Corporate Cash ManagementThe Galli Investment Team

Marina Galli, CFASenior Vice President – Financial Consultant415-445-8519

Jennifer J. SeidlerSenior Financial Associate415-445-8663

Jennifer CaiRegistered Senior Client Associate415-445-8582

Bonafe De MayoRegistered Client Associate415-445-8583

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Navigating in the Current Environment for Cash Management

Nebraska AFP ConferenceSeptember 10, 2009

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Table Of Contents

1) Overview of Current Environment

2) Financial Crisis and TARP timeline

3) US Government Agencies

4) Commercial Paper

5) Municipal Bond Market

6) Certificates of Deposit

7) Mortgage Market

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Overview of the Current Environment

-General strength of economy remain concerns

-Signs of recovery, but many areas of concern in the economic landscape

-Yield remain at historic lows

-A lot of corporate money on the sidelines

-Significant government intervention and support throughout the economy and markets

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Financial Crisis Timeline

2007• February 27: FHLMC announces it will no longer buy the most risky subprime mortgages and

mortgage-related securities.

• April 2: New Century Finance Corp, a leading subprime mortgage lender, files for Chapter 11

• July 24: Countrywide warns of difficult conditions

• July 31: Bear Stearns liquidates 2 hedge funds that invested in various MBS

• August 9: BNP Paribas, France’s largest bank, halts redemptions on 3 investment funds

• August: Liquidity problems in the CP (extendible and SIV programs); also some ARS failures

• September 14: Bank of England provides liquidity support for Northern Rock, UK’s 5th largest mortgage lender

• November 1 Financial market pressure intensifies, diminished liquidity in interbank funding market

• November 15: FASB, Fair Value Measurements

Source: St Louis Fed

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Financial Crisis Timeline2008• January 11: Bank of America purchase of Countrywide for $4 Billion

• February: ARS failures; market freezes

• March 16: Bear Stearns acquired by JP Morgan

• July 11: Indymac Bank goes into receiverships of the FDIC by the OTS

• September 7: FNMA and FHLMC into conservatorship

• September 14: Merrill Lynch sold to Bank of America

• September 15: Lehman files for Chapter 11 bankruptcy

• September 16: Reserve Fund breaks the buck triggered by Lehman exposure

• September 16: Moody’s and S&P downgrade AIG

• September 19: Treasury Department creates the Guarantee Program for Money Market Funds

• September 25: WAMU sold to JP Morgan

• October 12: Treasury Department creates TARP

Source: St Louis Fed

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Financial Crisis Timeline

2009

• February 17: President Obama signs “American Recovery & Reinvestment Act 2009” into law

• June 24: SEC proposes changes to Money Market Funds

Source: St. Louis Fed

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Government Programs - Overview

Treasury Programs TARP Funding GSE Conservatorships Guarantee Money Funds

Federal Reserve Programs Term Auction Facility (TAF) Commercial Paper Funding Facility (CPFF) Primary Dealer Credit Facility (PDCF) Agency MBS Programs Term Securities Lending Facility (TSLF) Term Asset-Backed Securities Facility (TALF) Treasury Purchase Program (TPP)

Source: FDIC.gov

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Government ProgramsProgram Total

CommitmentsSpent (as of 4/30/09)

Government as Investor $9.0 trillion $1.6 trillion

Commercial Paper $1.6 trillion $178 billion

U.S. Government Agency Securities $1.5 trillion $641 billion

Term Asset-Backed Securities Loan Facility (TALF)

$900 billion $5 billion

Public Private Investment Partnership (PPIP)

$900 billion $0

Troubled Asset Relief Program (TARP) $700 billion $645 billion

FNMA/FHLMC $400 billion $60 billion

AIG $53 billion $42 billion

Bear Stearns $29 billion $29 billion

Reserve U.S. Government Fund $4 billion $2 billion

Source: NY Times and RBCCM US Interest Rates Monthly Atlas

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Government ProgramsProgram Total

CommitmentsSpent (as of 4/30/09)

Government as Lender $1.4 trillion $404 billion

Term Auction Facility $900 billion $404 billion

Other Loans (Discount Window, etc) $236 billion $46 billion

Debt Swaps (Term Securities Lending Facility) $200 billion $33 billion

AIG $60 billion $45 billion

Government as Insurer $1.7 trillion $330 billion

Temporary Liquidity Guarantee Program (TLGP) $700 billion $326 billion

Non-Interest Bearing Deposit Accounts (TLGP) $684 billion $0

Citigroup $249 billion $0

Bank of America $98 billion $0

Morgan Stanley $9 billion $0

Source: NY Times and RBCCM US Interest Rates Monthly Atlas

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U.S. Government Agencies

Agencies State and Local Taxes

Federal Home Loan Mortgage Corporation (FHLMC)

No exemption

Federal National Mortgage Association (FNMA)

No exemption

Federal Home Loan Bank (FHLB) Exempt

Federal Farm Credit Bank (FFCB) Exempt

Financing Corp (FICO) Exempt

Resolution Funding Corporation (REFCORP)

Exempt

Tennessee Valley Authority (TVA) Exempt

Source: FINRA

These securities all have the implied backing of the U.S. Government

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U.S. Government Agencies

• On September 7, 2008, FNMA and FHLMC were placed into conservatorship to strengthen ties between the Government and the GSE’s.

