Fixed Income Strategies

Fourth Quarter 2010

MetWest is a wholly-owned subsidiary of The TCW Group, Inc.

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Table of Contents

I. TCW Overview

II Fixed Income Investment Philosophy

III. Corporate Bond Investment Philosophy and Process

IV. Structured Product Management

V. Outlook and Strategy

－ Economic Outlook

－ Corporate Market Outlook

－ Structured Product Outlook

This publication is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. Any holdings of a particular company or security discussedherein are under periodic review by the portfolio management group and are subject to change without notice. In addition, TCW manages a number of separate strategies, and portfolio managers in thosestrategies may have differing views or analysis with respect to a particular company, security or the economy than the views expressed herein. An investment in the strategy described herein has risks,including the risk of losing some or all of the invested capital. Before embarking on the described investment program, an investor should carefully consider the risks and suitability of the described strategybased on their own investment objectives and financial position. Past performance is no guarantee of future results.

The information contained herein may include estimates, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented herein.TCW assumes no duty to update any such forwardlooking statements or any other information or opinions in this document. Any information and statistical date contained herein derived from third partysources are believed to be reliable, but TCW does not represent that they are accurate, and they should not be relied on as such or be the basis for an investment decision.

Any issuers or securities noted in this document are provided as illustrations or examples only, for the limited purpose of analyzing general market or economic conditions, and may not form the basis for aninvestment decision. TCW makes no representation as to whether any security (or the security of any issuer) mentioned in this document is now or was ever held in any TCW portfolio. TCW is notrecommending the purchase, sale or holding of any security and is making no representation or indication of its own holdings of any securities. TCW may in fact be currently recommending the purchase of asecurity or the sale of a security regardless of any statement made in this document about that security or whether TCW owns it or not. Discussion of securities in this document are strictly for educationaluse only and are not intended to serve as investment advice. Any statement made in this document, including any statement or implication drawn from any discussion of individual securities, is subject tochange at any time, without notice.

Copyright TCW 2010

I. TCW Overview

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TCW Overview

• Established in 1971 in Los Angeles, California

• The TCW Group (TCW®) entities principally include:

The TCW Group, Inc.Holding company

Trust Company of the WestAn independent trust company chartered by the State of California

TCW Asset Management Company (TAMCO)*Institutional and private client separate accounts

TCW Investment Management Company (TIMCO)*Mutual funds and retail managed accounts

Metropolitan West Asset Management, LLC (MetWest)*Mutual funds, institutional separate accounts and private client separate accounts

• Over $115 billion under management or committed to management as of December 31, 2010

• Approximately 1,300 institutional and private clients

• Over 900,000 retail accounts**

• TCW staff of 614 individuals, including 378 investment and administrative professionals***

• The TCW Group, Inc. is an indirect majority-owned subsidiary of Société Générale, S.A.

• TCW offers strategies that invest in major world equity, fixed income and alternative markets, with offices in Los Angeles and New York

* Investment advisors registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Other registered investment advisor entities are also included in the TCW Group.

** Number reported semi-annually, as of December 31, 2010.

***Assistant Vice President and above.

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TCW Assets Under Management – By Products Offeredor Committed to Management as of December 31, 2010

U.S. Fixed Income ($64.6)

U.S. Equities ($25.4)

AlternativeInvestments ($16.1)

International ($9.6)

Core Balanced ($0.5)

Mortgage-BackedSecurities ($20.9)

Core Fixed Income ($26.2)

Government/CorporateInvestments ($1.7)

Low/Intermediate/Long Duration ($9.0)

Bank Loans ($3.2)

High Yield Bonds ($3.6)

Total Assets: $116.2 Billion U.S. Fixed Income Assets: $64.6 Billion

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Fixed Income Products

TraditionalUltra Short Active liquidity managementLow Duration Relative value 1-3 year durationIntermediate Relative value 2-4 year durationTotal Return

Core Investment grade; opportunistic, value drivenCore Plus Value driven, up to 20% in high yield

Opportunistic Core Plus Value driven, up to 50% in plus sectors

Mortgage StrategiesMBS Total Return Value-driven vs. MBS IndexSpecialized Cash LIBOR plus objectiveOpportunistic MBS Non-agency MBS focusStrategic MBS Absolute return objectiveMBS Alternatives Private Vehicles

Corporate Credit StrategiesInvestment Grade Dedicated investment grade corporate

bond portfolios

High Yield Dedicated credit intensive process

Liability Driven Investments (LDI)Long Duration High quality vs. Long G/C or Long CreditOverlay Strategies Derivative-based asset/liability

investing strategies

International StrategiesEmerging Markets Exploits improving credit fundamentalsDeveloped Market Non-U.S. $ Dedicated focus on international

opportunities

Other StrategiesTreasury-Only U.S. TreasuriesTIPs Treasury Inflation Protected SecuritiesSecured Fixed Income Multiple-sector, bonds backed by

pledged collateralPortable Alpha Futures/swaps to gain beta (e.g. S&P

500), fixed income alpha engine

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Fixed Income Team History & Evolution

1990 – 1992

History at PIMCO

Tad Rivelle,

Laird Landmann,

and Stephen Kane

work together as

portfolio managers

1996 – 2009

Metropolitan West Asset Management

• Founded firm in August 1996

• Grew from $2 Billion to $30 Billion assets under management

• 100% focused on U.S. fixed income management

• Morningstar Fixed Income Manager of the Year for 2005

As of December 2009• 115 Employees

• 30 Investment Professionals

TCW/MetWest Today

December 2009 transaction brings together two prominent

fixed income teams

As of December 31, 2010

• $116.2 Billion Total AUM /$64.6 Billion AUM in Fixed Income products offered

• 614 Total Employees

• 149 Investment Professionals

• 57 Fixed Income InvestmentProfessionals

1992 – 1996

History at Hotchkis & Wiley

• Team recruited to build fixedincome effort

• Fixed income assets undermanagement grew from $200 Million to $2 Billion

• 5 Investment Professionals

Established in 1971

Trust Company of the West

• Robert A. Day founder

• Acquired by Société Générale in 2001

• Fixed Income team established in 1976

• Broad capabilities in mortgage-backed securities,government, corporate, emerging markets, andnon-dollar debt

TCW

As of December 2009

• Headquartered in Los Angeles, California

• Grows to $50+ Billion in Fixed Income assets under management

• 618 Employees

• 192 Investment professionals

• 76 Fixed Income Investment professionals

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Fixed Income ExpertiseAs of December 31, 2010

Portfolio Investment TeamEric Arentsen

Pat DoyleMitch Flack

Bryan Whalen, CFA

Analysts/TradersPat Ahn

Scott Austin, CFAHarrison Choi

Beth Clarke Melissa ConnDavid Doan

Philip Dominquez, CFADaniel Dy

Michael Hsu Tony LeeLifen Li

Brian Loo, CFASonia Mangelsdorf Jonathan Marcus

Sagar Parikh Palak Pathak, CFA

Brian Rosenlund, CFABrett Roth, CFA

Charles TuNanlan Ye Zhao Zhao

Portfolio Investment TeamBret Barker

Lawrence Rhee

Analysts/TradersJeannie Fong

Jeffrey Lee Katherine Wu

Stephen Burns, PhD Marcos Gutierrez

Joseph Lopez Joyce Pang

Melicia ShenAndy Wu

Bing Bing Yu

Patrick MooreDavid Vick, CFA

Christina Bau

Government/RatesMortgage-Backed

Securities Corporate/High YieldInvestment

Risk Management Product Management

Portfolio Investment TeamJamie Farnham

Tammy Karp Thomas Lyon, CFAGino Nucci, CFA

Analysts/TradersRahul Bapna, CFA

Sinjin BowronMike Carrion

Marie ChoiNikhil ChopraRJ Cruz, CFAJoel Shpall

Kenneth Toshima

Generalist Portfolio TeamStephen Kane, CFA

Laird LandmannBarr Segal, CFA, CIC

Ruben Hovhannisyan, CFA, CPA – Analyst

Chief Investment Officer–Fixed IncomeTad Rivelle

Portfolio Investment TeamPenny Foley

David RobbinsJavier Segovia

Analysts/TradersStephen Keck, CFA

Jason ShamalyAlex Stanojevic

Sovereign Risk Research

Blaise AntinMarcela Meirelles, PhD

Brett RowleyJean-Charles Sambor

Commodities

Claude Erb, CFAJay Gerard

Matthijs Randsdorp

Emerging MarketsDebt

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Representative Client ListAs of September 30, 2010

CorporationsArcelorMittal Steel USA, Inc.AT&T Inc.BAE Systems North AmericaBriggs & Stratton CorporationCEMEXCleco CorporationGrupo BimboHallmark Cards, Inc.ITT Corporation Jack in the Box, Inc. M Life Insurance Co.McDonald’s Owner/Operator Ins. Co. Ltd.Navy Federal Credit UnionR. H. Donnelley CorporationRR Donnelley & Sons Companysanofi-aventisSmart & Final Textron, Inc.The Schwan Food Company Union BankVerizon Investment Management Corporation

Multiple-Employer/UnionsBoilermaker-Blacksmith National Pension TrustDistrict 1199J Pension Fund Local No. 8 I.B.E.W. Retirement PlanMedia Guild Retirement PlanNew Jersey Transit Painting Industry of Hawaii Annuity FundProducer-Writers Guild of America Pension PlanSan Diego County Cement Masons San Diego County Construction LaborersScreen Actors Guild - Producers Pension PlanTeamsters Negotiated Pension Plan

Public FundsAlameda County Employees' Retirement AssociationCalifornia State Teachers' Retirement SystemCity of Tallahassee Pension PlanDuluth Teachers Retirement Fund AssociationEmployees’ Retirement System of the State of HawaiiFire & Police Pension Association of ColoradoIllinois State Universities Retirement SystemMaine Public Employees’ Retirement System Michigan Department of TreasuryOklahoma Law Enforcement Retirement SystemOklahoma Public Employees’ Retirement SystemSacramento County Employees’ Retirement SystemSacramento Regional Transit District San Diego City Employees’ Retirement SystemState of Michigan Retirement SystemSouth Carolina Retirement SystemsTacoma Employees’ Retirement SystemUniform Retirement System for Justices & Judges of the State of OklahomaWestmoreland County Employees’ Retirement System

Health CareAllina Health SystemAria HealthBishop Clarkson Memorial FoundationBlue Cross and Blue Shield of MinnesotaCedars-Sinai Medical CenterHackensack University Medical CenterIowa Health SystemMedicaMethodist Le Bonheur HealthcarePeaceHealthRush University Medical CenterTrinity HealthVia Christi Health SystemWelborn Baptist Foundation

Foundations, Universities andNot-For-Profit OrganizationsAdrian Dominican Sisters California State University Risk Management AuthorityCatholic Relief ServicesCommunity Funds, Inc.Cornell UniversityCumberland Presbyterian ChurchFather Flanagan’s Trust FundMississippi United Methodist FoundationMissouri Baptist FoundationNew York UniversityThe Archdiocese of San FranciscoThe Bush FoundationTwin Cities Public Television University of Oklahoma Foundation, Inc.U.S. Conference of Catholic BishopsVirginia Tech Foundation, Inc.

