[Local-Gov-News] IMPORTANT MESSAGE FROM THE OREGON STATE TREASURER'S OFFICE

[RAWE, Heidi]

Local Government

NewS REPORT

                                                                                                                       September 16, 2008
Oregon Short-Term Fund Update Regarding Current Market Conditions

Dear Colleagues:

The credit crunch, which began to unfold in early 2007 and paused after the JP Morgan acquisition of Bear Stearns on March 16, 2008, has recently taken on new life, resulting in a financial crisis in the United States and all international markets. Currently, American International Group Inc. (AIG), facing a cash shortage, is seeking a loan package of as much as $75 billion from the private sector and/or the Federal Reserve. AIG's credit ratings were cut two and three notches by Moody's and S&P late yesterday to A2/A- from Aa3/AA-, theoretically resulting in a higher cost of financing for the firm.

This is occurring after the U.S. government, on September 7th, placed Fannie Mae (FNM) and Freddie Mac (FRE) into conservatorship, assuming the power of the Board and management, thus increasing investor confidence of buyers of government-sponsored enterprises (GSEs) debt and mortgage-backed securities.

This past Monday, Bank of America announced that they would acquire Merrill Lynch and, in a shocking announcement to all global investors, Lehman Brothers Holdings Inc. (LEH) filed for Chapter 11 bankruptcy protection after all attempts to instill confidence (through increasing liquidity, deleveraging of balance sheet, plans to sell subsidiaries) or find an acquirer failed.

OSTF Update
Staff regrets to inform participants that the Oregon Short-Term Fund (OSTF) has exposure to LEH bonds, representing a little less than 2% of the total fund. The purpose of this "Update" is to disclose our LEH exposure, explain our next steps and, finally, to attempt to ease any anxiety our customers may be feeling.

Lehman Brothers Holdings Inc. Bond Exposure:
Issue

Coupon

Maturity Date

Capital Structure

Par Amount

% OSTF*

LEH

4.25%

January 27, 2010

Senior Unsecured

$20,187,000

0.21%

LEH

Floating Rate

May 25, 2010

Senior Unsecured

$171,115,000

1.75%

*As of September 15, 2008


The plan going forward:
Amortize the two Lehman bonds at a recovery value to their respective maturity dates based on current expected recovery information.  This mechanism recognizes the fluidity of the current situation and does not unduly penalize or benefit any account holder.

What does this mean for rates?
               This action results in a rate reduction adjustment to the OSTF.

    *   Prior to the LEH announcement, the OSTF has been able to maintain an attractive, above-market rate for a long period of time
    *   The adjustment for the LEH exposure still results in a very attractive rate versus alternatives with daily liquidity
    *   Going forward, rates will continue to adjust based on general market conditions as has occurred in the past

For the past few months, staff has structured the OSTF with a higher degree of liquidity as well as an increased allocation to Treasuries and (more recently) GSEs. With the current crisis state of the market, this trend will continue.


 *   All participants will maintain full daily liquidity with no principal losses and accrued interest at the then prevailing OSTF rate; liquidity is plentiful.
    *   The OSTF is currently structured with 13.8% maturing within 7 days, 12.2% between 7-14 days, 9.4% between 15- 21 days, and 9.8% between 22-30 days; or $3.99 billion within 30 days.
    *   The OSTF has a total of 53.4%, or $5.04 billion, maturing within 93 days
    *   The OSTF remains diversified with an increase in Treasury and GSE securities (currently, 53.7% in Treasury/GSE, 44.3% corporate securities, 2.0% in TCD's)

Given the large amount of outstanding LEH commercial paper and debt, staff expects continued fallout from the Lehman filing in days and weeks to come, including announcements from the money market fund universe.

Investments, outside of government securities, all carry some measure of risk-that's exactly what creates yields above Treasury benchmark rates.  Our exposure to LEH is quite limited, and is but a very small part of a broadly diversified investment pool. Our goal remains to be good stewards of your funds, in an open and transparent manner. Staff encourages you to contact us with any questions or concerns.




Sincerely,



OSTF Staff


Judy A. Whaley-Fultz,CTP
Assistant Director of Cash Management, Finance Division
Office of the Oregon State Treasurer
Phone:  (503) 378-2885
Fax:      (503) 373-1179
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