But Inventory Is Still at Double Historical Levels – And Shadow Inventory Lurks

Months Supply

Annualized Rate of Existing Home Sales 12

7.5

11 7.0 10 6.5

6.0

Months

Millions

9

5.5

3.6 million units, equal to 8.5 months as of the end of August 2009

8 7 6

5.0 5

5.1 million units as of the end of August 2009

4.5

4

4.0 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

3 1999

2000

2001

2002

2003

Source: NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series; estimates prepared for The Wall Street Journal by LPS Applied Analytics, WSJ, 9/23/09

2004

2005

2006

2007

2008

2009

14

Home Prices Look Affordable Due to Price Declines and Ultra-Low Interest Rates 800 CASE SHILLER USA (1975 = 100) Modeled Home Prices - Interest Only

700

Modeled Home Prices - 30yr Fully Amortizing

600

Index Value

500

400

300

200

100

0

Date

Source: Case-Shiller, Bureau of Labor Statistics, Amherst Securities. 15

Home Prices Were in an Unprecedented Freefall Until A Bounce in Recent Months 220 S&P/Case-Shiller U.S. National Home Price Index S&P/Case-Shiller 20-City Composite OFHEO Purchase-Only Index NAR Median Sales Price of Existing Homes

200

180

160

140

120

09 20

1

20 Q

Q

3

20

08

08

07 1 Q

3 Q

Q

1

20

20

07

06 20

06

3 Q

Q

1

20

20

05

05 3 Q

Q

1

20

20

04

04 3 Q

1

20

20 Q

Q

3

20 1

Q

03

03

02 20

02 3

20 Q

1 Q

Q

3

20

01

01 20

00 1

20 Q

3 Q

Q

1

20

00

100

Sources: Standard & Poor’s, OFHEO Purchase-Only Index, NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series. 16

Recent Signs of Stabilization Are Likely the Mother of All Head Fakes Rather than representing a true bottom, recent signs of stabilization are likely due to seven factors that are (or are likely to be) short-term: 1. Ultra-low interest rates 2. The $8,000 tax credit for first-time homebuyers 3. More middle- and upper-end homes are being sold (either voluntarily or via foreclosure), which has the effect of raising the price at which the average home is sold – but more defaults of higher priced homes is very bad news for mortgage holders 4. A decline in resets 5. A reduction in the inventory of foreclosed homes 6. The FHA is providing massive support to the housing market, in part by doing extremely risky lending 7. Home sales and prices are seasonally strong in April-July due to tax refunds and the spring selling season

17

Another Wave of Resetting Loans Is On the Horizon The Last Wave Was Driven By Subprime Loans; This Time, It Will be Option ARMs Option ARM

Total Loan Balance  ($Bil)

20

Alt A

Prime

Subprime

We are here 15

10

5

0

Source: Loan Performance, Amherst Securities. 18

Banks Are Selling Their REO, But Foreclosures Have Plunged By More Than Half, Ballooning the Inventory Pipeline 25%

Monthly Roll Rates

Monthly Roll Rates (%)

Non-Performing to Foreclosure 20%

REO to Liquidation

15%

10%

5%

Foreclosure to REO

Inventory Pipeline 1,400,000

0%

1,200,000

90 Days & Foreclosure

1,000,000 Non Performing to  Foreclosure

Foreclosure to  REO

REO to Liquidation

800,000 600,000

REO

400,000 200,000 0

REO

90 Days PLUS Foreclosure

Source: Loan Performance, Amherst Securities. 19

The Current “Housing Overhang” Is 7 Million Homes – Which Doesn’t Include Any New Defaults, Which Are Running at Approximately 300,000/Month!

