ANALYZING YOUR CASH FLOW, INVESTMENT POLICY AND INVESTMENT OPPORTUNITIES IN TODAY’S TODAY S ECONOMY September 13, 2010 Presented by: Kenneth Schiebel, CFA Managing Director & Sr. Portfolio Manager PFM Asset Management LLC PFM Asset Management LLC 77 West Port Plaza, Suite 220 St. Louis, MO 63146 (314) 878-5000 www.pfm.com

Presenters & Representatives

PFM

Kenneth Schiebel, CFA Managing Director & Sr. Portfolio manager (717) 232-2723 [email protected]

Ken Schiebel leads a team of portfolio managers, traders and research staff responsible for the management of $19 billion in separate account portfolios. His team manages custom designed high quality portfolios for cities, counties, self-insurance organizations, school districts, state and local government agencies, and other not-for-profits. These funds include operating funds, capital reserves and municipal bond proceeds.

Maria Altomare Managing Director (314)-878-5000 Ext 222 [email protected]

Maria Altomare manages PFM’s St. Louis office. She assists public entities in Missouri, Nebraska, Wyoming and Kansas with cash management services, including individual portfolios, local government investment pools, fixed income products and bond proceeds investments. fixed-income investments Ms. Altomare also serves as national sales representative for purchasing card products and services. She has over 25 years experience and prides herself in providing her clients with excellent customer service.

Mark Barry Senior Managing Consultant (314)-878-5000 Ext 223 [email protected]

Mark Barry is a Senior Managing Consultant in PFM’’s St. Louis office. Mr. Barry assists public entities in Missouri with cash management services, including the marketing of individual portfolios, investment pools, fixed-income products and bond p p proceeds investment. In addition, Mr. Barry serves as a sales representative for purchasing card products and services.

© 2010 PFM Asset Management LLC

1

Agenda

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I Developing an Investment Policy I. II. Using Cash Flow Analysis III. Market Update IV Investment IV. I t t Opportunities O t iti in i the th Current C t Market M k t V. Update on Fannie Mae and Freddie Mac

© 2010 PFM Asset Management LLC

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I. Developing an Investment Policy

The Investment Policy Document I.

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Scope

II. Objectives MODEL INVESTMENT POLICY

FOR POLITICAL SUBDIVISIONS OF THE STATE OF MISSOURI

– – –

Safety Liquidity Yield

III. Standards of Care IV. Investment Transaction V Suitable V. S it bl and dA Authorized th i d IInvestments t t VI. Investment Parameters VII Reporting VII.

December 3, 1998 Appendix A Page 1 of 11

VIII.Policy Considerations IX. Additional Attachments

© 2010 PFM Asset Management LLC

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Defining Scope •

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To what funds does it apply? – General Funds – Reserves – Bond Proceeds – Retirement Funds

•

Applies to both Internal and External Management – Define role – Name members – List responsibilities

© 2010 PFM Asset Management LLC

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Investment Objectives •

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Safety – Preservation of Capital – Legal Compliance – Risk Management or Mitigation • Credit risk and interest rate risk

•

Liquidity – Ability to meet payment obligations – Expected vs. unexpected

•

Yield – Secondary S d tto safety f t and d liquidity li idit – Obtain a “market rate of return” – Earn a “fair return relative to the risk being assumed”

© 2010 PFM Asset Management LLC

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Standards of Care & Investment Transactions •

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Standards of Care – “Prudent Prudent Person Person” standard – Ethics and conflicts of interest – Delegation of authority • Designated investment officials • External manager

•

I Investment t t Transactions T ti – Authorized dealers • Primary dealers – Internal controls – Delivery vs. payment – Competitive C titi shopping h i

© 2010 PFM Asset Management LLC

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Suitable and Authorized Investments •

Permitted investment types (e.g. Treasury, Agency, CP)

•

For each type, yp specify: p y

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– Maximum maturity – Minimum credit quality – Maximum sector allocation – Maximum per issuer – Collateral requirements •

List prohibited investment types

•

Collateralization

•

Consider nature of funds

•

C Consider id capabilities biliti off staff t ff

© 2010 PFM Asset Management LLC

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Reporting •

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Complete information – Monthly and quarterly

•

Full transparency

•

Market valuation – Identify problems early

•

P f Performance reporting ti – Feedback loop – Re-assess objectives – Review portfolio structure

