Fixed Income Strategies

Fourth Quarter 2010

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

Table of Contents
I. II III. IV. V. TCW Overview Fixed Income Investment Philosophy Corporate Bond Investment Philosophy and Process Structured Product Management 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 discussed herein 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 those strategies 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 strategy based 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 party sources 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 an investment 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 not recommending 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 a security 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 educational use 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 to change at any time, without notice. Copyright TCW 2010

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I. TCW Overview

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 West An 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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4) U.S.2) Mortgage-Backed Securities ($20.6) Bank Loans ($3.TCW Assets Under Management – By Products Offered or Committed to Management as of December 31. Fixed Income ($64.6) Core Fixed Income ($26.2) 4 PREShgf386 1/19/11 .S.2 Billion Core Balanced ($0. Fixed Income Assets: $64.6 Billion High Yield Bonds ($3.1) Low/Intermediate/ Long Duration ($9.S.6) U. Equities ($25.5) International ($9.9) Alternative Investments ($16.0) Government/Corporate Investments ($1. 2010 Total Assets: $116.7) U.

g. MBS Index LIBOR plus objective Non-agency MBS focus Absolute return objective Private Vehicles Other Strategies Treasury-Only TIPs Secured Fixed Income Portable Alpha U. value driven Value driven. fixed income alpha engine Corporate Credit Strategies Investment Grade High Yield Dedicated investment grade corporate bond portfolios Dedicated credit intensive process 5 PREShgf386 1/19/11 . up to 50% in plus sectors Liability Driven Investments (LDI) Long Duration Overlay Strategies High quality vs. opportunistic.S. S&P 500). Treasuries Treasury Inflation Protected Securities Multiple-sector.S. up to 20% in high yield Value driven.Fixed Income Products Traditional Ultra Short Low Duration Intermediate Total Return Core Core Plus Opportunistic Core Plus Active liquidity management Relative value 1-3 year duration Relative value 2-4 year duration Investment grade. bonds backed by pledged collateral Futures/swaps to gain beta (e. $ Exploits improving credit fundamentals Dedicated focus on international opportunities Mortgage Strategies MBS Total Return Specialized Cash Opportunistic MBS Strategic MBS MBS Alternatives Value-driven vs. Long G/C or Long Credit Derivative-based asset/liability investing strategies International Strategies Emerging Markets Developed Market Non-U.

and Stephen Kane work together as portfolio managers 1992 – 1996 History at Hotchkis & Wiley • Team recruited to build fixed income effort • Fixed income assets under management grew from $200 Million to $2 Billion • 5 Investment Professionals 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. 2010 Established in 1971 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 Trust Company of the West • Robert A. and non-dollar debt • $116.Fixed Income Team History & Evolution 1990 – 1992 History at PIMCO Tad Rivelle.6 Billion AUM in Fixed Income products offered • 614 Total Employees • 149 Investment Professionals • 57 Fixed Income Investment Professionals 6 PREShgf386 1/19/11 . Day founder • Acquired by Société Générale in 2001 • Fixed Income team established in 1976 • Broad capabilities in mortgage-backed securities. 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.S. Laird Landmann. emerging markets.2 Billion Total AUM / $64. government. corporate.

CFA. CFA Harrison Choi Beth Clarke Melissa Conn David Doan Philip Dominquez. CFA Sinjin Bowron Mike Carrion Marie Choi Nikhil Chopra RJ Cruz. 2010 Chief Investment Officer–Fixed Income Tad Rivelle Generalist Portfolio Team Stephen Kane. CFA Daniel Dy Michael Hsu Tony Lee Lifen Li Brian Loo. CFA Jay Gerard Matthijs Randsdorp Sovereign Risk Research Blaise Antin Marcela Meirelles. CFA Charles Tu Nanlan Ye Zhao Zhao Corporate/High Yield Portfolio Investment Team Jamie Farnham Tammy Karp Thomas Lyon. CFA Brian Rosenlund. CFA Sonia Mangelsdorf Jonathan Marcus Sagar Parikh Palak Pathak. PhD Brett Rowley Jean-Charles Sambor 7 PREShgf386 1/19/11 . PhD Marcos Gutierrez Joseph Lopez Joyce Pang Melicia Shen Andy Wu Bing Bing Yu Product Management Patrick Moore David Vick. CFA Laird Landmann Barr Segal. CFA Jason Shamaly Alex Stanojevic Commodities Claude Erb. CFA Christina Bau Emerging Markets Debt Portfolio Investment Team Penny Foley David Robbins Javier Segovia Analysts/Traders Stephen Keck. CPA – Analyst Mortgage-Backed Securities Portfolio Investment Team Eric Arentsen Pat Doyle Mitch Flack Bryan Whalen. CFA Joel Shpall Kenneth Toshima Government/Rates Portfolio Investment Team Bret Barker Lawrence Rhee Analysts/Traders Jeannie Fong Jeffrey Lee Katherine Wu Investment Risk Management Stephen Burns. CIC Ruben Hovhannisyan. CFA Analysts/Traders Rahul Bapna. CFA Analysts/Traders Pat Ahn Scott Austin. CFA. CFA Brett Roth.Fixed Income Expertise As of December 31. CFA Gino Nucci.

Conference of Catholic Bishops Virginia Tech Foundation. 2010 Corporations ArcelorMittal Steel USA. BAE Systems North America Briggs & Stratton Corporation CEMEX Cleco Corporation Grupo Bimbo Hallmark Cards. McDonald’s Owner/Operator Ins. 8 PREShgf386 1/19/11 .S. Inc. Inc.B. Donnelley Corporation RR Donnelley & Sons Company sanofi-aventis Smart & Final Textron.Producers Pension Plan Teamsters Negotiated Pension Plan 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. AT&T Inc. ITT Corporation Jack in the Box. Inc. Navy Federal Credit Union R. Retirement Plan Media Guild Retirement Plan New Jersey Transit Painting Industry of Hawaii Annuity Fund Producer-Writers Guild of America Pension Plan San Diego County Cement Masons San Diego County Construction Laborers Screen Actors Guild . Ltd.Representative Client List As of September 30. Inc. Inclusion on this list should not be considered an endorsement of the investment advisor or services rendered. M Life Insurance Co. Co. Cornell University Cumberland Presbyterian Church Father Flanagan’s Trust Fund Mississippi United Methodist Foundation Missouri Baptist Foundation New York University The Archdiocese of San Francisco The Bush Foundation Twin Cities Public Television University of Oklahoma Foundation. U. Inc.S. Inc. The Schwan Food Company Union Bank Verizon Investment Management Corporation Public Funds Alameda County Employees' Retirement Association California State Teachers' Retirement System City of Tallahassee Pension Plan Duluth Teachers Retirement Fund Association Employees’ Retirement System of the State of Hawaii Fire & Police Pension Association of Colorado Illinois State Universities Retirement System Maine Public Employees’ Retirement System Michigan Department of Treasury Oklahoma Law Enforcement Retirement System Oklahoma Public Employees’ Retirement System Sacramento County Employees’ Retirement System Sacramento Regional Transit District San Diego City Employees’ Retirement System State of Michigan Retirement System South Carolina Retirement Systems Tacoma Employees’ Retirement System Uniform Retirement System for Justices & Judges of the State of Oklahoma Westmoreland County Employees’ Retirement System Foundations.E. Inc. 8 I. H. High Yield Fund Health Care Allina Health System Aria Health Bishop Clarkson Memorial Foundation Blue Cross and Blue Shield of Minnesota Cedars-Sinai Medical Center Hackensack University Medical Center Iowa Health System Medica Methodist Le Bonheur Healthcare PeaceHealth Rush University Medical Center Trinity Health Via Christi Health System Welborn Baptist Foundation Multiple-Employer/Unions Boilermaker-Blacksmith National Pension Trust District 1199J Pension Fund Local No. Universities and Not-For-Profit Organizations Adrian Dominican Sisters California State University Risk Management Authority Catholic Relief Services Community Funds. Mutual Funds and Subadvisory Absolute Investment Advisers LLC CGCM Core Bond Fund Metropolitan West Funds Russell Investment Group – Multiple Funds SEI Core Fixed Income SEI Long Duration Fund Pictet & Co. – U.W.