Source: Mortgage Bankers Association, Loan Performance, Amherst Securities. 20

FHA’s Loan Book Is a Rapidly Growing Disaster 17.9% of Loans Are in Some Stage of Default; For 2007 Loans, It’s 32.4%

Source: HUD/FHA, through August 31, 2009, NY Times, 10/8/09. 21

Existing Home Sales Are Highly Seasonal

Source: National Association of Realtors. 22

Existing Home Sales Are Highly Seasonal

HPA Seasonality Coefficient -- Deviation From Mean

Source: National Association of Realtors. 23

Home Prices Bounced From April-July…

Sequential Home Prices March 2005-July 2009 2.0%

July 2009: +1.6%

1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0%

09 n-

Ju

-0 9

8

M ar

-0 ec

D

p-

08

08 Se

n-

ar M

Ju

-0 8

7 -0 ec

D

p-

07

07 Se

nJu

ar -0

7

6 M

-0 ec

D

ep

-0 6

06 S

n-

6 Ju

ar -0

M

-0 5 ec

D

p05

Se

nJu

M

ar -0

5

05

-3.5%

Source: S&P Case-Shiller 20-city index. 24

…But They Always Bounce in the Spring and Early Summer! Sequential Home Prices February 2000-July 2009 3.0% 2.0% 1.0% 0.0% -1.0%

Red circles represent April June each year

-2.0% -3.0%

Fe

b-

0 Ju 0 lD 00 ec M 00 ay -0 O 1 ct M 01 ar Au 0 2 g0 Ja 2 n0 Ju 3 nN 03 ov -0 Ap 3 rSe 0 4 pFe 04 b0 Ju 5 lD 05 ec M 05 ay -0 O 6 ct M 06 ar Au 0 7 g0 Ja 7 n0 Ju 8 nN 08 ov -0 Ap 8 r-0 9

-4.0%

Source: S&P Case-Shiller 20-city index. 25

Outlook for Housing Prices • •

We think housing prices will reach fair value/trend line, down 40% from the peak based on the S&P/Case-Shiller national (not 20-city) index, which implies roughly a 10% further decline from where prices were as of the end of Q2 2009 The key question is whether housing prices will go crashing through the trend line and fall well below fair value. This is a real possibility, though continued massive government subsidies could prevent it. In the long-term, housing prices will likely settle around fair value, but in the short-term prices will be driven both by psychology as well as supply and demand. The recent bounce in home prices has improved psychology, but the supply-demand trends are very unfavorable – There is a huge mismatch between supply and demand, due largely to the tsunami of foreclosures. In addition, the “shadow” inventory of foreclosed homes already exceeds one year and there will be millions more foreclosures over the next few years, creating a large overhang of excess supply that will likely cause prices to overshoot on the downside, as they did in California

• •

Therefore, we expect housing prices to decline at least 40% from the peak, bottoming in mid-2010 We are also quite certain that wherever prices bottom, there will be no quick rebound – There’s too much inventory to work off quickly, especially in light of the millions of foreclosures over the next few years – We don’t think the economy is likely to provide a tailwind, as we expect tepid economic growth at best for a number of years 26

The Current Unemployment Situation Is the Most Severe Since the Great Depression

There Have More Than 8 Million Jobs Lost So Far in This Recession, Though the Monthly Rate of Losses Has Eased in Recent Months

Change in Nonfarm Payroll Employment (000s)

600

150,000 jobs/month are required to absorb new entrants to the workforce and prevent unemployment from rising

400 200 0 -200 -400 -600 -800

There have been job losses every month since December 2007

Ja

n9 Ja 0 n9 Ja 1 n9 Ja 2 n9 Ja 3 n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n09

-1000

Source: Bureau of Labor Statistics. 28

The Unemployment Rate Continues to Rise, Reaching 9.8% in September If part-time and discouraged workers are factored in, the unemployment rate would have been 17.0% in September. The labor force participation rate was 65.2%, the lowest in 22 years. Finally, the average work week hit a record low of 33.0 hours. To return to the average of 33.8 hours would be the equivalent of three million new jobs not created. 11% 10%

Unemployment Rate

9% 8% 7% 6% 5% 4%

Source: Bureau of Labor Statistics.