•

Recheck ratings

© 2010 PFM Asset Management LLC

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Formal Adoption of Policy •

Initial adoption by governing body

•

Annual review and update

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ԟ Changes in personnel ԟ Changes to statutes ԟ Changes in objectives ԟ Changes in market conditions

© 2010 PFM Asset Management LLC

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Missouri State Treasurer’s Investment Guidelines Your Investment Missouri Virginia CodePolicy Guidelines U.S. Treasuries Sector Allocation I Issuer Limit Li it Maximum Maturity

Your Investment Missouri Virginia Policy Code Guidelines

100% none 5 years

Collateralized Repurchase Agreements Sector Allocation I Issuer Limit Li it Maximum Maturity

Bulleted Federal Agencies Sector Allocation Issuer Limit Maximum Maturity

60% none 5 years

Bankers' Acceptances Sector Allocation Issuer Limit Maximum Maturity

Callable Federal Agencies Sector Allocation Issuer Limit Maximum Maturity

30% none 5 years

Collateralized Certificates of Deposit Sector Allocation Issuer Limit Maximum Maturity

Commercial Paper Sector Allocation Issuer Limit Maximum Maturity

© 2010 PFM Asset Management LLC

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50% none 5 years

30% 5% 180 days

100% none 5 years

30% 5% 180 days

11

II. Using Cash Flow Analysis

Benefits of Cash Flow Forecasting

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• Ensure adequate liquidity • Enhance cash management practices • Help design investment program ԟ Potentially increase amounts available for investment ԟ May allow for longer maturity investments ԟ Help p with budgeting g g investment income • Early warning system ԟ Revenue shortfall ԟ Expenditures exceed budget

© 2010 PFM Asset Management LLC

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The Building Blocks

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• Identify cash flow components • Identify data sources • Determine degree of certainty/predictability • Accumulate historical data • Develop a cash flow forecast • Compare forecast to actual results

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© 2010 PFM Asset Management LLC

03 Jan-0 Aug‐10 0

Oct-02 May‐10 0

Jul-02 Feb‐10 02

Apr-02 Nov‐09 9

Jan-0 02 Aug‐09 9

01 Oct-0 May‐09 9

Jul-01 Feb‐09 9

Apr-0 01 Nov‐08 8

Peaks

Jan-0 01 Aug‐08 8

40 000 000 40,000,000

00 Oct-0 May‐08 8

Jul-00 Feb‐08 8

Apr-0 00 Nov‐07 7

Jan-0 00 Aug‐07 7

99 Oct-9 May‐07 7

35,000,000

Jul-99 Feb‐07 7

Apr-99 Nov‐06 6

Jan-9 99 Aug‐06 6

Macro Forecasting Process PFM

Analysis of Historical Monthly Cash Flows

Troughs

30,000,000

25 000 000 25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

15

Cash Flow Seasonality

PFM

• Investment balances often show strong seasonality over time S Seasonal l Factors F t January February y March April May June July August S September b October November D December b © 2010 PFM Asset Management LLC

94% 93% 94% 96% 116% 102% 96% 97% 96% 99% 118% 98%

Lowest Month

Highest Month

16

Computing a Growth Factor

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Analysis of Historical Monthly Cash Flows 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000

Historic Monthlyy Balance

© 2010 PFM Asset Management LLC

Jan-03 Aug‐10

Oct-02 May‐10

Jul-02 Feb‐10

Apr-02 Nov‐09

Jan-02 Aug‐09

Oct-01 May‐09

Jul-01 Feb‐09

Apr-01 Nov‐08

Oct-00 May‐08

Jul-00 Feb‐08

Apr-00 Nov‐07

Aug‐07

Oct-99 May‐07

Jul-99 Feb‐07

Apr-99 Nov‐06

Aug‐06

Jan-99

5,000,000

Jan-01 Aug‐08

Average Monthly Increase: $205,118 Historic Annual Growth Rate: 9.9%

Average g Portfolio Growth

17

Balance Projections

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• Historic data can be used to predict future investable balances.