Mutual Funds and SubadvisoryAbsolute Investment Advisers LLCCGCM Core Bond FundMetropolitan West FundsRussell Investment Group

– Multiple FundsSEI Core Fixed IncomeSEI Long Duration FundPictet & Co.

– U.S. High Yield Fund

The clients listed are invested in one or more investment strategies and are selected either because of their inclusion in the 2010 Money Market Directory or with express written consent by the client. Inclusion on this listshould not be considered an endorsement of the investment advisor or services rendered.

II. Fixed Income Investment Philosophy

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U.S. Fixed Income Investment Philosophy

Consistent outperformance can be achieved through:

• Implementation of multiple fixed income strategies

• Focus on sector management and issue selection

• Application of fundamental value-driven research process

Philosophical Tenets:

• Fixed income markets/securities are mean reverting

• Technical factors can temporarily drive pricing away from fundamentals

• Persistent inefficiencies in fixed income market can be exploited through disciplined research and bottom-upissue selection

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Investment Process

Long-TermEconomic Outlook

Mean reversionPatience

DisciplineUnderstanding of macro risks

Intensive search for valueUnderstanding of micro risks

• Duration Management• Yield Curve Management• Sector Management

Portfolio Structure

• Diversified• Optimized• Controlled Risk

Client

Objectives and Guidelines

• Security Selection• Buy/Sell Execution

Quarterly

Monthly

Daily

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Duration Management

Long-Term Investment Outlook

Duration Strategy

Financial Market Conditions

Credit Spreads

Slope of Yield Curve

Corporate Profitability

Consumer Delinquency Rates

Monetary Policy

Real Fed Funds

Fed Objectives

Inflation

Fiscal Policy

Budgetary Initiatives

Tax Policies

Deficit / Surplus Conditions

Defensive Outlook

Fast Growth

Higher Rates

Index

Trend Growth

Rates Stable

Duration Range + / - 1 year

Positive Outlook

Slow Growth

Declining Rates

• Long-term outlook is primary driver of long-term duration strategy

• Duration/maturity shifts are held to one-year around client benchmark

• Duration is only one of five tools to add value

• Duration is “dollar cost averaged” over the interest rate cycle

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• Yield curve strategy based upon:

– Fundamental outlook for Fed policy and inflation

– Expectations versus forward curve

– Yield versus convexity trade-off

– Total return analysis

Unchanging Scenario

Flattening Scenario

Steepening Scenario

Yield Curve Management

Scenarios presented do not represent current conditions and are illustrative only.

5%

6%

7%

8%

Yiel

d

Maturity

Bullet

Barbell

5%

6%

7%

8%

Yiel

dMaturity

Current

One Year

4%

5%

6%

7%

8%

Yiel

d

Maturity

Current

One Year

BulletReturn6.87%

BarbellReturn6.17%

BulletReturn7.39%

BarbellReturn7.97%

BulletReturn7.39%

BarbellReturn5.49%

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Sector Management

Average Annual Return by Investment Horizon(Looking Back from 2008)

Average Annual Return by Investment Horizon(Looking Back from 2009)

Source: Barclays Capital Live Fixed Income Indices as of 12/31/08 Source: Barclays Capital Live Fixed Income Indices as of 12/31/09

“Investors should be greedy when others are fearful and fearful when others are greedy.” – Warren Buffett

• Sector Allocation Philosophy

– Diversify across all allowed investment classes to reduce volatility

– Returns of each sector can be highly divergent in the short-term but revert to the mean in the long-term

– Overweight most attractive sectors to achieve higher risk adjusted returns

13.74%

8.52%6.35% 6.26% 6.57% 7.71%

-26.16%

-5.59%

-0.80%

2.17%4.26%

6.28%

1-Year 3-Year 5-Year 10-Year 15-Year 20-Year-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Treasuries High Yield

39.89%

14.12% 7.15%4.09% 2.31%

1.43

-3.57%

6.14%

4.85% 6.15% 6.56% 6.79%

58.21%

5.98%

6.46% 6.72% 7.57% 8.70%

1-Year 3-Year 5-Year 10-Year 15-Year 20-Year-10%

0%

10%

20%

30%

40%

50%

60%

Treasuries High Yield

0.16% 1.61% 0.57% 1.01% 1.91%

61.78%

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Issue Selection: Treasuries

• Live pricing feeds to analytical models

• Constructs fair value curve

– Identifies rich/cheap Treasury securities

– Compares valuations to historical averages

• Simulate total returns

– Steepen/flatten yield curve

– Measures roll-downs

– Values convexity/volatility

• Trading done via electronic systems (TradeWeb) to foster best execution

TCW/MetWest Proprietary Treasury Model

Source: MetWest

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Issue Selection: Corporates

• TCW/MetWest employs a “belts and suspenders” approachto corporate bond investing

– Cash flow analysis

– Asset quantification

• Customized corporate valuation models screen relative value of various credits

• Comprehensive credit analysis

– Rating agency / management interviews

– Capital structure / organizational structure

– Liquidity forecast

– Covenant analysis

Traditional Sub-Sectors• Industrial• Finance• Utilities• Yankees• Euro Bonds• Taxable Munis

Structured Sub-Sectors• Callable Corporates• Putable Corporates• Refundable Bonds• Floating Rate Notes• Sinking Fund Bonds• Asset-Backed

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Issue Selection: Mortgage-Backed and Asset-Backed SecuritiesShown is a print screen from our loan level database, which aggregates information on all of the loans backing this particular deal and compares it against the average for the cohort.

1 Deal Information – Basic information about the deal structure2 Geographic Distribution – Aggregated from zip code data3 Loan Characteristics – Average loan details, and a breakdown

of loans by type (fixed, adjustable, interest only, etc.)4 Income Documentation – Loans to borrowers with

documented income are less likely to default5 Loan-To-Value Ratios – Measure of the size of the loan relative to the

value of the property; higher LTVs generally translate to higher loan delin-quency. Two methodologies are used to enhance our understanding ofthe impact of distressed markets

6 FICO Scores – Limited importance to security analysis in today’senvironment

7 Servicer – Each servicer is independently rated based upona proprietary scoring system

8 Current Loan Performance – Current Credit Enhancement, delinquency,default, and prepayment rates allow us tocompare this bond to similar bonds in the same cohort

9 Servicing Metrics – In addition to a broad servicer level score, servicingmetrics such as cash flow velocity, advancing, cure rates, severities andtimelines are tracked at the bond level and compared to the cohort averages

10 Modifications and Recidivism – We track the percentage of the bond levelcollateral that has been modified and compare these to the cohort. Wealso break out the modification type and measure what percentage ofseasoned modifications re-default through the recidivism metric.

11 Negative Amortization – For those loans that allow negative amorti-zation, we track what percentage of each negam sleeveis current and the percentage of each sleeve approaching the negam cap

12 Subsequent Performance of Serious Delinquent Loans – Tracks thenumber of payments made by loans that were seriously delinquent 3months prior and have yet to liquidate. Good indicator of future transi-tions from serious delinquency to default.

13 Current Consumer Credit Data – Knowledge of current borrower creditactivities helps forecast delinquencies, defaults and severities as well asshifts in the overall credit quality of the pool.

14 Alpha/Negative Alpha Pricing – Using the TCW loan level default, severityand prepayment models, the price at which the bond is likely tooutperform (Alpha Px) or underperform (Neg Alpha Px) versus it’s peers.

15 Roll Rates – Tracks the trend of previously current loans transitioning tothe delinquency pipeline.

16 Delinquency Analytics – Detailed delinquency statistics covering allstages of delinquency and default for both the primary pool backing thebond as well as any cross collateralized pools. Additional metrics provideinformation on loans that have never been delinquent or are reper-forming giving an even more detailed view of the health of the pool.

Result: There is a wealth of information that is gathered, organized, and analyzedthrough the proprietary loan database. This information has been critical in

navigating the difficult environment of the last two years.

1

3

4

5

9

7

10

13

2

11

12

14

6

15

16

8

III. Corporate Bond Investment Philosophy and Process

Corporate Bond Investment Philosophy

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• Add value throughout the credit cycle via multiple strategies

– Adjust the overall corporate exposure (basis) as valuations change over the credit cycle

– Implement intensive credit research process to identify undervalued securities

– Make modest duration and yield curve shifts

• Control risk through

– Limited basis when spreads are tight

– Intensive credit analysis that focuses on assetcoverage/downside protection

– Emphasis on companies with proven management and strong balance sheets

– Diversification by industry and issuer

• Take advantage of modest asset base

– Nimbly trade into/out of issuers and sectors

– Position sizes are not limited by size of market

– Make use of relatively small, but often compellingareas of the corporate bond market

• Project debt

• 1st mortgage debt

• Secured bank debt

• SPVs, e.g. EETCs

• Look for value across

– Capital structure

– Term structure

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Credit ResearchU.S. Fixed Income Resources

Credit Committee

• Generalist Portfolio Managers

• Jamie Farnham – Director of Credit Research

• Gino Nucci, CFA – Corporate Trader

• Tammy Karp – Corporate Trader

Credit Research Team

• Jamie Farnham – Director of Credit Research; Utilities

• Gino Nucci, CFA – Corporate Trader

• Mike Carrion – Corporate Trader

• Tammy Karp – Corporate Trader

• Joel Shpall – Credit Analyst; Transportation, Autos, REITs

• Marie Choi – Credit Analyst; Healthcare, Food/Beverage,Consumer Products, Retail

• Rahul Bapna, CFA – Credit Analyst; Insurance, Banks, Finance,Chemicals, Diversified Manufacturing

• Sinjin Bowron – Credit Analyst; Telecom, Media, Technology,Homebuilders/Materials, Municipals

• RJ Cruz, CFA – Credit Analyst; Energy, Metals/Mining

• Ken Toshima – Credit Analyst; Industrials, Paper/Packaging,Gaming/Lodging

• Nikhil Chopra – Credit Analyst; Utilities, Municipals

Systems Used for Analysis:

• Credit Sights • Aviation Specialists, Avitas, etc.