09 Ja

n-

06 nJa

Ja

n-

03

00 nJa

n97 Ja

n94 Ja

n91 Ja

n88 Ja

n85 Ja

n82 Ja

79 Ja

n-

76 Ja

n-

73 nJa

Ja

n-

70

3%

29

Chronic Unemployment Is Skyrocketing

35.6%

Source: Labor Department, WSJ, 10/3/09.

30

The Average Weeks Unemployed is 26.2

26.2

Source: Labor Department, WSJ, 10/3/09.

31

The Percentage of Unemployed Not on Temporary Layoff Has Risen to 54%

54%

Source: Labor Department, WSJ, 10/3/09.

32

Ju n M -72 ar De -73 cSe 73 pJu 7 4 nM 75 ar De -76 cSe 76 pJu 7 7 nM 78 ar De -79 cSe 79 pJu 8 0 nM 81 ar De -82 cSe 82 pJu 8 3 nM 84 ar De -85 cSe 85 pJu 8 6 n M -87 ar De -88 cSe 88 pJu 8 9 n M -90 ar De -91 cSe 91 pJu 9 2 n M -93 ar De -94 cSe 94 pJu 9 5 n M -96 ar De -97 cSe 97 pJu 9 8 n M -99 ar De -00 cSe 00 pJu 0 1 n M -02 ar De -03 cSe 03 pJu 0 4 n M -05 ar De -06 cSe 06 pJu 0 7 n M -08 ar -0 9

The Proportion of Unemployed Whose Unemployment Benefits Have Expired Has Soared 60%

50%

40%

30%

20%

10%

0%

S D fL b h // d l / l / l i

Source: Labor Department, http://ows.doleta.gov/unemploy/claimssum.asp. 33

There Are Now Six Unemployed People for Every Job Opening

Source: Bureau of Labor Statistics, NY Times, 9/27/09.

34

5.2% of All Jobs Have Disappeared, Far Worse Than Any of the Past Five Recessions

1980

-0.5%

1974 - 76

1981 - 83

1990 - 93

2001 - 05

-1.5%

-2.5%

-3.5%

-4.5%

2007- present

-5.5% 0

6

12

18

24

30

36

42

48

Months after pre-recession peak

Source: Bureau of Labor Statistics; John Burns Real Estate Consulting. 35

Consumer Spending, Which Accounts for 70% of GDP, Is Weak and Likely to Remain So

Consumer Confidence Has Rebounded

Somewhat But Remains Low 160

Consumer Confidence Index

140

120

100

80

60

40

20

0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Note: 1985=100. Source: The Conference Board (www.pollingreport.com/consumer.htm) 37

Total Consumer Credit Is Falling Sharply

Total Amount of Revolving and Nonrevolving Consumer Credit Outstanding

Total Consumer Credit Outstanding (Change From Year Earlier)

Down $119 billion or 4.6% from its peak in 7/08. Down $12 billion in August, a 5.8% seasonally adjusted annual rate, the seventh straight month of declines, the longest stretch since 1991. Source: Federal Reserve Board, WSJ, 10/9/09. 38

Household Credit Market Debt Outstanding Has Declined for the First Time Since This Was Measured Beginning in the Early 1950s

Source: St. Louis Fed. 39

The Percentage of Banks Tightening Standards for Consumer Loans Has Risen Sharply

Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices, July 2009.

