FOR USE WITH FINANCIAL PROFESSIONALS ONLY. NOT FOR USE WITH

FOR USE WITH FINANCIAL PROFESSIONALS ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

AFP of Atlanta Education Day --- August 19, 2009

Kevin H. Brown, CIMA

Senior Vice President, Dreyfus Investments

A Division of BNY Mellon Asset Management

Stress in Credit Markets: Implications for Short Term Investing

2 FOR USE WITH INSTITUTIONAL INVESTORS ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Outline

I. Credit Crisis: Genesis and Unraveling

1. What is “credit”

2. Cause vs. effect

3. Timeline

II. Short Term Investing: Participants’ Reactions

1. Federal Government

2. Issuers

3. Investors

4. Asset Managers & Securities Dealers

5. Industry Assets

III. What’s Changed: Implications for Short Term Investing

1. Treasury Due Diligence

2. Risk factors Redefined

3. Regulatory Proposals


I. Credit Crisis: Genesis and Unraveling


Genesis of Credit Crisis

What does “credit” mean?

• Barron’s Financial Guides, 2007 edition:

“At its loftiest, it is defined in Dun & Bradstreet’s motto:

‘Credit: Man’s Confidence in Man’”

• Quantitative vs. Qualitative

• This crisis: significant qualitative factors



Community Reinvestment Act Credit forcibly extended to wrong obligors

Low Interest Rates Artificial price escalation of leveraged assets, exaggerated purchase capacity, artificial demand

Lowered Consumer Credit Standards

Credit wrongly extended

Borrower Behavior Credit wrongly extended, risk escalation

Lax mortgage issuer regulation Improper issuance & risk calibration

Rating Agency Policies Inaccurate ratings; risks remain unidentified

Securitization Buck-passing of risk

Excessive investment bank leverage

Exaggerated crisis amplitude

Subprime borrower paying habits

Slow-motion collapse, recession

CAUSE EFFECT



Results:

• Created updraft of ever-escalating house prices

• Housing development & construction rose to meet demand

• Artificial and unsustainable support of both supply and demand

• Many ignored what was to many an obvious bubble in real estate price/demand

And then the bubble started to burst.


Unraveling and Unwinding


*A Structured Investment Vehicle is a triple A-rated leveraged investment vehicle that seeks to maximize spread income through proactive management of liabilities and assets.


Phase 1: New Century June 2007

Investor flight to quality

Fed begins easing

Quick acceptance of lower yields

Phase 2: Broader Collateralized Debt Obligation (CDO) & Collateralized Mortgage Obligation (CMO) problems (Quantitative vs Qualitative judgments)

Phase 3: Structured Investment Vehicle (SIV) * Commercial Paper issuers with heavy CDO & CMO holdings…October 2007

Phase 4: State Pools, Common Fund



Phase 5: Asset-Backed Commercial Paper: questions arise

sponsor? transparency? LOC?

Phase 6: Municipal securities: bank LOCs

Phase 7: Auction Rate Securities: Failed Auctions Jan 2008

Merrill, UBS, Citi: $18bb, $11bb, $8bb; sand bags relative to market

$330bb market

morphed into classic bank run

Phase 8: Bear Stearns in Mar 2008; broader Repurchase Counterparty Questions

term or overnight?

credit review of counterparty?



Phase 9: Contraction of Commercial Paper issuance

Phase 10: Long list of AAA’s fall to the axe

Phase 11: The crescendo (the latest)

Lehman; September 15, 2008

Obligor to many; Reserve Prime fund broke buck

1.2%; $785mm face value; flood of redemptions; then runs

Public perception of Bruce Bent; rhetoric

Huge fund; many institutional investors affected

Firm size: capital support not an option



CORE ISSUES?

• People didn’t pay their bills

• Violated D & B’s “essence of credit”: Man’s confidence in Man

• Liquidity Problems, Valuation Problems

• Will I get paid?



Phase 12: Era of the marriage of the titans & acronym proliferation;

heightened credit market dysfunction

• Private

B of A & Merrill Lynch

JP Morgan & WaMu

Wells & Wachovia

• Public (selected)

TARP

CPFF

SEC NO Action Letter

TLGP

MMIFF

Spending Stimulus



Phase 13:

• Continued Fed tightening, persistently low yields

• Money Market Fund Reaction: Trading restrictions, Fee waivers

• Dec 2008: Treasurys trading at negative yields

Sample investment opportunity

> You give me $1,000,000

- And 60 days later, I’ll give you $999,833.33

- - $166.67 HPR

- Negative 1 bp return (annualized)

- Treasury fund balances peaked Nov 08 at $720bb; $550bb July 2009



• Issuing credit is a slow process

• Unraveling is a slow process

• Yet Confidence evaporated quickly

• Confidence rebuilding is a slow process


Who Did What?

