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					Washington Public Ports Association

November 19, 2008

Cynthia Weed K&L Preston Gates Ellis Maud Daudon, President and CEO, SNW

Navigating the credit markets

   

Outline what has happened Show you the impacts on market for municipal bonds Describe what this means for investment portfolios Provide advice on how to best position your port in this environment

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A Shared Sentiment

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Timeline of Events that Rocked the Municipal Market
Sep 15, 2008 12:00 am US/Central Timeline: U.S. Credit Crunch & Financial Failures View Market Summaries & Leading Stock Changes NEW‖YORK‖(CBS‖News)‖―‖Wall‖Street‖and‖Main‖Street‖have‖been‖caught‖up‖in‖credit‖market‖turmoil,‖which‖began‖in‖2007‖ with rising defaults on mortgages made to financially shaky borrowers and spread to corporate bonds and other kinds of debt. The situation leaves many asking the question: How did all this all happen? FROM CBS NEWS: CBS News Interactive: Bank Seizure Q&A CBS News Interactive: Inside The Federal Reserve CBS News Interactive: About Chairman Ben Bernanke CBS News Interactive: Federal Reserve History CBS News Interactive: Federal Funds Rate 1900-2008 CBS News Interactive: Eye On The Economy HOW THE FINANCIAL INDUSTRY FELL INTO TROUBLE... Here's a look at actions and statements from key players in Washington related to the credit crunch: May 17, 2007: Federal Reserve Chairman Ben Bernanke said growing number of mortgage defaults will not seriously harm the U.S. economy. June 29, 2007: Banking regulators complete new guidelines calling on lenders to strictly evaluate borrowers' ability to repay home loans. Aug. 7, 2007: Fed leaves key federal funds rate unchanged, says credit problems and housing slump pose increasing risks to U.S. economy. Aug. 9, 2007: Fed pumps $24 billion into U.S. banking system through large purchases of securities, while European Central Bank makes record cash injection of $130 billion into its markets to shake off credit fears. Wall Street suffers its second-worst decline of the year as Dow Jones industrials drop by nearly 400 points. Aug. 10, 2007: Fed pumps another $38 billion in temporary reserves into the U.S. financial system; government rejects request for mortgage finance giants Fannie Mae and Freddie Mac to take on more debt.

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Aug. 17, 2007: Fed tries to stabilize financial markets by approving 0.5 percentage point cut in its discount rate on direct loans to banks.

Timeline of Events (cont’d)
Aug. 31, 2007: President Bush announces plan to use Federal Housing Administration, which insures loans for low-income borrowers, to offer government-guaranteed loans to around 80,000 homeowners in default. Sept. 18, 2007: Fed cuts key federal funds rate by a half point to 4.75 percent.

Sept. 19, 2007: Government raises debt portfolio limits for Fannie and Freddie by more than 2 percent annually.
Sept. 20, 2007: Bush acknowledges "some unsettling times" in the housing and credit markets, while Treasury Secretary Henry Paulson signals the administration would consider allowing Fannie and Freddie to temporarily buy loans bigger than the current cap of $417,000. Oct. 4, 2007: House approves tax break for homeowners who have mortgage debt forgiven as part of a foreclosure or loan renegotiation. Oct. 10, 2007: Paulson announces a new mortgage industry coalition aimed at helping homeowners avoid foreclosure. Oct. 11, 2007: House and Senate Democrats reach a compromise on legislation permitting Fannie and Freddie to increase mortgage holdings by 10 percent from current limit; Bush administration rejects that idea. Oct. 15, 2007: Three largest banks - Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. - announce a plan organized by Treasury Department to buy securities hurt during the summer's mortgage turmoil. Dec. 5, 2007: Congressional aides say the Bush administration has hammered out an industry agreement to freeze interest rates for certain subprime mortgages for five years. Dec. 6, 2007: The Mortgage Bankers Association reports that home foreclosures hit an all time high in the third quarter. Dec. 11, 2007: The U.S. Federal Reserve cuts its key interest rate by a quarter-point to 4.25 per cent, the third rate reduction in three months as the central bank tries to keep the country out of a recession. The reduction came as Fed officials signalled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending get worse. Jan. 10, 2008: Federal Reserve Chairman Ben Bernanke pledges to slash interest rates yet again to prevent housing and credit problems from plunging the country into a recession. Jan. 11, 2008: Bank of America Corporation soon will be the nation's biggest mortgage lender and loan servicer. The Charlotte, N.C.-based company announced that will buy Countrywide Financial for just over $4 billion in stock. The deal rescues the country's biggest mortgage lender and expands the financial services empire of the nation's largest consumer bank.

