Understanding the Value of Credit Enhancement in Municipal Market

1. NFMA Presentation Understanding the Value of Credit Enhancement Bob Shoback

2. Lack of Insurance Contributing to Dislocation in Municipal Market Without stable bond insurers to provide credit enhancement in the municipal market: • Long term public finance issuance volume is down • New money issuance down 23% in 2008 • $100 billion of capital improvement bond issues cancelled in 2008 • Short term/variable rate issuance has almost ceased • Auction rate market has collapsed • VRDO market is strained as pricing has sky- rocketed and capacity evaporated • More problems looming on the horizon • Liquidity facilities issued over the past year are expiring and capacity to renew is unavailable or prohibitively expensive • Smaller and lower rated issuers still have almost no ability to access the market • Larger issuers and even highly rated issuers hitting capacity constraints with investors • Municipal bond investors have seen the market value of their holdings decrease significantly as spreads widened throughout the market

3. Dislocation Comes at High Costs to State and Local Governments Total cost of financing ~33% higher Present value of interest payments$ Billions $186 $46 $140 Current dislocation increasing the cost of debt by 33% even before factoring in increased credit spreads with the municipal market Normal market Increased cost Current cost Key assumptions • $400 B in public finance issues • Present value of 30-year interest payments • Muni yield/ Treasury yield = 90% • Muni yield/ Treasury yield = 120% Source: Thompson Municipal Market Monitor as of 2009-04-17

4. Credit Spreads Widened as Credit Enhancement Became Less Available

5. Additional Benefits of Bond Insurance • Greater ability to negotiate stronger credit structures / covenants upfront • Thorough ongoing surveillance and remediation efforts • Credit strength represented by two-name paper • Provides buyers additional capacity with respect to large issuers • Homogenizes credits of many small, unknown issuers • Provides opportunity to diversity with respect to bond insurers • Enhanced liquidity especially in the secondary market trading • Provides more stability with respect to ongoing trading value • Other services – bondholder representative exercising control rights, etc. • Reduces upfront and ongoing workload with regard to limited disclosure

6. Monoline Model for the Future • Narrowly focused business model - public finance only • Clean balance sheet – no structured finance business • Best practices risk management and capital metrics • Strict underwriting criteria • Conservative single risk limits and portfolio stress limits • Strict adherence to established and tested policies and procedures • Strong corporate governance and regulatory protections • By-laws and charter restrict "scope of business" • A majority of independent directors from public finance industry • Unprecedented transparency - web site geared for financial investor • All exposures disclosed in real time on web site • Web-base analytical tools to drill down and assess financial stability • Enhanced disclosure on stressed exposures and stress scenarios