• Conservatorship helped stabilize perception of strength of these two public entities.

• As of March 2009, the combined debt and obligations of FNMA, FHLMC and FHLB was $6.7 Trillion

Source: FHFA.gov and Federal Reserve

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Certificates of Deposit (CDs)

• Certificates of Deposit (CDs) are debt instruments issued by commercial banks. The issuing bank promises to pay principal and fixed rate of interest.

• The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts,

• Amounts that exceed $250,000 are not insured and are only secured by the bank's credit.

Source: FDIC.gov

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Municipal Bond Market

• Tax‑Exempt securities are debt obligations issued by states, cities, counties, and other local government entities to finance projects.

• Muni market has come under pressure as States continue to be under financial stress.

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Municipal Bond Market

Pre‑Refunded/Escrowed Bonds

• Pre‑Refunded Bonds/Escrowed Bonds are bonds in which outstanding securities are refinanced by excessive revenues or the proceeds of a new issue of securities prior to the maturity date of the original bond. These bonds may originally have been issued as general obligation or revenue bonds but are now secured by an escrow fund.

• The proceeds of the refunding securities are generally invested in US Government or Federal Agency Securities and held in an escrow account. The principal and interest from these securities are used to pay the principal and interest on the refunded securities.

• Securities are considered "Pre‑refunded" when the refunding issue's proceeds are Escrowed only until a call date or dates on the refunded issue, with the refunded issue redeemed at that time.

• Securities are "Escrowed to maturity" when the proceeds are deposited in escrow for investment in an amount sufficient to pay the principal of and interest on the issue being escrowed on the original issue payment and maturity dates.

Source: MSRB.org

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Municipal Bond Market

Chart of Bond insurer ratingsInsurer Moody’s S&P Fitch

Ambac Caa2 (Dev Outlook) CC (Dev Outlook) WD

BHAC Aa1 (Stable Outlook) AAA (Neg Outlook) NR

FGIC WR NR WD

FSA Aa3 (Neg Watch) AAA (Neg Outlook) AA+ (Neg Watch)

NATL (frmr MBIA) Baa1 (Dev Outlook) A (Dev Outlook) NR

Radian Ba1 (Sta Outlook) BBB- (Neg Watch) WD

XLCA (Syncora) Ca (Dev Watch) R WD

Source: Bloomberg, 8/10/2009

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Municipal Bond Market Case Study – City of Vallejo

• Declared Chapter 9 Bankruptcy protection

• Largest municipal bankruptcy since Orange County in 1994

• At time of bankruptcy had nearly $163 Million in outstanding debt

• Creditors included bondholders and credit enhancers Union Bank of California and MBIA

Source: Bondbuyer

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Commercial Paper

• Commercial paper is an unsecured short‑term promissory note sold at a discount to face value by corporations to institutions, high net worth individuals, other corporations, and commercial paper dealer firms.

• Significant changes to the market over the past 2 years

• What happens when government programs get lifted?

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Mortgage Market - U.S. compared to Canada

U.S. CanadaProducts •30-year terms with matching amortization

•“Teasers” (low initial rate, then increases)

•1 to 5-year terms, typical, with up to 35 year amortization. Prepayment penalties.•Limited use of “teasers”

Lenders •Brokers are 70% of the market•Mortgages are usually packaged and sold

•Major banks are over 60% of the market•Mortgages stay on bank balance sheets

Underwriting •Wide range of underwriting and documentation requirements

•Major banks credit score using in-house model and 3rd party metrics•Extensive documentation

Credit Quality •Sub-prime origination was almost 20% in 2006•Higher delinquency rates

•No sub-prime origination by major banks•Low delinquency rates

Regulation & Mortgage Insurance

•Insured on if conforming and LTV under 80%•No regulatory LTV limit – can be over 100%•Not government backed if insurer defaults

•Must be fully insured if LTV over 80%•Insured by government housing agency or government approved private insurers•Insured principal is 90% government backed if a private insurer defaults

Consumer Behavior

•Mortgage interest is tax deductible•Less tendency to pay down mortgages•More leveraged

•Interest not tax deductible•More likely to pay off mortgage•Less leveraged

Source: DBRS “Comments on the Mortgage Markets in Canada and U.S., RBC data and IMF paper

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Contact Information

•Marina Galli 415-445-8519 marina.galli@rbc.com

•Jennifer Seidler 415-445-8663 jennifer.seidler@rbc.com

•Jennifer Cai 415-445-8582 jennifer.cai@rbc.com

•Bonafe DeMayo 415-445-8583 bonafe.demayo@rbc.com

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Disclosures

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.