Projected Portfolio Growth 45,000,000 40,000,000 35 000 000 35,000,000 30,000,000 25,000,000 20,000,000 15 000 000 15,000,000 10,000,000

0

Jan-9 99 Aug‐06 6 May-9 Dec‐06 699 Sep-9 Apr‐07 799 Jan-0 00 Aug‐07 7 May-0 Dec‐07 700 Sep-0 Apr‐08 800 Jan-0 Aug‐08 801 May-0 01 Dec‐088 Sep-0 01 Apr‐099 Jan-0 02 Aug‐099 May-0 02 Dec‐099 Sep-0 02 Apr‐100 Jan-0 03 Aug‐100 May-0 03 Dec‐100 Sep-0 03 Apr‐111 Jan-0 04 Aug‐11 104 May-0 Dec‐11 1 Sep-0 04 Apr‐12 2 Jan-0 05 Aug‐122

5,000,000

Actual Monthly Balances

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Projected Monthly Balances

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Identify the “Core” Portfolio

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• Most governments have a “core” or stable portion of the portfolio that can be invested further out on the yield curve, taking advantage of higher rates. • Even at its lowest balance, a portion of funds are kept liquid, usually between 10% and 25%, depending on the client’s needs.

45,000,000 , , 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0

Jan-99 Aug‐06 May-99 Dec‐06 Sep-99 Apr‐07 Jan-00 Aug‐07 May-00 Dec‐07 Sep-00 Apr‐08 Jan-01 Aug‐08 May-01 Dec‐08 Sep-01 Apr‐09 Jan-02 Aug‐09 May-02 Dec‐09 Sep-02 Apr‐10 Jan-03 Aug‐10 May-03 Dec‐10 Sep-03 Apr‐11 Jan-04 Aug‐11 May-04 Dec‐11 Sep-04 Apr‐12 Jan-05 Aug‐12

Analysis of Core Portfolio

Historical Hi t i l Sh Short-term tt Portfolio P tf li Historical Core © 2010 PFM Asset Management LLC

Projected Short-term Portfolio Projected Core 19

Incorporate Balances into an Investment Plan Historical Short-Term Portfolio

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Projected Short-Term Portfolio

Historical Liquidity Reserve

All Funds F d - Total T t l Analysis of Core Portfolio 160,000,000 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000

Historical Historical Short-term Short-term PortfolioPortfolio

Historical Liquidity Historical Reserve Liquidity Reserve

Historical Core Historical Core

Projected Projected Short-term Short-term PortfolioPortfolio

Projected Liquidity Reserve Projected Liquidity Reserve

Projected Core Projected Core

Historical Core Portfolio

© 2010 PFM Asset Management LLC

Projected Liquidity Reserve

Feb-09 Feb-10

Oct-08 Oct-09

Jun-08 Jun-09

Feb-08 Feb-09

Oct-07 Oct-08

Jun-07 Jun-08

Feb-07 Feb-08

Oct-06 Oct-07

Jun-06 Jun-07

Feb-06 Feb-07

Oct-05 Oct-06

Jun-05 Jun-06

Feb-05 Feb-06

Oct-04 Oct-05

Jun-04 Jun-05

Feb-04 Feb-05

Oct-03 Oct-04

20,000,000

Projected Core Portfolio

20

Impact on Portfolio

PFM

• Understanding cash flows can allow the portfolio to be invested longer and more broadly to generate higher returns.

TSY 20% MMF 100%

AGY 40%

MMF 25% CD 15%

Before Yield: Avg. Maturity: Average Rating:

© 2010 PFM Asset Management LLC

After 0.15% 1 day AAA

Yield: Avg. Maturity: Average Rating:

0.50% 1 year AAA

21

Investment Opportunities

PFM

U S Treasury U.S.

Agency

Comm Paper Comm.

3 month

0.12%

0.17%

0.24%

6 month

0.17%

0.21%

0.30%

1 year

0.31%

0.34%

--

2 year

0.57%

0.71%

--

3 year

0.89%

1.06%

--

Maturity

As of 9/10/10 © 2010 PFM Asset Management LLC Source: Bloomberg

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III. Market Update

Longest “Bull Market” In History

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10-Year U.S. Treasury Yields 1965 - 2010 18% 16% 14% 12% 10% 8% 6% 4% 2.79%

2% 0% 1964 1967 1969 1972 1974 1977 1979 1982 1984 1987 1989 1992 1994 1997 1999 2002 2004 2007 2009

© 2010 PFM Asset Management LLC Source: Bloomberg

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Treasury Yields Hit Record Lows

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2-Year U.S. Treasury Yields September 2009 – September 2010 1 4% 1.4% 1.3% 1.2% 1.1% 1.0% 0 9% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% Sep '09

