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This report has been prepared by Banc of America Securities LLC (BAS), member FINRA and SIPC. BAS is a subsidiary of

Debt ResearchCross Product

January 2, 2009 Cross-Product

Research AnalystContributors

Jeffrey Rosenberg

(646) 855 7927

Mike Cho

(646) 855 6302

Hans Mikkelsen

(646) 855 6468

Economists

Gary Bigg(646) 855 1980

Peter Kretzmer(646) 855 1046

Mickey Levy(646) 855 1045

Situation RoomThe Bailout Guide

The Bailout Guide. We provide an updated version of our bailout guidesummarizing the panoply of government intervention efforts to date in one singlespot. The economic consequence of these combined actions, we estimate, is thatthey provide more than 70% government support of bank liabilities in addition tothe $315 billion capital in the form of preferred stock. Jeffrey Rosenberg, HansMikkelsen, Mike Cho.......................................................................................... (Page 5)

Equities and Credit Gain Over Last Two Weeks. On the first trading day of thenew year, equities gained as the S&P 500 closed up 3.2% to 932. Credit waslargely unchanged, with the CDX IG remaining at 198 and CDX HY up slightly at80 . Week over week, the S&P 500 has rallied nearly 7% while CDX IG hastightened 5 bps and CDX HY is up 1 pt. Since Friday, December 19, the S&P500 has climbed 5% while CDX IG has tightened 15 bps and CDX HY is up 3 pts.

Mike Cho .......................................................................................................... (Page 3)

Record Low Confidence, More Housing Declines but Hope for Spending?2008 ended with the U.S. in severe recession. With labor market conditionsdismal, Conference Board consumer confidence hit an all-time record low inDecember. The long fall in housing also continued late in the year, as sales

plummeted and home price declines reaccelerated. However, five months ofdecline in inflation-adjusted consumer spending ended in November, a sign thatthe huge declines in energy costs are providing some consumer relief and theworst of the adjustment to large wealth declines may be past. But we do notexpect a quick consumer-led recovery. Peter Kretzmer, Mickey Levy,Gary Bigg............................................................................................................................ (Page 33)

The factory recession continued to worsen in December, as the ISMmanufacturing index recorded a 5th consecutive below-50 reading. The

composite index fell to 32.4, while new orders fell at a record-setting pace.Export orders also continued to weaken at an accelerating pace last month as didinput prices. Peter Kretzmer ........................................................................ (Page 34)

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Bank of America Corporation. This report is intended for sophisticated institutional investors and equivalent professionalsin the fixed income market only.

Please see the analyst certification and important disclosures on page 37 of this report. BAS and its affiliates do and seekto do business with companies mentioned in their research reports. As a result, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Should investors consider this report as afactor in making an investment decision, it must be considered as a single factor only.

Any portion of this report that has been prepared by a desk strategist or an economist is NOT a product of the debtresearch department and is NOT covered by the research analyst certification provided on page 37. For additionalinformation concerning the role of trading desk strategists and economists, please see the important conflicts disclosuresbeginning at page 36 of this report.


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Cross-Product Research 35January 2, 2009

Situation Room 2

Table of ContentsResearch Overview The Situation .................................................................................................................................... 3

Equities and Credit Gain Over Last Two Weeks .................................................................................................................. 3Credit Strategy........................................................................................................................................................................ 4

The Bailout Guide................................................................................................................................................................. 5Congressional Interventions: EESA and HERA ................................................................................................................... 5

Emergency Economic Stabilization Act (EESA) of 2008................................................................................................. 5Housing and Economic Recovery Act (HERA) of 2008................................................................................................... 5Hope for Homeowners ...................................................................................................................................................... 6

Treasury Interventions .......................................................................................................................................................... 8FDIC Deposit Insurance Limit Increase............................................................................................................................ 8Temporary Liquidity Guarantee Program (TLGP)............................................................................................................ 9

Guaranteed Performance..................................................................................................................................................... 10Guarantee Program for Money Market Funds................................................................................................................. 11Troubled Asset Relief Program (TARP) ......................................................................................................................... 12Treasury Programs Under TARP .................................................................................................................................... 13The Heart of Financial Market UncertaintyInsolvency............................................................................................... 13The Expanding Safety TARP.......................................................................................................................................... 14Toward a Final Version of TARP ................................................................................................................................... 15Company Specific Bailouts............................................................................................................................................. 17The Citi Bailout............................................................................................................................................................... 17The AIG Bailout.............................................................................................................................................................. 18Auto Bailout .................................................................................................................................................................... 19DIPping Into the TARP................................................................................................................................................... 19GMAC Bailout ................................................................................................................................................................ 20Three Steps to Complement Fannie/Freddie Conservatorship........................................................................................ 21What Is a Conservatorship?............................................................................................................................................. 21

Federal Reserve Interventions: Supporting Funding........................................................................................................... 22Funding From the Fed ..................................................................................................................................................... 25Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)....................................................... 26Commercial Paper Funding Facility (CPFF)................................................................................................................... 26

The CPFF in Short........................................................................................................................................................... 27Money Market Investor Funding Facility (MMIFF) ....................................................................................................... 28Term Asset-Backed Securities Loan Facility (TALF) .................................................................................................... 29Clarification on TALF..................................................................................................................................................... 29Leveraging the TARP...................................................................................................................................................... 30GSE Direct Obligation & MBS Purchase Program......................................................................................................... 31Fed Liquidity Facilities ................................................................................................................................................... 32

Economics.............................................................................................................................................................................. 33Record Low Confidence, More Housing Declines but Hope for Spending? ...................................................................... 33Manufacturing Recession Continued to Worsen in December ........................................................................................... 34

Recent Publications

Title Authors

Electric Utilities & Power: Credit Ratings Card Peter Quinn

Telecommunications High Yield Weekly: Market Update Ana Goshko, Jhanvi Lakhani, Raj Atri

BAS IG Consumer & Retail Earnings and Event Calendar Todd Duvick, Thomas Truxillo

For more information visithttp://bofa.com/research/
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Research Overview The SituationResearch Overview The Situation

Equities and Credit Gain Over Last Two WeeksEquities and Credit Gain Over Last Two Weeks

Mike Cho(646) 855 6302

On the first trading day of the new year, equities gained as the S&P 500 closed up 3.2%to 932. Credit was largely unchanged with the CDX IG remaining at 198 and CDX HYup slightly at 80 . Week over week, the S&P 500 has rallied nearly 7% while CDX IGhas tightened 5 bps and CDX HY is up 1 pt. Since Friday, December 19, the S&P500 has climbed 5% while CDX IG has tightened 15 bps and CDX HY is up 3 pts.

On the first trading day of the new year, equities gained as the S&P 500 closed up 3.2%to 932. Credit was largely unchanged with the CDX IG remaining at 198 and CDX HYup slightly at 80 . Week over week, the S&P 500 has rallied nearly 7% while CDX IGhas tightened 5 bps and CDX HY is up 1 pt. Since Friday, December 19, the S&P500 has climbed 5% while CDX IG has tightened 15 bps and CDX HY is up 3 pts.

Figure 1. Equities Gained Over the Last Two WeeksFigure 1. Equities Gained Over the Last Two Weeks Figure 2. as Did CreditFigure 2. as Did Credit

860

870

880

890

900910

920

930

940

19-Dec

-08

22-Dec

-08

23-Dec

-08

24-Dec

-08

26-Dec

-08

29-Dec

-08

30-Dec

-08

31-Dec

-08

2-Ja

n-09

S&P500

S&P 500

193

197

201

205

209

213

217

19-Dec

-08

22-Dec

-08

23-Dec

-08

24-Dec

-08

26-Dec

-08

29-Dec

-08

30-Dec

-08

31-Dec

-08

2-Jan-09

CDXIG

Index

(bps)

76.9

77.4

77.9

78.4

78.979.4

79.9

80.4

80.9

CDXHYIndex(pts)

CDX IG CDX HY

Source: Bloomberg. Source: Banc of America Securities LLC.

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The Bailout Guide1The Bailout Guide1Jeffrey Rosenberg(646) 855 7927

Hans Mikkelsen

(646) 855 6468

Mike Cho

(646) 855 6302

We provide an updated version of our bailout guide summarizing the panoply of

government intervention efforts to date in one single spot. The economic consequenceof these combined actions, we estimate, is that they provide more than 70%government support of bank liabilities in addition to the $315 billion capital in the formof preferred stock.

We provide an updated version of our bailout guide summarizing the panoply of

government intervention efforts to date in one single spot. The economic consequenceof these combined actions, we estimate, is that they provide more than 70%government support of bank liabilities in addition to the $315 billion capital in the formof preferred stock.