II. Fixed Income Investment Philosophy .

U. 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-up issue selection 10 PREShgf386 1/19/11 .S.

Investment Process Long-Term Economic Outlook Mean reversion Patience Discipline Understanding of macro risks Quarterly • Duration Management • Yield Curve Management • Sector Management Monthly Portfolio Structure • Diversified • Optimized • Controlled Risk Client Objectives and Guidelines Intensive search for value Understanding of micro risks • Security Selection • Buy/Sell Execution Daily 11 PREShgf386 1/19/11 .

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 12 PREShgf386 1/19/11 .Duration Management Long-Term Investment Outlook 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 Duration Strategy Defensive Outlook Fast Growth Higher Rates Index Trend Growth Rates Stable Duration Range + / .

39% Barbell Return 5.49% 6% 5% 4% Maturity Scenarios presented do not represent current conditions and are illustrative only.87% Barbell Return 6.39% Barbell Return 7.17% Barbell 5% Maturity Flattening Scenario 8% Current Yield 7% Bullet Return 7.97% One Year 6% 5% Maturity Steepening Scenario 8% 7% One Year Current Yield Bullet Return 7. 13 PREShgf386 1/19/11 .Yield Curve Management • Yield curve strategy based upon: – Fundamental outlook for Fed policy and inflation – Expectations versus forward curve – Yield versus convexity trade-off – Total return analysis Yield Unchanging Scenario 8% 7% 6% Bullet Bullet Return 6.

09% 6.61% 6.72% 1.16% 6.” – 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 14 PREShgf386 1/19/11 .52% 6.12% -0.16% 39.59% 13.57% 6.15% 2.70% 1.21% 50% 40% 30% 20% 10% 0% -10% -3.Sector Management Average Annual Return by Investment Horizon (Looking Back from 2008) 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -26.57% 6.91% 61.43 58.56% 8.17% 6.35% 14.46% 4.74% 8.15% 7.28% Average Annual Return by Investment Horizon (Looking Back from 2009) 60% 1.57% 0.26% 7.78% 1-Year 3-Year 5-Year Treasuries 10-Year 15-Year High Yield 20-Year 1-Year 3-Year 5-Year Treasuries 10-Year 15-Year High Yield 20-Year 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.26% 4.31% 4.14% 5.71% 6.89% -5.57% 2.85% 6.80% 7.01% 6.98% 0.79% 1.

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 Source: MetWest TCW/MetWest Proprietary Treasury Model 15 PREShgf386 1/19/11 .

Issue Selection: Corporates • TCW/MetWest employs a “belts and suspenders” approach to 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 16 PREShgf386 1/19/11 .

Additional metrics provide information on loans that have never been delinquent or are reperforming giving an even more detailed view of the health of the pool. 13 Current Consumer Credit Data – Knowledge of current borrower credit activities helps forecast delinquencies. defaults and severities as well as shifts in the overall credit quality of the pool. organized. We also break out the modification type and measure what percentage of seasoned modifications re-default through the recidivism metric. 11 Negative Amortization – For those loans that allow negative amortization. 15 Roll Rates – Tracks the trend of previously current loans transitioning to the delinquency pipeline. advancing. 14 Alpha/Negative Alpha Pricing – Using the TCW loan level default. servicing metrics such as cash flow velocity. 16 Delinquency Analytics – Detailed delinquency statistics covering all stages of delinquency and default for both the primary pool backing the bond as well as any cross collateralized pools. PREShgf386 1/19/11 . severities and timelines are tracked at the bond level and compared to the cohort averages 10 Modifications and Recidivism – We track the percentage of the bond level collateral that has been modified and compare these to the cohort. and a breakdown of loans by type (fixed. which aggregates information on all of the loans backing this particular deal and compares it against the average for the cohort. etc. adjustable. cure rates. and analyzed through the proprietary loan database. Good indicator of future transitions from serious delinquency to default. and prepayment rates allow us to compare this bond to similar bonds in the same cohort 9 Servicing Metrics – In addition to a broad servicer level score. interest only. severity and prepayment models. Two methodologies are used to enhance our understanding of the impact of distressed markets 6 FICO Scores – Limited importance to security analysis in today’s environment 7 Servicer – Each servicer is independently rated based upon a proprietary scoring system 8 Current Loan Performance – Current Credit Enhancement. we track what percentage of each negam sleeve is current and the percentage of each sleeve approaching the negam cap 12 Subsequent Performance of Serious Delinquent Loans – Tracks the number of payments made by loans that were seriously delinquent 3 months prior and have yet to liquidate. This information has been critical in navigating the difficult environment of the last two years. delinquency. higher LTVs generally translate to higher loan delinquency.) 4 Income Documentation – Loans to borrowers with documented income are less likely to default 5 Loan-To-Value Ratios – Measure of the size of the loan relative to the value of the property. the price at which the bond is likely to outperform (Alpha Px) or underperform (Neg Alpha Px) versus it’s peers. 1 3 5 10 14 16 13 6 15 4 11 9 8 12 2 7 Result: There is a wealth of information that is gathered.Issue Selection: Mortgage-Backed and Asset-Backed Securities Shown is a print screen from our loan level database. default. 17 1 Deal Information – Basic information about the deal structure 2 Geographic Distribution – Aggregated from zip code data 3 Loan Characteristics – Average loan details.

III. Corporate Bond Investment Philosophy and Process .

EETCs st 19 PREShgf386 1/19/11 .Corporate Bond Investment Philosophy • 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 • 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.g. e. but often compelling areas of the corporate bond market • Project debt • 1 mortgage debt • Control risk through – Limited basis when spreads are tight – Intensive credit analysis that focuses on asset coverage/downside protection – Emphasis on companies with proven management and strong balance sheets – Diversification by industry and issuer • Look for value across – Capital structure – Term structure • Secured bank debt • SPVs.

Gaming/Lodging Nikhil Chopra – Credit Analyst. Banks. Autos. Metals/Mining Ken Toshima – Credit Analyst. Avitas. CFA – Credit Analyst. Chemicals. Diversified Manufacturing Sinjin Bowron – Credit Analyst. Paper/Packaging. Insurance. Municipals RJ Cruz. Utilities. Bloomberg Barclays Live TCW/MetWest’s proprietary Securities Management System (SMS) • TCW/MetWest’s proprietary Credit Trading System • SyndTrak Credit Research Team • • • • • • • • • • • Jamie Farnham – Director of Credit Research. Telecom. Homebuilders/Materials. REITs Marie Choi – Credit Analyst. Municipals 20 PREShgf386 1/19/11 . Retail Rahul Bapna. Fixed Income Resources Credit Committee • • • • Generalist Portfolio Managers Jamie Farnham – Director of Credit Research Gino Nucci. Food/Beverage. Technology. etc. CFA – Credit Analyst. Energy. Industrials. Healthcare. CFA – Corporate Trader Tammy Karp – Corporate Trader Systems Used for Analysis: • • • • • • • • • Credit Sights Covenant Review SNL Markets. Transportation.Credit Research U.com CallStreet Bond Hub Capital IQ Power Finance & Risk Intra Links • • • • Aviation Specialists. Consumer Products. Utilities Gino Nucci. CFA – Corporate Trader Mike Carrion – Corporate Trader Tammy Karp – Corporate Trader Joel Shpall – Credit Analyst. Finance.S. Media.