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Timeline of Events (cont’d)
Jan. 15, 2008: The Federal Reserve, working to combat the effects of a serious credit crisis, says it auctioned $30 billion in money to commercial banks at an interest rate of 3.95 percent. It marked the third in a series of innovative auctions the Fed began last month as a way to provide cash-strapped banks with the reserves they need. The hope is that the increase in resources will keep banks lending to consumers and businesses and prevent the credit turmoil that hit in August from pushing the country into a recession.

Jan. 22, 2008: The Federal Reserve's unexpected slashing of a key interest rate by a bold three-quarters of a point appears to be having the desired effect on world markets. The move has sent Asian stocks up after two days of steep losses. Fears of a U.S. recession have battered the region's markets since the start of the year.
Jan. 24, 2008: Democratic and Republican congressional leaders reach a tentative deal on tax rebates of $300 to $1,200 per household and business tax cuts to jolt the slumping economy. Jan. 29, 2008: The House overwhelmingly passes a $146 billion aid package that would speed rebates to most taxpayers. But the Senate could slow things, with lawmakers there backing a larger package that adds billions of dollars for senior citizens and the unemployed. Jan. 30, 2008: The Fed cuts a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. The rate cut marked the fifth time that the Fed has cut the funds rate since Sept. 18 in response to the severe credit crisis which hit global markets in August. The action was expected to be quickly followed by cuts in banks' prime lending rate, the benchmark rate for millions of consumer and business loans. Feb. 7, 2008: Congress passes an economic stimulus bill and the White House says President Bush will sign it. Rebate checks could start arriving in the homes of Americans in May, averaging $600 to $1,200 for most taxpayers. Disabled veterans, the elderly and other low-income people will get around $300. Feb. 12, 2008: Homeowners threatened with foreclosure could get a 30-day reprieve under a plan announced by the Bush administration. "Project Lifeline" is meant to cover people with all types of mortgages, not just subprime loans that were the focus of previous relief efforts. The Federal Reserve has auctioned another $30 billion in funds to commercial banks, meant to alleviate the credit crunch. It is the the fifth in a series of auctions that have pumped $130 billion into the nation's banking system. March 3, 2008: Federal Reserve Chairman Ben Bernanke calls for additional relief and urges lenders to help distressed homeowners by lowering the amount of their loans. He says foreclosures are likely to keep rising even as the government and the housing industry begin relief efforts. March 6, 2008: The Mortgage Bankers Association reports that home foreclosures hit an all-time high in the final quarter of 2007. Meantime, the Federal Reserve says the percent of equity homeowners have in their houses has fallen below 50 percent for the first time since 1945. March 15, 2008: The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy.