• Covenant Review • Bloomberg

• SNL • Barclays Live

• Markets.com • TCW/MetWest’s proprietary

• CallStreet Securities Management

• Bond Hub System (SMS)

• Capital IQ • TCW/MetWest’s proprietary

• Power Finance & Risk Credit Trading System

• Intra Links • SyndTrak

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TCW/MetWest Corporate Credit Team, Resources, Interactions

Corporate Credit Committee CIO

Generalists / Jamie Farnham / Gino Nucci, CFA / Tammy KarpRisk Management/Credit Analysts

Reviews relative value, sets risk budgets, industry concentration, conducts credit reviews

Credit Research

Jamie Farnham, Director

Joel Shpall Rahul Bapna, CFAKenneth Toshima RJ Cruz, CFAMarie Choi Sinjin BowronNikhil Chopra

Risk Management

Marcos GutierrezAndy Wu, FRM

Joyce PangMelicia Shen

Ruben Hovhannisyan, CPAStephen Burns, PhDVladimir Goldenberg

Proprietary Technology

• Quantitative Risk Tiering Model• Corporate Index Tracking Model• Attribution Analysis• Credit Tracking System• Securities Management System (SMS)

Portfolio Construction/Credit Trading

Tammy Karp Mike Carrion Gino Nucci, CFA

• Idea Generation • Implementation• Portfolio Construction

Information Services

• SEC Filings • Consultants• Economic Data • Wall Street Analysts• Industry Data Sources • Independent Analysts• Management Reviews/ • Legal Professionals

Company Visits • Rating Agency Analysts

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Credit ResearchFixed Income Roles, Responsibilities & Process

• Analyst(s)• Trader(s)

• Director of Credit

• Analyst(s)

• Generalist(s)

• Trader(s) continually monitor real-time relative value

• Analyst(s) periodically review comparable universe

• Generalist(s) also evaluate relative value across fixed income sectors

• Industry & competitive dynamics

• Financial analysis & projections

• Liquidity review

• Read indenture & credit agreements

• Asset value analysis

• Discussions with management & rating agency

• Analyst(s) presents initial analysis/opinion to Director of Credit

• Evaluate whether idea merits credit committee discussion

• Analyst(s) prepares analysis for credit committee discussion

• Evaluate investment merits

• Trader(s) present relative value vs. opportunity set

• Identify further credit questions for follow-up

• If approved, develop trading axe targets & parameters

• Director of Credit, trader(s) and analyst(s) initially discuss investment merits

• Evaluate relative value to decide if full credit review analysis is appropriate use of resources

• Trader(s) implement Investment axe

• Analyst(s) conduct ongoing credit monitoring

• Director of Credit

• Analyst(s)

• Trader(s)

• Generalist(s)

• Director of Credit

• Trader(s)

• Analyst(s)

• Director of Credit

• Analyst(s)

• Trader(s)

• Analyst(s)

• Analyst(s)

InvestmentCreditCommitteeDiscussion

Review CreditAnalysis

FundamentalAnalysis

BriefInvestment Discussion

Investment Idea

Follow upquestions

Ideas Advance

SomeIdeas

Advance

Responsibility

Process

Some

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Credit Research Evaluation

• TCW/MetWest’s credit analysts conduct rigorous fundamental assessments to evaluate tangible asset value, claim structure and management quality

Credit OpinionMerits vs. Risks

Assets/Cash Flow Liquidity Liability/Capital Structure

• Tangible asset valuation

• Cash flow assessment/forecast

• Industry trends

• Economic trends

• Management skill of growing

business/cash flow

• Cash and undrawn credit facilities

• Two year quarterly forecast

• Restrictive covenants

• Unencumbered assets/value

• History of liquidity management

• Capital structure

• Organizational structure

• Restrictive covenants

• Management’s ability to execute

within restrictive capital structure

• Bondholder friendliness history

Credit Opportunity

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Credit ProcessAnchored in Asset Value

• “Two Ways Out” allows flexibility across market cycles

• Asset “coverage” measured both on the face value and market value basis.

• Lower bond prices improves asset coverage

Cash Flow/Liquidity at Maturity Distressed Liquidity/ Recovery (most conservative)

Example – Asset Coverage

Debt at Face Debt at Market

Asset Value $800m $800m

Less: Debt $1b $300m1

Asset Coverage 0.8x 2.7x

Asset Coverage (Discounted)2 0.6x 2.0x

1 Assumes debt trades at 30 cents on dollar

2 Assumes chapter 11 bankruptcy. Discounts at 20% for 1.5 Years

Valuation Methods

Distressed recoveryCritical

Asset sale value

DCF analysisImportant

FCF analysis

Relevant EBITDA multiple

Most relevantin times ofmarket stress

}

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Critical Credit Research AspectsWhat Are They & Why They Are Important?

Cre

dit

Eval

uati

onSe

ctor

Cov

erag

e Industry Analysis

Cash Flow Generation

Claim Structure Priority

Asset Valuation

Covenant Analysis

Liquidity Assessment

Management Interaction

• Traces short/long-term industry trends• Understand competitive dynamics of companies,

suppliers & customers

• Identify business model drivers and forecast future expected cash flows

• Distill accounting “gimmicks” to identify actual cash generation

• Detailed examination of legal/organizational structure and associated claims (debt)

• Identify structural and/or claim priority seniority

• Conduct various valuation approaches including cashflow multiple, discounted cash flow percent of replacement cost, required IRR, etc.

• Determine enterprise valuation of assets

• Identify and understand various covenants across capital structure

• Identify cash and undrawn credit facilities available• Detailed quarterly forecast of cash sources/uses for

the next two years

• Evaluation of senior management via historical trackrecord and regular interviews

• Assess bondholder friendliness and incentives to favor shareholders

• Identify potential investment candidates• Highlight industry trends that may include

important economic signals for generalist macroeconomic view point

• Can business internally generate cash via business operations?

• If not, business is dependent on external sourcesand long-term viability could be in question

• In a downside, recoveries result from asset valueattributed to claim pool. Higher priority claimshave more favorable recoveries

• Abundant asset value and unencumbered assetscould be a potential source of cash

• Are there limitations on management flexibilityvia tight covenants?

• Loose covenants could indicate leveraging potential via value shift to equity owners

• Defaults occur when external liquidity disappears. Can the company manage within internal liquidity during a crisis?

• Does management have history and flexibility to expect leveraging?

• How strong is management?

Credit Research Analyst Tasks Why is it important?

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Credit ResearchOther Current Considerations

This list is not exhaustive but is designed to be indicative of the types of issues analyzed when researching credits.

• Bankruptcy Scenario

– Would a priming debtor in possession loan be necessary? If so, How much?

– Potential for undisclosed liabilities

– Implied recovery using claim priority

• Capital Structure Considerations

– Organizational structure and claim priority analysis

– Pressure of intercompany loans

• Supply Chain Considerations

– Sector excess capacity

– Ability to pass through commodity cost

– Customer concentration/health

• Pension/OPEB Obligations

– Funding requirements

– In downside, what priority and how large would claim be?

• Environmental Liabilities

– Potential capital requirements or demand response of carbon emissions regulation

– Asbestos liability

– Decommissioning liability

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Credit Portfolio TrackingProprietary Credit/Index Monitoring System

• Real-time portfolio monitoring vs. Index using proprietary system

• Idea generation

– Both buy and sell using historical trading relationships

• Credit tracking system keeps record of key analyst notes

Source: TCW/MetWest

Credit Monitoring

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Credit Research ExampleTelecommunications Firm A

• Large U.S. wireless carrier with valuable spectrum positions,customer relationships, and long-haul wireless assets.

• Fallen angel that entered high yield universe due to operationalchallenges from integration that caused subscriber losses.

• This coincided with market deleveraging with irrational fears ofan impending default despite generating sizable free cash flowwhile having substantial liquidity and moderate (~3.0x)leverage.

• During crisis, fears of a split were overblown, in our opinion,causing over 30 points of price disparity between bonds.Subsidiary bonds traded as low as the 30s but still trade at a 5to 10 point discount to parent bonds.

Recent Developments:

• The operational turn-around is now gaining traction with lowersubscriber churn, and liquidity is still strong.

• Company recently contributed assets and funding to nextgeneration wireless network operator in exchange for majorityownership, which represents an additional high yieldinvestment opportunity.

• Distinct credit but strategically aligned requiring dual creditanalysis.

Parent Telecommunications Corporation

x1.00$revloveRExport Development Canada $750 0.1x6.000% Senior Notes 2016 $2,000 3.4x8.375% Senior Notes 2017 $1,300 3.4x9.250% Debentures 2022 $200 3.4xTowerCo Sale-Leaseback $697 3.4x

x4.3749,4$latotbuSTotal Subsidiary Debt $15,115 3.4x

x4.3932$tbeD rehtOConsolidated Debt $20,301 3.4x

noitaroproC gnidloHnoitaroproC gnidloHCo-borrower under credit facility

7.625% Senior Notes 2011* $1,650 3.4x 6.875% Senior Notes 2013** $1,473 3.4x8.375% Senior Notes 2012* $2,000 3.4x 5.950% Senior Notes 2014** $1,170 3.4x6.900% Senior Notes 2019* $1,729 3.4x 7.375% Senior Notes 2015** $2,137 3.4x

x4.3087,4$latoTx4.3574,2$*8202 setoN roineS %578.68.750% Senior Notes 2032* $2,000 3.4x ** Guaranteed by Parent but can be waived

x4.3458,9$latoT in certain asset sale circumstances* Unconditionally guaranteed by Parent

Other Subsidiary 1Other Subsidiary A

Other Subsidiary 2Other Subsidiary B

Other Subsidiary 3Other Subsidiary C

Other Subsidiary 4Other Subsidiary D

Other Subsidiary 5x4.3003$*3102 NRF 5.212+L neiL ts1tseretnI gnitoV %45

Parent Telecommunications Corporation B 2nd Lien L+325 FRN PIK 2014* $181 3.4xx4.3184$latoT

* Unconditionally guaranteed by Parent56% Economic Interest

Holding Corporation B

12.00% Secured Notes 2015 $2,772 N/AVendor Financing Notes 2014 $33 N/A

A/N508,2$latoT

IV. Structured Product Management

31 PREShgf386 1/19/11

Structured Products – Team, Resources, Interactions

The processes described herein are illustrative only and subject to adaptation in any particular context.

Structured Product Working Group (Sector Allocations/Risk Weightings)

CIOGeneralist Portfolio Managers/Structured Product Specialists

Structured Product Analysts

Reviews relative value, risk budgets, sets trading targets and approves new structures/trading programs

Global Capital Market Resources

Other factors requiring cross-sector perspectives arequickly assessed through internal collaboration with TCW

specialists in:

• Developed and Emerging Markets

• U.S. High Yield Fixed Income

• U.S. High Grade Fixed Income

• U.S. Equities and Convertibles

• Commodities

Structured Product Portfolio Managers (Implementation)

• Idea generation • Reporting

• Implementation • Analysis Review

• Supervision

Structured Products Analysts

• Idea generation • Prepayment analysis

• Price discovery • Servicer reviews

• Relative value analysis • Risk monitoring

• Delinquency trends/forecasts • Stress testing

• Originator tracking

Proprietary Technology

• Loan level database over 30 million loans

• Default, prepayment and severity models

• Deal level tracking

• Deal/collateral tracking

• Servicer/originator reviews

• Securities Management System (SMS)

• BWIC Browser

• Security Analyzer

• WIP (Collaborative Trading Tool)

• Portfolio Surveillance

Additional Technology

• INTEX

• Trepp

• Yield Book

• Bloomberg

• Loan Performance 1010 Data

• Derivative Solutions

• Charles River Investment Management System

• FactSet

• Equifax

• Altos

32 PREShgf386 1/19/11

Non-Agency MBSThe unprecedented housing and sector dislocation has created theopportunity for high loss-adjusted yields through a disciplined assetselection process using:

• Top-Down Analysis

– Regional and local property trends

– Local employment conditions

– National loan modification initiatives

– Differentiating mortgage servicers methods

• Bottom-Up Deal Analysis

– Detailed collateral analysis

– In-depth structural analysis

– On-going surveillance of investments, strategies, and trends

• Negative home equity is of particular focus

Agency MBSPersistent inefficiencies in the agency mortgage market can be exploitedthrough disciplined research and bottoms-up issue selection.