Resources. CFA RJ Cruz. CFA Sinjin Bowron Risk Management Marcos Gutierrez Andy Wu. PhD Vladimir Goldenberg Information Services • • • • SEC Filings Economic Data Industry Data Sources Management Reviews/ Company Visits • • • • • Consultants Wall Street Analysts Independent Analysts Legal Professionals Rating Agency Analysts 21 PREShgf386 1/19/11 . CFA • Idea Generation • Portfolio Construction • Implementation Proprietary Technology • • • • • Quantitative Risk Tiering Model Corporate Index Tracking Model Attribution Analysis Credit Tracking System Securities Management System (SMS) Credit Research Jamie Farnham.TCW/MetWest Corporate Credit Team. CPA Stephen Burns. Interactions Corporate Credit Committee CIO Generalists / Jamie Farnham / Gino Nucci. CFA / Tammy Karp Risk Management/Credit Analysts Reviews relative value. Director Joel Shpall Kenneth Toshima Marie Choi Nikhil Chopra Rahul Bapna. conducts credit reviews Portfolio Construction/Credit Trading Tammy Karp Mike Carrion Gino Nucci. sets risk budgets. FRM Joyce Pang Melicia Shen Ruben Hovhannisyan. industry concentration.

develop trading axe targets & parameters • Trader(s) implement Investment axe • Analyst(s) conduct ongoing credit monitoring 22 PREShgf386 1/19/11 . opportunity set • Identify further credit questions for follow-up • If approved.Credit Research Fixed Income Roles. Responsibilities & Process Follow up questions Investment Idea Responsibility • Trader(s) • Director of Credit • Analyst(s) • Generalist(s) Brief Investment Discussion • Director of Credit • Trader(s) • Analyst(s) Some Ideas Advance Fundamental Analysis Review Credit Analysis Credit Committee Discussion • Director of Credit • Analyst(s) • Trader(s) • Generalist(s) Some Ideas Advance Investment Analyst(s) • • Analyst(s) • Director of Credit • Analyst(s) • Trader(s) • Analyst(s) Process • Trader(s) continually monitor real-time relative value • Analyst(s) periodically review comparable universe • Generalist(s) also evaluate relative value across fixed income sectors • 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 • 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.

Risks 23 PREShgf386 1/19/11 . claim structure and management quality Credit Opportunity Assets/Cash Flow • Tangible asset valuation • Cash flow assessment/forecast • Industry trends • Economic trends • Management skill of growing business/cash flow Liquidity • Cash and undrawn credit facilities • Two year quarterly forecast • Restrictive covenants • Unencumbered assets/value • History of liquidity management Liability/Capital Structure • Capital structure • Organizational structure • Restrictive covenants • Management’s ability to execute within restrictive capital structure • Bondholder friendliness history Credit Opinion Merits vs.Credit Research Evaluation • TCW/MetWest’s credit analysts conduct rigorous fundamental assessments to evaluate tangible asset value.

Credit Process Anchored in Asset Value • “Two Ways Out” allows flexibility across market cycles Cash Flow/Liquidity at Maturity Distressed Liquidity/ Recovery (most conservative) • Asset “coverage” measured both on the face value and market value basis.8x 0.6x Debt at Market $800m $300m1 2. Discounts at 20% for 1.0x Valuation Methods Distressed recovery Critical Asset sale value DCF analysis Important FCF analysis } Most relevant in times of market stress 1 Assumes debt trades at 30 cents on dollar 2 Assumes chapter 11 bankruptcy. Example – Asset Coverage Debt at Face Asset Value Less: Debt Asset Coverage Asset Coverage (Discounted)2 $800m $1b 0.7x 2.5 Years Relevant EBITDA multiple • Lower bond prices improves asset coverage 24 PREShgf386 1/19/11 .

• Determine enterprise valuation of assets • Identify and understand various covenants across capital structure Claim Structure Priority Asset Valuation Credit Evaluation Covenant Analysis • Are there limitations on management flexibility via tight covenants? • Loose covenants could indicate leveraging potential via value shift to equity owners • Defaults occur when external liquidity disappears.Critical Credit Research Aspects What Are They & Why They Are Important? Credit Research Sector Coverage Analyst Tasks • Traces short/long-term industry trends • Understand competitive dynamics of companies. discounted cash flow percent of replacement cost. required IRR. etc. business is dependent on external sources and long-term viability could be in question • In a downside. Can the company manage within internal liquidity during a crisis? • Does management have history and flexibility to expect leveraging? • How strong is management? Liquidity Assessment • 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 track record and regular interviews • Assess bondholder friendliness and incentives to favor shareholders Management Interaction 25 PREShgf386 1/19/11 . Higher priority claims have more favorable recoveries • Abundant asset value and unencumbered assets could be a potential source of cash Industry Analysis Cash Flow Generation • 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 cash flow multiple. suppliers & customers Why is it important? • 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. recoveries result from asset value attributed to claim pool.

26 PREShgf386 1/19/11 .Credit Research Other Current Considerations • Bankruptcy Scenario – Would a priming debtor in possession loan be necessary? If so. what priority and how large would claim be? • Environmental Liabilities – Potential capital requirements or demand response of carbon emissions regulation – Asbestos liability – Decommissioning liability This list is not exhaustive but is designed to be indicative of the types of issues analyzed when researching credits. 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.

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 27 PREShgf386 1/19/11 .Credit Portfolio Tracking Proprietary Credit/Index Monitoring System • Real-time portfolio monitoring vs.

Credit Monitoring 28 PREShgf386 1/19/11 .

475 8.4x 3.4x 3.S. causing over 30 points of price disparity between bonds.875% Senior Notes 2013** $1. and long-haul wireless assets.300 $200 $697 $4.4x 6.875% Senior Notes 2028* $2.780 ** Guaranteed by Parent but can be waived in certain asset sale circumstances Other Subsidiary 1 3.000 6. and liquidity is still strong. • During crisis.854 * Unconditionally guaranteed by Parent Other Subsidiary A Holding Corporation 3.4x 3.4x 3.650 8.4x 3.000 Total $9.729 6.4x 3.4x 3.4x Holding Corporation Co-borrower under credit facility 7.4x 3. wireless carrier with valuable spectrum positions.473 5.772 $33 $2.4x 3.5 FRN 2013* 2nd Lien L+325 FRN PIK 2014* $181 Total $481 * Unconditionally guaranteed by Parent 3.4x 3.1x 0. 29 Other Subsidiary 3 Other Subsidiary C Other Subsidiary 4 Other Subsidiary D 54% Voting Interest Parent Telecommunications Corporation B Other Subsidiary 5 $300 1st Lien L+212.950% Senior Notes 2014** $1.4x 3.375% Senior Notes 2012* $2.375% Senior Notes 2017 9. in our opinion.137 Total $4.250% Debentures 2022 TowerCo Sale-Leaseback Subtotal Total Subsidiary Debt Other Debt Consolidated Debt $0 $750 $2.000% Senior Notes 2016 8.4x 3. • Company recently contributed assets and funding to next generation wireless network operator in exchange for majority ownership.375% Senior Notes 2015** $2. customer relationships. Parent Telecommunications Corporation Revolver Export Development Canada 6.4x 56% Economic Interest Holding Corporation B 12.4x 3.1x 3. fears of a split were overblown.00% Secured Notes 2015 Vendor Financing Notes 2014 Total $2. • This coincided with market deleveraging with irrational fears of an impending default despite generating sizable free cash flow while having substantial liquidity and moderate (~3.4x Other Subsidiary 2 Other Subsidiary B Recent Developments: • The operational turn-around is now gaining traction with lower subscriber churn.900% Senior Notes 2019* $1.115 $239 $20. • Distinct credit but strategically aligned requiring dual credit analysis.750% Senior Notes 2032* $2.170 7.947 $15.4x 3.4x 3.000 $1.301 0. Subsidiary bonds traded as low as the 30s but still trade at a 5 to 10 point discount to parent bonds.Credit Research Example Telecommunications Firm A • Large U. • Fallen angel that entered high yield universe due to operational challenges from integration that caused subscriber losses.0x) leverage.625% Senior Notes 2011* $1.4x 3. which represents an additional high yield investment opportunity.805 N/A N/A N/A PREShgf386 1/19/11 .4x 3.

IV. Structured Product Management .

Resources.S. High Grade Fixed Income • U.S. 31 PREShgf386 1/19/11 . sets trading targets and approves new structures/trading programs Proprietary Technology • Loan level database over 30 million loans • Default. Interactions Structured Product Working Group (Sector Allocations/Risk Weightings) CIO Generalist Portfolio Managers/Structured Product Specialists Structured Product Analysts Reviews relative value. High Yield Fixed Income • U. Equities and Convertibles • Commodities The processes described herein are illustrative only and subject to adaptation in any particular context. 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 Structured Product Portfolio Managers (Implementation) • INTEX • Idea generation • Implementation • Supervision • Reporting • Analysis Review • Trepp Additional Technology • Yield Book • Bloomberg • Loan Performance 1010 Data • Derivative Solutions • Charles River Investment Management System • FactSet • Equifax • Altos Structured Products Analysts • Idea generation • Price discovery • Relative value analysis • Delinquency trends/forecasts • Originator tracking • Prepayment analysis • Servicer reviews • Risk monitoring • Stress testing Global Capital Market Resources Other factors requiring cross-sector perspectives are quickly assessed through internal collaboration with TCW specialists in: • Developed and Emerging Markets • U.Structured Products – Team. risk budgets.S.