40

The U.S. Savings Rate Hit a 15-Year High of 6.9% in May, but Fell to 3.0% in August This is good news in the long run, but could be a severe economic headwind in the short run, given that consumer spending is 2/3 of GDP

Peaked

Source: Paul Kedrosky’s blog, 6/26/09; http://paul.kedrosky.com/archives/2009/06/the_black_swan.html; www.bea.gov/newsreleases/national/pi/2009/pi0709.htm. 41

Household Liabilities as a Percentage of Disposable Income Remains Very High

Peak: 138% 2000: 101% 1991: 90%

Peaked Today: 129%

Source: U.S. Federal Reserve, WSJ, 10/13/09. 42

Investment Idea #1 Short the Homebuilders Via the iShares Dow Jones US Home Construction ETF (ITB)

Housing Starts, Completions and Sales Are At or Near All-Time Lows 2000 Starts 1800

Completions

Seasonally Adjusted Annual Rate (000s)

New Homes Sold 1600 1400 1200 1000 800 600

A slight rebound in starts and sales in recent months

400 200 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: Commerce Department, data through 9/09. 44

Ja n9 Ja 0 n9 Ja 1 n9 Ja 2 n9 Ja 3 n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n0 Ja 1 n0 Ja 2 n0 Ja 3 n0 Ja 4 n0 Ja 5 n0 Ja 6 n0 Ja 7 n0 Ja 8 n09

Median Age (months

There Is an Enormous Inventory Glut of New Homes

The Average New Home Has Been on the Market for 12.9 Months

14

12

10

8

6

4

2

Source: Census Bureau, through 8/09. 45

Vacant Housing Stock Creates an Enormous Inventory Overhang

1.1-1.5 million excess units, equal to 2-3 years of existing home sales

Source: Census Bureau Source: Census Bureau, Moody’s Economy.com. 46

Nearly 6% of Homes Built This Decade Are Vacant Vacancy Rate By Date of Construction 5.9%

2.0%

March 2000 or earlier

April 2000 to present

Source: Census Bureau Source: Census Bureau, through Q4 2008. 47

Unlike Past Housing Downturns, New Home Sales Have Fallen Far More Than Existing Home Sales

New homes sales fell 76% from the peak; still down 69% through August

A slight rebound from MarchAugust

Source: National Assoc. of Realtors (existing sales) and Census Bureau (new sales), both via Haver Analytics; chart from the New York Times, 6/27/09; manually updated through 8/09.

48

Debt-to-Equity Ratio of Major Homebuilders 2.0

1.97

6.76

SPF

-11.98 BZH HOV

1.40

1.5

0.99

1.0

0.48

0.5

0.53

0.55

0.59

0.64

0.26 0.17 0.00

0.00

0.0

-0.5 NVR MDC TOL RYL MTH DHI

LEN MHO PHM BHS KBH

Source: Census Bureau Source: Company filings. 49

Inventory-to-Equity Ratio of Major Homebuilders 8.74

4.0 3.37

3.5 3.12 3.0 2.5 2.10 2.0

1.80 1.50

1.56

1.55

1.33

1.5

1.71 1.46

1.0 0.50 0.5

0.30

0.0 -0.5 NVR MDC TOL RYL MTH DHI

LEN MHO PHM BHS KBH

SPF

BZH HOV

-12.89 Source: Census Bureau Source: Company filings. 50

Price-to-Book Ratio of Major Homebuilders 3.0 2.69 2.43

2.5 1.97

2.0

1.76 1.62

1.55 1.41

1.5

1.37

1.27

1.21 1.08 1.0 0.70

0.39

0.5

0.0

-0.5 NVR MDC TOL RYL MTH DHI

LEN MHO PHM BHS

KBH

SPF

BZH HOV

-3.09 Source: Census Bureau Source: Company filings. 51

Investment Idea #2 Iridium (IRDM)

Overview •

• • • •

Iridium is the world’s only communication provider with the ability to provide real-time voice and data communications over 100% of the earth’s service by virtue of the company’s 66-satellite low-earth orbit (LEO) constellation. In addition, Iridium is one of the few satellite operators with the ability to provide effective voice, machine-to-machine (M2M), and high-speed data services. One of two major players in Global Satellite Communications industry Single subscriber device works worldwide Motorola spent $5 billion launching satellites in late 1990s Filed for bankruptcy in 1999 with only 50,000 customers due to too much debt and clunky phones that didn’t work inside buildings

