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Each depositor insured to at least $250,000 per insured bank

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Chief Financial Officer's (CFO) Report to the Board

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II. DIF Investments Results - First Quarter 2009

Investment Results

  • The amortized cost (book value) of the DIF investment portfolio decreased by $2.1 billion (7.7 percent) during the first quarter of 2009, from $26.6 billion on December 31, 2008, to $24.5 billion on March 31, 2009. Similarly, the DIF portfolio’s market value dropped by $2.4 billion (8.3 percent), from $28.8 billion on December 31, 2008 to $26.4 billion on March 31, 2009. Again, the declines were primarily the result of funding failed institution resolutions during the quarter.
  • The DIF investment portfolio's total return for the first quarter of 2009 was 0.140 percent, approximately 46 basis points higher than its benchmark, the Merrill Lynch 1 – 10 Year U.S. Treasury Index (Index), which had a total return of -0.320 percent during the same period. The DIF portfolio’s Treasury Inflation-Protected Securities (TIPS) considerably outperformed the Index’s conventional Treasury securities; short-maturity TIPS market real yields declined during the quarter while conventional Treasury yields increased. Moreover, the DIF portfolio’s cash balances held during the quarter helped contribute to the positive relative return. Finally, because the DIF portfolio’s conventional Treasury securities have a lower average duration than the securities held in the Index, their price declines were less than those of the Index.
  • During the first quarter of 2009, to help fund resolution-related cash outlays, staff sold a total of eight AFS conventional Treasury securities on four occasions; the securities had a total book value of $1.2 billion, a total market value of $1.3 billion, a weighted average maturity (WAM) of 7.90 years, a weighted average modified duration of 6.09 years, and a weighted average yield-at-cost of 4.90%. These security sales resulted in a realized gain of $136.3 million. On March 31, 2009, the DIF portfolio’s overnight investment balance was $1.5 billion (about 5.8 percent of the portfolio by market value), largely reflecting the receipt of almost $1.1 billion in assessments on March 30, 2009.

Other Corporate Investment Portfolios

  • The book value of the recently established Debt Guarantee Program investment portfolio increased from $2.4 billion on December 31, 2008, to $6.2 billion on March 31, 2009. The funds in this portfolio are from the guarantee fees related to the Debt Guarantee Program under the TLGP. Consistent with the approved quarterly investment strategy, all Debt Guarantee Program portfolio funds were invested in overnight investments during the quarter.
  • On February 16, 2009, the FDIC collected $20.2 million in dividends on the Fixed Rate Cumulative Perpetual Preferred Stock, Series G issued by Citigroup Inc. (Citigroup Stock). Subsequently, the DIF should receive dividends of $60.5 million per quarter from the Citigroup Stock. These funds are segregated and invested separately from DIF’s other cash and investments in the newly established Other Systemic Risk Reserves investment portfolio.
  • On March 30, 2009, the FDIC collected about $90.0 million in fees related to the transaction account guarantee program under the TLGP. However, on March 31, 2009, all funds were transferred to the DIF portfolio for reimbursement of claims and expenses, so the newly established Transaction Account Guarantee Program investment portfolio had no balance at month end.

The Treasury Market

  • During the first quarter of 2009, Treasury yields increased modestly, with longer-maturity Treasuries posting the largest yield increases. Although Treasury yields remain relatively low amid continued flight-to-quality trades and in light of the weak U.S. economy, the modestly higher yields appeared to generally reflect concerns over the increasing supply of Treasury securities. The three-month Treasury bill (T-Bill) and the six-month T-Bill yields increased by 12 basis points and 16 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, as well as to flight-to-quality concerns, increased by only four basis points during the first quarter. Intermediate- to longer-maturity Treasury security yields also increased, with longer-maturity Treasuries posting the largest increases. The yield on the five-year Treasury note increased by 12 basis points, while the yield on the ten-year Treasury note increased by 45 basis points. Accordingly, the conventional Treasury yield curve steepened during the first quarter of 2009; on March 31, 2009, the two- to ten-year yield curve had a 186-basis point positive spread (compared to a positive 154-basis point spread at the beginning of the quarter). Over the past five years, this spread has averaged 82 basis points.

Prospective Strategies

  • The second quarter 2009 DIF investment strategy calls for placing all net proceeds from deposit insurance assessments, maturing securities, TLGP 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.

Last Updated 06/17/2009

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