© 2010 PFM Asset Management LLC Source: Bloomberg

0.45% Dec '09

Mar '10

Jun '10

Sep '10

25

U.S. Treasury Yield Curve

PFM

• Yield curve has “flattened” but remains steep by historical standards

U.S. Treasury Yield Curve

9/10/09

9/10/10

Change

3 month

0.14%

0.14%

0.00%

6 month

0.21%

0.18%

- 0.03%

year 1y

0.37%

0.24%

- 0.13%

2 year

0.88%

0.57%

- 0.31%

3 year

1.43%

0.89%

- 0.54%

5 year

2.28%

1.59%

- 0.69%

10 year

3.35%

2.80%

- 0.55%

30 year

4.20%

3.88%

- 0.32%

5%

4%

Yield

3%

2%

September 10, 2009

1%

September 10, 2010 0% 3 m

3 y

© 2010 PFM Asset Management LLC Source: Bloomberg

Maturity

30 y

26

Bonds and Stocks are Intertwined

PFM

Dow Jones Industrial Average vs. 10-yr U.S. Treasury Yields September 2007 – September 2010 15,000

6.0%

14,000

5.5%

13,000

5.0%

12,000

4.5%

11,000

4.0%

10,000

3.5%

9,000

3.0%

8 000 8,000

2 5% 2.5%

7,000

2.0%

6,000

1.5%

Sep '07

Sep '08

DJIA © 2010 PFM Asset Management LLC Source: Bloomberg

Sep '09

Sep '10

10-year Treasury 27

Summary of U.S. Economic Conditions •

Economic recovery continues, but pace has slowed: – 2010 Q2 GDP was +1.6% -- a sharp slowdown from Q4 & Q1 – Averaging A i lless th than 100K new private i t sector t jjobs b per month th – Manufacturing and Service Sector industry surveys show slower growth – Very V llow iinflation fl ti prospects t

•

Significant troubles remain: – High unemployment (9.6%) – Housing market – expiration of first-time homebuyer tax credit – Government intervention (cap & trade, healthcare, FinReg, taxes) – Banks hording cash, not lending – Corporations hording cash, not investing – European sovereign debt crisis likely to impact global recovery – Global stock markets volatile on worries of “double dip”

© 2010 PFM Asset Management LLC

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2828

Gross Domestic Product (GDP)

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Gross Domestic Product 2005Q1 – 2011Q2 8% 6%

Economists Forecasts

4% 2% 0% -2% -4% -6% -8% 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11

© 2010 PFM Asset Management LLC Source: Bloomberg

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Unemployment Rate Remains Troubling

PFM

Unemployment Rate National and Missouri August 2004 – August 2010 11% 10%

8% 7% 6%

Unemploym ment Rate

9%

5%

Aug 04

Aug 05

Aug 06 U-3 Unemployment

© 2010 PFM Asset Management LLC Source: Bloomberg

Aug 07

Aug 08

Aug 09

4% Aug 10

Missouri Unemployment Rate

30

Improvement Gains Have Faltered

PFM

Key Employment Indicators 12%

600

10%

400 8%

200

6%

0 (200)

4%

(400) 2%

(600) (800) Mar 04

Mar 05

Mar 06

Mar 07

Non-Farm Payrolls © 2010 PFM Asset Management LLC Source: Bloomberg

Mar 08

Mar 09

Unemploym U ment Rate

Ch hange in No on-Farm Pa ayrolls (Tho ousands)

800

0% Mar 10

U-3 Unemployment

31

Watch the Weekly Jobless Claims

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Weekly Jobless Claims 2005 - 2010

700

I Insufficient ffi i t Progress P

Thousands per Wee ek

600

500

400

300

200

100

0 2005

© 2010 PFM Asset Management LLC Source: Bloomberg

2006

2007

2008

2009

2010

32

Excess Manufacturing Capacity

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Manufacturing Capacity Utilization 1985 – 2010 86%

82%

Average since 1948 78%

74%

70%

66% 1985 © 2010 PFM Asset Management LLC

1990

1995

2000

2005

2010

33

Leading Economic Indicators (LEI)

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• LEI are used as a gauge of future GDP growth • LEI have begun to reverse the positive trend from late 2009 & early 2010 Index of Leading Economic Indicators January 2008 – July 2010 2.00% 1.50% 1.00% Expansion