Congressional Interventions: EESA and HERACongressional Interventions: EESA and HERA

Emergency Economic Stabilization Act (EESA) of 2008Emergency Economic Stabilization Act (EESA) of 2008

The EESA, which was signed into law by President Bush on October 3, 2008,established the Troubled Assets Relief Program (TARP) administered by the Treasury.Please see the TARP section under Treasury Interventions later in this bailout guide.

The EESA, which was signed into law by President Bush on October 3, 2008,established the Troubled Assets Relief Program (TARP) administered by the Treasury.Please see the TARP section under Treasury Interventions later in this bailout guide.

Housing and Economic Recovery Act (HERA) of 2008Housing and Economic Recovery Act (HERA) of 2008

The HERA was signed into law by the president on July 30, 2008, and contains threeseparate acts, including the establishment of the Federal Housing Finance Agency(FHFA) as a stronger regulator for the GSEs. These new regulatory powers were usedto place Fannie Mae and Freddie Mac under conservatorship on September 7, 2008.Please see the section, Three Steps to Complement Fannie/Freddie Conservatorshipunder Treasury Interventions later in this bailout guide for details on the three programsinitiated by the Fed to complement the FHFAs action on Fannie Mae and FreddieMac. The other key part of the HERA is the HOPE for Homeowners program torefinance distressed mortgages with significant principal writedowns. We reprint belowour summary of the HOPE for Homeowners program.

The HERA was signed into law by the president on July 30, 2008, and contains threeseparate acts, including the establishment of the Federal Housing Finance Agency(FHFA) as a stronger regulator for the GSEs. These new regulatory powers were usedto place Fannie Mae and Freddie Mac under conservatorship on September 7, 2008.Please see the section, Three Steps to Complement Fannie/Freddie Conservatorshipunder Treasury Interventions later in this bailout guide for details on the three programsinitiated by the Fed to complement the FHFAs action on Fannie Mae and FreddieMac. The other key part of the HERA is the HOPE for Homeowners program torefinance distressed mortgages with significant principal writedowns. We reprint belowour summary of the HOPE for Homeowners program.

Figure 3. Key Aspects of the Housing and Recovery Act (HERA) of 2008Figure 3. Key Aspects of the Housing and Recovery Act (HERA) of 2008

Housing and Economic Recovery Act (HERA) of 2008

Federal Housing Finance Regulatory Reform Act of 2008

- New stronger regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHFA)- Raising conforming loan limit in areas with high home prices by as much as 50% to as much as $625,000

HOPE for Homeowners Act of 2008- Refinancing distressed loans into FHA insured mortgages with significant write downs

Foreclosure Prevention Act of 2008

- Increasing FHA Loan limits- $3.92 billion to assist communities devastated by foreclosures

Source: U.S. Senate.

1Updated version of our US Bailout Guide which we last published in the November 26, 2008 Credit Market Strategist.

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Hope for Homeowners2

HOPE provides

refinancing through theFHA with principal

writedown

The Bush administration announced the launch of the HOPE for Homeowners programand provided detailed guidance on its usage. Recall, this was the centerpiece of whatwe previously called the Frank-Dodd bailout for homeowners that providedrefinancing options for homeowners through the FHA. As we previously commented

3,

the ultimate language in this plan showed marked improvement with regard toprotecting against moral hazard as the massive potential subsidy through principalreduction comes at the cost of sharing all future appreciation (as well as equity created)with the government. The guidance also helps to clarify how the implementation willattempt to overcome one of the key issues in a wider adoption: securing the subordinatelien holders approval. The bill initially called for a subordinated holder to receive 9 or12% of claims after the sale of the home, but was revised on November 19 to animmediate payment after origination of the new loan. Relative to current marks of centson the dollar, that may be enough to ease this restriction and open this avenue ofrefinancing to borrowers, though gaining the acceptance of the large writedownsrequired by first lien holders remains.

The HOPE for Homeowners program, as described above, retains the distinctionbetween the equity created as a result of the restructuring of the loan and anyappreciation that may be achieved due to future increase in the price of the houseabove the appraisal value at the time of restructuring. While the percentage of equitythat FHA takes from the homeowners decreases with the immediate payment tosubordinate lienholders, the appreciation is split 50-50 regardless of the timing of sale.Importantly, refinancing prior to a sale does not relieve the homeowner from theobligation to share current and future appreciation with the FHA. For a detailedexplanation of the profit-sharing mechanism, please see Figure 5 below.

In addtion to revising payments to subordinate lienholders, the Department of Housingand Urban Development (HUD) made several other changes on November 19, 2008,including increasing the loan-to-value (LTV) and adjusting debt-to-income (DTI)ratios. These changes will reduce the program costs for consumers and lenders alike

while also expanding eligibility by driving down the borrowers monthly mortgagepayments according to HUD. Figure 6 summarizes the key changes.

Situation Room 6

2Excerpted from the October 1, 2008 Situation Room. Notice that since that issue was published after midnight, it has an

October 2 date. We also published a regular (and different) October 2, 2008 issue with that date.3

Please see the September 21, 2008 Situation Room.
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Figure 4. Key Aspects of the HOPE for Homeowners Program

I. HOPE for Homeowners Act of 2008 (previously referred to as the "Frank-Dodd" bill)

How does it Work?

In guarantees from FHA, up to $300 billion to refinance distressed loans for borrowers at significant discounts

Establishes Board of Directors made up of HUD, Treasury, FDIC, and the Federal Reserve to establish additional program standards

Voluntary - process initiated when borrower or loan servicer contacts an FHA approved lender

Original lender must accept losses at a level to be set by the Board

Program starts October 1, 2008 and ends September 30, 2011

Estimated to help approximately 400k borrowers

Eligibility Requirements

Owner-occupied 1-unit primary residences only; borrower must not have ownership interest in any other residential real estate

Originated on or before January 1, 2008; must have made at least 6 payments

Mortgage debt-to-income > 31%

Under the EESA legislation, this definition was expanded to mean a DTI ratio > to 31% after taking into consideration

the terms of the mortgage refinance

New Loan < 90% of property current appraised value

Note this provision was modified under EESA legislation to give discretion to the Board to set a higher percentage

as the Board determines at their discretion

1) including a 3% upfront mortgage insurance premium for the FHA and closing costs

2) An additional annual 1.5% premium paid by the borrower of the remaining balance

Underwriting Criteria

Fully documented and verified income with the IRS

Only refinanced if borrower can reasonably be expected to pay new terms

New loan must extinguish all subordinate liens

New loan will have a fixed interest rate and a minimum maturity of 30 years

New loan cannot exceed 132% of the 2007 GSE loan limit (132% of $417k=$550k)

Safeguards Against Misuse - Equity & Appreciation Sharing

Limiting Risks to the Regular FHA Program

The program will be paid for using part of the Affordable Housing Trust Fund

The GSE bill will provide a further $2 billion cushion by establishing a reserve fund

New loans will be permitted to be sold through GNMA

1) 5 Year Phase In - upon selling or refinancing of the property the borrower pays: 100% of the created equity in year 1 following restructuring of

the loan, 90% in year 2, 80% in year 3, 70% in year 4, 60% in year 5 and 50% thereafter

2) Any realized appreciation in value (difference between future sale price and original appraised value) is shared 50-50 between the government

and the borrower

Distinguish between 1) Equity created as result of the loan restructuring (i.e. min 10% of appraised value) and 2) Future home appreciation after

loan restructuring.

Source: FHA.

Situation Room 7


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Figure 5. Profit-Sharing Under HOPE for HomeownersFigure 5. Profit-Sharing Under HOPE for Homeowners

An example of how profits are shared under HOPE for Homeowners

At Time of FHA Mortgage Origination

Appraised Value of Home = $150,000FHA Mortgage Amount = $135,000

Equity because of loan restructuring = 150,000 - 135,000 = $15,000

If sold or refinanced:FHA Receives Homeowner Receives

During Year 1 100%, or $15,000 0%, or $0During Year 2 90%, or $13,500 10%, or $1,500DuringYear 3 80%, or $12,000 20%, or $3,000During Year 4 70%, or $10,500 30%, or $4,500

During Year 5 60%, or $9,000 40%, or $6,000

After Year 5 50%, or $7,500 50%, or $7,500

Appreciation is realized and shared, if soldSuppose, Selling Price = $170,000Appreciation = 170,000 - 150,000 = $20,000

Regardless of holding period,

Homeowner receives 50% appreciation, or $10,000

FHA receives 50% appreciation, or $10,000but FHA has to provide upfront payments to subordinate lien holders

Source: FHA.

