KOTOK Nov 1309

GIC 2009 Conference Series: Part IV – Singapore

Food & Water – Basic Challenges to International Stability November 2009

David R. Kotok Chairman & Chief Investment Officer

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Measuring Bank & Government Risk Now (10/29/09)

10

US Fannie Mae Benchmark Yield Curve USD US Bank (A) Bloomberg Fair Value Yield Curve US Dollar LIBOR Yield Curve US FDIC Temporary Liquidity Guarantee Yield Curve

Interest Rate

8

US Treasury Actives Curve

6

Bank Risk 4

2

Government Risk 0 o/n

1m

3m

6m

9m

1y

2y

3y

4y

5y

6y

7y

8y

9y

10y

15y

20y

25y

30y

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Source: Bloomberg and Cumberland Advisors. ŠCopyright

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Chart 2

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Measuring Bank & Government Risk December 29, 2008 10

US Fannie Mae Benchmark Yield Curve USD US Bank (A) Bloomberg Fair Value Yield Curve US Dollar LIBOR Yield Curve

Interest Rate

8

US Treasury Actives Curve

6

Bank Risk

4

2

Government Risk 0 o/n 1m 3m 6m 9m 1y

2y

3y

4y

5y

6y

7y

8y

9y 10y 15y 20y 25y 30y

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Source: Bloomberg and Cumberland Advisors. ŠCopyright

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Chart 3

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Measuring Bank & Government Risk January 1, 2007 10 US Fannie Mae Benchmark Yield Curve USD US Bank (A) Bloomberg Fair Value Yield Curve

8

US Dollar LIBOR Yield Curve

Interest Rate

US Treasury Actives Curve

6

Bank Risk 4

Government Risk 2

0 o/n 1m 3m 6m 9m 1y

2y

3y

4y

5y

6y

7y

8y

9y 10y 15y 20y 25y 30y

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Data as of 8/13/09. Source: Bloomberg and Cumberland Advisors. ŠCopyright

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Chart 4

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Factors Adding to Reserves Plus Off-Balance TSLF from 8/8/07 to 10/28/09

Other Credit Extensio ns M o rtgage B acked Securities Other Federal Reserve assets (14)

2,450 Central bank liquidity swaps (13) TA LF Net P o rtfo lio Ho ldings o f M aiden Lane II LLC

1,950

Net P o rtfo lio Ho ldings o f M aiden Lane III LLC

Lehman failure

PDCF-3/16/08 TSLF-3/11/08

TAF-12/12/07

950

Series Break

1,450

Series Break "TDWP - 8/17/07"

$ Billions

Net P o rtfo lio Ho ldings o f Co mmercial paper Funding Facility LLC Securities Lent to Dealers - Overnight Facility Securities Lent to Dealers - Term Facility-TSLF A sset-B acked Co mmercial P aper M o ney M arket M utual Fund Liquidity Facility Net P o rtfo lio Ho ldings o f M aiden Lane LLC Credit Extended to A IG P rimary Dealer Credit Facility-P CDF Term A uctio n Credit-TA F Regular Disco unt Windo w Credit(P rimary, Seco ndary and Seaso nal Credit)

450 21-Oct-09 7-Oct-09 23-Sep-09 9-Sep-09 26-Aug-09 12-Aug-09 29-Jul-09 15-Jul-09 1-Jul-09 17-Jun-09 3-Jun-09 20-May-09 6-May-09 22-Apr-09 8-Apr-09 25-Mar-09 11-Mar-09 25-Feb-09 11-Feb-09 28-Jan-09 14-Jan-09 31-Dec-08 17-Dec-08 3-Dec-08 19-Nov-08 5-Nov-08 22-Oct-08 8-Oct-08 24-Sep-08 10-Sep-08 27-Aug-08 2-Apr-08 19-Mar-08 5-Mar-08 20-Feb-08 6-Feb-08 23-Jan-08 9-Jan-08 26-Dec-07 12-Dec-07 28-Nov-07 14-Nov-07 22-Aug-07 8-Aug-07

Note: Data are weekly averages for all but the Foreign Central Bank TAF which are as of the last day of the week.