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Timeline of Events (cont’d)
April 10, 2008: The Senate passes a bipartisan measure aimed at boosting the housing market and easing the threat of foreclosures. The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes. The White House opposes the plan, saying parts of it would actually make the problem worse by depressing some home values. April 30, 2008: Scrambling to shore up the faltering economy, the Federal Reserve cut interest rates to the lowest point in nearly four years Wednesday as the nation teetered on the edge of recession. Wall Street rallied at first but then pulled back, concerned that the reduction might be the last for a while. May 2, 2008: The Federal Reserve and other regulators have begun steps to end "unfair and deceptive" credit card industry practices assailing consumers who are already struggling to cope in a bad economy. The proposed rules would be the biggest clampdown on the industry in decades. June 17, 2008: The Federal Reserve has auctioned another $75 billion in loans to squeezed banks to help them overcome credit problems. The auction is the 14th since the program began in December. July 11, 2008: A mortgage rescue to help struggling homeowners avoid foreclosure and get more affordable, safer loans has passed the Senate. The measure faces a bumpy road in the House. It includes a modernization of the Federal Housing Administration and would create tighter controls on mortgage giants Fannie Mae and Freddie Mac. July 13, 2008: Scrambling to bolster eroding investor confidence, the Federal Reserve and the Treasury Department announce steps to brace slumping mortgage giants Fannie Mae and Freddie Mac. The plan is intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted in 2007 with losses from subprime mortgages from engulfing financial markets. July 14, 2008: The Federal Reserve adopts rules to give homebuyers more protection from shady lending practices. The board approves a plan that would crack down on the type of practices that have hurt many of the riskiest borrowers. Lenders wouldn't be able to make loans without proof of a borrower's income. July 23, 2008: The House approves legislation to give the ailing housing market a boost. It targets help for 400,000 homeowners facing foreclosure while giving support to mortgage giants Fannie Mae and Freddie Mac. The highlights of the bill include: $300 billion to provide more affordable mortgages to troubled homeowners, nearly $4 billion in grants to help communities fix up foreclosed properties and a $7,500 tax credit for first-time homebuyers. July 30, 2008: The Federal Reserve announces that it is extending emergency borrowing to Wall Street, and is also making other moves to ease the crippling credit crunch. The program will now be available through January 2009, rather than ending in mid-September as was originally planned. July 30, 2008: President Bush signs a housing bill seen as the most significant in decades. The measure lets homeowners who can't afford their payments refinance into more affordable government-backed loans rather than lose their homes. As many as 400,000 struggling homeowners could stand to benefit.

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Aug. 12, 2008: The Fed has auctioned another $25 billion in loans to U.S. banks, at a rate of 2.754 percent. In the latest auction, the Fed says it offered the loans for an extended period of 84 days, rather than the 28-day period for the previous loans.

Timeline of Events (cont’d)
Sept. 7, 2008: The Bush administration announced it was seizing the troubled mortgage giants Fannie Mae and Freddie Mac in a bid to help reverse a prolonged housing and credit crisis. Both Fannie Mae and Freddie Mac were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Sept, 14, 2008: Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Sept. 15, 2008: Bank of America Corp. announces it would acquire Merrill Lynch in an all-stock transaction that should lift the uncertainty shrouding the investment bank since the start of the credit crisis over a year ago. The $50 billion deal would create a bank that offers everything from fixed-income trading to credit card lending and will rival Citigroup Inc., the biggest U.S. bank in terms of assets. Sept. 15, 2008: A stunning makeover of the Wall Street landscape sent stocks falling precipitously, with the Dow Jones industrials sliding 504.48 points in their worst point drop since the September 2001 terrorist attacks. Investors reacted badly to a shakeup of the financial industry that took out two storied names: Lehman Brothers and Merrill Lynch Co. Stocks also posted big losses in markets across much of the globe.

Sept. 16, 2008: The U.S. government announces an $85 billion emergency loan to rescue AIG, saying a disorderly failure of the company could hurt the already delicate financial markets and the economy.
Sept. 17, 2008: The Dow Jones industrial average lost about 450 points, giving it a shortfall of more than 800 so far for the week. Markets around the world shared in the confidence crisis, and Russia shut down its market for a third day following its worst plunge in share prices since 1998. Sept. 18, 2008: The U.S. Federal Reserve, working with central banks in Europe, Canada and Asia, pumped as much as $180 billion into money markets to combat a seizing up of lending between banks. Sept. 19, 2008: Following a series of ad hoc measures, the U.S. government announces a broad rescue plan for the financial system, including a program to buy hundreds of billions of dollars of bad mortgages and other forms of toxic debt that have been weighing down U.S. financial companies. The Fed and Treasury Dept. shore up money market funds, which had also come under siege during the crisis, and the SEC temporarily bans short-selling - a way of betting that a stock will fall - against shares in 799 financial stocks. Sept. 24, 2008: Warren Buffett's Berkshire Hathaway Inc. announces plans to invest at least $5 billion in Goldman Sachs, a move seen as a huge vote of confidence for one of the credit crisis survivors. Sept. 25, 2008: Washington Mutual Inc., one of the nation's largest banks, collapses under the weight of its enormous bad bets on the mortgage market. The Federal Deposit Insurance Corp. seizes WaMu and then sells the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion. With $307 billion in assets, Seattle-based WaMu, which was founded in 1889, is the largest bank in American history to fail.