Figure 6. Highlights of Modifications to Hope for Homeowners Program

Modifications Made on November 18, 2008

Modifications to Hope for Homeowners Program

- Loan-to-value (LTV) increases to 96.5% for loans where:

* mortgage payment is less than or equal to 31% of monthly gross income and,

* household debt payments are no more than 43% of monthly gross income

* Continue to offer 90% LTV with ratios of 38% and 50%, respectively

- Paying subordinate lien holders immediately to remove liens

* Under previous rules would have to wait for the eventual sale of the home

- Allowing the extension of maturities to 40 years

* Up from previously 30 years - reducing monthly payments Source: U.S. Department of Housing and Urban Development.

Treasury Interventions

FDIC Deposit Insurance Limit Increase

Treasury interventionsinclude the TARP and theguarantee program for

money market funds.

The Emergency Economic Stabilization Act (EESA) of 2008 authorized an increase inFDIC provided insurance of bank accounts to $250,000 from $100,000. That increasesthe volume of insured bank accounts to $5.1 trillion from $4.5 trillion, thus injectingextra stability into this important part of bank liabilities, reducing the likelihood of

Situation Room 8


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bank runs. The increase in the insured limit is only temporary and after the end of 2009the insurance limit is scheduled to again drop back to $100,000. While this insurance

program is backed by the FDICs own deposit insurance fund, the Treasury effectivelybackstops the program.

Temporary Liquidity Guarantee Program (TLGP)

This expansion of U.S. government intervention announced October 14, 2008underscores the two critical issues of the credit crisis: funding and liquidity. TheFDICs Temporary Liquidity Guarantee Program (TLGP) provides FDIC-insured USBank Holding Cos and US S&Ls a three-year guarantee on newly issued, seniorunsecured debt issued before June 30, 2009, and unlimited guarantees on non-interest-

bearing deposit accounts through December 31, 2009. An October 14 FDIC technicalbriefing estimated the amount of senior debt and non-interest bearing accounts eligiblefor the TLGP program to be $1.4 trillion and $400-500 billion, respectively. On

November 21, 2008, the FDIC held a board meeting to approve several revisions to theTLGP, including guarantees of timely payment of principal and interest, backing by thefull faith and credit of the United States, and cost of participation. As of January 2,

TLGP issuance totaled close to $115 billion.

Figure 7. Key Changes to the TLGP on November 21

Temporary Liquidity Guarantee Program (Final Rule)

-Backed by the full faith and credit of the United States

-Guarantees timely payment of principal and interest

-20% risk-weighting applied to debt guaranteed by the FDIC

-Excludes debt with a maturity of 30 days or less-Cost of participation is 50 bps for debt maturing in 180 days or less (excl. overnight debt),

75 bps for 181-364 days, 100 bps for 365 days or greater Source: FDIC.

Figure 8. Key Aspects of the FDIC TLGP Program

Temporary Liquidity Guarantee Program

-FDIC guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies

-Backed by the full faith and credit of the United States

-Issued prior to June 30, 2009

-Includes commercial paper and interbank funding, among others-Excludes debt with a maturity of 30 days or less

-Coverage ends June 30, 2012

-Guarantees timely payment of principal and interest

-20% risk-weighting applied to debt guaranteed by the FDIC

-Cost of participation is 50 bps for debt maturing in 180 days or less (excl. overnight debt),

75 bps for 181-364 days, 100 bps for 365 days or greater

-Coverage is automatic for 30 days free of charge, then institutions can opt out

-Guarantee will only cover up to 125% of debt outstanding as of Sep 30, 2008 and maturing before June 30, 2009-Unlimited insurance coverage of noninterest baring t ransaction accounts.

-Coverage ends December 31, 2009

-Cost of participating is a 10 bps surcharge

-Coverage is automatic for 30 days free of charge, then institutions can opt out

Source: FDIC.

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Guaranteed Performance4Guaranteed Performance4

TLGP appears successful in bringing down term financing costs for financial issuers.We expect this program to absorb much of financial issuance requirements in 2009.TLGP appears successful in bringing down term financing costs for financial issuers.We expect this program to absorb much of financial issuance requirements in 2009.

As banks continue to issue FDIC-guaranteed debt under the TLGP, taking advantage ofthe availability of cheap funding, the guaranteed bonds have tightened about 120 bps toTreasuries since issuance, outperforming agencies recently. The availability of termfunding for banks sharply reduces the probability of default at shorter horizons, whichhas resulted in tightening in non-guaranteed short-dated financial paper as well, makingit attractive at higher yields.

As banks continue to issue FDIC-guaranteed debt under the TLGP, taking advantage ofthe availability of cheap funding, the guaranteed bonds have tightened about 120 bps toTreasuries since issuance, outperforming agencies recently. The availability of termfunding for banks sharply reduces the probability of default at shorter horizons, whichhas resulted in tightening in non-guaranteed short-dated financial paper as well, makingit attractive at higher yields.

TLGP issuance appearssuccessful in its intent:

bringing down termfinancing costs forfinancials

Figure 9. FDIC-Guaranteed Bonds Have Tightened About 120 bps to Treasuries Since Issuance,Outperforming Agencies RecentlyFigure 9. FDIC-Guaranteed Bonds Have Tightened About 120 bps to Treasuries Since Issuance,Outperforming Agencies Recently

50

70

90

110

130

150

170190

210

3-Dec

-08

5-Dec

-08

9-Dec

-08

11-Dec

-08

15-Dec

-08

17-Dec

-08

19-Dec

-08

23-Dec

-08

26-Dec

-08

TLGP&AgenciesSpread(b

ps)

630

640

650

660

670

680

690

700710

720

BankSpread(bps)

3 year TLGP 3 year Agencies 1-5 year Bank debt

Note: TLGP spread includes average of MS 3.25 11, JPM 3.125 11, C 2.875 11, GS 3.25 12, BAC 3.125 12.

Source: Banc of America Securities LLC.

4Based on the December 17, 2008 Credit Market Strategist.

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Figure 10. TLGP Issuance Now Totals $115 billion

0

2

4

6

8

10

12

25-N

ov-08

1-D

ec-08

3-D

ec-08

5-D

ec-08

9-D

ec-08

11-D

ec-08

15-D

ec-08

17-D

ec-08

19-D

ec-08

TLGPIssuance($bn)

0

20

40

60

80

100

120

Cumulative($bn)

TLGP Issuance Cumulative

Source: Banc of America Securities LLC.

Guarantee Program for Money Market Funds5

The Treasury on September 29, 2008, released updated details regarding the guaranteeprogram for money market funds (originally announced on September 19, 2008). Theprogram guarantees the share price of any publicly eligible money market fund thatparticipates, if the funds NAV breaks the buck. New details include eligibilityrequirements, including a minimum net asset value of $0.995 and a 11.5 bp upfrontfee for participation. The program initially will last three months, after which theTreasury will review needs and possibly extend until September 18, 2009. On

November 24, 2008, the Treasury extended the program to April 30, 2009 fromDecember. Funds could elect to continue coverage and pay a fee by December 5.Funds not currently participating were precluded from signing up. The program coversapproximately $3 trillion of assets.

5Based on the September 29, 2008 Credit Market Strategist.

Situation Room 11
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Figure 11. Updated Details on the Guarantee Program for Money Market FundsFigure 11. Updated Details on the Guarantee Program for Money Market Funds

Temporary Guarantee Program for Money Market Funds

- Guarantees the share price of any publicly offered eligible money market mutual fund that participates

- Guarantee triggered if the participating fund's NAV falls below $0.995 (breaks the buck)- Provides coverage for amounts held in participating money market funds as of the close of Sept 19, 2008,

or the current amount, whichever is less- Program covers approximately $3 trillion of assets

- Will initially exist for 3 months, after which the Treasury will review needs and possibly extend

- The Treasury has the option to renew the program up to Sept 18, 2009

- Extended to April 30, 2009 from December

- To participate, money market funds with a NAV greater or equal to $0.9975 as of Sept 19, 2008 will pay a 1 bp u- Money market funds with a NAV between $0.995 and $0.9975 as of Sept 19, 2008 will pay a 1.5 bp upfront fee

- Funds with a NAV below $0.995 as of Sept 19, 2008 are ineligible

- Fees will only cover the first three months of the program

Source: U.S. Department of Treasury.

Troubled Asset Relief Program (TARP)

TARP now includes up to$310 billion in capitalinjections via preferred

stock

Interim Assistant Secretary for Financial Stability, Neel Kashkari, updated on October13 the structure of TARP implementation. We republish below our thoughts on theTARP program from the September 28, 2008 Situation Room.

Secretary Paulson on November 12, 2008 effectively put on hold the initial intent of theTARP to purchase illiquid mortgage assets directly from financial institutions. TheTerm Asset-Backed Securities Loan Facility (TALF) represents another use of TARPinitially with a $20 billion guarantee, see Figure 33.