• Minimal credit risk of agency MBS

• Few competing high quality assets with yield advantage

• Agency MBS cash flows modeled over a range of scenarios for prepayments, interest rates, volatility and home prices

• Combine fundamental OAS and spread regression with technicalmarket trends

• Dedicated team seeking relative value opportunities

ABSComplex structures, esoteric assets, and unique idiosyncratic risks limitinvestor participation but can also lead to cheap risk-adjusted investments.

• Hard asset or receivables valuation is the basis for which other formsof credit protection can be evaluated

• How these assets or receivables fit within the lessee or borrower’sbusiness model help us evaluate sponsorship and cash flow timing

• Structural protections need to fill the “credit” gaps and anticipate howand where performance deterioration will impact bondholders

• Any level of liquidity constraints are considered when determining theproper cusip and portfolio exposure

CMBSHistorically wide credit spreads and stable cash flows can be capturedthrough continuous evaluation of:

• Systematic Factors:

– Property Types and Geographic Region

– Modification and Liquidation Trends

– Availability of Financing in both Loan and Securities Markets

– Transaction Volumes and Subsequent Price Discovery

• Idiosyncratic Factors:

– Close attention to Tenants and Occupancy

– Payment Shocks can affect the borrower’s Ability to Pay

– Individual Loan Covenants such as Lockboxes can affect Cash Flows to the trust

Ultimately our goal is to establish the projected Debt ServiceCoverage Ratio

Structured ProductsPhilosophy and

Valuation Process

33 PREShgf386 1/19/11

RMBS Proprietary Research and Analytical Tools

Our systems allow us to understand the risks and opportunities of every MBS we purchase on behalf of our clients

Loan Level Database30+ Million Loans

• Combination of proprietary loan databaseand third-party loan data

• Original/current loan characteristicsupdated monthly by 10 trustees

• Loan information received quickly andgenerally accessible 30-45 days beforethird-party systems

• Original information provided includesLTV, zip code, property type,documentation, loan type, FICO score etc.

• Current information updated monthlyincludes payment status, modificationdetails, loss amounts, prepayments andliquidation amounts necessary for us toestimate information and REO sale prices

• Filters allow for cohort comparativeanalysis

Research & Analytics

• Delinquency roll rates (deal level)

• Prepayment rates (deal level)

• REO sales index (zip code level)

• Mark-to-Market LTV (loan level)

• Identify loans with/without positive equity(loan level-current/projected)

• Default behavior coefficient byMark-to-Market LTV

• Inventory to sales ratios (zip code level)

• Projected home price stabilization(MSA, city and zip code level)

• Probability of delinquency vs.unemployment rates

• Recidivism rates (vintage)

• Actual servicing timeline performance netof moratoriums and other regulatoryaction (respective servicers)

• Projected loss severities based onservicing non-performing loan model(loan level)

Outputs

• Vintage Rankings

• Alt A vs. Subprime vs. Prime vs. OptionArm comparative analysis

• Absolute and relative rankings at the deallevel as well as the security level.Approximately 65,000 individual securitiesare currently ranked

• Market analysis/insight

• Pricing

The processes described herein are illustrative only and subject to adaptation in any particular context.

34 PREShgf386 1/19/11

TCW Proprietary RMBS AnalyticsShown is a print screen from our loan level database, which aggregates information on all of the loans backing this particular dealand compares it against the average for the cohort.

1 Deal Information – Basic information about the deal structure2 Geographic Distribution – Aggregated from zip code data3 Loan Characteristics – Average loan details, and a breakdown

of loans by type (fixed, adjustable, interest only, etc.)4 Income Documentation – Loans to borrowers with

documented income are less likely to default5 Loan-To-Value Ratios – Measure of the size of the loan relative to the

value of the property; higher LTVs generally translate to higher loan delin-quency. Two methodologies are used to enhance our understanding ofthe impact of distressed markets

6 FICO Scores – Limited importance to security analysis in today’senvironment

7 Servicer – Each servicer is independently rated based upona proprietary scoring system

8 Current Loan Performance – Current Credit Enhancement, delinquency,default, and prepayment rates allow us tocompare this bond to similar bonds in the same cohort

9 Servicing Metrics – In addition to a broad servicer level score, servicingmetrics such as cash flow velocity, advancing, cure rates, severities andtimelines are tracked at the bond level and compared to the cohort averages

10 Modifications and Recidivism – We track the percentage of the bond levelcollateral that has been modified and compare these to the cohort. Wealso break out the modification type and measure what percentage ofseasoned modifications re-default through the recidivism metric

11 Negative Amortization – For those loans that allow negative amorti-zation, we track what percentage of each negam sleeveis current and the percentage of each sleeve approaching the negam cap

12 Subsequent Performance of Serious Delinquent Loans – Tracks thenumber of payments made by loans that were seriously delinquent 3months prior and have yet to liquidate. Good indicator of future transi-tions from serious delinquency to default

13 Current Consumer Credit Data – Knowledge of current borrower creditactivities helps forecast delinquencies, defaults and severities as well asshifts in the overall credit quality of the pool

14 Alpha/Negative Alpha Pricing – Using the TCW loan level default, severityand prepayment models, the price at which the bond is likely tooutperform (Alpha Px) or underperform (Neg Alpha Px) versus it’s peers

15 Roll Rates – Tracks the trend of previously current loans transitioning tothe delinquency pipeline

16 Delinquency Analytics – Detailed delinquency statistics covering allstages of delinquency and default for both the primary pool backing thebond as well as any cross collateralized pools. Additional metrics provideinformation on loans that have never been delinquent or are reper-forming giving an even more detailed view of the health of the pool

Result: There is a wealth of information that is gathered, organized, and analyzedthrough the proprietary loan database. This information has been critical in

navigating the difficult environment of the last two years.

1

3

4

5

9

7

10

13

2

11

12

14

6

15

16

8

35 PREShgf386 1/19/11

TCW RMBS Cash Flow Models

The processes described herein are illustrative only and subject to adaptation in any particular context.

Proprietary Default, Severity and Prepayment Model

Using logistical regression, TCW models defaultsand prepayments from over 15 different variablessuch as combined loan-to-value, refinancingincentive, and home price changes which areforward looking estimates of where home prices willstabilize at the MSA and certain zip code levels

Following a servicer timeline and liquidation costsmodel, TCW projects loan level severities from over10 variables including foreclosure timelines andlegal fees

Deal cash flows are influenced by deal specificTCW home price and unemployment vectors

36 PREShgf386 1/19/11

Proprietary CMBS Research and Analytical Tools

Our systems allow us to understand the risks and opportunities of every CMBS we purchase on behalf of our clients.

Loan Level Data – 55,000+ Loans

• Third-party loan data applied andcustomized in a proprietary database

• Original/current loan characteristics areupdated monthly by trustee data

• Live feed via nightly data downloads fromthird-party vendors provide the most up-to-date data

• Original Information includes LTV, NOI,DSCR, tenant lease information, propertytype, amortization type, and previousyears’ changes in revenue, expenses, etc.

• Current information includes the latestmonth’s debt service, modification data,loss amounts, prepayment amounts,delinquency status, any change in theloan’s amortization, and appraisalreductions to account for updatedproperty values

• Filters allow TCW to use the latestavailable debt service for calculating aloan’s DSCR, accounting for changes in aloan’s amortization and haircuts for loansthat have not reported financials for morethan 12 months

Research & Analytics

• DSCR distribution– Breakdown of Third Party Vendor

Data, TCW’s Prior to Debt ServiceReset DSCR and TCW’s Post DebtService Reset DSCR

• Debt Yield Distribution

• Delinquency Status and Roll Rates

• Projected maturity defaults and paymentdefaults using TCW’s proprietary loss vectors

• Breakdown of implied cap rates atsecuritization (Loan Level)

• % Change in reported NOI on an annualbasis

• Lockbox Status

• Breakdown of Workout Strategy forModified Loans

• Appraisal Reduction Summary (ASERsand ARAs)

• Lease Rollover Summary by Property Type(Loan Level)

• Balloon Analysis – % of loans that wereable to refinance vs. still outstanding(Deal Level)

• Breakout of loans with pro-forma LTVsand DSCRs at origination (Deal Level)

Outputs

• Rank of all 55,000 loans by cumulativedefaults and loss severities (rolled up toDeal Level)

• Ranking each deal by absolute and relativeloss projections

• Compare seasoned deals vs. recentvintage deals by normalizing the DSCR of06-07’ deals with the projected debtservice amount following the end of thepartial Interest-Only period

• Compare deals within each CMBX series

• Market Analysis/ Insight

• Price and Forecasted Yield Analysis

The processes described herein are illustrative only and subject to adaptation in any particular context.

37 PREShgf386 1/19/11

TCW Proprietary CMBS AnalyticsShown is a print screen from our loan level database, which aggregates information on all of the loans backing this particular deal.

Result: There is a wealth of information that is gathered, organized, andanalyzed through the proprietary loan database. It is not only the

access to the loan level information but how we use and assimilate thepieces of data that provides us with a competitive advantage.

