1. © 2007 Northern Trust Corporation northerntrust.com © 2007 Northern Trust Corporation northerntrust.com © 2007 Northern Trust Corporation northerntrust.com Risk Management Strategies In Today’s Economic Environment Michael Leon Senior Vice President Gary M. Kramer CFA Vice President September 11, 2007

2. 2 The Northern Experience Client Profile Private Business Owners  Sold business to publicly traded companies in stock for stock deals Corporate Executives  Stock and stock options Investors  Private equity and Venture Capital distributions  IPO’s  Strategic investments

3. 3 The Northern Experience Investment Concentrations What Constitutes a Concentration?  Determined by Facts and Circumstances  Size of Account  Size of Holding  Outside Assets Exclusions  U.S. Treasury and Agency Securities  Mutual Funds, Common Funds  Personal Residence

4. 4 The Northern Experience Risk However good our stock market research may be, we shall never be able to escape from the ultimate dilemma that all of our knowledge is about the past, and all of our decisions are about the future. Ian Wilson, American Risk Strategy Consultant

5. 5 The Northern Experience Why Clients Should Diversify To reduce overall portfolio volatility Increase risk adjusted rates of return Decrease risk of a stock disaster The average single stock has about twice the volatility as a well diversified portfolio such as the S&P 500

6. 6 The Northern Experience The Forbes 400 Forbes Magazine, October 11, 2004 51% 13% 36%

7. 7 The Northern Experience High Volatility Reduces Returns Stock Returns BeginningYearYearYearArithmeticCompoundEnding PriceOneTwoThreeReturnReturnPrice Stock A$10010%10%10%10%10.0%$133.3 Stock B$10035%-20%15%10%7.49%$124.2 Stock C$10040%20%-30%10%5.50%$117.6 Stocks can have equal arithmetic rates of return, but differ markedly in their real or compounded rates of return depending on how they fluctuate in price.

8. 8 The Northern Experience Monte Carlo Analysis

9. 9 The Northern Experience Modern Portfolio Theory Most important lesson one learns from modern portfolio theory is to… D I V E R S I F Y !

10. 10 The Northern Experience Concerns About Diversification Adverse Income Tax Consequences Unfamiliarity with Other Asset Classes Loss of Control Performance Expectations Legacy Holdings Impact on Portfolio Yield Fees

11. 11 The Northern Experience Evaluating Exposure Management Strategies H old O ptions / Derivatives P lanned Giving E xchange Funds S ell

12. 12 The Northern Experience Developing Best Practices Financial Planning / Investment Policy  Focus: Goals, not Performance Asset Allocation  Focus: “The R word” (and it’s not “Return”) Implementation  Evaluate all possible strategies Monitoring and Periodic Re-evaluation

13. 13 The Northern Experience Northern’s Advantages Access to Best in Class Products Competitive Pricing Best Practices ― Fiduciary Culture Aligns Interest with our Clients

14. 14 The Northern Experience Parting Thoughts Investors are generally overconfident. Studies show that investors often overestimate the future performance of their stock, and almost always overestimate their ability to predict performance. Even sophisticated investors have trouble identifying and understanding risk. Investors tend to myopically focus on returns and regularly assume significant degrees of diversifiable risk. Psychological or emotional factors often drive short-term investing decisions rather than objective planning.

15. © 2007 Northern Trust Corporation northerntrust.com © 2007 Northern Trust Corporation northerntrust.com © 2007 Northern Trust Corporation northerntrust.com Interest Rate Risk Management

16. 16 The Northern Experience Interest Rate Forecasts Economists Financial Futures Markets Crystal Balls

17. 17 The Northern Experience Where Are Interest Rates Headed? The Economists Say ―  The current average forecast of 60 economists surveyed by the Wall Street Journal for 10 Year Treasury Rates at year end is 5.16%  The range of forecasts for 10 Year Treasury Rates at year end is 4.14% - 6.20%. Financial Futures Markets Say ―  “Turmoil in credit and stock markets had prompted Wall Street traders as recently as Monday to place odds of a rate cut in September at 70%. The Fed dashed those expectations, though, and the odds plunged to 25% yesterday, as indicated by futures-contracts pricing.”* ― Wall Street Journal, Wednesday 8/8/07 Crystal Ball Says ―  “Rates tomorrow will be different than today”

18. 18 The Northern Experience Interest Rate Risk – What is it? Risk posed by unexpected changes in interest rates  Changes relative to economic forecasts, implied financial futures forecasts, crystal ball forecasts

19. 19 The Northern Experience Interest Rate Risk Risk to unexpected changes in Cash Flows Risk to unexpected changes in Valuation How Do We Manage This Risk?

20. 20 The Northern Experience Interest Rate Risk Management – What it is not! Interest Rate Risk Management is NOT a Strategy or Series of Strategies Which Tries to Forecast and Take Advantage of the Highs and Lows in Interest Rates!

21. 21 The Northern Experience Interest Rate Risk Management Identifying the Risks Establishing Tolerances Evaluating Strategies Implementing Solutions Monitoring Environment

22. 22 The Northern Experience Northern Trust’s Interest Rate Risk Management Expertise Northern can assist in identifying and quantifying risk Northern can then customize a solution that matches client needs with the most appropriate instruments, working within client objectives by discussing alternative hedging strategies and their benefits and costs

23. 23 The Northern Experience Examples of Customized Solutions Loan Refinancing Fixed rate loan with “liquidity crisis kicker” Modification of amortization schedule AND aversion of prepayment penalty AND providing a lower rate to borrower