Treasury Management Essentials Sponsored by: Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. CASH MANAGEMENT IN TURBULENT TIMES Richard Rokus, Director, Great Lakes Advisors

2 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. 1.Financial crisis recap (How did we get here) 2.Current State of the Short Term Markets (Where exactly is here) 3.Strategies for Investing Cash (Where are we going) CASH MANAGEMENT IN TURBULENT TIMES

3 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. What began with unusually high levels of mortgage defaults in late 2006 and early 2007 quickly snowballed into an investor panic Numerous AAA-rated SIV structures failed Financial leverage across banks and brokerage firms was too high –Bear Stearns was sold to JPM –Countrywide and Merrill Lynch were sold to Bank of America –Fannie Mae and Freddie Mac were nationalized –Wachovia was bought by Wells Fargo –A number of mortgage originators failed –Lehman Brothers defaulted –Washington Mutual failed and was sold to JPM –AIG required a federal loan package FINANCIAL CRISIS RECAP

4 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. As a result of the Lehman bankruptcy a large money market fund broke the buck and suspended redemptions Due to the run on prime (corporate) money market funds, the Treasury stepped in to offer a guarantee to the funds FDIC insurance was increased to $250,000 Auction Rate Preferred Market seized up Municipal bond insurers Ambac and FGIC have filed for reorganization Unprecedented losses in Ultra-Short mutual funds and Securities Lending programs As a result of the financial turmoil, the US economy entered the deepest recession since the 1930s depression FINANCIAL CRISIS RECAP

5 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. 2a-7 Money Market Funds Auction Rate Preferreds Commercial Paper Markets Economic Situation CURRENT STATE OF THE SHORT- TERM FIXED INCOME MARKETS

6 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Reforms instituted in 2010 –WAM shortened to 60 days –WAL instituted at 120 days –10% of the fund is due overnight –20% of the fund is due within 1 week –Full NAV published on a 60 day lag Dodd Frank prohibits another government guarantee Question of further reform and whether it is needed –Floating NAV –Capital Buffer –Industry sponsored liquidity bank 2A-7 MONEY MARKET FUNDS

7 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Long term municipal bond with a short-term auction to reset rates and provide liquidity Many issues had insurer guarantees Most, if not all issues that had reset at the maximum rate in the indenture have been retired Rest of the universe is resetting at very low rates Numerous lawsuits against brokerage firms to force repurchase based on sales practices Outstandings were approximately $330 Billion pre-crisis and now are at approximately $100 Billion Only source of liquidity is repurchase by the selling firm or vulture investors AUCTION RATE PREFERREDS

8 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Number of issuers is down dramatically –SIV structures –Regional Banks –Defaults/Mergers –European Banks Difference in yields between financial and non-financial names Moodys review of global capital markets intermediaries –Review will cover both European and US financial firms –Most are expected to be downgraded to the Baa range European issuers are constrained due to headline risk from the Greek crisis COMMERCIAL PAPER MARKETS

9 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Sustained period of sup-par growth High Unemployment levels have begun to subside –High levels of people no longer seeking employment –Spike in retired individuals –Long-term unemployed a real concern Manufacturing leading the economy –Devalued dollar –Energy infrastructure Real estate markets remain a challenge –Rates are low but mortgage availability is tight Replay of Japan? –0.6% growth in consumer demand over the last 17 quarters CURRENT ECONOMIC SITUATION

10 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Start with an investment policy –Minimum rating –Maximum maturity –Approved security types 2A-7 money market Non money market securities –Benchmarks Manage assets internally or hire an outside manager –Do you have the expertise in house? –Can you afford the systems that are needed? –Outside manager evaluation –Utilize current financial service provider or hire a specialist INVESTMENT STRATEGY

11 Treasury Management Essentials sponsored by Wintrust Commercial Banking Copyright 2012 Wintrust Financial Corporation. All Rights Reserved. Monitoring the portfolio is key but often overlooked –Money market funds Understand the minutiae of holdings Databases and portals have the ability to aggregate exposures and detail holdings –Ultra-short and short-term bond funds Difficult if not impossible to figure out individual holdings and exposures –Understand what is in separate accounts –Where is the Alpha in the portfolio coming from? Keep management informed –Not enough just to detail performance –Go through holdings and exposures INVESTMENT STRATEGY