Source: Federal Reserve Board of Governors Statistical Release H.4.1. Š

Repurchase A greements M isc(Flo at,Go ld Sto ck, Special Drawing Rights & Treas. Currency Securities Less M o rtgage B acked Securities

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Chart 5

Bank of England Assets 01/03/07 to 10/21/09 300000 Weekly amounts outstanding of Central Bank other assets total (in sterling millions) not seasonally adjusted RPWB74A

250000 Central Bank bonds and other securities acquired via market transactions (in sterling millions) not seasonally adjusted

Sterling (millions)

200000 Weekly amounts outstanding of Central Bank sterling w ays and means advances to HM government (in sterling millions) not seasonally adjusted

150000

Central Bank sterling longer-term reverse repos w ith Bank of England counterparties (in sterling millions) not seasonally adjusted

100000

Central Bank sterling short-term market operations w ith Bank of England counterparties (in sterling millions) not seasonally adjusted

50000

0 Jan-07

Weekly amounts outstanding of Central Bank sterling standing facility assets (in sterling millions) not seasonally adjusted

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Source: Bank of England.

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Apr-09

Jul-09

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Chart 6

Oct-09

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Consolidated Balance Sheet of European System of Central Banks from 01/05/07 to 10/23/09 2,500,000

Securities of euro area residents denominated in euro Claims on euro area residents denominated in foregn currency

2,000,000 Lending to euro area credit institutions related to monetary policy operations denominated in euro

Euros (millions)

Other assets 1,500,000 General government debt denominated in euro Other claims on euro area credit institutions denominated in euro

1,000,000

Claims on non-euro area reseidents denominated in euro 500,000

Claims on non-euro area residentsdenominated in foreign Currency Gold and gold receivables

0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Source: Oesterreichische Nationalbank.

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Chart 7

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Share of World Stock Market Value Oct 2007 (Total $63.05 trillion)

Japan 7.3%

Aug 2009 (Total $41.66 trillion)

UK Euro next 6.7% 7.0% China 10.7%

Euro next 6.3%

Canada 3.6%

Japan 8.6%

Germany 3.4%

EM 14.6%

1998 (Total $25.683 trillion) Japan 9.5%

US 49.2%

UK 5.6%

China 1.3% Canada 2.1% Germany 4.2% Italy 2.2%

Italy 1.5% Spain 2.8% Switzerland 2.4% India 3%

ROW 3.4% Canada 3.2% Germany 2.9% Italy 1.4% Spain 2.7%

US 37.2%

EM 13.3%

Spain 1.6%

EM 15.9%

Euro next 5.8%

China 11.3%

Euronext 7.4%

Canada 3.4%

US 32.9%

Feb 2009 (Total $28.67 trillion)

UK 9.2%

Switzerland 2.7%

Sources:

India 3%

Japan 9.2%

EM ROW 5.0% 5.5%

Note:

ROW 4.1%

Switzerland 2.1%

China 11.2%

Germany 2.9%

Italy 1.8% Spain 2.9%

US 33.2%

UK 6.1%

India 2%

Switzerland 2.4%

ROW 3.0%

“EM” slices include Argentina, Brazil, Chile, Colombia, Egypt, Hungary, Indonesia, Iran, Israel, Korea, Malaysia, Mauritius, Mexico, Peru, Philippines, Poland, Singapore, Slovenia, South Africa, Sri Lanka, Taiwan, Thailand, and Turkey. “ROW” includes Australia, Austria, Cyprus, Greece, Ireland, Luxembourg, Malta, OMX exchanges, New Zealand, and Norway. In 1998 China is the Hong Kong exchange; in 2008 China includes the Hong Kong, Shanghai, and Shenzhen exchanges.

World Federation of Stock Exchanges and Cumberland Advisors. No market data in 1998 for India, Mauritius, Egypt, Hungary, Colombia. ©Copyright 2009 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.

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Chart 8

World Measured by Gross Domestic Product (GDP) 1998 (Total $29.953 trillion)

Italy 4.1%

Italy 3.8%

Spain 2.0%

U.K. 4.8%

U.S. 29.0%

Spain 2.7% ROW 33.1%

U.K. 4.4%

ROW 25.6%

Germany 7.3% Euronext 7.5% India 1.4% China 3.4%

2008 (Total $60.115 trillion)

Germany 6.1%

U.S. 23.6%

Euronext 7.4% Japan 12.9%

Canada 2.1%

India 2.0%

China 6.4%

Japan 8.2%

Canada 2.3%

Sources: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Euronext (Europe) includes Belgium, France, France, and Portugal. Data is current US dollars. ŠCopyright

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Chart 9

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Domestic and International Debt All Issuers DOMESTIC AND INTERNATIONAL BONDS AND NOTES BY CURRENCY IN BILLIONS OF US DOLLARS, AMOUNTS OUTSTANDING

Jun 2008 84,798 Dec 1998 32,207 AUD 0.6% CAD 1.9% CHF 1.0%

ROW 7.2%

USD 46.2%

AUD 1.21% CAD 1.67%

Mar. 2009 81,862

ROW 10.50%

USD 39.38%

CHF 0.71% JPY 11.92%

USD 41.0%

JPY 16.5% EUR 23.3%

GBP 3.85%

ROW 9.6%

EUR 30.77% AUD 1.0%

GBP 3.3%

CAD 1.6% CHF 0.7%

Source: Bank for International Settlements and Cumberland Advisors.