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Timeline of Events (cont’d)
Meanwhile in Washington D.C., key members of Congress claimed agreement on an outline and crucial details of an urgent multibilliondollar plan to stave off the crisis, but Republican members of the house balk at the plan and suggest an alternative plan. Presidential candidates Barack Obama and John McCain join negotiations, and late in the day, McCain sides with the House GOP alternative plan. Sept. 29, 2008: In a surprise break from party leaders, House legislators defeat the $700 billion emergency rescue plan backed by the Senate and the White House for helping the nation's financial system. In reaction to the move, the Dow Jones industrials plunge nearly 780 points, the most ever point drop for a single day. Oct. 1, 2008: After senators loaded the economic rescue bill with tax breaks and other sweeteners, the $700 billion financial industry bailout passed on a 74-25 vote and moved on to the House. Oct. 3, 2008: On a final vote of 263-171, the House of Representatives approved the revised $700 billion government bailout plan and sent it to President Bush for his certain signature. Meanwhile, Wachovia announced it had agreed to be acquired by San Francisco-based Wells Fargo & Co rather than by Citigroup.

Oct. 6, 2008: In a rare coordinated move, the Federal Reserve and other major central banks from around the world slashed interest rates to prevent a mushrooming financial crisis from becoming a global economic meltdown. The Dow Jones industrials average posts its biggest loss ever during a trading day, closing below 10,000 for the first time since 2004.
Oct. 8, 2008: The Federal Reserve agrees to provide American International Group with a second loan of up to $37.8 billion, coming on top of a $85 billion loan made to the troubled insurance company in September. The move comes as lawmakers investigating the meltdown of AIG questioned the decision by AIG executives to spend $440,000 on a recent company retreat, complete with spa treatments, banquets and golf outings. Overseas, the British government announced a $87.5 billion plan on Wednesday to partly nationalize major banks, with taxpayers taking stakes in a bid to shore up a financial sector hard hit by the world financial crisis.

Oct. 13, 2008: Wall Street stormed back after its worst week ever and staged the biggest single-day stock rally since the Great Depression, catapulting the Dow Jones industrials to a 936-point gain.
Oct. 14, 2008: The 2008 federal budget deficit soars to $454.8 billion, the highest level in history and more than double the $161.5 billion recorded in 2007. Oct. 17, 2008: President George W. Bush addresses the country about financial crisis by saying the economy didn't falter overnight, "and it's going to take a while for the credit system to thaw." U.S. and world markets continue to endure a volatile period of record daily gains and daily losses.

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Timeline of Events (cont’d)

Oct. 23, 2008: Former Federal Reserve Chairman Alan Greenspan appears before the House Oversight Committee and says the financial meltdown -- a "once-in-a-century credit tsunami" -- has revealed a flaw in a lifetime of economic thinking, leaving him in a "state of shocked disbelief." Reported on this same day, the number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, while new claims for jobless benefits increased by more than expected. Oct. 28, 2008: The Conference Board reports the U.S. consumer confidence index fell to 38, down from a revised 61.4 in September and significantly below analysts' expectations of 52. That's the lowest level for the index since the Conference Board began tracking consumer sentiment in 1967, and the third-steepest drop. Oct. 30, 2008: The U.S. Commerce Department reports gross domestic product fell at an annual rate of 0.3 percent in the July-September period, a sign the country could be facing a worse recession. The GDP is widely seen as the broadest measure of America's economic health. Consumer spending, which accounts for two-thirds of the economy, dropped by the largest amount in 28 years in the third quarter.