• Hard asset or receivables valuation is the basis for which other forms of credit protection can be evaluated • How these assets or receivables fit within the lessee or borrower’s business model help us evaluate sponsorship and cash flow timing • Structural protections need to fill the “credit” gaps and anticipate how and where performance deterioration will impact bondholders • Any level of liquidity constraints are considered when determining the proper cusip and portfolio exposure CMBS Historically wide credit spreads and stable cash flows can be captured through 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 Service Coverage Ratio 32 PREShgf386 1/19/11 .Non-Agency MBS The unprecedented housing and sector dislocation has created the opportunity for high loss-adjusted yields through a disciplined asset selection 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. • 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. and trends • Negative home equity is of particular focus Agency MBS Persistent inefficiencies in the agency mortgage market can be exploited through disciplined research and bottoms-up issue selection. esoteric assets. volatility and home prices • Combine fundamental OAS and spread regression with technical market trends • Dedicated team seeking relative value opportunities Structured Products Philosophy and Valuation Process ABS Complex structures. strategies. interest rates. and unique idiosyncratic risks limit investor participation but can also lead to cheap risk-adjusted investments.

property type. prepayments and liquidation amounts necessary for us to estimate information and REO sale prices • Filters allow for cohort comparative analysis 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 by Mark-to-Market LTV • Inventory to sales ratios (zip code level) • Projected home price stabilization (MSA. city and zip code level) • Probability of delinquency vs. documentation. zip code. Approximately 65. Subprime vs. unemployment rates • Recidivism rates (vintage) • Actual servicing timeline performance net of moratoriums and other regulatory action (respective servicers) • Projected loss severities based on servicing non-performing loan model (loan level) Outputs • Vintage Rankings • Alt A vs. • Current information updated monthly includes payment status. modification details.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 Database 30+ Million Loans • Combination of proprietary loan database and third-party loan data • Original/current loan characteristics updated monthly by 10 trustees • Loan information received quickly and generally accessible 30-45 days before third-party systems • Original information provided includes LTV. 33 PREShgf386 1/19/11 .000 individual securities are currently ranked • Market analysis/insight • Pricing The processes described herein are illustrative only and subject to adaptation in any particular context. loan type. Option Arm comparative analysis • Absolute and relative rankings at the deal level as well as the security level. FICO score etc. Prime vs. loss amounts.

Good indicator of future transitions from serious delinquency to default 13 Current Consumer Credit Data – Knowledge of current borrower credit activities helps forecast delinquencies. defaults and severities as well as shifts in the overall credit quality of the pool 14 Alpha/Negative Alpha Pricing – Using the TCW loan level default. higher LTVs generally translate to higher loan delinquency. interest only. delinquency. we track what percentage of each negam sleeve is current and the percentage of each sleeve approaching the negam cap 12 Subsequent Performance of Serious Delinquent Loans – Tracks the number of payments made by loans that were seriously delinquent 3 months prior and have yet to liquidate. cure rates. and analyzed through the proprietary loan database.) 4 Income Documentation – Loans to borrowers with documented income are less likely to default 5 Loan-To-Value Ratios – Measure of the size of the loan relative to the value of the property. which aggregates information on all of the loans backing this particular deal and compares it against the average for the cohort. Additional metrics provide information on loans that have never been delinquent or are reperforming giving an even more detailed view of the health of the pool PREShgf386 1/19/11 1 3 5 10 14 16 13 6 15 4 11 9 8 12 2 7 Result: There is a wealth of information that is gathered. organized. default. etc. severity and prepayment models. We also break out the modification type and measure what percentage of seasoned modifications re-default through the recidivism metric 11 Negative Amortization – For those loans that allow negative amortization. severities and timelines are tracked at the bond level and compared to the cohort averages 10 Modifications and Recidivism – We track the percentage of the bond level collateral that has been modified and compare these to the cohort. the price at which the bond is likely to outperform (Alpha Px) or underperform (Neg Alpha Px) versus it’s peers 15 Roll Rates – Tracks the trend of previously current loans transitioning to the delinquency pipeline 16 Delinquency Analytics – Detailed delinquency statistics covering all stages of delinquency and default for both the primary pool backing the bond as well as any cross collateralized pools.TCW Proprietary RMBS Analytics Shown is a print screen from our loan level database. servicing metrics such as cash flow velocity. and prepayment rates allow us to compare this bond to similar bonds in the same cohort 9 Servicing Metrics – In addition to a broad servicer level score. and a breakdown of loans by type (fixed. 1 Deal Information – Basic information about the deal structure 2 Geographic Distribution – Aggregated from zip code data 3 Loan Characteristics – Average loan details. advancing. 34 . This information has been critical in navigating the difficult environment of the last two years. adjustable. Two methodologies are used to enhance our understanding of the impact of distressed markets 6 FICO Scores – Limited importance to security analysis in today’s environment 7 Servicer – Each servicer is independently rated based upon a proprietary scoring system 8 Current Loan Performance – Current Credit Enhancement.

TCW models defaults and prepayments from over 15 different variables such as combined loan-to-value. TCW projects loan level severities from over 10 variables including foreclosure timelines and legal fees Deal cash flows are influenced by deal specific TCW home price and unemployment vectors The processes described herein are illustrative only and subject to adaptation in any particular context. refinancing incentive.TCW RMBS Cash Flow Models Proprietary Default. and home price changes which are forward looking estimates of where home prices will stabilize at the MSA and certain zip code levels Following a servicer timeline and liquidation costs model. Severity and Prepayment Model Using logistical regression. 35 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 and customized in a proprietary database • Original/current loan characteristics are updated monthly by trustee data • Live feed via nightly data downloads from third-party vendors provide the most upto-date data • Original Information includes LTV, NOI, DSCR, tenant lease information, property type, amortization type, and previous years’ changes in revenue, expenses, etc. • Current information includes the latest month’s debt service, modification data, loss amounts, prepayment amounts, delinquency status, any change in the loan’s amortization, and appraisal reductions to account for updated property values • Filters allow TCW to use the latest available debt service for calculating a loan’s DSCR, accounting for changes in a loan’s amortization and haircuts for loans that have not reported financials for more than 12 months

Research & Analytics
• DSCR distribution – Breakdown of Third Party Vendor Data, TCW’s Prior to Debt Service Reset DSCR and TCW’s Post Debt Service Reset DSCR • Debt Yield Distribution • Delinquency Status and Roll Rates • Projected maturity defaults and payment defaults using TCW’s proprietary loss vectors • Breakdown of implied cap rates at securitization (Loan Level) • % Change in reported NOI on an annual basis • Lockbox Status • Breakdown of Workout Strategy for Modified Loans • Appraisal Reduction Summary (ASERs and ARAs) • Lease Rollover Summary by Property Type (Loan Level) • Balloon Analysis – % of loans that were able to refinance vs. still outstanding (Deal Level) • Breakout of loans with pro-forma LTVs and DSCRs at origination (Deal Level)

Outputs
• Rank of all 55,000 loans by cumulative defaults and loss severities (rolled up to Deal Level) • Ranking each deal by absolute and relative loss projections • Compare seasoned deals vs. recent vintage deals by normalizing the DSCR of 06-07’ deals with the projected debt service amount following the end of the partial 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.

