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LEGACY SECURITIES PUBLIC-PRIVATE INVESTMENT PROGRAM Program g Update p –Q Quarter Ended September p 30,, 2011 October 21, 2011 OVERVIEW Introduction This is the eighth quarterly report on the Legacy Securities Public-Private Investment Program (“PPIP”). This report includes a summary of PPIP capital activity, portfolio holdings and current pricing, and program and fund performance. Treasury expects to provide additional information as the program continues to mature in subsequent quarterly reports. PPIP Overview PPIP is designed to support market functioning and facilitate price discovery in the mortgage-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. The investment objective of PPIP is to generate attractive returns for taxpayers and private investors through long-term opportunistic investments in Eligible Assets (as defined below) by following predominantly a buy and hold strategy. Under the program, Treasury has committed $22.1 billion of equity and debt in public-private investment funds (“PPIFs”) established by private sector fund managers for the purpose of purchasing Eligible Assets. The fund managers and private investors have also committed capital to the funds. PPIFs have eight-year terms which may be extended for consecutive periods of up to one-year each, up to a maximum of two years. To qualify for purchase by a PPIF, the prior to 2009 and have originally g y been rated AAA – or an equivalent q ratingg byy two or securities must have been issued p more nationally recognized statistical rating organizations – without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets (“Eligible Assets”). Please see page 9 of this program update for a glossary of terms used throughout this document. Additional information on PPIP can also be found at www.financialstability.gov. Neither this report nor the information contained herein constitutes an offer to sell or the solicitation of an offer to buy any securities. Any such offer or solicitation with respect to any PPIF may only be made by the applicable fund manager. This presentation has not been reviewed by any of the fund managers. The performance-related returns and valuations in this report are calculated using an independent third-party market methodology h d l and d are not official ffi i l Treasury T estimates i as reportedd in i the h Financial Fi i l Statements S or the h President’s P id ’ Budget. B d Furthermore, performance-related returns, as used in this report, may differ materially from estimates reported in the Financial Statements or the President’s Budget, which are calculated pursuant to the requirements of the Federal Credit Reform Act of 1990. Treasury’s Financial Statements and the President’s Budget can be found at 2 www.financialstability.gov and www.whitehouse.gov/omb/budget, respectively. CAPITAL ACTIVITY Set forth below is a summary of equity and debt capital commitments by PPIF. The PPIFs have completed their fundraising and have closed on approximately $7.4 billion of private sector equity capital commitments, which has been matched 100 percent by Treasury, representing $14.7 billion of total equity capital commitments. Treasury has also provided $14.7 billion of debt capital commitments, representing $29.4 billion of total purchasing power. Summary of Capital Commitments by PPIF ($ in Millions) Closed Equity and Debt Capital Commitments (1)(2) Private Treasury Treasury Purchasing Equity Equity Debt Power $ 1,243 $ 1,243 $ 2,487 $ 4,973 Fund AG GECC PPIF Master Fund, L.P. Closing Date 10/30/09 AllianceBernstein Legacy Securities Master Fund, L.P. 10/02/09 1,150 1,150 2,301 4,602 Blackrock PPIF, L.P. 10/02/09 695 695 1,390 2,780 Invesco Legacy Securities Master Fund, Fund L.P. LP 09/30/09 856 856 1 712 1,712 3 424 3,424 Marathon Legacy Securities Public-Private Investment Partnership, L.P. 11/25/09 475 475 949 1,898 Oaktree PPIP Fund, L.P. 12/18/09 1,161 1,161 2,322 4,643 RLJ Western Asset Public/Private Master Fund, L.P. 11/05/09 621 621 1,241 2,482 Wellington Management Legacy Securities PPIF Master Fund, Fund LP 10/01/09 1 149 1,149 1 149 1,149 2 299 2,299 4 598 4,598 7,350 $ 7,350 $ Total Program Closed Commitments (1) $ 14,700 $ 29,400 Excludes the effect of any repayments or reductions in the amount of outstanding obligations. (2) Excludes $4.1 billion in total purchasing power within UST/TCW Senior Mortgage Securities Fund, L.P., which was wound-up and liquidated during 1Q 2010. Treasury realized a profit of $20.1 million on its $156.3 million equity investment in UST/TCW Senior Mortgage Securities Fund, L.P., equal to a 1.13x multiple of paid in capital on Treasury's equity. 