(© 2008 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.) http://wcco.com/business/credit.crisis.timeline.2.818699.html#howithappened

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Interest Rate Movements
7.00%

20- Y ear MMD Historical Interest Rates

6.00%

5.00%

Interest Rate (%)

4.00%
7.00%

Historical Interest Rates

3.00%
Interest Rate (% )

6.00%

5.00%

4.00%

2.00%

3.00%

2.00%

1.00%

1.00%

0.00%

Dec-07

Dec-07

Feb-08

Feb-08

Aug-08

Mar-08

Mar-08

Aug-08

un-08 J

Apr-08

Apr-08

un-08 J

Sep-08

Nov-07

Sep-08

Apr-08

Sep-08

May-08

May-08

0.00%

Dec-00

Feb-05

Feb-00

Nov-08

Nov-07

an-08 J

an-08 J

ul-08 J

ul-08 J

Oct-08

Oct-08

20-Year MMD High 5.94% Low 3.81% Average 4.70% Current 4.93%

Dec-05

Aug-07

Aug-02

Jun-03

Mar-02

Nov-98

Nov-03

Mar-07

Sep-99

Apr-99

Apr-04

Sep-04

Jun-08

May-01

May-06

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   

MMD = Municipal Market Data – a published benchmark of tax exempt bond rates Presently, municipal bond market is still highly illiquid (for initial offerings and secondary trading) Improvement has been seen over last several weeks However,‖conditions‖are‖not‖“normal”  AMT, taxable, lower rated credits, project financings most impacted

Nov-08

Jan-03

Oct-06

Oct-01

Jan-08

Jul-00

Jul-05

Tax-Exempt Market
Tax Exempt market has significantly underperformed relative to Treasuries.

 Municipals have not benefited from the flight to quality and continue to underperform  Liquidation of TOB, Hedge Fund municipal holdings has deluged secondary market with product  Traditional municipal investors (institutional and retail investors) are capital constrained
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Interest Rate (% )

8.00%

20- Year MMD VS. 20-Year Treasury

7.00%

6.00%

5.00%

4.00%

3.00%
20 Year AAA MMD 20 Year TSY

2.00%

1.00%

0.00%
Dec-00

Feb-05

Feb-00

Dec-05

Aug-07

Aug-02

un-03 J

Mar-02

Nov-98

Nov-03

Mar-07

Sep-99

Apr-99

Apr-04

Sep-04

un-08 J

May-01

May-06

Nov-08

an-03 J

Oct-06

Oct-01

an-08 J

ul-00 J

ul-05 J

Tax-Exempt Market
6.00%

Tax-Exempt Yield Curve (MMD)

5.00%

Interest Rate (%)

4.00%

3.00%

AAA MMD 11/13/07 AAA MMD 11/12/08

2.00%

1.00%
0.5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

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Yield curve is dramatically steeper versus just one year ago  Negative arbitrage for project accounts and refunding escrows is substantial due to both the slope of the tax-exempt curve and tax-exempt market dislocation from treasuries

AMT Increases Interest Rate Penalty
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Many port bonds (because they finance industrial/airport/maritime facilities are subject to alternative minimum taxes (referred to as AMT bonds) Historically, the interest rate penalty for AMT bonds has ranged from 25 to 50 bp In current markets, the AMT penalty has increased to anywhere from 100-250 bp Bonds from major Washington port (AA2/AA-/AA) maturing in February of 2011 traded last week priced to yield 5.25% (or +258 to the MMD). Only one initial offering of AMT bonds has been done since September - San Francisco Airport.  Deal was done under pressure (The bonds (A1/A/A) were a takeout of (FSA) insured variable rate demand obligations  Due in 10 years with mandatory puts in 2010, 2011 and 2012  Yields for each of the put years were 6.00%, 6.20% and 6.45  Spreads to the put dates were – 3.34% (334 bp) in 2010, 3.14% (314 bp) in 2011 and 3.11% (311 bp) in 2012  Of this spread, about 75+ bp was for the mandatory put

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1/1/2007 2/1/2007 3/1/2007 4/1/2007 5/1/2007 6/1/2007 7/1/2007 8/1/2007 9/1/2007 10/1/2007 11/1/2007 12/1/2007 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/1/2008