II. Short Term Investing Participants


Short Term Investing: Participants’ Reactions


2. Issuers

3. Investors

4. Asset Managers, Securities Dealers, Capital Markets

5. Industry Assets




• TARP

• Treasury Guarantee Program for mmfs

• CPFF

• SEC NO Action Letter

• TLGP

• MMIFF



2. Issuers of Short Term Investments

• Some had to pay more as rates spiked

• Some lost financing altogether (CP contraction from $2.5 to $1.6 trillion in 5 months)

• Bank lines reduced

• Typical short-term financing vehicles became suddenly more expensive

• Cut growth, shed costs



3. Investors

• From Sept 2008 onward, steep risk retrenchment; abated in 2009

• Treasury rally in 2009

• Due Diligence Process Changes (details to come)

• Piled into money market funds (certain funds; certain families)



4. Asset Managers, Securities Dealers, Capital Markets

• Winners and losers among firms

• Industry asset explosion

• Despite bank deposit growth & very competitive CD rates


5196 111 109

323

18

-122 -84

52

444

775

-129

142

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q12009

Money Market Funds

Net New Cash Flow – ($ Billions)


Source: Investment Company Institute & Crane Data’s “Money Fund Intelligence Reports,” various dates


516 648 7861,154 1,209 1,115 1,062 1,167 1,349

1,875

2,470 2,388835

9651,059

1,063937 851 874

1,005

1,199

1,360 1,313

1,132

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jun-09

Institutional Retail

1,351

2,2712,285

1,8451,613

2,0481913

2,052

3,074

38303,701

2,358


Assets in Taxable and Tax-Exempt Money Funds(Year-End; $ Billions)

Source: Imoneynet.com’s “Money Market Insight,” multiple issues from 2009



U.S. Taxable MMF Assets and Annual Returns



U.S. Tax-Exempt MMF Assets and Annual Returns



0

5

10

15

20

25

30

35

1993 1995 1997 1999 2001 2003 2005 2007 Q12009

5

10

15

20

25

30

35

40

Source: Federal Reserve’s “Flow of Funds” Tables, Q1 2009

Percentage of Businesses’ cash held in money market funds



2009 2008 2007 2009 2008 2007

Bank Deposits 37.2 25 27.1 100 100 100Money Market Funds 31.8 39.4 30.9 78 82 76

Treasury Bills 9.2 8.1 1.9 83 100 100Commercial Paper 3.5 6.7 9.4 55 66 69Agency Securities 3.4 5.3 3.2 56 59 56

Repo 3.1 3.5 6.3 50 55 57Eurodollar Deposits 2.9 6 4.6 37 49 42

Separately Managed Accts 2.1 1.5 3.4 16 17 20Enhanced Cash 1.9 1.6 2.2 14 15 22

Asset-Backed Securities 0.8 0.7 1.1 20 31 33Municipal Securities 0.7 0 1.1 28 36 38

Auction Rate Securities 0.3 0.9 5.1 8 18 33VDRNs 0.2 0 1.5 12 17 25

Other 2.9 1.3 2.2 n/a n/a n/aMean # of Investment Vehicles 2.4 2.4 2.7 3.7 4 6.4

Organizations’ Short-Term Investments

Source: AFP 2009 Liquidity Survey

Allocation Permitted Use


*Institutional Investor, July/August 2009 issue


• Top 80 US asset managers

(any manager < $2bb in cash)

• $7.87 trillion AUM in cash & cash equivalents at 12-31-08*

• Top 10 Assets under Mgmt:

$3,619,522,000,000

• Top 10 Firms’ Market Share: 46%

Rank Firm

Cash & Equiv. AUM ($billion)

1 JP Morgan 612.8

2 Fidelity 592.6

3 State Street 468.5

4 BNY Mellon (Dreyfus)

386.0

5 Federated 356.7

6 BlackRock 338.4

7 Goldman Sachs 285.8

8 Northern Trust 241.0

9 Wells Fargo 227.9

10 Charles Schwab 209.7


*Imoneynet “Money Fund Analyzer as of 7-31-09

**Excludes offshore money market fund balances, if any


• $3.690 trillion AUM in all domestic money market funds at 7-31-09*

• Top 10 Firms’ AUM:

$2,520,500,000,000

• Top 10 Firms’ Market Share: 68%

Rank Firm MMF AUM**

1 Fidelity 511.5

2 JP Morgan 390.6

3 Federated 294.2

4 Dreyfus (BNY) 246.0

5 BlackRock 240.8

6 Goldman Sachs 216.9

7 Vanguard 192.0

8 Schwab 186.5

9 Wells Fargo 121.7

10 Columbia (B of A)

120.3


III. What’s Changed? Implications for Short Term Investing

• Treasury Due Diligence Process

• Risk Factors Redefined

• Regulatory Proposals


Treasury Due Diligence Process

People, Process, Philosophy

• People:

Tenure of staff

Professional background

Credit & Sector expertise

Compensation

Reporting structure




• Process:

Risk Management: identify all

Credit Criteria

Concentration rules

Creation of Buy List

Sector Focus

Team Decision Making

Capital Commitments Committee

Limits definitions: issuer, amount, tenor




• Philosophy:

Disciplined investment approach

Emphasis on fundamentals: liquidity, ratings, structure

2a-7 approved list should have large, liquid issuers with multiple dealer support

Risk Budgeting



Portfolio Construction : What to ask your asset manager

• Hierarchy: capital preservation, liquidity, yield

• Investment strategy: global macro-economic indicators, Federal Reserve policy, current credit markets

• Yield curve, Fed actions: cornerstones of WAM strategy Long and wrong Short and under

• Pre-trade and post-trade compliance

• Stress Tests

• Active management of cash positions

• Consistent sell discipline

• Downgrade policy


Risk Factors Redefined

….For Investors in Money Market Funds & Separate Accounts



Investment Manager Analysis

• Performance History

• Security Selection Track Record

• Fund Closings, large trade warnings & acceptance

• Credit Analyst/Portfolio Manager Accessibility

• Holdings Transparency

• Business structure of Sponsor

• Size of asset management in relation to firm

• Length of participation in asset management

Fund Analysis

• WAM strategy & results

• Quality of credit research

• Tolerance for fringe asset classes

• Counterparty evaluation



Shareholder Base

• Retail vs institutional client base

• Access vehicle: portals, intermediaries, direct

Systemic Factors

• Participation in government insurance & liquidity programs

• Evolving regulation structure (proposed 2a-7 amendments)

• Investor perception

• Rumors and innuendo


*Crane Data’s “Money Fund Intelligence,” March 2009


Bottom line: How is the Treasury’s process changing?

Implementing Increased Due Diligence

• Limits by fund, fund family, ratings, bank-owned funds

• Scrubbing Holdings

• Holding Aggregation

• Portal Migration ($200bb; 8% of institutional mmf AUM)*



Implementing Increased Due Diligence

• Manager Research

Statistics, performance

> Crane Data

> Imoneynet.com

News & Reporting

> Ignites.com

> Fundfire.com

Consultants & Financial Advisors


Regulatory Changes

Investment Company Institute (ICI)

• Report of the Money Market Working Group (MWWG) released March 17, 2009

Obama Administration: June 17, 2009

• Report on Financial Regulatory Reform

SEC on June 24, 2009: proposed 2a-7 amendments

• Goal: “significantly strengthen the regulatory framework for money market funds to increase their resilience to economic stresses and reduce the risks of runs on the funds.”


Investment Company Act of 1940: Rule 2a-7

Sets Standards for:

a. Credit Quality

b. Maturity

c. Diversification

d. Defines Board of Director Responsibilities

Regulatory Changes


Proposed 2a-7 Amendments

Portfolio Risk

• Shorter Average Maturity

• New Weighted Average Life

• Credit Quality Strengthened

• Periodic Stress Tests

Liquidity

• No illiquid

• Retail vs. Institutional

• Daily and Weekly Standards ; General Liquidity Standard


Proposed 2a-7 Amendments

Holdings Disclosures

Special Operations

• Processing orders at other than $1/share

• Suspension of Redemptions

• Affiliate Purchases


*Atlanta Business Chronicle, Aug 7-13, 2009, page 29A

Wisdom & Insight: A Dialectic

Wisdom from Tom Bell, former CEO of Cousins Properties*

• July 20, 2009 speech to Rotary Club of Atlanta:

1st priority: get Fed government to stop changing rules

Markets frightened by unpredictable government rule-making

Can’t underwrite risk without rules

No markets without rules

Can’t make investments without rules

Can’t buy or sell without rules

If you can’t trade, there is no market

No market, can’t set a price

No price, nothing sells

Nothing sells, nothing grows

Jobs aren’t created, taxes aren’t paid

So, without free markets, without risk and reward, wealth creation and job creation stops


© 2009 MBSC Securities Corporation, Distributor for The Dreyfus Family of Funds.

Dreyfus Cash Investment Services is a division of MBSC Securities Corporation

Not FDIC-insured. Not bank-guaranteed. May lose value.

An investment in any money market fund is not insured or guaranteed by the Federal Deposit

Insurance Corporation or any other governmental agency. Although a money market fund seeks

to preserve the value of your investment at $1.00 per share, it is possible to lose money by

investing in a money market fund. Yield fluctuates. Past performance is no guarantee of future

results.

Short-term corporate and asset-backed securities, while rated in the highest rating category by

one or more NRSRO (or if an unrated municipal, deemed of comparable quality by Dreyfus),

involve credit and liquidity risks and risk of principal loss.

Documents

FOR USE WITH FINANCIAL PROFESSIONALS ONLY. NOT FOR USE WITH