Moody's Warns of Diminishing Credit Buffer as Treasury Swap Spreads Turn Negative

However, in Longer Term, Credit Rating Agencies Have Begun to Worry About USA Inc.’s Debt Affordability On balance, we believe that the ratings of all large Aaa governments [including USA Inc.] remain well positioned, although their ‘distance-to-downgrade’ has in all cases substantially diminished...Growth alone will not resolve an increasingly complicated debt equation...Preserving debt affordability at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion. ' - Pierre Cailleteau Managing Director of Sovereign Risk at Moody’s, 3/16/2010 .../f there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase. 2 Sarah Carlson, Senior Analyst at Moody's, 1/14/2011 KP Sources: 1) Bloomberg, The New York Times; 2) The Wall Street Journal (@)E) www.kpcb.com USA Inc. | Consequences of Inaction 419 Treasury Swap Spread’ Turned Negative For First Time in History? — Now Cheaper for Some Private Companies to Borrow than USA Government 10-Year Treasury Swap Spreads & Federal Budget Deficit / Surplus, 1988 — 2010 160 4% 3 30 2% x _~ 2) & 120 = 2 0% % 3 5 $ 100 a g 2% a ” > a 80 BS $ 4% Za n on 60 ie =) a 6% Z g 40 a . 2% § = 20 3 - rg O|. “10% & > -20 -12% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 — 10y Treasury Swap Spreads (left axis) -==Federal Budget Deficit/Surplus as % of GDP (right axis) Note: 1) Treasury swap spread = Treasury yield — swap rate (between bonds of comparable maturity); swap rate is the fixed interest rate that the buyer demands in exchange for the uncertainty of paying the short-term LIBOR (floating) rate over time; swap rates are generally higher than Treasury yields with corresponding maturities as they include incremental credit risk associated with the banks that provide swaps compared to Treasuries, which are viewed as risk-free. 2)10-year Treasury swap spread turned negative on 3/24/10, while 30-year Treasury swap spread turned negative in 10/08 and shorter-term Treasury swap spreads are still positive. Source: Bloomberg. (@E) www.kpcb.com USA Inc. | Consequences of Inaction 420 HOUSE_OVERSIGHT_021051