Figure 12. Update on TARP Implementation by the Treasury Department on October 13, 2008

Structure of TARP Implementation1) Mortgage-backed securities purchase program

- Identifying which troubled assets to purchase, from whom and pricing mechanism

2) Whole loan purchase program aimed particularly at regional banks.- Identifying which troubled assets to purchase first and pricing mechanism

3) Insurance program for troubled assets

- Mortgage-backed securities and whole loans- Public request for comment issued on October 10 requiring responses with ideas for program within 14 days

4) Equity purchase program targeting broad array of financial institutions- Voluntary with attractive terms to encourage participation from healthy institutions.

- Encourage complementary private capital raising5) Homeownership preservation

- Help homeowners when purchasing mortgages and mortgage-backed securities while protecting taxpayers

6) Executive compensation- Specifying requirements on executive compensation for firms that participate in the TARP- Will differ depending on the method of troubled asset purchases

7) Compliance- Establishing Oversight and Compliance structures

Source: U.S. Department of Treasury and Banc of America Securities LLC.

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Treasury Programs Under TARP

The Treasury has released program descriptions for four programs under TARP:1) Capital Purchase Program, 2) Systematically Significant Failing InstitutionsProgram, 3) Automotive Industry Financing Program and 4) Targeted InvestmentProgram.

6While the last three have been used for company specific bailouts (AIG, the

autos and Citi, respectively) we provide more details about the more broadly applicableCapital Purchase Program below.

Figure 13. Summary of Treasury Programs Under the Economic Stabilization Act.

1. Capital Purchase Program

- Treasury purchases up to $250bn in senior pfd stock from qualifying US controlled banks, savings associations and certain

bank and savings & loan holding co's (see below table for full details)2. Systemically Significant Failing Institutions Program

- Treasury purchases any financial instrument including debt, equity or warrants from systemically significant institutions- Participation requires issuing warrants to Treasury and executive compensation limits

- Eligibility determined on a case-by-case basis and no deadline for participation

3. Automotive Industry Financing Program- Treasury purchases any financial instrument including debt, equity or warrants that are determind to be troubled from theautomotive industry

- Participation requires issuing warrants to Treasury and executive compensation limits

- Eligibility determined on a case-by-case basis and no deadline for participation4. Targeted Investment Program

- Treasury purchases any financial instrument including debt, equity or warrants that are determind to be troubled

- Participation requires issuing warrants to Treasury and executive compensation limits

- Eligibility determined on a case-by-case basis and no deadline for participation


The Heart of Financial Market UncertaintyInsolvency

Treasurys expansion of TARP to include purchases of preferred stock through theCapital Purchase Program (CPP) dramatically expands the initial focus of TARP fromassets to equity. Such an expansion goes directly to the heart of financial marketuncertaintyinsolvency. The key future question will be defining healthybefore orafter such capital injections? And for the remaining financial institutions seeking suchcapital, Treasurys determination of eligibility and allocations becomes an existentialevent. Finance companies as well face critical strategic decisions as the actions furthertip the competitive landscape in favor of regulated banks.

6Please see: http://www.treas.gov/initiatives/eesa/program-descriptions

Situation Room 13


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Figure 14. Key Aspects of the TARP Capital Purchase Program

TARP Capital Purchase Program

- Treasury to purchase up to $250 billion of senior preferred shares in qualifying U.S. controlled banks, savings

associations, and certain bank and savings and loan holding companies- Must elect to participate November 14, 2008.- Size is a minimum 1% of risk-weighted assets. Maximum is the lesser 3% of risk-weighted assets or $25 billion- Senior preferred shares will be funded by the Treasury by year-end 2008;

- New preferred stock is non-voting and ranks pari pasu to existing preferred stock except junior preferred stock.- Dividend on new preferred shares is 5% for the first five years, then increasing to 9%.

- Treasury receives warrants to purchase 15% of the amount of the senior preferred stock purchase

- Participating companies adopt the Treasury's standards for executive compensation and corporate governance


Figure 15. TARP CPP Participation List (>$330 million)

As of December 29, 2008

Date Company Amount($mm)

2 8 -Oct-0 8 C itig ro up I nc. 2 5 ,0 00

2 8 -Oct-0 8 J P M o rg an C ha se & C o . 2 5 ,0 002 8 -Oct-0 8 W e l ls Far go & C o m p an y 2 5 ,0 002 8 -Oct-0 8 B a n k o f A m erica C orp or atio n 1 5 ,0 00

2 8 -Oct-0 8 M e rri ll L yn ch & C o ., I nc . 1 0 ,0 002 8 -Oct-0 8 M o rg an S ta n le y 1 0 ,0 00

2 8 -Oct-0 8 T he G old m a n S a ch s Gr ou p, In c . 1 0 ,0 00

1 4-N o v-0 8 U .S . B an co rp 6 ,5 991 4-N ov-0 8 C apita l On e Fina n cia l Co rp ora tio n 3 ,5 55

1 4-N o v-0 8 R e gion s F in a nc ia l Co rp. 3 ,5 00

1 4-N o v-0 8 Su n Tru st B a n ks, Inc . 3 ,5 00

1 4-N o v-0 8 B B & T C orp . 3 ,1 342 8-O ct-0 8 B an k o f N ew Yo rk Me llo n C orp or atio n 3 ,0 00

1 4-N o v-0 8 K e yCo rp 2 ,5 001 4-N o v-0 8 C o m er ica In c . 2 ,2 50

2 8 -Oct-0 8 S tate S t ree t Co rp ora tion 2 ,0 00

Date Company Amount($mm)

1 4-N o v-0 8 M a rsh al l & Ils ley C orp o rat io n 1 ,7 151 4-N o v-0 8 N o rth ern T rus t C orp o rat io n 1 ,5 76

1 4-N o v-0 8 Z io n s B an co rpo ra tion 1 ,4 001 4-N o v-0 8 H u nt in gton B a n csha re s 1 ,3 9819 -D ec-0 8 S yn ovu s Fin an c ial C orp . 9 68

5 -D ec-0 8 P o p ular, In c. 9 351 4-N ov-0 8 F irs t H orizon N atio n al C orpo ra tio n 8 6723 -D ec-0 8 M &T B a nk Co rp ora tio n 6 00

2 1-N o v-0 8 Asso c iated B a nc-C o rp 5 252 1-N o v-0 8 C ity Na tio na l C orp ora tio n 4 00

2 1-N o v-0 8 W e b ste r Fin an c ia l C orp o rat io n 4 0023 -D ec-0 8 F ulto n Fina n cia l C orp ora tio n 3 771 4-N o v-0 8 T CF F in an cial C or po rat io n 3 61

5 -D ec-0 8 S o u th Fina n cia l G ro u p, In c . 3 47O th er 1 0 ,5 55T otal 17 2 ,4 61

Source: Treasury Department. Source: Treasury Department.

The Expanding Safety TARP7

The Treasurys safety net for financial markets appears to be expanding. Reportssuggesting inclusion of insurance companies mark only the latest episode of expansionof the EESA legislation and the role of government to respond to the financial crisis.We wrote in Engineering the Bottom

8that the capital purchase plan and Treasurys

determination of eligibility and allocations would create an existential event forbanks, and the purchase of National City by PNC illustrates exactly such a point. TheTreasurys capital determinations and its apparent accelerated pace should go a long

way to relieving the uncertainty of solvency currently plaguing financial markets.Despite the volatility for individual institutions, the rapid clarification of these issuesshould be welcomed for its duration limiting impact on the credit crisis. The extensioninto insurance companies, especially if those end up including the monoline industry,will further help to reduce systemic risk critically important as banks holding

7Based on the October 24, 2008 Situation Room.

8Please see the October 14, 2008 Credit Market Strategist.

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commercial-based CDO exposures face writedowns on those, increasing their exposureto monolines in the corporate analog (albeit much less severe) to last years subprime-related super senior CDO issues.

commercial-based CDO exposures face writedowns on those, increasing their exposureto monolines in the corporate analog (albeit much less severe) to last years subprime-related super senior CDO issues.

Figure 16. Breakdown of Monolines Structured Finance Guarantee Portfolios (1)Figure 16. Breakdown of Monolines Structured Finance Guarantee Portfolios (1). .

Company ABS CDO Other CDORMBS and

Home Equity

Other

ABS (2)Other Structured

Finance (3)

ABK 29,195 42,305 46,184 56,577 22,894

AGO (4) 1,255 38,992 16,367 12,301 2,509FGIC 10,932 17,168 31,361 15,832 95

CIFG 9,400 - 1,900 - -

FSA 364 72,836 18,772 38,499 -

MBI 30,600 100,296 33,447 23,265 19,846

SCA 17,996 26,304 8,900 6,067 15,371

Total 99,742 297,901 156,931 152,541 60,715 (1) CDOs include both international and US CDOs. All other exposures are only US. (2) Other includes Student Loans, Commercial MBS, AutoLoan, Credit Card and Non-Specified ABS. (3) Investor owned Utilities, Financial Debt, Direct Corporate Exposure and unspecified structuredfinance. (4) MBS and HE are comprised of roughly 50% Prime MBS with an average rating of A+.

