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Institutional Investor April 2005 The Great American Corporate Director Hunt It’s never been more vital — or harder — to attract qualified independent directors. Who needs the hassle? Yet good corporate governance depends on how companies cope with today’s director shortage. For more than two decades, Leslie Rahl had made her living analyzing risks, but she’d never come across one quite like this: In December 2003, Fannie Mae approached her about taking a seat on its board of directors.  Rahl was honored, and in many ways she was the perfect candidate for the now-troubled mortgage lender. A star options trader for Citibank in the 1980s, she had opened her own consulting shop, Capital Market Risk Advisors, in 1994 and was soon counseling Orange County, California, on how to handle $2 billion in derivatives losses. Fannie Mae, also a huge derivatives market player, needed a financial expert on the board to replace former Goldman, Sachs & Co. chairman Stephen Friedman, who was leaving to join George W. Bush’s administration as director of the National Economic Council. But Rahl was also a little worried. She had never been a public-company director before, and the previous few years of corporate scandals and strict new regulations had redefined the nature of board service, turning what had often been a cushy networking opportunity into a highrisk endeavor. Congress’s quick response to frauds at companies like Enron Corp. and WorldCom — the Sarbanes- Oxley Act of 2002 — had heaped unprecedented legal and financial responsibilities on board members. Regulators, activist shareholders and trial lawyers increasingly were targeting directors for failing to question or prevent corporate misdeeds. Complicating things further for Rahl, federal regulators had just announced an examination of Fannie Mae’s accounting practices following the company’s disclosure of a $1.1 billion error in its third-quarter 2003 earnings statement. So rather than accept the position right away, the risk expert embarked on several weeks of painstaking due diligence.  She spoke with other Fannie Mae directors, scrutinized the company’s financial statements going back several years and even asked her husband, a bankruptcy lawyer, to vet the offer from a professional perspective. After two months of checking out the company, she agreed to join its board. (Since then the accounting probe has prompted a huge earnings restatement and the resignations of Fannie’s CEO and CFO.) “It seemed, and still seems, that I could be of value on this board, and that while it would be a time-consuming exercise, it wouldn’t involve an undue amount of personal liability,” she says. Besides, she adds, “I find tricky issues intriguing.” Even Leslie Rahl, who brought a wealth of risk management expertise to Fannie Mae, benefited from some tutoring in the ways of the boardroom. The mortgage giant agreed to foot a $6,250 bill for her to attend a three-day Harvard seminar to learn more about how to be an effective director. “For someone who is used to digging deep into issues and problems, it is a challenge to step back and understand that a director’s role is to ask questions, not necessarily to have all the answers themselves,” Rahl says.  “That’s one of the things that the course helped me understand.” Consider Rahl and Fannie Mae. Who better to serve on the mortgage lender’s board at a time when its capital markets and risk management practices are coming under harsh scrutiny than an expert in those fields? “Clearly, I had no idea of the full magnitude of the events that would unfold,” Rahl says today, referring to the accounting controversy that since December has prompted the resignations of CFO Timothy Howard and CEO Franklin Raines, a restatement of earnings back to 2001 that is still under way and the conclusion by regulators that Fannie Mae is undercapitalized to the tune of $3 billion. Still, she doesn’t regret her decision to join the board, even though her workload has expanded to include serving on a new compliance committee charged with helping to clean up the company’s accounting. Click here to read the entire article.

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February 18, 2004 Leslie Rahl Selected to Fannie Mae Board of Directors WASHINGTON, DC -- Fannie Mae (FNM/NYSE), the nation’s largest source of financing for home mortgages, announced that the Board of Directors has selected Leslie Rahl to its Board of Directors to fill the seat vacated when Stephen Friedman resigned to become assistant to the President for economic policy and director of the National Economic Council. Ms. Rahl will be included on the company’s slate of directors and will stand for election at the company’s 2004 annual meeting of shareholders in May 2004. “Leslie Rahl’s experience in the financial markets and her understanding of the derivatives markets will bring us an extremely broad range of skills, which will benefit our Board, senior management and our company as a whole,” said Franklin D. Raines, Fannie Mae’s Chairman and Chief Executive Officer.  “Leslie has a keen understanding of financial markets and an interest in the mission of Fannie Mae, and we look forward to benefiting from her expertise.” Rahl is the president and founder of Capital Market Risk Advisors, Inc., a financial advisory firm that specializes in risk management and capital markets strategy.  Prior to that she had her own consulting firm, Leslie Rahl Associates, which concentrated in swaps, options and derivative products.  From 1972-1991, Rahl was employed by Citibank in New York where she served as vice president and co-head derivatives group – North America. Prior to that, Rahl served in various positions of increasing responsibility in financial control and operations management.