3 CAPITAL ACTIVITY Set forth below is a summary of equity and debt paid in capital(1) by PPIF. As of September 30, 2011, the PPIFs have drawn-down approximately $23.1 billion of the total capital committed (78.5% of total purchasing power), which has been invested in Eligible Assets and cash equivalents pending investment. In addition, Treasury has received approximately $887 million in net cumulative equity distributions, approximately $179 million in cumulative interest payments and approximately $940 million in cumulative d bt principal debt i i l payments t from f the th PPIFs PPIF as off SSeptember t b 30 30, 2011. 2011 Summary of Paid in Capital by PPIF ($ in Millions) Gross Paid in Capital(1) % Purchasing Private Treasury Treasury Purchasing Power(1) Equity q y Equity q y Total Power Debt $ 4,973 $ 1,117 $1,117 $2,235 $ 4,470 89.9% Gross Distributions(2) Private Treasury Treasury Equity q y Equity q y Debt $ 99 $ 99 $ - $ Fund AG GECC PPIF Master Fund, L.P. Inception Date 11/12/09 AllianceBernstein Legacy Securities Master Fund, L.P. 10/23/09 4,602 1,035 1,035 2,070 4,141 90.0% 132 132 30 295 Blackrock PPIF, L.P. 10/16/09 2,780 528 528 1,053 2,109 75.9% 2 2 - 5 Total 198 Invesco Legacy Securities Master Fund, L.P. 10/13/09 3,424 581 581 1,162 2,324 67.9% 468 468 817 1,754 Marathon Legacy Securities Public-Private Investment Partnership, 12/15/09 1,898 475 475 894 1,843 97.1% 9 9 - 18 (3) O k Oaktree PPIP Fund, F d L.P. LP 02/19/10 4 643 4,643 340 340 679 1 359 1,359 29 3% 29.3% 41 41 79 160 RLJ Western Asset Public/Private Master Fund, L.P. 11/23/09 2,482 621 621 1,241 2,482 100.0% 79 79 14 172 Wellington Management Legacy Securities PPIF Master Fund, LP 10/19/09 4,598 1,149 1,149 2,041 4,340 94.4% 76 76 - 153 29,400 $ 5,846 $ 5,846 $ 11,375 $ 23,068 78.5% $ 907 $ Total Paid in Capital (1) $ (1) Excludes the effect of any repayments or reductions in the amount of outstanding obligations. (2) Excludes the effects of management fees and expenses attributable to either Private Equity or Treasury Equity. Equity 907 $ 940 $ 2,754 (3) On 9/26/11, Invesco notified Treasury that the Investment Period for the PPIF was terminated. As a result, Treasury's debt obligation was reduced by approximately $550 million to reflect the amount of debt funded and outstanding at this time ($345 million). Treasury's equity obligation will be reduced upon the wind-up and liquidation of the fund. 4 PORTFOLIO HOLDINGS – SUMMARY BY SECTOR The total market value of Non-Agency RMBS and CMBS held by all PPIFs was approximately $20.6 billion as of September 30, 2011. Approximately 77% of the portfolio holdings are Non-Agency RMBS and 23% are CMBS. The charts below show composition of Eligible Assets by sector(1). Non-Agency RMBS(2)– $15.9 Billion CMBS – $4.7 Billion $1,288 8% $1,741 $1 741 11% $707 15% $398 8% $5,335 34% $1,397 30% $2,246 47% $7,465 47% Prim Prime Alt-A Alt A S bprim Subprime ($ in Millions) Opti n ARM Option S p r SSenior Super ni r (1) Please see page 9 for a glossary of Non-agency RMBS and CMBS sector definitions. (2) Non-agency RMBS chart excludes $33 million of Other RMBS. AM AJ Oth r CMBS Other ($ in Millions) 5 PORTFOLIO HOLDINGS – NON-AGENCY RMBS The charts below illustrate the range of market prices of Non-Agency RMBS held by all PPIFs as of September 30 30, 2011 2011. Prices are expressed as a percent of par value. value Prime 100.0% Alt-A 100.0% Median Price: 75.4 80.0% 80.0% 58.3% 60.0% 40.0% 60.0% 31.6% 20.0% 3.5% 43.5% 13.2% 8.5% 0.0% < 40 40 - 60 60 - 80 < 40 80 + Subprime 40 - 60 60 - 80 80 + Option ARM 100.0% Median Price: 50.3 80.0% 80.0% 60.0% 60.0% 40.0% 34.7% 40.0% 20.0% 6.6% 0.0% 100.0% Median Price: 60.7 39.6% 22.1% 47.4% 34.9% 40.0% 23.9% 14.3% 20.0% Median Price: 57.8 0.0% 20.0% 13.8% 3 9% 3.9% 0.0% < 40 40 - 60 60 - 80 80 + < 40 40 - 60 Note: Pricing is based on UST valuation process on a consistent basis across all PPIFs. Excludes Other RMBS. 60 - 80 80 + 6 PORTFOLIO HOLDINGS – CMBS The charts below illustrate the range of market prices of CMBS held by all PPIFs as of September 30, 2011. Prices are expressed as a percent of par value value. Super Senior 100.0% AM Median Price: 103.1 87.5% 100.0% 80.0% 80.0% 60.0% 60.0% 40.0% 40.0% 12.5% 20.0% 0.0% 0.0% < 40 20.0% 0.0% 40 - 60 60 - 80 0.0% 80 + 88.5% Median Price: 87.5 11.5% 0.0% 0.0% < 40 40 - 60 60 - 80 80 + AJ 100.0% Median Price: 74.0 80.0% 62.5% 60.0% 40.0% 31.9% 20.0% 0.0% 0 0% 0.0% < 40 5.6% 40 - 60 60 - 80 80 + Note: Pricing is based on UST valuation process on a consistent basis across all PPIFs. Excludes Other CMBS. 7 PERFORMANCE Set forth below is a summary of performance of Treasury’s equity since inception for the program and by fund manager. Note performance will vary among PPIFs due to different risk/return objectives, leverage ratios, and sector allocations among other reasons. The influence of these factors as well as others on performance may evolve over time based on market conditions. PPIFs have been investing for approximately two years and have approximately one year remaining on their three-year investment periods. Performance to date may be disproportionately