Source: Company reports, Banc of America Securities LLC estimates.

Toward a Final Version of TARP9

Funding for the TARP willbe tranched with $700bnauthorized, but $250bn

available for immediateuse

Working through the weekend, a final version of the TARP emerged on September 29.That Sunday night, the Treasury hosted a call to go over aspects of the legislation andto field analysts questions. Most of the main provisions from earlier versions remainedintact with some critical changes and additions. Funding will now be tranched with$700bn authorized, but $250bn available for immediate use. With presidentialcertification, an additional $100bn can be accessed and the remaining $350bn subjectto Congressional disapproval. As of December 29, 2008, $172bn of the $250bn was

allocated through preferred stocks to 208 banks in addition to an extra $20 and $40bnfor Citi and AIG, respectively and $6 billion for GMAC and GM (see section below).$20bn has been reserved for the TALF.

Regarding both price and conditions, more discretion was granted to the Secretary onboth fronts. Both direct purchases and market mechanisms remain with little specificityon how the price determination would be met. The bills language requires programguidelines to be issued within 45 days of passage, providing further details, or within 2days of the first purchase. Warrants and limits on executive compensation remain in the

bill, with some critical easing of the compensation limits relative to earlier versions.

Warrants attached to participation remain in the bill, but terms of the warrantsgoverning the degree of dilution now stand at the discretion of the Secretary. Treasurygave further guidance on the call regarding their intent. Direct purchases envision the

purchase of assets from failing institutions such as in the case of Bear Stearns or AIGwith substantial and punitive equity stakes taken. But for institutions accessing theprogram through the market mechanism, Treasurys guidance was that in exercisingthis discretion, the Secretary would look to scale the size of dilution according to

participation, say, as a percentage of total liabilities of the institution sold into the fund.The goal is for the warrants to not be punitive so as to not create a disincentive to

9Based on the September 28, 2008 Situation Room.

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Situation Room 16

participation. The bills language includes a provision excluding warrants for the first$100m of participation.

Executive compensation limits scaled back. Relative to earlier bills, executivecompensation limits have been scaled back again to lessen the punitive nature anddisincentive toward participation. The most stringent limits now only apply to use ofthe fund under the direct purchases method. For purchases made under Auctions,executive compensation limits only apply to participation of greater than $300m, andthose limits only include limitations of No Golden Parachutes under the events oftermination, bankruptcy, or receivership and would apply only to top 5 executives andonly during the 2-year period of the fund (subject to a 1-year extension by the

president). This clearly represents an attempt to encourage usage of the program, at aminimum in small size, by reducing the punitive nature of the executive compensationlimits present in earlier versions of the bill.

Not intended to bail out failing institutions. Note as well that the bill includes languagestipulating the Secretary take into consideration the long-term viability of theinstitution before purchasing the assets. Further clarification on the call indicated the

intent is not to put funds into failing institutions, but to help healthy institutions getliquidity for the troubled assets and for that liquidity to make its way back into thesystem.

In what appears a political concession, the House Republican proposal for theestablishment of an insurance fund as an alternative mechanism appears in the bill.Treasury stated that their thought process on this program was further behind that of the

purchase program and as such they were unable to provide many details on how itwould work. Provisions in terms of size and equity warrants appear to apply to this

portion. Critical to evaluating this alternative will again be the determination of price.The draft legislation stipulates pricing should create reserves necessary to protecttaxpayers. This appears an even less well thought through provision, and its inclusion isfor political rather than economic sense. On the pricing issue, for example, theinsurance premium must be set equal to the consideration given under the purchases

method; otherwise, sellers into the fund will choose the more advantaged pricingscheme. Furthermore, premium-based payments for insurance create potential issues as,for example, the Treasury will be severely informationally disadvantaged indetermining the risk of the asset being insured relative to the financial institutionseeking the insurance. The same issue exists under direct purchases, but underinsurance the problem is exacerbated by the fact that premiums received, if they arespread out over the expected life of the asset, may end up falling well short of therealized loss.

Overall, this version makes some critical revisions relative to earlier versions. The newversion gives substantial discretion to the Secretary in regards to the attachment ofwarrants to usage of the program. The guidance on the call clearly suggests thatTreasury envisions the Auction process as a way to bring liquidity to the market, andintends in this version, through lessening the punitive nature of both warrants and

executive compensation under that form of usage, to encourage its use. For small sizes,this clearly appears to be the case. However, for most institutions, exposures to thetroubled assets far exceed these limits, and therefore a broader usage of the programwould expose them to not only these scaled-down executive compensation limits, butalso to an as-yet undefined amount of future equity dilution. The issue of price as wellremains unclear, and any decision to use the program will first and foremost depend onhow Treasury sets price. As we have discussed, the use of reverse auctions to set priceslikely limits participation to institutions carrying assets at the lowest levels as they will


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be able to offer troubled assets at the lowest levels with no additional capital hitrequired. This version of the bill appears to extend benefits to those using it forrelatively small sizes (below the trigger thresholds for executive compensation andwarrants). For the rest in between, it remains to be seen how Treasury determines price

in balancing the competing priorities to stabilize financial markets while at the sametime protecting taxpayers before the longer-term impact will be clear. Near term,however, passage of the bill will likely be treated as lowering systemic risks, easing thecredit crisis with tighter spreads and higher stock prices a result.

Company Specific Bailouts

In addition to the government intervention and programs addressed above, Citi andAIG received company-specific bailout packages on November 23 and November 10,respectively. The Citi investment falls under the Targeted Investment Program

10as

part of EESA and the AIG investment is classified under the Systemically SignificantFailing Institutions Program

11. While several government agencies are involved we

categorize these under Treasury Interventions as both received TARP capitalinjections and review the bailouts for Citi and AIG below.

The Citi Bailout12

The US Treasury, Federal Deposit Insurance Corporation (FDIC), and Federal ReserveBoard on November 23, 2008 issued a joint statement announcing an agreement withCitigroup to guarantee specific residential and commercial real estate-based assetsvalued at $306 billion in exchange for $7 billion in preferred stock. Besides the assetguarantee, the Treasury also buys $20 billion in preferred stock under the CapitalPurchase Plan (CPP) and receives warrants with exercise value of $2.7 billion.

Figure 17. US Government Announced Bailout for Citigroup

Citigroup Bailout Summary

Asset Guarantee:

- $306 bn of loans and securities backed by residential and commercial real estate to be guaranteed- Assets to remain on Citi's books and get 20% risk weighting

- Guarantee is in place for 10 years on residential and 5 years on non-residential assets- Citi takes the first $29bn in losses; thereafter losses shared 90% by US govt , 10% by Citi

- The 90% US govt share of losses is split as follows:* Treasury takes second loss (after Citi's first loss) up to $5bn

* FDIC takes third loss up to $10bn* Fed funds the remaining pool of assets, if required, with a non-recourse loan at OIS + 300bps

- Treasury to get $4bn of preferred stock with 8% dividend rate; FDIC $3bn

- Citi is prohibited from paying common stock dividends of more than $0.01 per share for three years

TARP Capital Purchase Plan:- Treasury to buy $20 bn of perpetual preferred stock paying cumulative dividend of 8% per annum- Treasury also gets 10 year warrants for exercise value of $2.7 bn at strike of $10.61 per share

Source: Treasury, FDIC, Federal Reserve.

10See: http://www.treas.gov/initiatives/eesa/program-descriptions/tip.html

11Please see: http://www.treas.gov/initiatives/eesa/program-descriptions/ssfip.shtml

12Based on the November 24, 2008 Situation Room.

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The AIG Bailout13

In what may form a template for other bailouts, including for the bond insurers, thegovernment announced a restructured support package for AIG. Highlighting the

broadening scope of TARPs Capital Purchase Program (CPP), the Treasury ispurchasing $40 billion in new preferred stock, with 10% coupon from AIG. Theexisting $85 billion credit facility with the Fed is restructured, dramatically reducingthe interest rate and commitment fees, as well as extending the maturity to five years.Finally, the Fed is committing loan financing to two limited liability companies (LLC)designed to purchase troubled assets from AIG. One $23.5 billion LLC will purchaseRMBS from the companys U.S. securities lending program, while the other $35 billion

program is set to acquire ABS CDOs on which AIGFP has written CDS protection.AIG provides a $1 billion first loss piece for the former and $5 billion for the latter.We note that the package does not address AIGs $237 billion exposure to corporateCDOs, where performance is sensitive to the developing default cycle.