1

11

3

4

2

5

7

9

10

8

6

18

20

1 Deal Information – Basic Information about the deal structure2 Collateral Summary – Avg. loan details and the weighted average DSCR prior to and post

the partial interest-only reset date3 DSCR Distribution – A comparison of Trepp to TCW’s proprietary DSCR distribution,

which includes each loan’s most recent financials, and its post-reset debt servicepayment

4 TCW NOI Vector – Applying TCW’s NOI and cap rate assumptions to each individualloan, and projecting deal cumulative defaults as well as loss severities

5 Maturity Analysis – The deal’s ability to refinance at the balloon date. The % of loansoutstanding past maturity and the % of loans that were able to successfully refinance

6 Delinquency Roll Dates – Tracking the continual movement of loans that are currenttransitioning to the delinquency pipeline

7 Amortization Type – Data has shown that loans experiencing the end of their interestonly period and entering into full amortization have shown a higher propensity to default

8 DSCR Migration – The transition of the pool’s DSCR buckets over time9 Appraisal Reduction Amount – The % of loans that have had appraisals lower than their

loan balance, allowing the servicer to limit their advances. The % cumulative appraisalreduction is the difference between the appraisal amount and the current loan balance

10 Prepayment Protection – Most CMBS loans are structured with prepayment protection,either through a yield maintenance provision or defeasance. The payment protectionusually ends a year before the loan’s balloon date

11 Financial As of Date – A breakout of the reporting dates for the loans in the pool.Research has shown that loans that have not reported recent financials have shown tohave a higher delinquency %

12 Debt Yield Breakdown – Debt Yield is a loan’s NOI over its current loan balance. Itsoften used as a measure to estimate a property’s ability to refinance its debt

13 % Change in NOI – Year-over-year changes in the loan’s net operating income. A majorityof loans (as of Nov 2010 remittance reports) have reported financials during 2010

14 LTV Breakdown – Collection of LTV’s that were reported at securitization, as well asrecent LTV’s for loans that have received appraisals since origination

15 Lease Expiration – The reported lease rolls from different property types. Loans that havea high % of expiring leases are vulnerable to significant variability in their net cash flow

16 Lockbox Status – Loans are structured with either a hard lockbox (in which cashflows godirectly from the tenants towards paying the property’s debt) or a soft lockbox (in whichthe borrowers have discretion to the funds before the debt payment is due) or nolockbox at all

17 Remaining Term – The pool’s maturity schedule. (to the balloon date)18 Special Service Loans- List of the pool’s largest special servicing loans (non-performing

or in special servicing due to lease rollover risk, low DSCR, or borrower bankruptcy)19 Special Service/Watchlist – Loans that have been either added to the Watchlist, are

performing special servicing loans or loans that are delinquent. (mutually independent)20 Pro-Forma Financials – Loans that were underwritten with pro-forma financials (based

on expected future cash-flows) have higher leverage and lower DSCR’s than were inplace at origination

19

16

12

14

1317

15

38 PREShgf386 1/19/11

Transportation and Specialized Finance Asset-Backed Securities (ABS)

The processes described herein are illustrative only and subject to adaptation in any particular context.

Our dedicated ABS research and investment team enables us to participate in these less-trafficked but opportunistic asset classes.

Fundamentals

• Financial aspects

– Current lease rates and direction

– Lessee performance, absolute andrelative to industry

– Utilization/participant portfoliogrowth rates

– Revenue stability

– Access to capital/broader-picturefinancing considerations

• Tangible assets

– Plant, property and equipment

– Current market values

– Lease type/terms

– Recourse

• Expert opinions and forecasts

– Servicer involvement and projections

– Specific company performance

– Overall industry performance

Structure

• Waterfall– Priority of interest versus principal

– Robustness of LTV maintenancerequirements

– Performance triggers

• Ability to cure• Influence of Servicer

• External Credit Enhancement– Class-dedicated Reserve Funds

– Financial guarantor/monoline wrap

• Involvement of Related Parties– Issuer’s reliance upon securitization

– Role of private equity, takeoutconsiderations and impact oncashflow

– Servicer’s capacity, with or withoutachieving consents, to re-deploy ordispose of assets

Outputs

• Asset-specific valuation

• Comprehensive portfolio valuation

• Comparative statistics between assetpools

• Servicer opinions

• Assessment of market assumptions withregard to asset deployment, cashflowstream and residual value

• Market and current environment opinion

• Security/asset-specific price-yield analysis

39 PREShgf386 1/19/11

Structured Products: Reporting and Tracking Exposure

Duration and liquidity positioning areconstantly evaluated against bothtarget and current credit exposures.

Long term sector targets are set by theStructured Products Committee basedupon relative value against a myriad ofeconomic scenarios.

Sector construction and individualsecurity selection is delegated to theSpecialists.

These reports ensure that sub-sectortargets are achieved and done so withconsistency across similar accounts.

Risk Management – Proprietary Risk Exposure Reports

Disciplined risk allocation and position size monitoring

40 PREShgf386 1/19/11

Structured Products: Portfolio Tracking and Reporting Exposure

Risk Management – Proprietary Risk Exposure Reports

Portfolio guidelines, restrictions and risk targets

Allocation of credit related structured products aredictated by portfolio targets set by Structured ProductsCommittee and specific client directives.

Downgrade policies mandated by clients are monitoreddaily along with required actions.

41 PREShgf386 1/19/11

Structured Products: Portfolio Tracking and Reporting Exposure

The processes described herein are illustrative only and subject to adaptation in any particular context.

Contribution to Duration Report

• MetWest Monitors mortgage contribution to duration (CTD) by account on a daily basis

• Effective durations are run daily using Barclays Point System to compare MetWest Total Return strategy portfolios to the MBS portionof the Barclays Aggregate Index

V. Outlook and Strategy

Economic Outlook

44 PREShgf386 1/19/11

U.S. Economy Has Suffered An Immense Loss of Wealth

• The “illusion of wealth” effect brought on by the asset price bubble in housing led to:

– Personal net-worths are systematically mis-estimated

– Sharp elevation in consumption, remember “mortgage equity withdrawals”?

– Economic distortions, e.g., an excess of construction activity, too many mortgage brokers, record levels of car sales

• Since the 2006/2007 peak in housing, the U.S. has experienced a dramatic diminution in net worth

– Residential real estate down $7 trillion – some 28% from the 2006 peak

– U.S. equities down over 25% since 10/31/071

19511955

19581961

19641968

19711974

19771981

19841987

19901994

19972000

20032007

0.0

5.0

10.0

15.0

20.0

25.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Ow

ners

' Equ

ity (

$ Tr

illio

ns)

Ow

ners

' Equ

ity a

s %

of R

eal E

stat

e

2010

Households Owners’ Equity in Real Estate

Owners' Equity as % of Household Real Estate

Households Owners’ Equity in Real Estate

Source: Federal Reserve Board1Through 8/31/10

...Which Has Translated Into

45 PREShgf386 1/19/11

• Elevation in savings rate/loss of consumption

• De-leveraging of the American consumer

Savings Rate

Jul-2000

Jul-2001

Jul-2002

Jul-2003

Jul-2004

Jul-2005

Jul-2006

Jul-2007

Jul-2008

Jul-2009

Jul-2010

0%

1%

2%

3%

4%

5%

6%

7%

Source: Bloomberg

Consumer Credit Outstanding

19591962

19651969

19721976

19791982

19861989

19931996

20002003

20062010

0

500

1000

1500

2000

2500

3000

Bill

ions

($)

46 PREShgf386 1/19/11

Meanwhile, the Rest of the Private Sector Continues to De-Lever

Source: Federal Reserve Bank of St. Louis

Commercial and Industrial Loans Outstanding Commercial Paper Outstanding: Financial and Asset-Backed

Jan-1988

Aug-1989

Mar-

1991

Oct-1992

May

-1994

Dec-1995

Jul-1997

Feb-1999

Sep-2000

Apr-2002

Nov-2003

Jun-2005

Jan-2007

Aug-2008

Mar-

2010200

400

600

800

1000

1200

1400

1600

Bill

ions

($)

Commercial and Industrial Loans at All Commercial Banks

Commercial and Industrial Loans of Large Commercial Banks

Jan-2001

Oct-2001

Jul-2002

Apr-2003

Jan-2004

Nov-2004

Aug-2005

May

-2006

Feb-2007

Nov-2007

Sep-2008

Jun-2009

Mar-

2010200

400

600

800

1000

1200

1400

Bill

ions

($)

Financial Commercial Paper Outstanding (SA)

Asset-backed Commercial Paper Outstanding (SA)

• Banking Sector • Shadow Banking System

• “Narrow” Measure • “Broad” Measure

47 PREShgf386 1/19/11

Leaving Labor Markets Deeply Stressed

Jan-1948 Mar-1953 May-1958 Jul-1963 Sep-1968 Nov-1973 Jan-1979 Mar-1984 May-1989 Jul-1994 Sep-1999 Nov-2004 Jan-2010Jan-1948 Mar-1953 May-1958 Jul-1963 Sep-1968 Nov-1973 Jan-1979 Mar-1984 May-1989 Jul-1994 Sep-1999 Nov-2004 Jan-2010

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

U-3

Une

mpl

oym

ent R

ate

(%)

U-3

Une

mpl

oym

ent R

ate

(%)

Unemployment Rate (U-3) Recession

Historical Unemployment (U-3) Historical Unemployment and Underemployment Rate (U-6)

Jan-1994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010Jan-1994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010

6.0

8.0

10.0

12.0

14.0

16.0

18.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

U-3

Une

mpl

oym

ent R

ate

(%)

U-3

Une

mpl

oym

ent R

ate

(%)

Unemployment Rate (U-3) Recession

Length of Time on Unemployment Rolls – An Indication of Depth of Economic Distortions

Source: Bloomberg

Jan-1985 Oct-1988 Jul-1992 Apr-1996 Jan-2000 Oct-2003 Jul-20070

5

10

15

20

25

30

35

40

Ave

rage

Wee

ks o

f Une

mpl

oym

ent D

urat

ion

Jun-2010

48 PREShgf386 1/19/11

As the Loss of Wealth Was Severe, So Has Been the Economic Retrenchment

Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Gro

ss D

omes

tic P

rodu

ct(A

nnua

lized

)

2.9%

-0.7%

0.6%

-4.0%

-6.8%

-4.9%

-0.7%

1.6%

5.0%

3.7%

1.6%

• The technical ending of the Great Recession has not brought economic activity back to where it was pre-recession

• And, with all these negative forces, how has the economy stayed above water?

Source: Bloomberg

49 PREShgf386 1/19/11

America Goes for Broke:Government “Levers Up” as Private Sector “Levers Down”

GDP = Consumer Spending (C) + Business Investment (I) + Government Outlays (G) + Net Exports (X – M)

• In classic fashion, government is “replacing” the loss of consumption from the private sector by implementing“borrow and spend” stimulative programs

U.S. Public Debt Outstanding U.S. Total Public Debt Outstanding as a % of GDP

19961996

19971998

19991999

20002001

20022002

20032004

20052005

20062007

20082008

20092010

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

Tota

l Pub

lic D

ebt a

s a

% o

f GD

P

Jan-2000 Jan-2007 Dec-2009 Jun-2010

3.2

2.5

4.3 4.4

7.3

5.0

8.2

5.1

Marketable Non-Marketable

$5.7 Trillion

$12.3 Trillion

$8.7 Trillion

Source: Bloomberg, U.S. Treasury

$13.2 Trillion

50 PREShgf386 1/19/11

Government Spending Providing “Bridge Financing”

Source: Bloomberg

• Do the Feds have the willingness and the ability to sustain the stimulus until private sector balance sheets recoverand growth resumes?

Transfer Payments as a Share of Personal Income

8%

10%

12%

14%

16%

18%

20%

4%

6%

8%

10%

12%

14%

16%

18%

20%

51 PREShgf386 1/19/11

Interest-Bearing Debt

Rate*

T-bills 0.24%

Treasury Notes 2.74%

Treasury Bonds 6.23%1

TIPS 2.24%

Other 4.63%

Non-Marketable 4.37%

Total 3.21%

Interest service over $400 Billion per annum

Cost: Federal Debt Interest Payments

*As of May 31, 2010.1Approximate rate on non-marketable Treasury debt.