0.50% 0.00% Contraction

-0 50% -0.50% -1.00% -1.50% Jan-08

Apr-08

© 2010 PFM Asset Management LLC Source: The Conference Board

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

34

Inflation Remains Subdued, Deflation Concerns Persist

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PCE Deflator January 2005 – September 2010 5% 4% 3% 2% 1% 0% -1% -2% J 05 Jan-05

J l 05 Jul-05

J 06 Jan-06

© 2010 PFM Asset Management LLC Source: Bloomberg

J l 06 Jul-06

J 07 Jan-07

J l 07 Jul-07

J 08 Jan-08

J l 08 Jul-08

J 09 Jan-09

J l 09 Jul-09

J 10 Jan-10

J l 10 Jul-10

35

PFM

Inflation Indicators July 2010

June 2010

July 2009

Consumer Price Index

1 20% 1.20%

1 10% 1.10%

-2.10% 2 10%

Core CPI

0.90%

0.90%

1.50%

Producer Price Index

4.20%

2.80%

-6.90%

Core PPI

1.50%

1.10%

2.50%

Personal Consumption Expenditures (PCE) Deflator

1.50%

1.40%

-1.00%

Core PCE

1.40%

1.40%

1.30%

Price of Oil/Barrel

$79.39

$76.60

$77.91

$1181.00

$1242.25

$954.00

Price of Gold/Ounce

© 2010 PFM Asset Management LLC Source: Bloomberg

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Deficits Cause Treasury Borrowing to Surge

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Total U.S. Treasury Debt Outstanding 1989 –2009 $8 $7 $6 $5 $4 $3 $2 Dec '89

© 2010 PFM Asset Management LLC Source: Bloomberg

Dec '94

Dec '99

Dec '04

Dec '09

37

Silver Lining of Low Rates

© 2010 PFM Asset Management LLC Source: wallstreetjournal.com

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38

Short Rates to Remain “Exceptionally Low”

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Fed Funds Target Rate August 2004 – August 2010 6% 5% 4% 3% 2% 1% 0% Aug '04

Aug '05

© 2010 PFM Asset Management LLC Source: Bloomberg

Aug '06

Aug '07

Aug '08

Aug '09

Aug '10

39

Interest Rate Forecasts Vary Widely

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Two Year U Two-Year U.S. S Treasury Note Yield and Forecasts August 2009 – March 2012 6% August 2009 forecast y 2-Year U.S. Treasury August 2010 forecast

5%

Guerilla Economics

RBS

4% 3%

Barclays Capital Societe Generale Morgan Stanley

2%

Credit Suisse Goldman Sachs

1% 0% Aug-09

Credit Suisse Goldman Sachs

Dec-09

© 2010 PFM Asset Management LLC Source: Bloomberg

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

40

IV. Investment Opportunities in the C Current Market M k

Investment Opportunities

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U S Treasury U.S.

Agency

Comm Paper Comm.

3 month

0.12%

0.17%

0.24%

6 month

0.17%

0.21%

0.30%

1 year

0.31%

0.34%

--

2 year

0.57%

0.71%

--

3 year

0.89%

1.06%

--

Maturity

As of 9/10/10

© 2010 PFM Asset Management LLC Source: Bloomberg

42

PFM

European Sovereign Debt Crisis Weighs on Markets Select European Country Credit Default Swap Prices March 31, 2009 – August 30, 2010 $1,200

$1,000

Greece Spain Portugal

$800

Italy Ireland

$600

$400

$200

$Mar-09

May-09

© 2010 PFM Asset Management LLC Source: Bloomberg

Jul-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

43

Value in Commercial Paper

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Short-Term Rates January 1, 2010 – September 10, 2010 0 70% 0.70% 3-Month LIBOR

0.60%

CP has value

Fed Target Rate 90 Day Commercial Paper 90-Day

0.50%

0.40%

0.30%

0.20%

0.10% 01/01/10

02/01/10

© 2010 PFM Asset Management LLC Source: Bloomberg

03/01/10

04/01/10

05/01/10

06/01/10

07/01/10

08/01/10

09/01/10

44

Agency Floaters Offer Value

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Fed Funds Effective Rate August 2005 – September 2010