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GARP Risk Review Aug/Sept 2001 WOMEN IN RISK MANAGEMENT A league of their own Leslie Rahl, founder and president of Capital Market Risk Advisors Having structured the first cap, collar and floor options, Leslie Rahl is one of the most influential women in risk management. From heading up Citibank's derivatives group to starting up her own business Rahl has got oodles of stories on risk management. Rahl was one of only two senior vice-presidents worldwide working at Citibank in the early 80s. She says that I they were not allowed to go into the 'senior officers' dining I hall. "But the chairman's wife, Kathy Wristen [Walter Wristen was chairman then] would invite me over for luncheons," she says. She says that she has found women's intuition to help her a lot throughout her career. "No one would think it was a male dominated industry if they came into my office." It is decorated with pink chairs and flower arrangements "Being a good risk manager requires more than good quantitative skills. It requires good communication skills and strong instinct. Quantitative skills are stereotypically not considered a woman's quality. Communication is though." Rahl fancies herself as a 'risk shrink' and 1- 'empathic hand holder'. .

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Euromoney April 1997 Top 50 Women in Finance LESLIE LYNN RAHL Capital Market Risk Advisors "The impossible we do right away. The more difficult takes a little longer." A founder of the swaps business and an innovator in interest rate caps, collars and floors, Leslie Lynn Rahl had certainly taken this adage to heart by the time she founded CMRA in 1994 Before setting up her company, she worked at Citibank, where she was at the forefront of the swaps and derivatives team for nine years and responsible for market-making, hedging and proprietary trading for books in excess of $100 billion. She left to run Leslie Rahl Associates, a consulting firm specializing in swaps, options and derivatives. Rahl has also been active on a number of boards and presently sits on the board of directors of the International Association of Financial Engineers (IAFE). She is a graduate of the MBA programme at the Sloan School of Management at MIT and is looking forward to the day when she finally gets some sleep.

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RISK December 1997 Derivatives pioneers Lisa Polsky and Leslie Rahl, pioneers of the over-the-counter derivative markets, started their careers in the 1970s. Wall Street was then largely a man's world but was about to change dramatically. "Derivatives markets began to develop when women began coming out of universities with the appropriate credentials," remembers Rahl, principal of Capital Market Risk Advisors in New York. "We were becoming mathematicians and MBAs. In my class at the Massachusetts Institute of Technology (MIT), for example, there were 50 women and 950 men. That was the largest class of women that MIT had ever had up until that time." After a spell as Citibank's traders, both women's careers at the bank continued on an upward path - and eventually coincided when they became joint heads of the risk management products group in the 1980s. Rahl joined the bank in 1972 with a BS in computer science and an MBA from MIT. After managing the bank's growing back-office operation for 10 years, she began to trade a proprietary option portfolio in 1982 and went on to oversee the bank's push into interest rate options. Keen to trade, her entry into derivatives at Citibank was no fluke. in the early 1980s, she agreed to set up a team for the head of Citibank's investment bank in return for such an opportunity. It was around this time that the Chicago Board of Trade had started to trade interest rate options on futures. A door opened, and Rahl never let it shut. "My boss said: 'Well, you don't really know much about trading, but you went to MIT, so you can probably trade these options as well as anyone else'. It was really a situation of being in the right place at the right time," says Rahl. Through the 1980s, she oversaw the bank's interest rate risk management department. ...After the two women worked together in the risk management group, their career paths diverged. Rahl took maternity leave in 1990, and decided to raise her child without the pressures of the dealing room in the background. Her new life included running a part-time risk consultancy