53

Iridium Serves Many Different Markets

Source: Company presentation, 6/09. 54

A Highly Attractive Business

• Growing market share in a growing industry • Huge barriers to entry • US Department of Defense is an anchor customer (22% of revenues in Q2 ‘09) • Very high and rapidly expanding margins • New products and applications

55

Iridium’s Market Share Has Grown Rapidly

Source: Company presentation, 9/08. 56

Iridium Has Shown Extraordinary Growth in Subscribers

Up 24% YOY in Q2 ’09 to 347,000 subscribers Source: Company filings. 57

Iridium Has Shown Extraordinary Growth in Revenue and Operational EDITDA

In Q2 ’09, revenue was only up 1% due to weak equipment sales, but Operational EBITDA rose 32% and net income grew 53%.

Source: Company filings. 58

Subscriber Growth Has Been Driven by Commercial and Machine-to-Machine

Source: Stifel Nicolaus, company filings. 59

Iridium’s Stock Has Tumbled Since It Began Trading a Few Weeks Ago

Source: BigCharts.com. 60

Why Is Iridium Out of Favor?

• SPAC structure – Many SPAC shareholders were just in it for the cash payout upon consummation of a deal and are now selling

• Many warrant owners are shorting the stock – Iridium tried to mitigate technical issues: • Retired 30.5 million $7 warrants • Issued 16 million new shares • Repurchased15.9 million shares

• Large future funding requirement for Iridium NEXT • Dismal record of early telecom satellite networks • Prior bankruptcy 61

Iridium Came Public Via a SPAC Transaction • SPACs have very poor track records in general • But Iridium was acquired by a SPAC (Special Purpose Acquisition Company) controlled by Greenhill, a top quality private equity sponsor • The deal price was negotiated during the market meltdown last fall (deal was announced 9/23/08), then the price was reduced in April and warrant dilution was cut back in July

62

Iridium NEXT • Current satellite constellation will need to be replaced starting in 2014 – Backwards compatible (existing customers will not need to replace equipment) – Improved capacity and data rates

• Total cost: $2.7 billion – Satellites: $1.9 billion – Launch: $0.6 billion – Other: $0.2 billion

• Funding – Internally generated cash flow – Debt – Equity

– Revenue offsets (hosted payloads) 63

Iridium’s Cap Ex Requirements Will Rise to Fund Iridium Next, and Then Fall

Source: Stifel Nicolaus estimates. 64

Iridium Should Be Able to Fund Iridium NEXT From Cash Flow, Hosted Payloads and Warrant Conversion

Source: Raymond James estimates. 65

Valuation

Share price (10/19/09): Shares outstanding: $7 warrants $11.50 warrants Market cap: Less cash: Enterprise value:

$8.38 68.2 million 13.5 million 14.4 million $572 million $80 million $492 million

2009 EBITDA (E) EV/EBITDA:

$130 3.8x 66

Iridium’s Operational EBITDA is Projected to Double in Only Three Years

Source: Raymond James estimates. 67

We Expect a Mid-20% IRR on This Investment for Many Years to Come

Stock Price Based on EV/EBITDA Multiples Multiple 2016 2017 8 $25.36 $31.20 9 $29.05 $35.22 10 $32.74 $39.25 IRR Multiple 2016 2017 8 21% 21% 9 23% 23% 10 26% 25%

2018 $37.77 $42.10 $46.43 2018 24% 26% 28%

Source: T2 Partners estimates. 68

Drivers of Stock Price Appreciation

• Low current valuation multiple (40% discount to closest public comp, Inmarsat) • Rapid growth in earnings • Removal of legacy SPAC investors • Warrant holders finish hedging (shorting the stock) • Removal of uncertainty overhang related to future capital expenditures

69