Figure 18. Key Aspects of the New AIG Rescue Package

New November 10, 2008 AIG Rescue Package- Treasury to purchase $40 billion in preferred shares under TARP

* 10% Coupon

* Includes 10-year warrant for 2% of AIG common stock

- Restructuring of existing credit facility with the Fed

* Size reduced to $60 billion from $85 billion

* Maturity of facility extended to 5 years from 2

* Interest rate on drawn funds reduced to L+300 from L+850 bps

* Commitment fee for undrawn funds reduced to 75 bps from 850

- $23.5 billion residential Mortgage-Backed Securities Facility

* Limited liability company to purchase RMBS from AIG's U.S. securities lending program

* Funded with a $22.5 billion loan from the New York Fed and $1 billion subordinated loan from AIG

* $37.8 billion existing securities lending facility with the Fed will be repaid and terminated- $35 billion Collateralized Debt Obligations Facility

* Limited liability company to purchase multi-sector CDOs on which AIGFP has written CDS contracts

* Funded with a $30 billion loan from the New York Fed and $5 billion subordinated loan from AIG

* Counterparties to unwind the related CDS transactions

Source: Federal Reserve and AIG.

13Based on the November 10, 2008 Situation Room.

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Figure 19. Summary Statistics for Super Senior Credit DerivativesFigure 19. Summary Statistics for Super Senior Credit Derivatives

As of September 30, 2008As of September 30, 2008

Asset Class Notional Amount

Regulatory Capital Relief Transact ions ($mm)Corporate 170.0

Residential Mortgages 143.6

Other 3.6

Arbitrage Transactions

Multi Sector CDO w/Subprime 76.5

Multi Sector CDOs w/No Subprime 32.0

Corporate debt/CLOs 67.1

Total 492.8 Source: AIG I3Q investor Presentation.

Auto Bailout

On December 19, 2008 GM and Chrysler announced they will receive secured bridgeloans facilities utilizing TARP in the amounts of $13.4 and $4bn, respectively

14. As

announced on December 29, 2008 the Treasury separately will purchase $5bn inpreferred stock from GMAC, using TARP funds as well as lend $1bn to GM toparticipate in a rights offering at GMAC in supporting the companys transition as abank holding company

1516. We republish our original thoughts below.

DIPping Into the TARP17

GM and Chrysler obtain abridge loan to arestructuring that

converts to a DIP loan if

negotiations areunsuccessful

The Administration announced utilizing the TARP to fund effectively a Debtor-In-Possession (DIP) loan to GM and Chrysler. Unlike regular DIP financing, however,terms on the loan give the companies through first quarter 2009 to complete arestructuring outside of bankruptcy before triggering a default. Terms of the loan

mirror those in the failed Senate bill including the Corker amendment, but with thoseprovisions stated as Targets rather than hard requirements. The focus of autouncertainty now shifts to required stakeholder concessions by February 17 before thefinal March 31 deadline certifying long term viability ..[and]..achievement by thecompany of positive net present value. Failure by this date (or after one extension of30 days) by the Presidents Designee to certify plan completion will result in the loanamounts becoming due and payable in 30 days. Absent another source of financing,such an action would precipitate a bankruptcy filing, upon which these governmentloans may be converted into a true DIP facility.

14As part of the Automotive Industry Financing Program under EESA:

15Please see the press release:

http://www.treasury.gov/press/releases/hp1335.htm16

The Federal Reserve announced its conditional approval of GMAC as a bank holding company in a December 24, 2008 pressrelease: http://www.federalreserve.gov/newsevents/press/orders/20081224a.htm17

Based on the December 19, 2008 Situation Room.

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Figure 20. Highlights from the General Motors and Chrysler Secured Bridge Loan Facilities

General Motors and Chrysler Secured Bridge Loan Facilities

- Term loan to Dec 29, 2011 (if in compliance with conditions of agreement) with full recourse financed using TARP funds

* Secured by first lien on unencumbered assets or junior lien on encumbered assets

* GM loan amount up to $13.4 bn. $4 bn on Dec 29, $5.4 bn on Jan 16 and $4.0 bn on Feb 17 (last payment needs approval by Congress).

* Chrysler loan amount up to $4.0 billion.

- Cost is L+300 bps though spread increases to 800 bps in the event of default. LIBOR floor is 2.00%

- Except for mandatory repayments under existing secured loans, 100% proceeds from asset sales and capital raisings directed to loan repayment

- Subject to executive privileges and compensation limitations in the EESA

- President's Designee need to approve any special business transaction exceeding $100 million.

- Companies submit long-term plan (including term sheet signed by all relevant parties) to President's Designee by Feb 17, 2009 including plans for

* Repayment of the government

* Complying with Federal fuel efficiency and emissions requirements and commencing production of advanced technology vehicles

* Providing positive net present value, rationalizing costs, restructuring existing debt and a competitive product mix

- Restructuring targets (carried over from "Corker Amendment")

* debt-to-equity swaps amounting to at least 2/3 of existing debt

* Average compensation levels per labor hour and work rules must be similar toUS operations of Nissan, Toyota and Honda by Dec 31, 2009

* Elimination of benefits to employees that have been fired, laid-off, furloughed or idled (other than customary severance)

* No less than half of contributions made to the voluntary employees beneficiary organization to be made in stock

- Progress report to be submitted to Congress by March 31, 2009

- Loan facilities may be converted into DIP financing in the event of bankruptcy at lender's option

- Treasury receives warrants for 20% of the maximum loan amount up to 20% of common shares

Source: Treasury Department.

GMAC Bailout

The Treasury announced on December 29, 2008 that it will purchase from GMAC $5bnin senior preferred stock using TARP funds. The preferred stock will have an 8%dividend and warrants will be issued to Treasury in the form of additional preferredequity, equal to 5% of the preferred stock purchase, which will pay a 9% dividend ifexercised. In addition, the Treasury will lend up to $1bn to GM to help the companysupport GMACs transition to a bank holding co. The GM loan will be exchangeable atany time at the Treasurys option, into equity interests in GMAC acquired by GM in arights offering.

Figure 21. Highlights in the GMAC Investment

TARP Investment in GMAC

-Treasury w il l purchas e $5 b n in pre fer red s tock w i th a n 8 % d ivide nd

-W arrants wi l l be issu ed to Trea sury in the form of addi t ion al pfd stock, equ al to 5%of the pfd stock pu rchase w i th a 9% d iv idend i f exe rcised

-Treasury w il l lend GM $1 bn to he lp G M su ppor t G MA C's trans i ti on to a BHC wi thterms s ubstant ia l ly the sam e as the $13 .4bn credi t faci l i ty (see abo ve), exc ept

secured by GM AC equ ity Source: Treasury.

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Three Steps to Complement Fannie/Freddie Conservatorship18Three Steps to Complement Fannie/Freddie Conservatorship18

Senior Preferred Stock

Purchase Agreement Government-Sponsored

Enterprise Credit Facility-- GSE Mortgage-Backed

Securities Purchase Program

The Federal Housing Finance Agency (FHFA) on September 7, 2008 placed FannieMae and Freddie Mac under Conservatorship. This state, as defined below, meansthe FHFA establishes control and oversight of the GSEs to put them in a sound andsolvent condition and thus closely resembles bankruptcy. Simultaneously, the TreasuryDepartment announced three steps to complement the FHFA decision. The Treasurywill purchase senior preferred stock as needed to maintain positive net worth at Fannieand Freddie up to $100 billion each. The Treasury also announced the GovernmentSponsored Enterprise Credit Facility (GSECF) to provide secured funding to FannieMae, Freddie Mac and the Federal Home Loan Banks. The final step by the TreasuryDepartment involves direct purchases of agency MBS designed to complement modestincreases in GSE retained portfolios until December 31, 2009 (without regards tocapital requirements) to directly support the mortgage market.

The Federal Housing Finance Agency (FHFA) on September 7, 2008 placed FannieMae and Freddie Mac under Conservatorship. This state, as defined below, meansthe FHFA establishes control and oversight of the GSEs to put them in a sound andsolvent condition and thus closely resembles bankruptcy. Simultaneously, the TreasuryDepartment announced three steps to complement the FHFA decision. The Treasurywill purchase senior preferred stock as needed to maintain positive net worth at Fannieand Freddie up to $100 billion each. The Treasury also announced the GovernmentSponsored Enterprise Credit Facility (GSECF) to provide secured funding to FannieMae, Freddie Mac and the Federal Home Loan Banks. The final step by the TreasuryDepartment involves direct purchases of agency MBS designed to complement modestincreases in GSE retained portfolios until December 31, 2009 (without regards tocapital requirements) to directly support the mortgage market.

While the above-described measures are designed to provide temporary support for themortgage market as the Treasury Departments authority expires December 31, 2009, itis up to Congress to define the structure and roles of the GSEs over the longer term.