at home, Leslie Rahl Associates. Since then, Capital Market Risk Advisors, formed in July 1994, has become one of Wall Street's largest independent risk consultancies, with 25 professional staff. About half the firm's clients are commercial and investment banks, while the remainder are pension funds, mutual funds and corporates. ...Both women remember the first trades that launched their careers and the long list of Citibank alumni who made major contributions to the development of derivative markets, including Yves de Balmann, now vice chairman at Bankers Trust, David Pritchard, now with the UK's Securities and Investments Board, and Lee Wakeman, currently consulting for CIBC Wood Gundy, who is often credited with bringing a new level of sophistication to the study of term structure. What made Citibank such a fertile environment for talent? Simple, says Rahl: the bank was a triple-A credit at the time, had a strong balance sheet, and a global client base that rivaled that of any bank in the world. "Citibank attracted a lot of smart people just for that reason," she explains. "Of course, circumstances changed with time and the bank ran into problems with loans later on. But, if you look at the alumni it spawned, it was a real powerhouse." Rahl believes it was a dead heat between Citibank and Salomon Brothers as to who sold the first interest rate cap. But when it comes to interest rate collars, she is confident that Citibank edged out the competition with a blockbuster transaction in 1983. This inaugural trade, a 10-year, $100 million deal for a real estate concern, was prompted by business conversation at a cocktail reception. “It was a sizable and long-term deal even by today's standards," notes Rahl. "Caps had been around for a couple of months. But the concept of the collar, or a "floor/ceiling" as it was called at the time, evolved when we learned that some clients didn't want to pay premiums. The collar was a way to eliminate the premium fee or at least to reduce significantly the upfront cash that needed to change hands. The client said, 'I love the idea of buying a cap, but I don't want to write a cheque. Is there something you can do?'." Rahl's suggested solution was not zero-cost, but involved significantly reduced upfront fees. When asked to explain how the deal was priced, she laughs. Fortunately, she recalls, the spreads that could be charged on such a transaction were so large that pricing and hedging precision were not the critical factors they have come to be some 14 years later. "The futures markets were clearly an invaluable tool for us," Rahl says. But the futures strip didn't go out that far back then, maybe two years. So you had to stack futures, which had its own series of inherent risks. Most banks used a blend of stacked futures and intermediate US Treasury instruments. If you just stacked futures, you had this huge curve bet. And if you hedged everything in Treasuries, you'd have a huge basis risk. So generally what was done was to use a combination to get some yield-curve protection and Treasury-Eurodollar (Ted) spread protection." And what about a pricing model? "We priced options by drawing a forward yield curve, drawing the cap line, and saying: `If it never pierces the cap, it has zero value. If it pierces the cap, it has a value equal to a swap.' That was one of the methods we bandied about in those early days. In addition to using the Black-Scholes model, which we thought was pretty sophisticated, we had two normalized style yield curves. On any given day, we would pick either yield curve A or B, high or low, as our term structure of volatility. That's the way we priced and hedged. "Thank goodness interest rates kept coming down and it didn't really matter," she chuckles. "These were the go-go years for caps and collars. It was a great period for option sellers because interest rates and market volatilities just kept coming down after the big interest rate spike in the early 1980s. Everything was working in the seller's favour, except the relatively primitive nature of option price modeling. But it was not as hard to make money in those early days." Documentation was a thorny issue at the time. Rahl recalls that caps were sometimes categorized as swaps in which one counterparty never pays anything and the other counterparty pays out "if Libor is greater than X. "It took a few years for the industry to reach a common ground on documentation," she admits. "The market was