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TCW Proprietary CMBS Analytics
Shown is a print screen from our loan level database, which aggregates information on all of the loans backing this particular deal.
1 Deal Information – Basic Information about the deal structure 2 Collateral Summary – Avg. loan details and the weighted average DSCR prior to and post the partial interest-only reset date 3 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 service payment 4 TCW NOI Vector – Applying TCW’s NOI and cap rate assumptions to each individual loan, 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 loans outstanding past maturity and the % of loans that were able to successfully refinance 6 Delinquency Roll Dates – Tracking the continual movement of loans that are current transitioning to the delinquency pipeline 7 Amortization Type – Data has shown that loans experiencing the end of their interest only 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 time 9 Appraisal Reduction Amount – The % of loans that have had appraisals lower than their loan balance, allowing the servicer to limit their advances. The % cumulative appraisal reduction 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 protection usually 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 to have a higher delinquency % 12 Debt Yield Breakdown – Debt Yield is a loan’s NOI over its current loan balance. Its often 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 majority of 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 as recent LTV’s for loans that have received appraisals since origination 15 Lease Expiration – The reported lease rolls from different property types. Loans that have a 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 go directly from the tenants towards paying the property’s debt) or a soft lockbox (in which the borrowers have discretion to the funds before the debt payment is due) or no lockbox 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 in place at origination
PREShgf386 1/19/11

1 2

6 7

11

16

12
18 3 8

13
17

19

4 9 5
10 14 15 20

Result: There is a wealth of information that is gathered, organized, and
analyzed through the proprietary loan database. It is not only the access to the loan level information but how we use and assimilate the pieces of data that provides us with a competitive advantage.
37

Transportation and Specialized Finance Asset-Backed Securities (ABS)
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 and relative to industry – Utilization/participant portfolio growth rates – Revenue stability – Access to capital/broader-picture financing 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 maintenance requirements – 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, takeout considerations and impact on cashflow – Servicer’s capacity, with or without achieving consents, to re-deploy or dispose of assets

Outputs
• Asset-specific valuation • Comprehensive portfolio valuation • Comparative statistics between asset pools • Servicer opinions • Assessment of market assumptions with regard to asset deployment, cashflow stream and residual value • Market and current environment opinion • Security/asset-specific price-yield analysis

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

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Structured Products: Reporting and Tracking Exposure
Risk Management – Proprietary Risk Exposure Reports
Disciplined risk allocation and position size monitoring

Duration and liquidity positioning are constantly evaluated against both target and current credit exposures.

Long term sector targets are set by the Structured Products Committee based upon relative value against a myriad of economic scenarios.

Sector construction and individual security selection is delegated to the Specialists. These reports ensure that sub-sector targets are achieved and done so with consistency across similar accounts.

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restrictions and risk targets Allocation of credit related structured products are dictated by portfolio targets set by Structured Products Committee and specific client directives. Downgrade policies mandated by clients are monitored daily along with required actions.Structured Products: Portfolio Tracking and Reporting Exposure Risk Management – Proprietary Risk Exposure Reports Portfolio guidelines. 40 PREShgf386 1/19/11 .

41 PREShgf386 1/19/11 .Structured Products: Portfolio Tracking and Reporting Exposure 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 portion of the Barclays Aggregate Index The processes described herein are illustrative only and subject to adaptation in any particular context.

Outlook and Strategy .V.

Economic Outlook .

equities down over 25% since 10/31/071 Households Owners’ Equity in Real Estate 25.S. the U.0 0. has experienced a dramatic diminution in net worth – Residential real estate down $7 trillion – some 28% from the 2006 peak – U.S. too many mortgage brokers.0 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 19 81 19 84 19 87 19 90 94 997 000 003 007 010 2 2 2 2 1 19 20. record levels of car sales • Since the 2006/2007 peak in housing.0 15. an excess of construction activity.g.0 10.. e.0 19 51 19 55 19 58 19 61 19 64 19 68 19 71 19 74 19 77 Owners' Equity as % of Household Real Estate Source: Federal Reserve Board 1 Through 8/31/10 44 PREShgf386 Owners' Equity as % of Real Estate 1/19/11 Owners' Equity ($ Trillions) . 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.U.0 Households Owners’ Equity in Real Estate 5.S.

.Which Has Translated Into • Elevation in savings rate/loss of consumption • De-leveraging of the American consumer Savings Rate 7% 6% 5% 4% 3% 2% 1% 0% Consumer Credit Outstanding 3000 2500 2000 1500 1000 500 0 Billions ($) 0 3 5 7 2 1 4 6 0 8 9 01 00 00 00 00 00 00 00 -200 00 00 l-2 l-2 l-2 l-2 l-2 l l-2 l-2 l-2 l-2 l-2 Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju 19 59 962 965 969 972 976 979 982 986 989 993 996 000 003 006 010 1 1 1 1 1 1 1 1 1 2 1 2 1 2 2 Source: Bloomberg 45 PREShgf386 1/19/11 ...

ug-1 arJu Feb Sep Apr Nov Jun Jan Aug Ma Ja A Oc Ma De M 1000 800 600 400 200 08 03 004 01 001 002 06 007 007 04 005 09 10 2 -20 -20 -20 -20 -2 ul-2 -20 -2 -20 -2 -20 -2 pr Janar ep Jun ov Aug May Feb Nov an Oct J J A S M N 200 Commercial and Industrial Loans at All Commercial Banks Commercial and Industrial Loans of Large Commercial Banks Financial Commercial Paper Outstanding (SA) Asset-backed Commercial Paper Outstanding (SA) • Banking Sector • Shadow Banking System Source: Federal Reserve Bank of St. Louis 46 PREShgf386 1/19/11 . the Rest of the Private Sector Continues to De-Lever Commercial and Industrial Loans Outstanding 1600 1400 Commercial Paper Outstanding: Financial and Asset-Backed 1400 1200 Billions ($) Billions ($) 1200 1000 800 600 400 88 989 991 992 994 995 997 999 000 002 003 005 007 008 010 19 1 t-1 y-1 c-1 -1 -2 -2 -2 -2 -2 -2 r-2 l-1 n.Meanwhile.

0 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-2010 Unemployment Rate (U-3) Recession 6.0 Unemployment Rate (U-3) • “Narrow” Measure • “Broad” Measure Length of Time on Unemployment Rolls – An Indication of Depth of Economic Distortions Average Weeks of Unemployment Duration 40 35 30 25 20 15 10 5 0 Jan-1985 Oct-1988 Jul-1992 Apr-1996 Jan-2000 Oct-2003 Jul-2007 Jun-2010 Source: Bloomberg 47 PREShgf386 1/19/11 .Leaving Labor Markets Deeply Stressed Historical Unemployment (U-3) 16.0 Jan-1994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Recession Jan-2008 Jan-2010 Historical Unemployment and Underemployment Rate (U-6) 18.0 14.0 8.0 10.0 U-3 Unemployment Rate (%) U-3 Unemployment Rate (%) 12.0 4.0 10.0 8.0 0.0 16.0 6.0 2.0 14.0 12.

0% Q4 2007 Q1 2008 Q2 2008 Q3 2008 -6.7% -0.8% -4.0% 4.0% -4.6% -0.9% Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 • The technical ending of the Great Recession has not brought economic activity back to where it was pre-recession • And.0% 5.0% -6.As the Loss of Wealth Was Severe. So Has Been the Economic Retrenchment 6.0% -8.0% -4.6% 3. with all these negative forces.0% 2.0% 0.9% Gross Domestic Product (Annualized) 2.6% 1.0% 1. how has the economy stayed above water? Source: Bloomberg 48 PREShgf386 1/19/11 .7% -2.7% 0.

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.2 $12. U.S.4 5. Public Debt Outstanding $13.3 4.0 5.2 2.2 Trillion 7.3 U.1 Jan-2000 Jan-2007 Marketable Dec-2009 Non-Marketable Jun-2010 50% 96 96 97 98 99 99 00 01 02 02 03 04 05 05 06 07 08 08 09 10 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Bloomberg.S.3 Trillion $8. Total Public Debt Outstanding as a % of GDP 95% Total Public Debt as a % of GDP 90% 85% 80% 75% 70% 65% 60% 55% 8.S.7 Trillion $5. government is “replacing” the loss of consumption from the private sector by implementing “borrow and spend” stimulative programs U.5 4. Treasury 49 PREShgf386 1/19/11 .7 Trillion 3.

Government Spending Providing “Bridge Financing” Transfer Payments as a Share of Personal Income 20% 18% 16% 14% 12% 10% 8% 6% 4% • Do the Feds have the willingness and the ability to sustain the stimulus until private sector balance sheets recover and growth resumes? Source: Bloomberg 50 PREShgf386 1/19/11 .

74% 6.S.Cost: Federal Debt Interest Payments Interest-Bearing Debt Rate* T-bills Treasury Notes Treasury Bonds TIPS Other Non-Marketable Total 0.23%1 2.24% 4. Treasury 51 PREShgf386 1/19/11 . 2010.63% 4.21% Interest service over $400 Billion per annum *As of May 31. 1 Approximate rate on non-marketable Treasury debt.24% 2.37% 3. Source: U.