impacted by the pace of capital deployment by each PPIF. Because of this, industry practice counsels that, at this stage, any performance analysis done on these funds would not generate meaningful results and it would be premature to draw any long-term conclusions about the performance of individual PPIFs or PPIP in general from the data reported to date. It should be noted that the current and past performance of a PPIF is not indicative of its future performance. f Performance Since Inception as of September 30, 2011 ($ in Millions) Program - Cumulative Performance Treasury Equity Capital Commitment $ 7,350 (1) $ Paid in Capital 5,846 Net Cumulative Distributions $ 887 (1) Excludes the effect of any repayments or reductions in the amount of outstanding obligations. (2) Net of management fees and expenses attributable to Treasury's equity. (3) Calculated as the sum of Net Cumulative Distributions received and Ending Capital balance of Treasury's equity position as a multiple of Paid in Capital. Fund AG GECC PPIF Master Fund, L.P. AllianceBernstein Legacy Securities Master Fund, L.P. Blackrock PPIF, L.P. Invesco Legacy Securities Master Fund, L.P. Marathon Legacy Securities Public-Private Investment Partnership, L.P. Oaktree PPIP Fund,, L.P. RLJ Western Asset Public/Private Master Fund, L.P. Wellington Management Legacy Securities PPIF Master Fund, LP Inception Date 11/12/09 10/23/09 10/16/09 10/13/09 12/15/09 02/19/10 / / 11/23/09 10/19/09 Net Time Weighted Cumulative Return Since Inception 42.0% 24.4% 33.1% 27.2% 21.8% 16.8% 31.9% 5.2% (1)(2) (1) Net of management fees and expenses attributable to Treasury's equity. (2) Time-weighted geometrically linked return calculated on a consistent basis across all PPIFs. (3) Dollar-weighted rate of return calculated on a consistent basis across all PPIFs. (4) Calculated as the sum of Net Cumulative Distributions received and Ending Capital balance of Treasury's equity position as a multiple of Paid in Capital. (2) Net Ending Capital $ 5,743 Net Internal Rate of Return Since Inception 13.1% 12.7% 13.4% 19.5% 6.2% 3.7% 15.7% -3.3% (2) (1)(3) Net Multiple of Paid in Capital 1.13x Net Multiple of Paid in Capital 1.17x 1.19x 1.22x 1.22x 1.08x 1.02x 1.25x 0.96x 8 (2)(3) (1)(4) GLOSSARY OF TERMS Non-Agency Residential Mortgage-Backed Securities (RMBS) Non-Agency N A R Residential id i l M Mortgage B Backed k dS Securities i i (RMBS) (RMBS): Type T off mortgage-backed b k d security i that is secured by loans on residential properties that are not issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, or any other United States federal government-sponsored enterprise (GSE) or a United States federal government agency. Non-Agency RMBS are typically classified by underlying collateral / type of mortgage (i.e. Prime, Alt-A, Subprime, Option ARM). Pi Prime: M Mortgage lloan made d to a b borrower with i h good d credit di that h generally ll meets the h llender’s d ’ strictest i underwriting criteria. Non-Agency Prime loans generally are loans that exceed the dollar amount eligible for purchase by the GSEs (jumbo loans), but may include lower balance loans as well. Alt-A: Mortgage loan made to a borrower with good credit but with limited documentation, or other characteristics that do not meet the standards for Prime loans. An Alt-A loan may have a borrower with a l lower r FICO score, r a hi higher h r lloan-to-value t l ratio, r ti orr lilimited it d orr no ddocumentation t ti compared p r d tto a Prime Pri loan. l Subprime: Mortgage loan made to a borrower with poor credit, typically having a FICO score of 620 or less. Option ARM: Mortgage loan that gives the borrower a set of choices of how much interest and principal to pay each month. This may result in negative amortization (i.e. an increasing loan principal balance over time). i ) Commercial Mortgage-Backed Securities (CMBS) Commercial Mortgage Backed Securities (CMBS): Type of mortgage-backed security that is secured byy loans on commercial properties p p such as office buildings, g retail buildings, g apartment p buildings, g hotels, etc. CMBS are typically classified by position in the capital structure (i.e. Super Senior, AM, AJ). Super Senior: Most senior originally rated AAA bonds in a CMBS securitization with the highest level of credit enhancement. Credit enhancement refers to the percentage of the underlying mortgage pool by balance that must be written down before the bond experiences any losses. Super Senior bonds often comprised 70% of a securitization and therefore had 30% credit enhancement at issuance. AM: Mezzanine-level originally rated AAA bond. AM bonds often comprised 10% of a CMBS securitization and therefore had 20% credit enhancement at issuance, versus 30% for Super Senior bonds. AJ: The most junior bond in a CMBS securitization that attained a AAA rating at issuance. 9
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