fortunate not to run into problems before that. Improved documentation made a enormous difference in the ability of the market to grow and prosper thereafter. It was 1989, I believe, when ISDA came up with the cap and collar addendum to the standard master agreement." ...Meanwhile, on Rahl's desk, interest rate options-caps, collars, floors and swaptions were becoming significant, providing alternative risk management products for floating-rate or fixed-rate borrowers. Interest rate caps and collars provided interest rate protection without fixing rates, allowing many borrowers to fund at the short end of the yield curve with limited risk as rates fell. Citibank was soon taking a 10-25% market share in each product. Then it began warehousing option positions - and interest rate and currency swaps - to accommodate its customer base and to manage the enormous derivatives book it was building up. By 1985, caps and collars were "established business", says Rahl. Interest rate swaptions followed in late 1987 and early 1988. These allowed for the monetisation of embedded options in callable bonds and gave Citibank a hedge. Soon the bank controlled as much as 50% of the market in swaptions, which brought risk management to the top of the agenda. "Our risk in the cap and collar deals was structural," says Rahl. "Basically, clients wanted to buy caps so everything was one way. Dealers would sell, clients would buy, so dealers tend to have a short position on volatility. After the 1987 crash, interest rates plummeted. Although most made quite a bit of money by benefiting from the fall in rates rather than the increase in volatility, the Street decided it wasn't such a nifty position to be in. Not that there weren't times that you wanted to be short volatility, but you didn't want a business where you always had a structural position. So there was a lot of research and financial engineering effort put into figuring out option products where the Street could be a buyer." To solve this problem, Citibank and others looked to the covered call writers in the institutional investment community. Their options tended to be short term and so did not cover the kind of longer-dated risk dealers were assuming in their cap and collar books. The only place where long-dated options were in great supply was the callable bond market, as longer-dated options were embedded in the bonds. Citibank soon switched on to the idea of using the swaption concept as a natural hedge. Rahl says that Chip Carver, now with Goldman Sachs, played a key role in the development of the swaption market. "There was a very large supply of those embedded options and it gave dealers a natural hedge," she says. In early 1989, ISDA estimated the size of the cap/collar/swaption market at $325 billion. It wasn't long before Citibank broadened the concept to include non-dollar interest rates, equities, precious metals, energy and emerging markets, says Polsky. "You had a cap, you had a collar, you had a floor, you had a swap and swaption," adds Rahl. "Whatever a client who needed hedge protection wanted, you had the tools to meet his needs. This helped take away some of the clients' excuses for not hedging." But it wasn't all plain sailing. Rahl recalls that in the mid-to-late 1980s, the success of the derivatives markets was creating competitive tension within the bank over who deserved credit for deals - the relationship managers responsible for traditional corporate lending or the "upstart" derivatives marketers. There were also some painful lessons from the market. "The [1987] stock market crash had some indirect effects on the swap market that people hadn't really thought about, and that made them very nervous about dealer credit," she recalls. "It became very hard to repo your securities, and you had all these short positions because you had all these clients that wanted to pay you a fixed rate, but you couldn't repo them very effectively. Spreads really widened out in the swap market because of what was going on in the repo market. That was really a wake-up call about the interdependence of some of these markets. Clearly when you have that kind of turmoil, you worry about credit risk, because you don't know who's going to be burned." "Lisa and I often laugh about what's happened to us," says Rahl. "We believe it's largely because many bankers in charge never thought derivatives were going to be all that big and important, so it seemed safe to give them up."