– GDP must grow as fast as debt service rate or debt/GDP worsens (forever) – Interest-bearing debt rate of 3.2 Trillion • 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%.Central Conundrum National Economy (GDP) Public and Non-Marketable Federal Debt $14..6 Trillion $13.2% suggests that nominal GDP growth rate must sustain itself over this figure 52 PREShgf386 1/19/11 ..

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.Fundamentally: How Do You Solve a Problem Like a Debt Burden? 1. 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 53 PREShgf386 1/19/11 . 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.

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.S. thereby delaying recovery 54 PREShgf386 1/19/11 . 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.Prognosis • Keynesian stimulus will be pulled back – hence. government intervention has impeded economic adjustments – including slowing the re-pricing of the stock of residential real estate. leading to long-term inflation • Meanwhile.

Investment Approach in Uncertain Times Economic Backdrop • 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) Investment Opportunities • Treasury rates near historical lows (0. Treasuries and Equities 55 PREShgf386 1/19/11 . good substitute for Treasuries • Non-agency MBS is still the best risk-adjusted asset with high single digit loss adjusted yields • Defensive. rates) Conclusions • Underweight Treasuries. earnings. defensive duration • Agency MBS has attractive carry.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. production. highly regulated industries of IG Corp market offer value • High Yield attractive vs.

Corporate Market Outlook .

Barclays Credit Spreads – Index OAS As of December 31. 2010 900 800 700 600 OAS (bps) 500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Credit Index Non-Corporates Industrials Utilities Financials Source: Barclays Capital 57 PREShgf386 1/19/11 .

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. frontend) • Underweight – Industrials – Retailers – Technology – Media • Opportunistic allocation to Super-Senior CMBS Opinions expressed are current only as of the time made. 58 PREShgf386 1/19/11 . are subject to change without notice.Current Portfolio Positioning Objective • Position portfolio for challenging economic environment. asset-rich companies – Insurance companies (Senior) – REITs (Healthcare.

are subject to change without notice. Currently trade in low 70s and yield 7-8% • Insurance – favor operating company level securities.Opportunities in the Corporate Bond Market Financials: Financials bonds offer compelling valuation on both absolute and relative basis. – 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 incurrence ability. both on secured and unsecured basis. Likely to cause incentive to call/refinance structures while quasi inflation-hedge. Expect financials spread to mean revert over time. • Money-center banks – relatively stable funding profile (deposit-heavy) and diversification by business line and geography. – Large money center bank senior debt @ ~+220-230bps – Floating rate TRUPs/hybrids – due to FinReg (Collins amendment). Well capitalized and generally have lower problematic loan balances than banks. Favor healthcare REITs and shorter maturities. trading at nearly 2x the spread of single A-rated industrials and at nearly 2x historical pre-crisis means. 59 PREShgf386 1/19/11 . Opinions expressed are current only as of the time made. regulatory capital credit will phase between 3-5 years from passage. Long-term ramifications of FinReg are credit friendly while balance sheets continue to rehabilitate.

are subject to change without notice.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-rated regulated utilities. similarly rated electric utilities in mid +100’s – FERC regulated gas pipeline that provides 70% of Florida’s natural gas supply. 3 767-400ers (’00 vintage). nearly 3x the credit index – Aircraft: 12 737-800’s (’00 vintage). attractive relative value vs. ~+220bps – At ~+220bps. Strong asset coverage with contracted cash flows • Example Alternative Power Project – 7% ‘23 average life. Current market value LTV of ~85% Utility project debt – bonds benefit from power generation collateral and long-term contracts with highly-rated regulated utilities.5% or ~+530bps. Strong asset coverage with contracted cash flows • Example Gas Pipeline Company – 5. bankruptcy-remote debt instruments backed by a diversified pool of aircraft. 60 PREShgf386 1/19/11 .Opportunities in the Corporate Bond Market (cont’d) Regulated Pipeline / Secured debt: Enhanced Equipment Trust Certificates (EETCs) – secured. 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. with modern collateral and LTVs in the 65% – 85% range • Example A tranche EETC: 16 average life: rated Baa2/BBB – At ~$103. Rated Baa2/BBB.5. Florida’s gas-fired power generation is projected to grow from 39% in ’08 to 54% in ’17.45% ’20. Favor senior tranches (top of capital structure) with strong asset coverage. trades at nearly 7. Rated BBB-/BBB– At ~$101. trades at ~6.5.

Rated Aa3/AA. tend to be cautious on asset-light sectors and industries where rapid technological evolution could cause diminution of intellectual property. faith and credit of governments • Example Revenue Bond – 6. Underweight both sectors Opinions expressed are current only as of the time made.263% senior bonds.Opportunities in the Corporate Bond Market (cont’d) BABs / Underweight Asset-Light Sectors: Build America Bonds (BABs) – taxable municipal bonds that benefit from federal government subsidy of 35% of the ’09 Congressional stimulus bill (ARRA). or fee revenue cash flows or General Obligation bonds backed by full. utility.5x Technology/Retail – due to asset-based lending philosophy. ~+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. 61 PREShgf386 1/19/11 . Municipals have ability to adjust both cost structure and revenue structure. Focus on both revenue bonds backed by specific cash flows from certain tax. are subject to change without notice.

Structured Product Outlook .

51 2.42 1.75 Conclusion: Rates backed up significantly in 4th quarter and the curve steepened.13 Difference +0.09 3. 2010 2-Year UST 5-Year UST 10-Year UST 2/10 UST curve 30yr Current Coupon FNMA Yield 0. 63 PREShgf386 1/19/11 .29 2.17 +0. MBS Agency yields rose 75 bps and average lives extended. 2010 0.74 +0.59 2.70 4.78 +0.26 2.61 +0.Treasury Rate & Agency MBS Yield Moves In 4Q 2010 September 30.00 3.38 December 31.

94 December 31.Agency MBS Duration Changes In 4Q 2010 September 30. Cohort Effective Durations 30-Year Freddie Mac 5% LLB 30-Year Freddie Mac 5% Cohort 5.63 5.57 +0.82 4.37 • While price payups for Loan Balance pools compressed.16 +1.93 4. 64 PREShgf386 1/19/11 . their more stable durations due to better convexity as well as 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 less than the duration in the Barclays MBS Index by 0.25 +0. 2010 Agency MBS In TGLMX Duration Barclays MBS Index Duration 2. 2010 Difference Representative Position In TGLMX vs.88 5.04 2.29 years due to better convexity characteristics.23 4.78 +1.

Agency MBS Fundamental Valuations • Nominal Spreads to Treasuries near long term averages • Nominal Spreads above averages when removing the 2008 financial crisis period Agency MBS Spread to 5/10 yr UST 350 2008 financial crisis 300 FNMA Current Coupon Nominal Spread 250 200 150 100 50 Min Max Last Average (10 yr) Average (5 yr) 103 293 146 156 150 0 Source: Bloomberg 65 PREShgf386 1/19/11 .

Agency MBS Fundamental Valuations (cont’d) • LIBOR option-adjusted spreads (LOAS) slightly above long term averages Agency MBS LOAS 100 80 60 FNCL Current Coupon LOAS (bps) Min Max Last Average (10 yr) Average (5 yr) 41 82 15 4 5 40 20 0 20 40 60 Source: Yieldbook 66 PREShgf386 1/19/11 .

FICO > 720) Source: FTN Financial 67 PREShgf386 1/19/11 . which will bode well for collecting carry in Agency MBS • After accounting for credit.5s 6.Agency MBS Fundamental Valuations Refinancability of 30yr Fixed Conventional Universe 4.5s 400 350 300 250 Outstanding Balance ($bn) utstanding 200 150 100 50 0 <18% of universe is both willing AND able to Marginally Refinanceable = ~64% Fully Refinanceable = ~42% Willing and Able Unwilling or Unable • Expectations for voluntary prepayments remain muted for 2011 despite the historically low rate environment.000) to overcome upfront costs of refinance 50 bps is "marginally refinancable" 100 bps is "fully refinancable" Able: Unconstrained by credit (LTV < 80%.0s 6.5s 5.0s 5. mark-to-market LTVs. only about 18% of the outstanding Agency mortgage market is currently “refinanceable” Gross WAC Bucket Willing: Sufficient mortgage rate incentive on large enough loan size (>$150.0s 4. and loan balances.

reducing LOAS valuations for Agency MBS and pressuring spreads wider 50 0 Source: Bloomberg 68 PREShgf386 1/19/11 . 20 day average (bp) 250 200 150 100 If delivered volatility remains elevated.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 Implied Swaption Volatility versus Delivered Volatility 300 3 Yr by 10 Yr Implied Volatility (bp) Vol of 3 Yr by 10 Yr Swap Rate. implied volatility is likely to rise.