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Chart 10

EUR 29.1%

JPY 13.4% GBP 3.7%

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Stocks, Debt and World GDP 300%

$70,000,000

Stocks / GDP (percent, left axis) $60,000,000

Debt / GDP (percent, left axis) 250%

GDP Current (USD millions, right axis) $50,000,000

112.0%

200% 84.6% 112.8% 97.2%

83.9%

89.1%

90.8% 54.2%

69.2%

$30,000,000

85.7%

150%

58.1%

64.6%

(USD millions)

$40,000,000

104.1%

71.7%

$20,000,000

100% 129.6%

144.9% 140.8% 136.8% 138.6% 132.0% 140.5%

117.7% 107.8% 112.6% 111.7%

$10,000,000

92.8% 95.3% 95.6%

50%

$1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Bank for International Settlements, World Federation of Exchanges and Cumberland Advisors. Data through Dec 2008. ŠCopyright

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Chart 11

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Growth of Securitization Markets Yearly Securitized Issuance

2500 CMBS CDO

2000

Non-Agency Student Loan

Issuance ($ Billions)

Home Equity

1500

Credit Card Auto

1000

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YTD 2009

Source: AB Alert, CM Alert, SIFMA, S&P, MCM, IFR, LPC, Bloomberg and Wachovia Securities ŠCopyright

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Chart 12

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Why Bond Managers Exist Bond Market Regime Change: Moody’s AAA Monthly Returns 1919-2009 Nov. 2008 16.79

15 Apr. 1980 10.14

Percent

10

Apr. 2003 8.27

5

0

-5 Jan. 1980 -9.18

-10

Jun. 2003 -7.14 Sep. 2008 -7.94

1919 1927 1935 1943 1951 1959 1967 1975 1983 1991 1999 2007 Source: St. Louis Fed and Cumberland Advisors. Data through September 2009.

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Chart 13

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Diminishing Returns from Each $1 of Additional Debt 1Q55 - 2Q09 Dollar change y/y in nominal GDP divided by Dollar change y/y in Total U.S. Debt equals the Dollar increase in GDP per $1.00 increase in total U.S. debt

$1.00

$0.80

$0.60

$0.40

$0.20

* Each point plotted is a four-quarter moving average. Data through 2Q09.

$0.00 1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Barry B. Bannister, CFA, Managing Director, Stifel Nicolaus; data from the Federal Reserve Flow of Funds, Z.1 Release, Series D.3 Debt Outstanding by Sector (billions of U.S. Dollars, quarterly figures, seasonally adjusted), U.S. Bureau of Economic Analysis, and Cumberland Advisors. ŠCopyright

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Chart 14

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About Cumberland Advisors Cumberland Advisors supervises over one billion dollars in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 43 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC-registered investment adviser.

Munis, Taxables, ETFs Cumberland’s portfolio management efforts emphasize long-lasting relationships and continuous dialogue among clients, their consultants, tax advisors, accountants, estate planners, and their assigned portfolio management contact at Cumberland. Cumberland offers several different investment portfolio management styles. Our investment strategy is described in detail on our website.

Fixed Income All of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles are Tax-Free Municipal Bonds, Taxable Bonds, and Short-Term Investment Program Stocks Cumberland uses Exchange-Traded Funds to manage global equities. Exchange-Traded Funds (ETFs) are securities that mimic the price performance and dividend yield of an index, or a basket, of securities. Cumberland uses ETFs as building blocks in crafting a portfolio, investing in attractive equity sectors, industries, market capitalization strata, styles, and regions. Our equity portfolios are U.S. Exchange-Traded Funds (ETF) Equity, International Exchange-Traded Funds (ETF) Equity, Emerging Markets Exchange-Traded Funds, and Global Multi-Asset Class Exchange-Traded Funds.

Balanced Accounts Cumberland can blend the strategies presented above to create a balanced mix of stocks and bonds.

For further information about Cumberland Advisors, please visit our website at www.cumber.com.