Source: U.S. Treasury

52 PREShgf386 1/19/11

Central Conundrum

• Public debt/GDP has risen from 55% to 90% over the ‘00s

– Trend is not sustainable unless private sector begins to grow substantially more rapidly

– Private sector must replenish the demand that will be “lost” when deficit spending moderates

• Once debt/GDP equals 100%...

– GDP must grow as fast as debt service rate or debt/GDP worsens (forever)

– Interest-bearing debt rate of 3.2% suggests that nominal GDP growth rate must sustain itself over this figure

$14.6 Trillion

NationalEconomy

(GDP)

$13.2 Trillion

Public andNon-Marketable

Federal Debt

53 PREShgf386 1/19/11

1.Depression: Cancel debt via forgiveness/bankruptcy

– Creates vicious cycle of foreclosure and bankruptcy forcing asset sales and still more bankruptcies

– Democratic systems do not voluntarily choose this as the primary solution

2. Inflation: Reduce the debt burden over time via expansion of money and credit

– Allow the real adjustment to be “masked” by a nominal change in price level

– “Socializes” the costs of adjustment

3.Prosperity: Grow your way out: Fix private sector balance sheets

– Re-allocate labor/capital facilitating real GDP growth

– Not directly determined by policy makers in Washington

Fundamentally: How Do You Solve a Problem Like a Debt Burden?

Prognosis

54 PREShgf386 1/19/11

• Keynesian stimulus will be pulled back – hence, growth will be very muted

– Endogenously: By deficit hawks pre-emptively cutting the budget or raising taxes

– Exogenously: By global financial markets reducing its “preference” for U.S. Treasuries

Prematurely scaling back government spending would set the table for a “double-dip”

• Would the Fed then stand idly by – or would the Fed activate “QE-2” and inflate the economy?

But a “double-dip” might be (mis)-managed, leading to long-term inflation

• Meanwhile, government intervention has impeded economic adjustments – including slowing the re-pricing of thestock of residential real estate, thereby delaying recovery

55 PREShgf386 1/19/11

Investment Approach in Uncertain Times

• Recovery faces deleveraging headwinds

• Housing stabilizing

• Corporate balance sheets improving

• Government stimulus will eventually fade

• Heightened risk for deflation (near-term) and inflation (long-term)

• Treasury rates near historical lows (0.5-3%)

• Agency MBS at 3-4%

• Senior non-agency RMBS 5-11%

• Senior commercial MBS 4-5%

• IG Corporates 3-5%

• HY Corporates 8-9%

• Equities: Function (GDP, earnings, production, rates)

Economic Backdrop Investment Opportunities

• Underweight Treasuries, defensive duration

• Agency MBS has attractive carry, good substitute for Treasuries

• Non-agency MBS is still the best risk-adjusted asset with highsingle digit loss adjusted yields

• Defensive, highly regulated industries of IG Corp market offer value

• High Yield attractive vs. Treasuries and Equities

Conclusions

Corporate Market Outlook

57 PREShgf386 1/19/11

Barclays Credit Spreads – Index OASAs of December 31, 2010

Source: Barclays Capital

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

100

200

300

400

500

600

700

800

900

OA

S (b

ps)

Credit Index Non-Corporates Industrials Utilities Financials

Current Portfolio Positioning

58 PREShgf386 1/19/11

Objective• Position portfolio for challenging economic environment, focusing on companies that are:

– Government–sponsored – Non-cyclical – Backed by good management and flexible balance sheets

• Achieve corporate basis exposure above market/index

Strategy• Corporate basis greater than index• Duration short index• Overweight/Emphasize

– Senior debt of large money center banks– Regulated pipeline companies– Secured project debt– Well-capitalized telecommunications companies– Well-managed, asset-rich companies – Insurance companies (Senior)– REITs (Healthcare; frontend)

• Underweight – Industrials– Retailers– Technology– Media

• Opportunistic allocation to Super-Senior CMBS

Opinions expressed are current only as of the time made; are subject to change without notice.

Opportunities in the Corporate Bond Market

59 PREShgf386 1/19/11

Financials:

Financials bonds offer compelling valuation on both absolute and relative basis, trading at nearly 2x the spread of single A-ratedindustrials and at nearly 2x historical pre-crisis means.

• Money-center banks – relatively stable funding profile (deposit-heavy) and diversification by business line and geography. Long-termramifications of FinReg are credit friendly while balance sheets continue to rehabilitate. Expect financials spread to mean revert over time.

– Large money center bank senior debt @ ~+220-230bps

– Floating rate TRUPs/hybrids – due to FinReg (Collins amendment), regulatory capital credit will phase between 3-5 years frompassage. Likely to cause incentive to call/refinance structures while quasi inflation-hedge. Currently trade in low 70s and yield 7-8%

• Insurance – favor operating company level securities. Well capitalized and generally have lower problematic loan balances than banks.

– Secured paper at ~+200–300bps

– Opco surplus notes @ ~+300–400bps

– Callable hybrid securities @ ~8-9% to likely call

• Real Estate Investment Trusts (REITs) – asset-heavy sector where bonds offer strong covenant protection that limit debt incurrenceability, both on secured and unsecured basis. Favor healthcare REITs and shorter maturities.

Opinions expressed are current only as of the time made; are subject to change without notice.

Opportunities in the Corporate Bond Market (cont’d)

60 PREShgf386 1/19/11

Regulated Pipeline / Secured debt:

Enhanced Equipment Trust Certificates (EETCs) – secured, bankruptcy-remote debt instruments backed by a diversified pool of aircraft.Favor senior tranches (top of capital structure) with strong asset coverage, with modern collateral and LTVs in the 65% – 85% range

• Example A tranche EETC: 16 average life: rated Baa2/BBB

– At ~$103.5, trades at nearly 7.5% or ~+530bps, nearly 3x the credit index

– Aircraft: 12 737-800’s (’00 vintage), 3 767-400ers (’00 vintage). Current market value LTV of ~85%

Utility project debt – bonds benefit from power generation collateral and long-term contracts with highly-rated regulated utilities. Strongasset coverage with contracted cash flows

• Example Alternative Power Project – 7% ‘23 average life. Rated BBB-/BBB-

– At ~$101.5, trades at ~6.8% yld or ~+370bps

– Collateral of 190 wind generation turbines that generate power under long-term contract

– Benefit from ambitious state renewable generation requirements

Regulated natural gas pipeline debt – transports natural gas over long-haul pipelines under long-term contracts with highly-ratedregulated utilities. Strong asset coverage with contracted cash flows

• Example Gas Pipeline Company – 5.45% ’20. Rated Baa2/BBB. ~+220bps

– At ~+220bps, attractive relative value vs. similarly rated electric utilities in mid +100’s

– FERC regulated gas pipeline that provides 70% of Florida’s natural gas supply, Florida’s gas-fired power generation is projectedto grow from 39% in ’08 to 54% in ’17, implying favorable demand for natural gas

– Average contract term is 11 years with main counterparties

Opinions expressed are current only as of the time made; are subject to change without notice.

Opportunities in the Corporate Bond Market (cont’d)

61 PREShgf386 1/19/11

BABs / Underweight Asset-Light Sectors:

Build America Bonds (BABs) – taxable municipal bonds that benefit from federal government subsidy of 35% of the ’09 Congressionalstimulus bill (ARRA). Municipals have ability to adjust both cost structure and revenue structure. Focus on both revenue bonds backed by specific cash flows from certain tax, utility, or fee revenue cash flows or General Obligation bonds backed by full, faith and credit of governments

• Example Revenue Bond – 6.263% senior bonds. Rated Aa3/AA. ~+220bps

– Revenue bonds supported by toll cash flows of seven bridges

– Critical to city’s commerce as commuting alternatives are limited

– Solid debt service coverage in excess of 1.5x

Technology/Retail – due to asset-based lending philosophy, tend to be cautious on asset-light sectors and industries where rapidtechnological evolution could cause diminution of intellectual property. Underweight both sectors

Opinions expressed are current only as of the time made; are subject to change without notice.

Structured Product Outlook

63 PREShgf386 1/19/11

Treasury Rate & Agency MBS Yield Moves In 4Q 2010

September 30, 2010 December 31, 2010 Difference

2-Year UST 0.42 0.59 +0.17

5-Year UST 1.26 2.00 +0.74

10-Year UST 2.51 3.29 +0.78

2/10 UST curve 2.09 2.70 +0.61

30yr Current Coupon FNMA Yield 3.38 4.13 +0.75

Conclusion: Rates backed up significantly in 4th quarter and the curve steepened.MBS Agency yields rose 75 bps and average lives extended.

64 PREShgf386 1/19/11

September 30, 2010 December 31, 2010 Difference

Agency MBS In TGLMX

Duration 4.63 5.57 +0.94

Barclays MBS Index

Duration 2.93 4.16 +1.23

Representative Position In TGLMX vs. Cohort

Effective Durations

30-Year Freddie Mac 5% LLB 5.04 5.82 +0.78

30-Year Freddie Mac 5% Cohort 2.88 4.25 +1.37

• While price payups for Loan Balance pools compressed, their more stable durations due to better convexity as wellas higher current yields offset the loss in payups during the rate backup in the 4th quarter

Conclusion: The duration in the Agency MBS in TGLMX extended lessthan the duration in the Barclays MBS Index by 0.29 yearsdue to better convexity characteristics.

