II. Investments - Third Quarter 2009

Investment Results

• The amortized cost (book value) of the DIF investment portfolio decreased by $10.6 billion during the first nine months of 2009, or by 39.9 percent, from $26.6 billion on December 31, 2008, to $16.0 billion on September 30, 2009. Similarly, the DIF portfolio’s market value dropped by approximately $12.6 billion, or by 43.8 percent, from $28.8 billion on December 31, 2008, to $16.2 billion on September 30, 2009. Again, the declines were primarily the result of funding failed institution resolutions during the first nine months of 2009.

• The DIF investment portfolio's total return for the first nine months of 2009 was 0.123 percent, approximately 94 basis points higher than its benchmark, the Merrill Lynch 1 - 10 Year U.S. Treasury Index (Index), which had a total return of negative return of 0.814 percent during the same period. The DIF portfolio’s Treasury Inflation-Protected Securities (TIPS) considerably outperformed the Index’s conventional Treasury securities. In addition, because the DIF conventional Treasury securities have a lower average duration than the securities held in the Index, and given the substantial increase in yields over the course of the year on longer duration securities, the DIF’s conventional Treasury securities outperformed those in the Index. Finally, the DIF portfolio’s high cash balances helped contribute to the positive relative return.

• During the third quarter of 2008, to help fund resolution-related cash outlays, staff sold a total of 50 AFS conventional Treasury securities on four occasions; the securities had a total book value of $8.3 billion, a total market value of $9.0 billion, a weighted average maturity (WAM) of 3.38 years, a weighted average modified duration of 3.07 years, and a weighted average yield at cost of 4.59 percent. These security sales resulted in a realized gain of $731.7 million. On September 30, 2009, the DIF portfolio’s overnight investment balance was $8.6 billion (about 53.1 percent of the portfolio by market value), reflecting the receipt of approximately $8.7 billion in assessments on September 30, 2009.

Other Corporate Investment Portfolios

• During the first nine months of 2009, the book value of the Debt Guarantee Program investment portfolio increased substantially, from $2.4 billion on December 31, 2008, to $7.0 billion on September 30, 2009. The funds in this portfolio are from the guarantee fees related to the Debt Guarantee Program under the Temporary Liquidity Guarantee Program (TLGP). More recently, during the third quarter, the book value of the Debt Guarantee Program investment portfolio decreased from $7.5 billion on June 30, 2009, to $7.0 billion on September 30, 2009. The quarter’s decline in funds was due to the fact that the TLGP fees collected during the quarter were less than amount of claims against the TLGP’s Transaction Account Guarantee program. Consistent with the approved quarterly investment strategy, all Debt Guarantee Program portfolio funds were invested in overnight investments during the quarter .

• The Other Systemic Risk Reserves investment portfolio was established in 2009 and holds $131.1 million as of September 30, 2009. Included in this amount was the receipt of a $50.4 million payment on July 30, 2009, coincident with the conversion of the former Fixed Rate Cumulative Perpetual Preferred Stock, Series G issued by Citigroup Inc. (Citigroup Stock) to the new trust preferred security issued by Citigroup Capital XXXIII (Citigroup TruPS). As the Citigroup Stock last paid its $60.5 million quarterly dividend on May 15, 2009, the $50.4 million represents 2.5 months of the regular dividend rate. Subsequently, the DIF will receive the full $60.5 million dividend per quarter from the Citigroup TruPS, but with different payment dates: October 30, January 30, April 30, and July 30 .

• On September 30, 2009, the FDIC collected about $181.8 million in fees related to the Transaction Account Guarantee Program under the TLGP. However, these funds were then immediately transferred to the Debt Guarantee Program portfolios for reimbursement of claims and expenses, so the recently established Transaction Account Guarantee Program investment portfolio had no balance at month-end.

The Treasury Market

• During the third quarter of 2009, conventional Treasury yields decreased modestly across all sectors of the Treasury yield curve. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields declined by 7 basis points and 17 basis points, respectively. The yield on two-year Treasury note, which also is very sensitive to actual and anticipated changes in the federal funds rate, decreased by 16 basis points during the third quarter, generally reflecting consensus forecasts for no changes in the federal funds target rate over the near term. Intermediate- to longer-maturity Treasury security yields decreased modestly as well; the yield on the five-year Treasury note decreased by 25 basis points, while the yield on the ten-year Treasury note decreased by 22 basis points. Finally, the thirty-year Treasury bond yield decreased by 28 basis points. The conventional Treasury yield curve remained relatively steep during the third quarter. On September 30, 2009, the two-year to ten-year yield curve had a 236-basis point positive spread (a little lower than the 242-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 87 basis points.

Prospective Strategies

• The fourth quarter 2009 DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, Temporary Liquidity Guarantee Program surcharges, coupon and other interest payments, and receivership dividends into overnight investments and/or short-term T-Bills in anticipation of using such funds for resolution activities.

• For the TLGP, all funds will be invested into overnight investments in anticipation of possibly using such funds for resolution activities or claims against the TLGP.

• For the Other Systemic Risk Reserves investment portfolio—which by contrast to the DIF portfolio is in investment mode—the fourth quarter 2009 investment strategy calls for strategically investing all available funds in overnight investments, and/or in conventional or callable Treasury securities with effective maturity dates not to exceed December 31, 2012.