00% 0.75% 1.75% 3.75% 2.25% 0.739 700 .00% 0.25% 2.50% 0.50% 1.00% 1. higher mortgage rates 4.50% 2.25% 3.00% 3. higher loan fees charged by GSEs (see table below) 4 0.25% 3.70% 0.00% 3.25% 85 .25% 90 .50% 1.50% 1.6 • Net supply of Agency MBS will be low due to: 1. 2011 Sources: NAR.90% 0.8 4.4 6 1.00% 1.00% LLPAs by LTV Range 75 .25% 0.50% 3.00% 80 .97% 0.25% 2.2 5.4 3.25% 2.639 < 620 -0.00% 0. U.25% 0. Census Bureau Credit Score <= 60% => 740 720 .50% 1.25% 3.00% 0.Agency MBS Technical Valuations Millions (Existing) 7 Existing Single Family Home Sales (ls) New Single Family Home Sales (rs) 6.00% 1.25% 3.75% 0.699 660 . continued low levels of new home sales (see graph) 2.25% 0.00% 1.25% 0.25% 2.00% 3.5 0.00% 0.5 1 5 0.25% -0.75% 3.659 620 .80% 0.75% 2.50% 60 . muted or negative home price appreciation (HPA) 3.50% 1.75% 3.5 0.50% 1.50% 3.25% 1.6 1.85% 0.25% -0.719 680 .5 Monthly Home Sales Buyers rushed to take advantage of expiring federal tax credits Millions (New) 1.00% 3.679 640 . tighter underwriting guidelines 5.50% 70 .25% 0.00% 1.25% 2.00% 2.50% 0.00% 1.00% 1.25% Source: Fannie Mae 69 PREShgf386 1/19/11 .25% 3.2 3 0 Fannie Mae Loan Level Pricing Adjustments Effective April 1.25% 0.25% 95 .95% 0.50% 0.50% 1.S.

Agency MBS Technical Valuations • Demand from commercial banks should remain robust – Steep yield curve provides high net interest margin (NIM) and is associated with growth in bank securities portfolios – C & I loan issuance remains anemic as banks remain cautious on economic recovery prospects and loan demand is weak – Basel III rules favor low riskweighted. Bloomberg 70 PREShgf386 1/19/11 . $ change YoY (LHS) 2 10 Spread (RHS) 50 400 100 Source: Federal Reserve. $ change YoY (LHS) Commercial Bank C&I Loans. highly liquid asset allocations Change in Commercial Bank Holdings ($bn) mmercial Change in Commercial Bank Holdings ($bn) versus Yield Curve Slope 400 300 300 250 200 200 100 150 10 Yr UST 2 Yr UST (b (bps) 0 100 100 50 200 0 300 Commercial Bank Govt Securities Holdings.

00 4.72 2.Agency MBS Technical Valuations • Demand from money managers should be steady as Agency MBS valuations appear attractive to other high quality assets such as investment grade corporates MBS Yield Advantage vs High-Grade Corporates As of 1/7/2011 Sector U.57 3.31 3.27 MBS Index Yield Pickup – 197 bps 112 bps 42 bps 71 PREShgf386 1/19/11 .54 4. MBS Index Intermediate AAA Corporates Intermediate AA Corporates Intermediate A Corporates Duration 4.S.41 Yield 3.69 1.

S. further participation in Agency MBS could be limited by investor concerns 72 PREShgf386 1/19/11 .Risks to Technical Factors for Agency MBS • Paydowns from the Federal Reserve’s (Fed’s) Agency MBS portfolio will not be reinvested in Agency MBS A lower rate or flatter curve environment would increase supply to the market from elevated Fed portfolio paydowns • Overseas accounts may avoid U. dollar investments in favor of fixed income assets or equities denominated in alternative currencies • If government proposals and debates on GSE reform shy away from continued strong support.

8 trillion • Loans – roughly $3. 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 – Individual mortgage loans not held in any TCW investment portfolio – Loans sit on bank balance sheets. 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 73 PREShgf386 1/19/11 .7 trillion – Securitized packages of loans that are publicly traded – Marked-to-market already.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.

000 500.000 2.000 5.500.500.000 15.000 20.000 10.000 1.000 1.000 30. bid list volume data provided by Deutsche Bank Monthly Bid List Volume 74 1/19/11 .000 25.000.000.000.000 Monthly Bid List Volume (mm) PREShgf386 Collateral Balance (mm) 2.000 0 Jan-2008 Apr-2008 Aug-2008 Dec-2008 Apr-2009 Aug-2009 Dec-2009 Apr-2010 Aug-2010 0 Dec-2010 Collateral Balance Source: TCW.Non-Agency MBS Outstanding and Monthly Bid List Volume 3.

meaning that those with the most equity refinance first.Non-Agency MBS Review and Outlook Loan Fundamentals • Voluntary Prepayments – Subprime and Alt-A • Running in low single digits and market is extrapolating this for the life of the loans Conditional Prepayment Rate (CPR) 80% 70% Historical Voluntary Prepayment Trends • Given large negative equity. Intex 75 PREShgf386 1/19/11 . 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. and the market is assigning a zero probability.3% 20% 10.2% 3. loans are unlikely to be refinanceable in the near future • The future is difficult to predict. leaving a weaker set of borrowers in the pool 60% 50% 40% 30% 25.1% 0% 1 1/ /2 2 3 9 6 0 1 2 5 6 3 4 5 7 8 9 1 8 0 00 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 201 201 / / / / / / / / / / / / / / / / / /1 3/1 0/1 5/1 2/1 7/1 2/1 9/1 4/1 1/1 6/1 1/1 8/1 3/1 0/1 5/1 2/1 8 1 1 1 1 1 10% Prime Alt-A SubPrime Source: TCW.

9% • 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 subprime and Alt-A and more delinquencies/defaults may be coming 3 4 5 5 6 7 8 9 0 0 1 2 3 4 5 5 6 7 8 9 0 0 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00 00 00 00 00 00 01 01 /1 /1 /1 /1 /1 /1 /1 /1 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /1 4/1 2/1 2/1 0/1 8/1 6/1 4/1 2/1 2/1 0/1 8/1 6/1 4/1 2/1 2/1 0/1 8/1 6/1 4/1 2/1 2/1 6 1 1 1 1 1 1 1 Subprime Alt-A Prime Source: TCW.3% 24. LoanPerformance 76 PREShgf386 1/19/11 .4% 44.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% 60+ Delinquency Rate 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 8.

4% 0% 7 8 6 9 4 5 3 1 2 0 0 8 9 7 5 6 4 2 3 1 0 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 01 01 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 6/1 2/1 1 1 1 1 1 1 1 1 1 1 12 Prime Alt-A SubPrime Source: TCW. LoanPerformance PREShgf386 1/19/11 .2% 57. both of which are weak • Tight credit for jumbo loans will hold down demand and limit refinancing options 77 70% 65% 60% 55% 50% Loss Severity Rate* 45% 40% 35% 30% 25% 20% 15% 10% 5% 72.7% 44.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 if they 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.

6% 6% . Source: Calculations based on security prices from Bloomberg and major banks.2% 72.70% 80% . and prepayments: Actual (12/31/2010)* 60+ Delinquency Rate Prime Alt-A Subprime 10.10% ⇒ Senior securities present excellent loss adjusted yield * 2005-2007 vintages.90% Expected Loss Adjusted Yield 4% .2% Market Expectations** Cumulative Default Rate 10% . 2005-2007 vintages.25% 40% .0% Loss Severities 44.9% 58.8% 8% . ** Source: TCW Loan Level database and Intex.95% Loss Severities 50% 60% .8% 27.65% 80% . loss severities. 78 PREShgf386 1/19/11 .4% 48.Non-Agency MBS Review and Outlook (cont’d) Non-Agency Mortgage Comparison • Distressed/Depression-like pricing conditions of late ‘08/early ‘09 have remediated to “stressed” pricing – Market continues to discount very severe defaults.