Agency MBS Duration Changes In 4Q 2010

65 PREShgf386 1/19/11

Agency MBS Fundamental Valuations

• Nominal Spreads to Treasuries near long term averages

• Nominal Spreads above averages when removing the 2008 financial crisis period

100

150

200

250

300

350

FNMACu

rren

tCo

upon

Nom

inalSp

read

Agency MBS Spread to 5/10 yr UST

2008 financial crisis

0

50

100

150

200

250

300

350

FNMACu

rren

tCo

upon

Nom

inalSp

read

Agency MBS Spread to 5/10 yr UST

Source: Bloomberg

2008 financial crisis

Min 103Max 293Last 146Average (10 yr) 156Average (5 yr) 150

66 PREShgf386 1/19/11

Agency MBS Fundamental Valuations (cont’d)

• LIBOR option-adjusted spreads (LOAS) slightly above long term averages

20

0

20

40

60

80

100

FNCL

Curren

tCo

upon

LOAS(bps)

Agency MBS LOAS

Min 41Max 82Last 15Average (10 yr) 4Average (5 yr) 5

60

40

20

0

20

40

60

80

100

FNCL

Curren

tCo

upon

LOAS(bps)

Agency MBS LOAS

Source: Yieldbook

Min 41Max 82Last 15Average (10 yr) 4Average (5 yr) 5

67 PREShgf386 1/19/11

Agency MBS Fundamental Valuations

• Expectations forvoluntary prepaymentsremain muted for 2011despite the historicallylow rate environment,which will bode wellfor collecting carry inAgency MBS

• After accounting forcredit, mark-to-marketLTVs, and loan balances,only about 18% of theoutstanding Agencymortgage market iscurrently “refinanceable”

100

150

200

250

300

350

400

utstan

ding

Balance($bn

)

Refinancability of 30yr Fixed Conventional Universe

Willing and Able

Unwilling or Unable

MarginallyRefinanceable

= ~64%

FullyRefinanceable

= ~42%

4.5s 5.0s 5.5s 6.0s 6.5s4.0s

<18% of universe is bothwilling AND able to

0

50

100

150

200

250

300

350

400

Outstan

ding

Balance($bn

)

Gross WAC Bucket

Refinancability of 30yr Fixed Conventional Universe

Willing and Able

Unwilling or Unable

MarginallyRefinanceable

= ~64%

FullyRefinanceable

= ~42%

4.5s 5.0s 5.5s 6.0s 6.5s4.0s

Source: FTN Financial

Willing: Sufficient mortgage rate incentive on large enough loan size (>$150,000) to overcome upfront costs of refinance50 bps is "marginally refinancable"100 bps is "fully refinancable"

Able: Unconstrained by credit (LTV < 80%, FICO > 720)

<18% of universe is bothwilling AND able to

68 PREShgf386 1/19/11

Risks to Fundamental Valuations

• Government policy changes are unpredictable and often a catalyst to higher mortgage spread volatility

• Delivered volatility has recently trended above implied volatility

100

150

200

250

300

Implied Swaption Volatility versus Delivered Volatility

3 Yr by 10 Yr Implied Volatility (bp)

Vol of 3 Yr by 10 Yr Swap Rate, 20 day average (bp)

0

50

100

150

200

250

300

Implied Swaption Volatility versus Delivered Volatility

3 Yr by 10 Yr Implied Volatility (bp)

Vol of 3 Yr by 10 Yr Swap Rate, 20 day average (bp)

Source: Bloomberg

If delivered volatilityremains elevated, impliedvolatility is likely to rise,

reducing LOASvaluations for AgencyMBS and pressuring

spreads wider

69 PREShgf386 1/19/11

Agency MBS Technical Valuations

• Net supply of Agency MBS will be lowdue to:

1. continued low levels of new homesales (see graph)

2. muted or negative home priceappreciation (HPA)

3. higher mortgage rates

4. tighter underwriting guidelines

5. higher loan fees charged by GSEs (see table below)0.6

0.8

1

1.2

1.4

1.6

4.5

5

5.5

6

6.5

7

Millions(New)

Millions(Existing)

Monthly Home Sales

Existing Single Family Home Sales (ls)

New Single Family Home Sales (rs)Buyers rushed to takeadvantage of expiringfederal tax credits

0

0.2

0.4

3

3.5

4

Sources: NAR, U.S. Census Bureau

Fannie Mae Loan Level Pricing Adjustments

Effective April 1, 2011

LLPAs by LTV Range

Credit Score <= 60% 60 - 70% 70 - 75% 75 - 80% 80 - 85% 85 - 90% 90 - 95% 95 - 97%

=> 740 -0.25% 0.00% 0.00% 0.25% 0.25% 0.25% 0.25% 0.25%

720 - 739 -0.25% 0.00% 0.25% 0.50% 0.50% 0.50% 0.50% 0.50%

700 - 719 -0.25% 0.50% 0.75% 1.00% 1.00% 1.00% 1.00% 1.00%

680 - 699 0.00% 0.50% 1.25% 1.75% 1.50% 1.25% 1.25% 1.00%

660 - 679 0.00% 1.00% 2.00% 2.50% 2.75% 2.25% 2.25% 1.75%

640 - 659 0.50% 1.25% 2.50% 3.00% 3.25% 2.75% 2.75% 2.25%

620 - 639 0.50% 1.50% 3.00% 3.00% 3.25% 3.25% 3.25% 3.00%

< 620 0.50% 1.50% 3.00% 3.00% 3.25% 3.25% 3.25% 3.25%

Source: Fannie Mae

70 PREShgf386 1/19/11

Agency MBS Technical Valuations

• Demand from commercial banksshould remain robust

– Steep yield curve provideshigh net interest margin(NIM) and is associated withgrowth in bank securitiesportfolios

– C & I loan issuance remainsanemic as banks remaincautious on economicrecovery prospects and loandemand is weak

– Basel III rules favor low risk-weighted, highly liquid assetallocations

100

150

200

250

300

0

100

200

300

400

10Yr

UST

2Yr

UST

(bmmercial

Bank

Holding

s($bn

)

Change in Commercial Bank Holdings ($bn) versus Yield Curve Slope

100

50

0

50

100

150

200

250

300

400

300

200

100

0

100

200

300

400

10Yr

UST

2Yr

UST

(bps)

Chan

gein

Commercial

Bank

Holding

s($bn

)

Change in Commercial Bank Holdings ($bn) versus Yield Curve Slope

Commercial Bank Govt Securities Holdings, $ change YoY (LHS)Commercial Bank C&I Loans, $ change YoY (LHS)2 10 Spread (RHS)

Source: Federal Reserve, Bloomberg

71 PREShgf386 1/19/11

Agency MBS Technical Valuations

• Demand from money managers should be steady as Agency MBS valuations appear attractiveto other high quality assets such as investment grade corporates

MBS Yield Advantage vs High-Grade CorporatesAs of 1/7/2011

MBS IndexSector Duration Yield Yield Pickup

U.S. MBS Index 4.31 3.69 –

Intermediate AAA Corporates 3.54 1.72 197 bps

Intermediate AA Corporates 4.00 2.57 112 bps

Intermediate A Corporates 4.41 3.27 42 bps

72 PREShgf386 1/19/11

Risks to Technical Factors for Agency MBS

• Paydowns from the Federal Reserve’s (Fed’s) AgencyMBS portfolio will not be reinvested in Agency MBS

A lower rate or flatter curve environment wouldincrease supply to the market from elevated Fedportfolio paydowns

• Overseas accounts may avoid U.S. dollar investmentsin favor of fixed income assets or equitiesdenominated in alternative currencies

• If government proposals and debates on GSE reformshy away from continued strong support, furtherparticipation in Agency MBS could be limited byinvestor concerns

73 PREShgf386 1/19/11

Non-Agency MBS Review and Outlook

Current State of the Market

• Important to distinguish between loans and securities – total residential mortgage market size is roughly $10.8 trillion

• Loans – roughly $3.7 trillion

– Individual mortgage loans not held in any TCW investment portfolio

– Loans sit on bank balance sheets, and largely have not yet been written down

– Banks want to delay writing them down to allow themselves time to earn their way out of trouble

– Deleveraging has only just begun

• Securities – roughly $1.7 trillion

– Securitized packages of loans that are publicly traded

– Marked-to-market already, deleveraging complete

– Re-leveraging has started

• Aided by pricing of super-senior bonds that are “cheap” relative to fundamental value

• Continued maturation of the re-REMIC* market has broadened the investor base

• Expansion and easing of terms for repo financing

– Prices on super-senior securities should rise further as cash flow projections improve

* Real Estate Mortgage Investment Conduits

74 PREShgf386 1/19/11

Non-Agency MBS Outstanding and Monthly Bid List Volume

Jan-2008 Apr-2008 Aug-2008 Dec-2008 Apr-2009 Aug-2009 Dec-2009 Apr-2010 Aug-2010 Dec-20100

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

0

5,000

10,000

15,000

20,000

25,000

30,000

Col

late

ral B

alan

ce (

mm

)

Mon

thly

Bid

Lis

t Vol

ume

(mm

)

Collateral Balance Monthly Bid List Volume

Source: TCW; bid list volume data provided by Deutsche Bank

75 PREShgf386 1/19/11

Non-Agency MBS Review and OutlookLoan Fundamentals

• Voluntary Prepayments

– Subprime and Alt-A

• Running in low single digits and market isextrapolating this for the life of the loans

• Given large negative equity, loans are unlikely to be refinanceable in the near future

• The future is difficult to predict, and the market is assigning a zero probability, so investors get a “free” option

– Prime

• Recent rise into the mid-20s will not be sustained due to rise in mortage rates

• Risk of adverse selection, meaning that those with the most equity refinance first, leaving a weaker set of borrowers in the pool

10.2%

3.1%

25.3%

1/1/2

001

8/1/2

001

3/1/2

002

10/1/2

002

5/1/2

003

12/1/2

003

7/1/2

004

2/1/2

005

9/1/2

005

4/1/2

006

11/1/2

006

6/1/2

007

1/1/2

008

8/1/2

008

3/1/2

009

10/1/2

009

5/1/2

010

12/1/2

0100%

10%

20%

30%

40%

50%

60%

70%

80%

Con

ditio

nal P

repa

ymen

t Rat

e (C

PR)

Prime Alt-A SubPrime

Historical Voluntary Prepayment Trends

Source: TCW, Intex

76 PREShgf386 1/19/11

Non-Agency MBS Review and Outlook (cont’d)

Loan Fundamentals

• Cumulative Defaults – Primarily a function of both the ability to pay and equity in the home

– Subprime and Alt-A

• Market assumes most (70% to 90%) of the remaining loans will default

• Delinquencies are between 25% to 50%

• Current pricing generates a relatively high yield even in near worst case scenarios

– Prime

• Market assumes cumulative defaults of 10% to 40% of the remaining loans

• Current delinquencies approaching 10%

• Risk that prime loans have lagged subprimeand Alt-A and more delinquencies/defaults may be coming

6/1/1

993

4/1/1

994

2/1/1

995

12/1/1

995

10/1/1

996

8/1/1

997

6/1/1

998

4/1/1

999

2/1/2

000

12/1/2

000

10/1/2

001

8/1/2

002

6/1/2

003

4/1/2

004

2/1/2

005

12/1/2

005

10/1/2

006

8/1/2

007

6/1/2

008

4/1/2

009

2/1/2

010

12/1/2

0100%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

60+

Del

inqu

ency

Rat

e

Subprime Alt-A Prime

24.4%

8.3%

44.9%

Source: TCW, LoanPerformance

77 PREShgf386 1/19/11

Non-Agency MBS Review and Outlook (cont’d)

Loan Fundamentals

• Loss Severity– Largest factor in determining loss severity is the

depreciation of home value• House prices have been stable recently• Risks to lower home prices remain due to large

shadow inventory of homes • Foreclosure moratoria may simply delay foreclosure

and increase severities• Bank/servicers can be conflicted on a 1st lien mortgage

regarding modification and/or foreclosure decisions ifthey own the second lien on the property as well

– Subprime and Alt-A• Prices reflect more margin for error regarding

ultimate severity outcomes• Lower priced homes have fallen to the level

where rental income can cover mortgage costs making it profitable for property owners to buy at current prices and rent homes

– Prime• Generally narrower band of outcomes for severities

is priced into prime markets• Still room for downside in prices for higher end homes• Closely tied to employment and wage growth,

both of which are weak• Tight credit for jumbo loans will hold down demand

and limit refinancing options

57.7%

44.4%

72.2%

12/1/2

000

6/1/2

001

12/1/2

001

6/1/2

002

12/1/2

002

6/1/2

003

12/1/2

003

6/1/2

004

12/1/2

004

6/1/2

005

12/1/2

005

6/1/2

006

12/1/2

006

6/1/2

007

12/1/2

007

6/1/2

008

12/1/2

008

6/1/2

009

12/1/2

009

6/1/2

010

12/1/2

0100%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

Loss

Sev

erity

Rat

e*

Prime Alt-A SubPrime

Source: TCW, LoanPerformance

78 PREShgf386 1/19/11

• Distressed/Depression-like pricing conditions of late ‘08/early ‘09 have remediated to “stressed” pricing

– Market continues to discount very severe defaults, loss severities, and prepayments:

Actual (12/31/2010)* Market Expectations**

60+ Delinquency Rate Loss Severities Cumulative Default Rate Loss Severities Expected Loss Adjusted Yield

Prime 10.8% 44.9% 10% - 25% 50% 4% - 6%

Alt-A 27.4% 58.2% 40% - 70% 60% - 65% 6% - 8%

Subprime 48.0% 72.2% 80% - 95% 80% - 90% 8% - 10%

⇒ Senior securities present excellent loss adjusted yield

Non-Agency MBS Review and Outlook (cont’d)

Non-Agency Mortgage Comparison

* 2005-2007 vintages. Source: Calculations based on security prices from Bloomberg and major banks.