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Market Volatility

-0.4 0.1 0.2 0.3 0.4 0

-0.3

-0.2

-0.1

Daily Basis Point Change - 20 Year "AAA" MMD Rate Since 2007

Sep-06
Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

15

5-Yr Maturity
1.0 2.0 2.5 3.5

1-Yr Maturity
1.5 3.0 4.0
4.5
Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07

2.5

4.0

2.0

3.0

3.5

Market Premiums Based on Credit Ratings (MMD Index)

Based on data from TM3.com.
Apr-07
May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08

Dec-07
Jan-08 Feb-08 Mar-08

Mar-08 Apr-08
May-08

Apr-08
May-08
Jun-08
Jul-08 Aug-08 Sep-08 Oct-08

Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

'A' spread over 'AAA'

'AA' spread over 'AAA'

Sep-06 Oct-06
Nov-06 Dec-06 Jan-07

Market Premiums Based on Credit Ratings (MMD Index)

Based on data from TM3.com.
Sep-06

Feb-07
Mar-07

Apr-07 May-07
Jun-07

Jul-07
Aug-07

Sep-07
Oct-07

Nov-07 Dec-07
Jan-08 Feb-08

Mar-08
Apr-08

May-08
Jun-08 Jul-08 Aug-08

'A' spread over 'AAA'

Sep-08
Oct-08

Nov-08

16

25-Yr Maturity
3.0 4.0 5.5

10-Yr Maturity
3.5 4.5 5.0 6.0

3.5

6.0

6.5

4.0

4.5

5.0

5.5

7.0

Oct-06
Nov-06 Dec-06 Jan-07

Feb-07 Mar-07
Apr-07

May-07
Jun-07 Jul-07 Aug-07

Sep-07
Oct-07

Nov-07 Dec-07
Jan-08 Feb-08

Mar-08
Apr-08 May-08 Jun-08 Jul-08 Aug-08

'AA' spread over 'AAA'

Sep-08 Oct-08
Nov-08

Short-Term Borrowing has been impacted
SIFMA vs. 15-Year MMD Rates

7.00%
SIFMA

6.00% 5.00%
4.00% 3.00%

Average SIFMA Rate from Current Date 15-Year MMD

2.00% 1.00% 0.00%

1/5/2000

1/5/2002

5/5/2002

9/5/2002

1/5/2003

5/5/2003

9/5/2003

5/5/2004

9/5/2004

1/5/2005

9/5/2005

1/5/2008

5/5/2000

9/5/2000

1/5/2001

5/5/2001

9/5/2001

1/5/2004

5/5/2005

1/5/2006

5/5/2006

9/5/2006

1/5/2007

5/5/2007

9/5/2007

5/5/2008

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While short-term market has historically provided issuers the lowest cost of capital  Bank letter of credit providers are capital constrained and re-evaluating pricing  Financial market crisis has resulted in money market fund liquidations

9/5/2008

Credit Ratings – Insurance Companies
0

Aaa Aa1
2

FSA

Aa2
Aa3 A1 A2 A3
8
4

6

Ambac
MBIA0

Baa1
Baa2 Ba1 Ba2 Ba3 B1 B2
18
16
14

10

Baa3 12
FGIC

XLCA
18

1-Dec

30-Jan

28-Jul

29-Apr

29-Feb

31-Dec

29-May

30-Mar

26-Sep

28-Jun

Friday November 14, 2008, Assured Guaranty agreed to purchase FSA. Ratings are under review pending completion of merger.

26-Oct

27-Aug

Insurance Overview – As of November 13, 2008
Insurers Moody's Ambac MBIA FSA FGIC Syncora ACA Financial Guaranty Assured Guaranty CIFG Assurance Radian Berkshire HathawayAC
19

Rating Agencies Standard and Poor's AA AA AAA BB BBBCCC AAA B BBB+ AAA Fitch Withdrawn Withdrawn AAA CCC Withdrawn No Rating AAA Withdrawn Withdrawn No Rating

Baa1 Baa1 Aaa B1 Caa1 NR Aaa B3 A3 Aaa

All insurers other than BHAC are on various forms of negative credit watch/outlook. These outlooks are constantly evolving . Friday November 14, 2008, Assured Guaranty agreed to purchase FSA. Ratings are under review pending completion of merger.