The Senior Preferred Stock Purchase Agreement calls for a gradual 10% annualreduction in Fannie Mae and Freddie Macs retained portfolios from as much as $850billion each as of December 31, 2009 to $250 billion.

While the above-described measures are designed to provide temporary support for themortgage market as the Treasury Departments authority expires December 31, 2009, itis up to Congress to define the structure and roles of the GSEs over the longer term.

The Senior Preferred Stock Purchase Agreement calls for a gradual 10% annualreduction in Fannie Mae and Freddie Macs retained portfolios from as much as $850billion each as of December 31, 2009 to $250 billion.

What Is a Conservatorship?What Is a Conservatorship?

A Conservatorship is the legal process in which a person or entity is appointed toestablish control and oversight of a Company to put it in a sound and solvent condition.In a conservatorship, the powers of the Companys directors, officers, and shareholdersare transferred to the designated Conservator.

from www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf

A Conservatorship is the legal process in which a person or entity is appointed toestablish control and oversight of a Company to put it in a sound and solvent condition.In a conservatorship, the powers of the Companys directors, officers, and shareholdersare transferred to the designated Conservator.

from www.ofheo.gov/media/PDF/FHFACONSERVQA.pdf

The FHFA will act as the conservator.The FHFA will act as the conservator.

Figure 22. GSE Capital Structure OutlineFigure 22. GSE Capital Structure OutlineTreasury Has Agreed To Inject Capital Into Fannie Mae and Freddie Mac as Needed at the Senior PreferredTreasury Has Agreed To Inject Capital Into Fannie Mae and Freddie Mac as Needed at the Senior Preferred

Stock Level

Sen io r Debt

Subordinated Debt

New 10% Sen io r Pre fe rred S tockTreasury to in ject up to $100 bi l l ion into eachagency as needed to ensure posit ive net worth

Exist ing Preferred StockSubordinated to new preferred stock anddividends el iminated

Co mm o n S t ockTreasury receives warrants for 79.9% of comm on s tock and d iv idends e l imina ted


18Based on the September 7, 2008 Situation Room.

Situation Room 21


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Figure 23. Three Steps Taken by the Treasury To Complement the FHFAs Decision To Place Fannie Mae and Freddie Mac IntoConservatorshipFigure 23. Three Steps Taken by the Treasury To Complement the FHFAs Decision To Place Fannie Mae and Freddie Mac IntoConservatorship

Senior Preferred Stock Purchase Agreement- Treasury to buy senior preffered stock to ensure that each Agency maintains positive net worth

- Up to $100 billion for each agency

- 10% coupon on the senior preferred stock - may increase to 12% for a period if dividends are not paid in cash

- Treasury receives immediately from each GSE $1 billion of sr. preferred stock and Warrants to purchase 79.9%

of common stock- Beginning March 31, 2008 the Treasury is paid a quarterly commitment fee in cash or sr. pref. stock

- GSEs subject to several covenants restricting their abilities to pay dividends and increase debt beyond 110% of

June 30, 2008 levels, among other things

- Caps each GSEs retained portfolio to $850 billion as of Dec 31, 2009 after which the portfolios shall decline by

10% each year until it reaches $250 billion

Government Sponsored Enterprise Credit Facility (GSECF)- Provide secured funding to the Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLB) on an as

needed basis

- Funded by the Treasury's general fund and expires Dec 31, 2009

- Collateral limited to agency MBS and advances made by the FHLBs- Federal Reserve Bank of New York will act as agent

- Short term loans expected to be less than one month but at least one week based on individual requests

- Maturing loans can be replaced with new loans- Can be pre-paid with two days notice

- Interest rate is set by the Treasury, initially LIBOR+50 bpsGSE Mortgage Backed Securities Purchase Program

- Treasury to invest in agency MBS in the open market at the discretion of the Treasury Secretary

- Scale determined by developments in the markets- Authority expires on December 31, 2009

- Independent asset managers to purchase and manage the portfolios under guidelines from the Treasury

- Subject to statutory debt limit

- The Treasury purchased $5 billion of GSE MBS in September and $20.5 billion in October


Federal Reserve Interventions: Supporting Funding19

Treasury and the Fed, we

estimate, now combine tosupport directly orindirectly more than 70%of banking system

liabilities

Step one in combating systemic risk lies in securing funding markets. The accumulatedefforts of the Treasury and the Fed, we estimate, now combine to support directly orindirectly more than 70% of banking system liabilities. Those efforts include expansionof FDIC guarantees by the Treasury, the CPFF, FHLB advances, TAF and Discount

Window borrowings From the Fed. The one large remaining area that could benefitfrom backstop liquidity is the Bank CD market, so potentially BCDLF (BankCertificate of Deposit Liquidity Facility) could be next, although the Money MarketInvestor Funding Facility (MMIFF) provides support for a small portion of CDs. Thecombined efforts so far should eventually reduce systemic bank funding risk, givingtime for step two, dealing with the root cause of the financial crisisthe uncertain assetvalues and solvency issues they raisethe time it needs to proceed.

19Based on the October 8, 2008 Situation Room.

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In Figure 24 below, we estimate the combined US Bank and Thrift assets andliabilities. The notes to the tables detail our methodology. In Figure 13, we associateBank and Thrift liabilities to their support sources. Note that in this table we makeseveral assumptions; please see detailed notes accompanying the table.

Figure 24. US Bank and Thrift Assets and Liabilities

Assets $bn Liabilities $bn

Cash or Near Cash(1) 147 Deposits 7,889

Total Bank Credit 10,895 Checkable and Small Time/Savings 4,447

Non-Interest Bearing Deposits 1,104

Securities 2,749 Large Time Deposits 2,338

Loans 8,146 Short Term Liabilities 2,791

Bank Loans 2,184 Short Term Borrowing(2) 2,427

Mortgages 4,778 Commercial Paper(2) 850

Consumer Credit 903 Other ST Borrowings(3)

1,578Misc. Assets 2,469

Other ST Liabilities(2) 364

Long term Liabilities 1,456

Total Assets 13,511 Total Liabilities 12,136 Note: Created using Table L.109 Commercial Banking and L.114 Savings Institutions of the Fed Flow of Funds Accounts Z.1 release for SecondQuarter 2008.

(1) Includes Vault Cash, Reserves at Federal Reserve, Checkable Deposits, Time and Saving Deposits, and Fed Funds and Security RPs.

(2) Estimated using liabilities' composition for a smaller sample of banks. To create the aggregate balance sheet, we begin with the data in the

Flow of Funds release from the Federal Reserve, which provides us the Banks and Savings levels separately. For simplicity of presentation, wecollapse the details therein into high-level balance sheet accounts. However, this release does not provide the break-up of liabilities by creditinstruments (commercial paper, etc.) or maturity (short term, long term), which is important for our purposes. To estimate these details for theaggregate data we calculate the weighted average compositions of liabilities for a sample of 10 banks with the highest total outstandingliabilities and apply that to the aggregate data.

(3) Other Short Term Borrowings include repos, Federal Funds and other interbank lending.

Source: Federal Reserve, company filings, Banc of America Securities LLC estimates.

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Figure 25. Treasury and the Fed We Estimate Now Combine To Support Directly or IndirectlyMore Than 70% of Banking System Liabilities

Liabilities $bn Support Sources $bn

Deposits 7,889Checkable and Small Time/Savings 4,447 FDIC(4) 5,100

Non-Interest Bearing Deposits 1,104 TLGP(5) 450

Large Time Deposits 2,338 MMIFF(9) 180

Short Term Liabilities 2,791

Short Term Borrowing(2) 2,427

Commercial Paper(2) 850 CPFF(6) 850

Other ST Borrowings(3) 1,578 Programs Listed Below 1,578

FHLB (Short term portion)(7) 356

TAF, Discount Window(8) 950

TLGP(5) 700

MMIFF(9) 420

Other ST Liabilities(2) 364

Long term Liabilities 1,456 FHLB (Long term portion)(7) 558

Total Liabilities 12,136 Total Support Sources 8,716 (72%) Note: Created using Table L.109 Commercial Banking and L.114 Savings Institutions of the Fed Flow of Funds Accounts Z.1 release for SecondQuarter 2008.

(2) Estimated using liabilities' composition for a smaller sample of banks. To create the aggregate balance sheet, we begin with the data in theFlow of Funds release from the Federal Reserve, which provides us the Banks and Savings levels separately. For simplicity of presentation, wecollapse the details therein into high-level balance sheet accounts. However, this release does not provide the break-up of liabilities by creditinstruments (commercial paper, etc.) or maturity (short term, long term), which is important for our purposes. To estimate these details for theaggregate data we calculate the weighted average compositions of liabilities for a sample of 10 banks with the highest total outstandingliabilities and apply that to the aggregate data.

(3) Other Short Term Borrowings include repos, Federal Funds and other interbank lending.