Federal Agency Floater Rates I d Indexed d tto Fed F d Funds F d

6%

5%

Maturity

Current Rate

12 month

FF + 0.10% = 0.30%

18 month

FF + 0.15% = 0.35%

24 month

FF + 0.25% = 0.45%

4%

3%

2%

1%

0.20%

0% Aug-05

Aug-06

Aug-07

© 2010 PFM Asset Management LLC Source: Bloomberg

Aug-08

Aug-09

Aug-10

45

V. Update on Fannie Mae & Freddie Mac

The Housing and Economic Recovery Act of 2008

PFM

July 2008: - As part of the reform of GSE regulation, the act created a new regulator, the Federal Housing Finance Agency (FHFA) (FHFA), by combining three government agencies agencies.

- Powers granted to the FHFA: - Safety and soundness mandate - Mission oversight responsibilities for the housing GSEs - Certain conservatorship powers, which they would use within a few months.

© 2010 PFM Asset Management LLC

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Conservatorship

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Sept 2008: - FHFA placed FNMA and FHLMC into conservatorship. - Goal of conservatorship: - Conserve the enterprises’ assets - Mitigating systematic risk. - FHFA assumed the power of the board and management. - Reconstituted the boards and executive management - Eliminated common and preferred dividends (saving $2B/yr) - Halted all political and lobbying activities - Implemented enterprise risk oversight system ,including: - Governance - Solvency - Earnings - Credit/market/operational risk. - Note: FHFA cannot dissolve the enterprises. This can only be done by an act of Congress Congress.

© 2010 PFM Asset Management LLC

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Agency Market Remains Active

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Federal Agency Average Daily Trading Volume 1997 - 2009 400 Federal Agency Securities Agency MBS

B Billions

300

200

100

0 1997

1999

2001

© 2010 PFM Asset Management LLC Source: SIFMA US Bond Markets Average Daily Trading Volume

2003

2005

2007

2009

49

Sr. Debt Credit Ratings Remain “AAA”

I Issuer Fannie Mae

T Type off D Debt bt

S&P

M d ’ Moody’s

PFM

Fit h Fitch

Short Term Debt A-1+

P-1

F1+

AAA

Aaa

AAA

A1 A-1+

P1 P-1

F1 F1+

AAA

Aaa

AAA

Long Term Debt

Freddie Mac

Short Term Debt

Long Term Debt

Source: Credit Ratings from Fannie Mae and Freddie Mac Second Quarter 10-Q as of July 30, 2010; Fannie Mae 10-K from 2006-2010; Freddie Mac Annual Information Statement from 2002-2008; Freddie Mac 10-K from 2009-2010

© 2010 PFM Asset Management LLC

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Challenges Remain - Housing market remains weak, but may be bottoming. Serious problems remain in certain geographic regions (NV, CA, AZ, FL). - D Delinquencies li i and d fforeclosures l remain i att ttroubling bli levels, the highest in recent history.

PFM

Delinquencies 11.0% 9 0% 9.0% 7.0%

- REO: collectively they own over 100K properties. 5.0%

- High unemployment and slow recovery pose significant headwinds.

3.0% Jun 00

Jun 02

- Their huge retained portfolios expose them to a huge amount of market risk, risk should rates move up sharply sharply.

Jun 04

Jun 06

Jun 08

Jun 10

Jun 08

Jun 10

Foreclosures 5.0%

- Continued reliance on front loaded short-term funding.

4.0%

- Staffing: attracting and retaining high quality staff.

3.0% 2.0%

- Ultimate future: to be determined by Congress. For the foreseeable future, there is no alternative. The private-label securitization market is virtually dead, and will never return in its prior form. form

© 2010 PFM Asset Management LLC Source: Bloomberg

1.0% 0.0% Jun 00

Jun 02

Jun 04

Jun 06

51

Conclusion – Agencies are Still Safe Investments

PFM

• Fannie Mae & Freddie Mac remain critical to mortgage finance in the U.S. • U.S. Treasury currently providing unlimited support • Agency debt is widely held • Agency market remains liquid and widely accepted • Business B i conditions diti are iimproving i • Default is unthinkable • Congressional solution will protect bondholders

© 2010 PFM Asset Management LLC

52

PFM

Questions?

© 2010 PFM Asset Management LLC

53

PFM

Thank You!

© 2010 PFM Asset Management LLC

54

Disclaimer

PFM

This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.

© 2010 PFM Asset Management LLC

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