The Current Investment Environment
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Liquidity is generally poor for investments other than U.S. Treasuries  Other types of assets – especially agencies – are marketable, but not yet liquid  Liquidity for corporate commercial paper – even high-grade obligations – is poor; do NOT count on finding reasonable bids prior to stated maturities Investment yields are at decades-low levels for U.S. Treasuries and other high-quality assets Treasury yields do not rise above 1% for 11 months, above 2% for 4.5 years! Agency yields reach 1% in 90 days, 2% in less than 1 year, and 3% within 3 years The Treasury has signaled that it backs agency/GSE debt; these credits are therefore safe to buy Yields on high-grade corporate commercial paper range from 1% near-term to more than 2.25%-2.50% in 90 days and beyond, but liquidity is very poor As these yield figures show, the yield curve has become steeply upward-sloping, with intermediate-term yields considerably higher than shorter-term ones

20

Investment Opportunities and Strategies
  
Treasury yields are far too low; use Treasuries and Treasury collateralized repo only for‖“must-have”‖liquidity‖reserves Agency/GSE credits represent an acceptable blend of credit safety and yield; use them as the core of your investment portfolio High-grade corporate commercial paper offers higher yield at the cost of liquidity; but before buying it, BE SURE ABOUT THE CREDIT, AND DO NOT ASSUME THAT IT CAN BE SOLD AT A REASONABLE PRICE PRIOR TO MATURITY If you cannot devote the resources necessary for proper analysis of commercial paper, forego the extra yield and stick with agencies instead The lack of liquidity in current investments requires care in selecting maturities which match anticipated expenditures; this means you have to pay greater attention to scheduled and potential disbursements as well as to investment maturities The upward slope of the yield curve now rewards you for buying longer maturities, provided that they match up with anticipated expenditures; with the lack of liquidity, you cannot afford to be caught with portfolio investments which are longer-maturing than your need for cash Bottom‖line:‖consider‖a‖“barbell”‖approach,‖with‖a‖short-term liquidity reserve and a series of discrete investment maturities which match your reasonably-anticipated dates of expenditure

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How can you respond?

It’s‖important‖not‖to‖over-react to daily market events but to make prudent choices for the long term  Balanced portfolios still make sense  Matching assets and liabilities still makes sense  Having a range of debt maturities, short and long term still makes sense Understand all the financial tools available and consider them fully  When undertaking a financing strategy, make sure to understand the downside implications – what can go wrong and what would I do about it?  Seek 3rd party advice when you are at all unsure—more minds on the issue  Move deliberately towards an overall set of goals or financing plan and be prepared to act Accessing the capital markets now could be challenging and more costly  Can your project be delayed? What is the cost of delay versus current construction savings?  Do you have sufficient cash on hand to weather a longer term storm?  What‖impacts‖will‖a‖delay‖in‖financing‖have‖on‖your‖entity’s‖performance?  Can you stage your financing needs making market access a bit easier?

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Navigating Current Credit Markets

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There are somewhere between 15 and 30 billion of municipal transactions waiting in the wings for better conditions in the market In this illiquid market, we have found that back to basics makes sense  Fixed rate debt  “Naked”‖credit  Smaller, or staged, issuance The‖markets‖have‖been‖better‖over‖the‖last‖couple‖of‖weeks,‖so‖don’t‖despair!‖ Most importantly- Investing in municipal infrastructure is vital to local and state economies so postponing or cancelling projects has a ripple effect that should be avoided

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What lies ahead

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Regulatory change– big-time  Disclosure  Transparency  Pressure to look and feel more like the Corporate market (some good, some bad) Economic Stimulus Package  Likely within next few months  Could contain infrastructure building funds Other legislation  No AMT??!!

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Debate rages about where to put money to work!

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Questions?

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