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Chart 15

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Appendix Explanation of Factors Adding to Reserves Chart The Federal Reserve Board has posted on its website information on how its balance sheet was allocated across the different asset classes, as well as the composition of its liabilities. For many years prior to the most recent turmoil that has occurred in financial markets, the bulk of the Federal Reserve’s assets were in the form of its holdings of US Treasury securities. Nearly 90% on average of its assets were of this type. Other major asset categories included Treasury currency and the gold stock. Normal daily open-market operations which add to and subtract from the Federal Reserve’s balance sheet take place mainly through repurchase and reverse repurchase agreements. The composition of the Federal Reserve’s portfolio has, however, changed dramatically during the recent period of financial turmoil, as the Board of Governors has modified the terms under which access to the discount window is available to banks, and now to investment banks, and the FOMC has modified its securities lending program from the System Open Market Account (SOMA). Specifically, several new programs have been created and several have been modified since they were originally established (while not all have as yet shown up on the Federal Reserve’s balance sheet they will be added to the Factors Chart 1 as loans are made): Term Discount Window Program (TDWP) – announced August 17, 2007 Under the TDWP banks were permitted to borrow on the full range of eligible discount window collateral for a term of up to 90 days.

Term Auction Facility (TAF) – announced December 12, 2007 Under the TAF banks were permitted to bid for term federal funds with maturities up to 28 days, backed by the full range of eligible discount window collateral.

Foreign Central Bank Term Auction Facility – announced in December 2007 Swap lines were established with the European Central Bank and Swiss National Bank specifically to facilitate the establishment of a dollar term auction facility against foreign denominated collateral to provide dollar liquidity in foreign markets. The swap lines were expanded several times and the program expanded to include seven additional central banks (Bank of England, Bank of Japan, Norges Bank, Sveriges Riksbank, Reserve Bank of Australia, Danmarks Nationalbank and Bank of Canada) Term Securities Lending Facility (TSLF) – announced March 11, 2008 Under the TSLF primary dealers (both banks and investment banks) were permitted to borrow US Treasuries from the SOMA portfolio overnight for a term of up to 28 days, using Treasuries, agency securities, agency mortgage-backed securities, AAA/Aaa-rated private-label real estate MBS, collateralized MVS, agency-collateralized mortgage obligations, and other asset-backed securities (these latter securities were added to the list on May 2, 2008). The Treasury securities so borrowed could then be repo-ed overnight and used as a way of liquefying what might otherwise be illiquid assets in this period of market turmoil. The TSLF-related securities lent show up on the System’s balance sheet as off balance-sheet items.

Primary Dealer Credit Facility (PDCF) – announced March 16, 2008, and renewed on July 20, 2008 until January 30, 2009 Under the PDCF primary dealers that didn’t have access to the discount window were permitted to borrow from the window under this program using Treasuries, agencies, and investment-grade munis, corporates, MBS and ABS for which a market price is available as collateral. The collateral requirement was subsequently relaxed to include all securities that can be readily pledged in the tri-party repo system.

Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) - announced September 19, 2008 The Federal Reserve created a special facility providing non-recourse loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds.

Commercial Paper Funding Facility (CPFF) – announced October 7, 2008 to provide temporary direct purchase of newly issued commercial paper directly from corporate issuers.

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Chart 16

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While the Federal Reserve has attempted to sterilize the impact of its lending programs so as to avoid undue expansion of the money supply, we do not believe that this adequately represents the total expansionary impact of the Federal Reserve's efforts to deal with the problems in certain segments of financial markets. The System has also initiated, in addition to its regular securities lending program, the Term Securities Lending Facility. This Facility permits prime dealers to borrow securities from the Federal Reserve's portfolio for a term of up to 28 days. In a series of rolling overnight loans of securities, prime dealers are permitted to pledge a wide range of eligible collateral (Treasuries, agencies, agency MBS, AAA/Aaa-rated private-label RMBS, CMBS, agency CO and other ABS) in return for US Treasuries which they can then RP out overnight. The effect is to enable them to liquefy otherwise illiquid securities on their balance sheets and replace them with dollar assets which can then be deployed in other ways. While these assets represent a reallocation of reserves within the US banking system, they also represent a way for prime dealers to tap into dollar reserve assets from the rest of the world. To the extent that prime dealer assets are freed up, these institutions can engage in lending that would otherwise not occur. Securities lent under the TSLF are off the Federal Reserve's balance sheet since the transaction is unwound each morning. During the day, the funds that had been RePoed by the prime dealers is likely replaced by daylight overdrafts from the Federal Reserve.