** Source: TCW Loan Level database and Intex. 2005-2007 vintages.

79 PREShgf386 1/19/11

2010 Non-Agency Sector Return Attribution

12%

Price Appreciation

6.0%

Current Yield

2.4%

8% * .3

Annualized Voluntary Prepayments& Amortization

x Market’s AveragePrice Discount to Par

0.8%

7% * .4 * .3

Annualized Defaults x Recovery

x Market’s AveragePrice Discount to Par

21.2%2010

Non-Agency SectorTotal Return

+ + + =

Coupon and principal payments alone provide healthy returnsgiven current market prices

Is there additional price appreciation to be captured?

Source: Return numbers are estimates provided by TCW portfolio management.

80 PREShgf386 1/19/11

4Q 2010 Non-Agency MBS Empirical Duration

Interest Rates 74 bps

Non-Agency MBS Prices +3.5%

-4.7 yr Empirical Duration for 4Q 2010

81 PREShgf386 1/19/11

The Layering of Old and New Metrics on Non-Agency MBS

Old Metrics 3 MonthPrice Base Case Timeline Extension

55.00 9.83 9.5356.00 9.51 9.2157.00 9.20 8.9158.00 8.90 8.6159.00 8.61 8.3360.00 8.33 8.0561.00 8.06 7.7862.00 7.79 7.5263.00 7.53 7.2664.00 7.28 7.0165.00 7.03 6.7766.00 6.79 6.5467.00 6.56 6.3168.00 6.33 6.0869.00 6.11 5.8770.00 5.90 5.6571.00 5.69 5.4572.00 5.48 5.2473.00 5.28 5.0574.00 5.09 4.8575.00 4.90 4.66Total Defaults 67% 67%Voluntary Prepayment Rate 1% 1% Severity Rate 60% 62.5%

+

�

82 PREShgf386 1/19/11

The Layering of Old and New Metrics on Non-Agency MBS (cont’d)

Old Metrics 3 Month Increasing Interest Increasing StopPrice Base Case Timeline Extension Rate Modifications Advancing %'s

55.00 9.83 9.53 9.10 8.6156.00 9.51 9.21 8.79 8.3157.00 9.20 8.91 8.49 8.0158.00 8.90 8.61 8.20 7.7359.00 8.61 8.33 7.92 7.4660.00 8.33 8.05 7.64 7.1961.00 8.06 7.78 7.38 6.9362.00 7.79 7.52 7.12 6.6763.00 7.53 7.26 6.87 6.4364.00 7.28 7.01 6.63 6.1965.00 7.03 6.77 6.39 5.9666.00 6.79 6.54 6.16 5.7367.00 6.56 6.31 5.93 5.5168.00 6.33 6.08 5.71 5.3069.00 6.11 5.87 5.50 5.0970.00 5.90 5.65 5.29 4.8871.00 5.69 5.45 5.09 4.6872.00 5.48 5.24 4.89 4.4973.00 5.28 5.05 4.69 4.2974.00 5.09 4.85 4.50 4.1175.00 4.90 4.66 4.32 3.93Total Defaults 67% 67% 67% 68%Voluntary Prepayment Rate 1% 1% 1% 1% Severity Rate 60% 62.5% 62.5% 62.5%

+ + +

� � �

83 PREShgf386 1/19/11

The Layering of Old and New Metrics on Non-Agency MBS (cont’d)

Old Metrics 3 Month Increasing Interest Increasing Stop Improved DefaultsPrice Base Case Timeline Extension Rate Modifications Advancing %'s and Prepayments

55.00 9.83 9.53 9.10 8.61 10.4156.00 9.51 9.21 8.79 8.31 10.0657.00 9.20 8.91 8.49 8.01 9.7258.00 8.90 8.61 8.20 7.73 9.3959.00 8.61 8.33 7.92 7.46 9.0860.00 8.33 8.05 7.64 7.19 8.7761.00 8.06 7.78 7.38 6.93 8.4762.00 7.79 7.52 7.12 6.67 8.1863.00 7.53 7.26 6.87 6.43 7.8964.00 7.28 7.01 6.63 6.19 7.6265.00 7.03 6.77 6.39 5.96 7.3566.00 6.79 6.54 6.16 5.73 7.0967.00 6.56 6.31 5.93 5.51 6.8468.00 6.33 6.08 5.71 5.30 6.5969.00 6.11 5.87 5.50 5.09 6.3570.00 5.90 5.65 5.29 4.88 6.1271.00 5.69 5.45 5.09 4.68 5.8972.00 5.48 5.24 4.89 4.49 5.6773.00 5.28 5.05 4.69 4.29 5.4574.00 5.09 4.85 4.50 4.11 5.2475.00 4.90 4.66 4.32 3.93 5.04Total Defaults 67% 67% 67% 68% 55%Voluntary Prepayment Rate 1% 1% 1% 1% 3%Severity Rate 60% 62.5% 62.5% 62.5% 62.5%

+ + + +

� � � �

84 PREShgf386 1/19/11

CMBS Review and OutlookDespite Strong Rally, Opportunity Remains In Super-Senior Tranches

Current State of Market

• Fundamental backdrop is likely to be challenged throughthe continued deleveraging process in the economy andfinancial markets

• Lease rates and occupancy are down giving rise to potentialdeterioration in debt service coverage

• Excess capacity and property owners struggling in asluggish economy

• Despite the considerable rally in CMBS over the past 18 months,we remain constructive on the risk-adjusted return opportunitiesavailable in super-senior tranches of selected CMBS issues

• Important to distinguish the securitized commercial real estatemarket (CMBS) and that which is proprietarily held on bankbalance sheets as loans

– 80% of the roughly $3.5 trillion in commercial mortgagesecurities is held by banks as loans

– Commercial real estate deleveraging has to occur largely inthe loan markets

– Loans, on bank balance sheets as “held to maturity” lineitems, are not marked to market

– Banks earn significant yields over the cost of the funds,and use this “net interest margin” to write off loan lossesover time

– CMBS have enjoyed no such privilege and are marked tomarket daily

• Near the peak of the crisis price declines of CMBS were excessiverelative to fundamentals

• The CRE market has seen prices decline roughly 40% from thepeak of the cycle in October of 2007

• On heels of successful government programs (PPIP & TALF)private leverage has returned

Opinions expressed are current only as of the time made; are subject to change without notice.

85 PREShgf386 1/19/11

CMBS Review and Outlook (cont’d)

Despite Strong Rally, Opportunity Remains In Super-Senior Tranches

The Opportunity

• Value to be gained in CMBS due to the structural protections of the super-senior tranches

• Best risk-adjusted value in senior last cash flow sequential payers bearing 30% credit enhancement at issuance

• The original credit enhancement of 30% would protect the nominal yield up to a 40% default rate and 75% severity(or, alternatively 50% default at 60% severity)

• Focused on large, well-diversified pools that are not concentrated in a few large loans

• Emphasizes those CMBS that are expected to hold up even in a process of continued deleveraging

• Avoiding exposure to deals with significant forecasted declines in debt service coverage ratios

• Capital has returned to new issue CRE lending albeit at conservative underwriting standards

Opinions expressed are current only as of the time made; are subject to change without notice.

86 PREShgf386 1/19/11

Asset-Backed Securities (ABS) Review and Outlook

On-the-run Sectors

Credit Cards

• Stricter underwriting standards enacted by issuers over the last two years have resulted in steadily improving master trust metrics

• Several trusts continue to employ the discount option, which will continue to lend stability to excess spread measures

• Chargeoffs and delinquencies continue to decline, although softness in the overall employment situation could challenge this trend

Autos

• Overall better performance in the auto industry has resulted in better execution levels for new issuance, across all pieces of the capitalstructure

• The more conservative guidelines prescribed by rating agencies have produced very solid, well-protected structures and historicallyactive purchasers have returned to provide support to the sector

FFELP Student Loans

• Consolidation has been the story this year, and the combination of a short list of approved servicers as well as smaller issuers’ lack ofongoing business due to the elimination of FFELP should lead to continued consolidation

• Refinancing, the resumption of ARS clearing, and securitization of loans still on balance sheet will continue to provide activity in the sector

Specialized Sectors

• The low interest rate environment, net decrease in outstanding supply and large amounts of cash to deployed have spurred issuers totap the markets

• Transportation stalwarts such as rails and containers have been able to access the markets, aircraft-related securitizations are in thequeue, and even highly-specific revenue streams should be able to issue in the near term

Opinions expressed are current only as of the time made; are subject to change without notice.

87 PREShgf386 1/19/11

Asset-Backed Securities (ABS) Review and Outlook (cont’d)

Spread Yield Outlook Comments

On-the-run Sectors

Credit Card AAA 35 dm 1.4% Marginally tighter Should see the mostspread tightening;

Credit Card BBB 140 dm 2.5% Much tighter represents even spreadto some private label AAA

Auto AAA 30 / swaps 1.5% Marginally tighter

Auto A 80 / swaps 2.6% Much tighter Limited size supportsfurther tightening

FFELP Student Loan 75 dm 3.0% Tighter

Specialized Sectors

Shipping Container 225 dm 3.25% Tighter Scarcity of assets and limited new issuance willcontinue to drive spreads

Aircraft 375 / maturity 5.3% Marginally tighter Will be affected by overall10% to refinancing prospects of refinancing

and participants’ access tounsecured and secured capital

Opinions expressed are current only as of the time made; are subject to change without notice.