79 PREShgf386 1/19/11 .2% + Current Yield + 8% * .0% 2.4 * .3 Annualized Voluntary Prepayments & Amortization x Market’s Average Price Discount to Par + 7% * .3 Annualized Defaults x Recovery x Market’s Average Price Discount to Par = 2010 Non-Agency Sector Total Return Coupon and principal payments alone provide healthy returns given current market prices Is there additional price appreciation to be captured? Source: Return numbers are estimates provided by TCW portfolio management.8% 21.4% 0.2010 Non-Agency Sector Return Attribution 12% Price Appreciation 6.

4Q 2010 Non-Agency MBS Empirical Duration Interest Rates Non-Agency MBS Prices 74 bps +3.5% -4.7 yr Empirical Duration for 4Q 2010 80 PREShgf386 1/19/11 .

45 5.00 63.00 65.00 Total Defaults Voluntary Prepayment Rate Severity Rate + 3 Month Timeline Extension 9.61 8.87 5.33 8.00 56.66 67% 1% 62.20 8.33 6.00 72.90 5.00 64.65 5.01 6.90 67% 1% 60% Price 55.51 9.52 7.53 9.78 7.00 67.28 7.28 5.48 5.00 66.54 6.5% 81 PREShgf386 1/19/11 .85 4.00 59.00 70.08 5.61 8.00 74.69 5.05 4.00 71.00 69.06 7.00 61.31 6.56 6.00 60.91 8.05 7.The Layering of Old and New Metrics on Non-Agency MBS Old Metrics Base Case 9.33 8.00 75.09 4.83 9.11 5.00 57.00 68.26 7.53 7.00 73.77 6.00 58.00 62.03 6.24 5.79 7.90 8.79 6.21 8.

48 5.00 65.09 4.24 5.88 4.00 75.26 7.19 5.83 9.69 5.00 67.09 4.31 8.85 4.00 68.93 68% 1% 62.77 6.78 7.93 5.5% 82 PREShgf386 1/19/11 .12 6.64 7.10 8.06 7.54 6.39 6.05 7.00 70.29 4.43 6.32 67% 1% 62.33 6.73 7.00 60.67 6.05 4.49 4.91 8.00 63.11 5.00 66.61 8.11 3.89 4.03 6.00 61.20 7.31 6.61 8.45 5.87 5.00 71.The Layering of Old and New Metrics on Non-Agency MBS (cont’d) Old Metrics Base Case 9.90 5.00 69.66 67% 1% 62.56 6.51 5.00 Total Defaults Voluntary Prepayment Rate Severity Rate + 3 Month Timeline Extension 9.00 56.33 8.30 5.90 67% 1% 60% Price 55.93 6.46 7.16 5.00 72.69 4.79 8.33 8.09 4.73 5.61 8.00 73.63 6.96 5.90 8.21 8.50 5.01 7.19 6.00 57.50 4.00 62.79 7.49 8.01 6.38 7.20 8.53 9.00 59.00 64.68 4.65 5.51 9.71 5.92 7.00 74.00 58.53 7.79 6.5% + Increasing Stop Advancing %'s 8.28 7.29 5.87 6.52 7.28 5.08 5.5% + Increasing Interest Rate Modifications 9.

92 7.65 5.12 5.29 4.79 8.48 5.66 67% 1% 62.53 7.33 8.16 5.09 6.12 6.38 7.50 4.05 7.69 4.32 67% 1% 62.21 8.51 9.09 4.00 59.06 7.90 67% 1% 60% Price 55.08 5.93 68% 1% 62.5% 83 PREShgf386 1/19/11 .69 5.00 57.68 4.09 4.00 60.00 62.00 63.01 6.83 9.52 7.31 8.96 5.61 8.77 6.5% + Increasing Stop Advancing %'s 8.00 68.00 61.56 6.28 5.5% + Increasing Interest Rate Modifications 9.00 64.72 9.49 8.63 6.71 5.00 71.19 5.11 3.79 6.89 7.87 5.5% + Improved Defaults and Prepayments 10.05 4.20 7.62 7.87 6.00 74.06 9.29 5.33 6.39 6.18 7.51 5.43 6.45 5.73 5.64 7.49 4.00 56.88 4.35 7.04 55% 3% 62.00 70.28 7.00 69.78 7.45 5.00 58.91 8.33 8.89 4.46 7.20 8.00 67.30 5.53 9.93 5.00 72.61 8.31 6.09 4.79 7.01 7.47 8.67 6.41 10.03 6.54 6.00 Total Defaults Voluntary Prepayment Rate Severity Rate + 3 Month Timeline Extension 9.67 5.89 5.90 8.24 5.61 8.35 6.93 6.00 66.90 5.85 4.19 6.26 7.08 8.00 75.The Layering of Old and New Metrics on Non-Agency MBS (cont’d) Old Metrics Base Case 9.77 8.00 73.84 6.39 9.10 8.59 6.00 65.73 7.24 5.11 5.50 5.

we remain constructive on the risk-adjusted return opportunities available in super-senior tranches of selected CMBS issues • Important to distinguish the securitized commercial real estate market (CMBS) and that which is proprietarily held on bank balance sheets as loans – 80% of the roughly $3. and use this “net interest margin” to write off loan losses over time – CMBS have enjoyed no such privilege and are marked to market daily • Near the peak of the crisis price declines of CMBS were excessive relative to fundamentals • The CRE market has seen prices decline roughly 40% from the peak 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.5 trillion in commercial mortgage securities is held by banks as loans – Commercial real estate deleveraging has to occur largely in the loan markets – Loans.CMBS Review and Outlook Despite Strong Rally. on bank balance sheets as “held to maturity” line items. are subject to change without notice. are not marked to market – Banks earn significant yields over the cost of the funds. 84 PREShgf386 1/19/11 . Opportunity Remains In Super-Senior Tranches Current State of Market • Fundamental backdrop is likely to be challenged through the continued deleveraging process in the economy and financial markets • Lease rates and occupancy are down giving rise to potential deterioration in debt service coverage • Excess capacity and property owners struggling in a sluggish economy • Despite the considerable rally in CMBS over the past 18 months.

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. are subject to change without notice. 85 PREShgf386 1/19/11 .CMBS Review and Outlook (cont’d) Despite Strong Rally. 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.

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.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. net decrease in outstanding supply and large amounts of cash to deployed have spurred issuers to tap the markets • Transportation stalwarts such as rails and containers have been able to access the markets. 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. aircraft-related securitizations are in the queue. 86 PREShgf386 1/19/11 . well-protected structures and historically active purchasers have returned to provide support to the sector FFELP Student Loans • Consolidation has been the story this year. the resumption of ARS clearing. are subject to change without notice. and the combination of a short list of approved servicers as well as smaller issuers’ lack of ongoing business due to the elimination of FFELP should lead to continued consolidation • Refinancing. which will continue to lend stability to excess spread measures • Chargeoffs and delinquencies continue to decline. across all pieces of the capital structure • The more conservative guidelines prescribed by rating agencies have produced very solid. and securitization of loans still on balance sheet will continue to provide activity in the sector Specialized Sectors • The low interest rate environment.

represents even spread to some private label AAA Yield Outlook Comments Specialized Sectors Shipping Container 225 dm 3.5% 1.5% 2. 87 PREShgf386 1/19/11 .25% Tighter Scarcity of assets and limited new issuance will continue to drive spreads Will be affected by overall prospects of refinancing and participants’ access to unsecured and secured capital Aircraft 375 / maturity 10% to refinancing 5.3% Marginally tighter Opinions expressed are current only as of the time made.6% 3.0% Marginally tighter Much tighter Marginally tighter Much tighter Tighter Limited size supports further tightening Should see the most spread tightening. are subject to change without notice.4% 2.Asset-Backed Securities (ABS) Review and Outlook (cont’d) Spread On-the-run Sectors Credit Card AAA Credit Card BBB Auto AAA Auto A FFELP Student Loan 35 dm 140 dm 30 / swaps 80 / swaps 75 dm 1.