Thus, there is effectively an off balance sheet creation of additional reserves to the banking system. To reflect the potential expansionary impact of the TSLF, we have created Chart 1, which attempts to reflect the potential impact that the TSLF may be having on the banking and financial system by adding the TSLF memorandum item to the Federal Reserve's balance sheet.

Definitions of additional Items Shown in Cumberland Table on Factors Adding to Reserves The following are the definitions of the items shown on the chart: Maiden Lane II LLC. On December 12, 2008, the Federal Reserve Bank of New York (FRBNY) began extending credit to Maiden Lane II LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase residential mortgage-backed securities from the U.S. securities lending reinvestment portfolio of subsidiaries of American International Group, Inc. (AIG subsidiaries).

Maiden Lane III LLC. On November 25, 2008, the Federal Reserve Bank of New York (FRBNY) began extending credit to Maiden Lane III LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of American International Group, Inc. (AIG) has written credit default swap (CDS) contracts.

Net Portfolio Holdings of Commercial paper Funding Facility LLC – Beginning Oct.27the the Federal Reserve began buying newly issued commercial paper directly from high quality issuers. These purchases are being made through a limited liability company that was formed to purchase three-month U.S. dollar-denominated commercial paper from eligible issuers and thereby foster liquidity in short-term funding markets and increase the availability of credit for businesses and households.

Securities Lent Off Balance Sheet to Dealers Overnight – Treasury securities lent under the Desk’s normal securities lending program Securities Lent Off Balance Sheet to Dealers Term Facility – Treasury securities lent under the TSLF Mutual Fund Facility – (AMLF)- Asset-backed commercial paper money market mutual fund liquidity facility added to extend non-recourse loans to U.S. depository institutions and bank holding companies to finance their purchase of high-quality asset backed commercial from money market mutual funds.

Maiden Lane LLC. On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets.

Other Assets Less Euro TAF – Other Federal Reserve assets minus the Foreign Central Bank TAF facilities conducted by the 9 participating foreign central banks as a result of dollar swap arrangements with the Federal Reserve.

Other credit extensions – emergency credit extended by a Federal Reserve Bank under exigent circumstances to an individual, partnership, or corporation that has been approved by the Board of Governors. This would include AIG Primary Dealer Credit Facility – Funds lent to primary dealers under the PDCF Foreign Central Bank TAF – Funds lent by now 9 central banks as a result of swap arrangements. These include: European Central Bank, Swiss National Bank, Bank of England, Danmarks Nationalbank, Svireges Risksbank, Bank of Japan, Bank of Canada, Reserve Bank of Australia and Norges Bank.

Term auction credit –Loans of term federal funds to banks under the TAF Repurchase agreements – Securities sold under agreements to repurchase them at a latter time ©Copyright

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Chart 17

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Miscellaneous which include: Float – Temporary funds that reflect the difference between checks that been credited against the sending bank’s reserve account but have not been cleared against the receiving bank’s account Gold – Gold bullion held by the System primarily in the Federal Reserve Bank of NY’s vaults Special drawing rights certificate accounts – an asset reflecting an allocation of funds to the US from the IMF and any accumulation of such assets by the Federal Reserve that had been allocated to other countries Treasury currency – US Treasury currency (mainly silver certificates that are being held by the Federal Reserve system but not in circulation) Regular Discount Window Credit which include: Primary credit – Discount window credit available to generally sound depository institutions on a very short-term basis as a backup rather than a regular source of funding. Depository institutions are not required to seek alternative sources of funds before requesting advances of primary credit.

Secondary credit – Discount window credit that is extended on a very short-term basis to depository institutions not eligible for primary credit. It is available to meet backup liquidity needs when its use is consistent with a timely return to market sources of funding or the orderly resolution of a troubled institution.

Seasonal credit – Discount window credit that is available to relatively small depository institutions to meet regular seasonal funding needs. Historically, the credits were related to agriculture.

Securities held outright - Include US Treasury bills, notes and bonds, inflation-indexed compensation, and federal agency securities (these securities are not presently in the portfolio).

Appendix for Bank of England and European Central Bank Charts Explanation The Bank of England and European System of Central Banks have significantly expanded their balance sheets in response to the financial crisis. To provide a more complete picture of how these institutions have responded by comparison with the Federal Reserve, we have added two charts. One is for the ECB and the other is for the Bank of England.

Neither bank publishes data exactly like the Federal Reserve’s “Factors Affecting Reserves” data. Nevertheless, by examining changes in the asset composition of each institution, it is possible to draw meaningful comparisons.

The legends of each chart show the asset categories as they are labeled by each of the central banks in their weekly data releases.

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Chart 18

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