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RISK December 1992 Five years of risk Most derivative houses now provision for credit risk. But very few do so for liquidity. LESLIE RAHL thinks he liquidity of underlying markets, or the lack of it, will be of increasing concern, forcing houses to provision accordingly. "In the same way people set aside reserves depending on the credit of the counterparty, I think you're going to have people set aside for liquidity. The reserve you'd set aside for a three-year US dollar interest rate swap would be quite different from CTE [Ecu Italian government bond] swaption." But how do you measure liquidity? Volume is one measure. "You know that volumes are greater in swaps than in caps. You can also use industry statistics. For example, for swaps you could use International Swap Dealers Association volume figures for different maturity swaps." The point is that houses should make a distinction between where they mark to market (which is normally mid-market) and here they are actually able to transact. "You might do a few [hypothetical] transactions to see where it is possible to transact and then construct a simple matrix based on product and maturity," Rahl explains. Maturity is important because, for example, 10-year swaps are a lot less liquid than three-year. Liquidity is one of the broad areas that regulators must examine to get an idea of the risks a firm is taking. "Although risk management techniques differ from firm to firm, there are some basic questions you could ask about risk management, such as whether a firm measures return on risk, the credit quality of counterparties, and whether it deals mostly in liquid or illiquid parts of the market." Rahl feels increased disclosure, rather in more regulation, would be enough to soothe the regulators' fears. Everyone, but particularly regulators, needs more information, she says, and information presented an understandable form. The trouble is, regulators still don't know what information to ask for. But won't derivative houses play the "It's proprietary" card to avoid disclosing anything sensitive? "A lot of information is not as proprietary as people would like to make it," she says. The type of business done by houses is important but, she feels, not necessarily proprietary. For example, whether derivative business is customer-driven or primarily for the firm's own book, or whether the business is mainly in vanilla or exotic products. "There's a big difference between a firm that does mostly short-dated swaps against Libor, and one which does a lot of exotic long-dated transactions," says Rahl. Given how the derivative industry has grown, Rahl is surprised regulators have taken so long to bring their guns to bear. "It's natural that regulators should want to take a closer look at something as big and important as the industry's become. It's not just that it's grown, but that derivatives are used by so many different types of company and are so integral to the capital markets." And regulation is inevitable. "Once you bite that bullet, the more the industry educates the regulators, the more likely we are to be happy with the results." The trouble is that regulators tend to be fazed by derivatives' complexities: "I'm not sure the people charged with regulation understand the business sufficiently to create intelligent regulation. It's easy for an expert to talk fast and use a lot of buzz words, but that means it's impossible for non-experts to figure out what they're talking about, making proper regulatory control very difficult. " But further growth in the derivative market could be curtailed by a lack of good-quality counterparties. "There are practical limits. How much credit can you take, even triple-A credit?" asks Rahl. Although the market still makes some distinction between genuine and synthetic triple-A institutions, those vehicles provide one alternative. But the real question is what happens to the rest of the market when such vehicles are commonplace. "When the triple-A club was very small, not being a member wasn't necessarily devastating. But if there were two or three dozen triple-A entities, would you be able to operate with a single-A rating?" A clearing house for OTC products could be one alternative: "I could easily envisage a clearing house in which, once a deal is done, a central margining credit-enhancement vehicle takes over." Rahl thinks derivative firms may therefore suffer the twin pressures of being forced to buy credit enhancement while building up capital as a result of regulators' concerns. Those pressures could lead to an exodus of houses whose profitability was poor to start with. "A lot of institutions entered the business without any real competitive advantage in terms of clientele or trading expertise," Rahl says. "Their margins may not be able to withstand those pressures." Leslie Rahl set up Leslie Rahl Associates in 1991, specializing in risk management and trading strategies. She was previously at Citibank, which she joined in 1972, and set up its caps business and ran the derivatives unit during the 1980s.

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Institutional Investor January 1990 The next generation of financial leaders LESLIE RAHL Bs in computer science and MBA from MIT . . . Joined Citi in 1972 and managed growing back-office operation for a decade . . . Turned options trader in the early 1980s . . . As part of Citi team, devised a host of interest-rate protection products . . . Now runs US interest-rate risk management department . . . Citi dominant in this area, especially in the $1 trillion swaps market and the $300 billion caps market . . . Driving force behind current boom in swaptions, arbitrage opportunity for companies issuing callable debt . . . "Derivatives are the new creative way to raise money, " says Rahl, "They are going to drive the capital markets during the 1990s."

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Fortune April 10, 1989 On the Rise LESLIE LYNN CITICORP Lynn heads Citibank's interest rate risk management department, which deals in the esoteric hedging services of high finance: swaps, swap options, caps, floors, and collars. Corporate treasurers pay her to cover them against adverse interest rate movements and to reduce the cost of debt. Though Citibank will not specify revenues or profits, Lynn, a vice president, says it is the world's leading purveyor of these services, with a market share of 10% to 25% in each. Says Lynn, who founded her department in 1983: "The market is expanding dramatically. Now that hedging tools exist, corporate treasurers have no excuse not to use them."