(4) An October 1, 2008 Congressional Budget Office report estimated that raising the limit for FDIC insured deposits to $250,000 from$100,000 would raise the amount of FDIC insured deposits to $5.1 trillion from $4.4 trillion. The first $250,000 of large time deposits are alsoinsured but we do not separate out the $5,100 billion FDIC insured amount.

(5) The FDIC estimated in an October 14, 2008 technical briefing that $400-500 billion in non-interest bearing bank accounts would be coveredunder the Temporary Liquidity Guarantee Program (TLGP). Additionally the FDIC estimated that $1.4 trillion in unsecured debt is eligible forrefinancing under the TLGP. Because there is overlap in coverage between the various government funding programs, for example the CPFF andthe TLGP, we use in this analysis half of the potential size, i.e., $700 billion.

(6) Because most banks are Tier 1 we assume for simplicity that all outstanding bank commercial paper is eligible for the Commercial PaperFunding Facility (CPFF).

(7) Bank advances from the Federal Home Loan Banks (FHLB) totaled $914 billion as of June 30, 2008. We classify the 39% of advances withmaturities less than one year as short term borrowings and the remaining $61% as long term liabilities.

(8) We used the peak potential size of the Term Auction Facility (TAF) over year-end of $900 billion and $50 billion in Discount Windowborrowing consistent with the most recent reported numbers as of October 1, 2008.(9) We assume that 30% of the $600 billion under the MMIF program is used to support CDs. The rest is available to support other short termliabilities.

Source: Federal Reserve, company filings, Banc of America Securities LLC estimates.

Figures on the TAF and Discount window usage are peak numbers possible toward theend of the year. As of December 29, actual usage was $535 billion.

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Funding From the FedFunding From the Fed

The Fed provides a variety

of liquidity facilitiesincluding the CPFF and

the TAF

We review below the AMLF and CPFF, the two commercial paper funding facilities setup by the Fed to support that market. In addition the Fed provides access to emergencyfunding through a variety of programs including the Term Auction Facility (TAF), thePrimary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility(TSLF). Figure 36 on page 32 provides a summary of these and other Fed liquidityfacilities. The AMLF, CPFF, and PDCF were extended to April 30, 2009 on December2, 2008. The Fed also funds the originally $30 billion Maiden Lane portfolio ofassets from Bear Stearns

20as well as extends credit lines to AIG (see Figure 26 below

for current usage). Finally, the Fed provides unlimited amounts of dollars in currencyswap arrangements with nine foreign central banks from the Bank of Japan to the ECB.These swaps provide dollars for foreign central banks to distribute while the Fed doesnot distribute the foreign currency.

We review below the AMLF and CPFF, the two commercial paper funding facilities setup by the Fed to support that market. In addition the Fed provides access to emergencyfunding through a variety of programs including the Term Auction Facility (TAF), thePrimary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility(TSLF). Figure 36 on page 32 provides a summary of these and other Fed liquidityfacilities. The AMLF, CPFF, and PDCF were extended to April 30, 2009 on December2, 2008. The Fed also funds the originally $30 billion Maiden Lane portfolio ofassets from Bear Stearns

20as well as extends credit lines to AIG (see Figure 26 below

for current usage). Finally, the Fed provides unlimited amounts of dollars in currencyswap arrangements with nine foreign central banks from the Bank of Japan to the ECB.These swaps provide dollars for foreign central banks to distribute while the Fed doesnot distribute the foreign currency.

Figure 26. Fed Lending in Cash to Banks and Brokers HasReached $1.1 TrillionFigure 26. Fed Lending in Cash to Banks and Brokers HasReached $1.1 Trillion

As of December 29, 2008As of December 29, 2008

Figure 27. a $36 Billion Increase From the End of NovemberFigure 27. a $36 Billion Increase From the End of November

Change In December as of December 29, 2008Change In December as of December 29, 2008

Repos, 80

TAF, 450

AMLF, 24

AIG, 87 CPFF, 332

PDCF, 38

Discount

Window,85

Maiden

Lane, 28

AIG, 9

CPFF, 28AMLF, -25

PDCF, -17

TAF, 44

Discount

Window, -

3

Source: Federal Reserve. Source: Federal Reserve.

20Notice that the Fed has written down this portfolio by nearly 10% due to deteriorating asset values, please see the October 23,

2008 Situation Room for details.

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Figure 28. $620 Billion in Emergency Dollar Currency Swap Arrangements With the FedFigure 28. $620 Billion in Emergency Dollar Currency Swap Arrangements With the Fed

Currency Swap Arrangements With the Fed ($ billions)

Banco Central do Brazil 30

Banco de Mexico 30Bank of Canada 30Bank of England UnlimitedBank of Japan Unlimited

Bank of Korea 30

Danmarks National Bank 15ECB Unlimited

Monetary Authority of Singapore 30

Norges Bank 15

Reserve Bank of Australia 30

Reserve Bank of New Zealand 15

Sveriges Riksbank 30

Swiss National Bank UnlimitedTotal Unlimited Source: Federal Reserve and Banc of America Securities LLC.

Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)21

The Federal Reserve announced September 21, 2008, the Asset Backed CommercialPaper Money Market Fund Liquidity Facility (AMLF). The program allows banks to

borrow from the Boston Fed to fund purchases of ABCP from money market funds atamortizedcost. The Fed bears all credit risk and banks get 0% risk weighing andamounts will be excluded from leveraged capital purposes.

This effectively gives Money Market Funds key motivations of capital (amortized costmeans no principal at risk) and liquidity (the Fed ensures a ready buyer for ABCP) to

keep money market funds invested in ABCP. The Fed disclosed $24 billion of loanshad been made under the program as of December 29, 2008, though the peak was $152

billion in October.

Commercial Paper Funding Facility (CPFF)22

The CPFF began October27 and provides 3-month

financing to Tier 1issuers

The Fed announced October 7, 2008, the formulation of the CPFFCommercial PaperFunding Facilityadding to the alphabet soup of liquidity backstops. These actionssignal the expansion of previously announced Guarantee Program for Money MarketFunds and AMLF (Asset Backed Commercial Paper Liquidity Facility) efforts to stemthe panic in wholesale funding markets. These quiet bailouts have helped to stem the

pace of outflows in Prime funds and, as evidenced by the $140bn increase in Primefund assets since inception, are helping to relieve the systemic risk of a funding

breakdown. Expanding those programs to the CP market benefits mainly Tier 1 bankissuers, but with subsidiary benefits to corporate issuers helping to alleviate anypotential bank draw risks. The program excludes A2/P2 issuers, but indirectly they maystill benefit from reduced funding costs in the Tier 1 market. As of December 29 theCPFF program $332 billion outstanding according to the H.4.1. statistical release.

21Based on the September 29, 2008, Credit Market Strategist.

22Based on the October 7, 2008, Situation Room.

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Figure 29. Description of the New Commercial Paper Funding Facility

Commercial Paper Funding Facility

- Federal Reserve to set up an SPV to Purchase Commercial Paper Until April 30, 2009

- Program Began October 27, 2008- The Fed Lends to the SPV at the target Fed Funds rate

- SPV purchases 3-month commercial paper directly from issuers- Pricing is 3-month OIS +100 bps and +300 for unsecured and asset-backed commercial paper, respectively

- 100 bps surcharge on unsecured lending

- Still unclear what collateral is acceptable for secured lending

- Initial fee of 10 bps on maximum amount of commercial paper the SPV may own

- Size of program: Up to $1.3 trillion

- Only U.S. issuers (includes U.S. domiciled subsidiaries of foreign issuers) may use the program

- CPFF will purchase paper rated Tier 1 by one of the three rating agencies or at least two if rated by multiple agen- For a single issuer the maximum amount of purchases by the CPFF is CP outstanding in August 2008, less CP

held by investors other than the CPFF

Source: Federal Reserve.

The CPFF in Short

The Fed sets up an SPV to purchase from issuers 3-month CP, set at a level of OIS plus100 bps plus as unsecured credit surcharge of 100 bps. ABCP is set at 3-month OIS +300 bps. Limits per issuer will be set at the amount outstanding as of August 2008,which by our figures for Tier 1 domestic CP programs totalled $1.3 trillion. As abackstop facility, the intent is by providing a guarantee of liquidity, private market

participants will be more willing to extend term financing and that only a small fractionof this amount would actually need to be used. The Fed will meet its secured lendingrequirement through one of an upfront fee, guarantee, or collateral satisfactory to theFed.

Figure 30. Current Commercial Paper Market and What Is Eligible for the CPFF (estimated)

Outstanding as of December 31 Represents the Total CP Market

Tier 1 Commercial Paper Issued by a US Issuer Outstanding as of August Is Eligible for the CPFF

CP CategoryOutstanding