US Municipal Bond Defaults and Recoveries, 1970-2019

U.S. PUBLIC FINANCE DATA REPORT US Public Finance 15 July 2020 US municipal bond defaults and recoveries, 1970-2019 TABLE OF CONTENTS This study updates our findings concerning the default, loss and rating transition of Moody’s- Introduction 2 rated US municipal bond issuers in 2019, as well as since 1970. Key findings include: Emerging trends 2 Default rates 10 » There were no new rated municipal defaults in 2019, as the municipal sector broadly Ratings stability 15 enjoyed the benefits of a strong national economy and historically low unemployment. Ratings accuracy 22 The recoveries and related court decisions from ongoing defaults in Puerto Rico have Recovery rates 24 slowed since mid 2019, but overall continue to reinforce the trends we have previously Appendices 31 identified, including a possible new trend of selective debt repudiation. Appendix A: Overview of rated public finance sector 31 » Two defaults to date in 2020 but not virus driven. The shutdowns in response to Appendix B: Additional cumulative the coronavirus have created an unprecedented global economic shock, but we continue default rates (CDR) analysis 34 to foresee no defaults among rated municipal issuers as a direct result. Separately, the Archdiocese of New Orleans (Caa1 negative) filed for pre-emptive bankruptcy on May 1, Contacts and the process led to a July 1 payment default, while the Virgin Islands Water and Power Alfred Medioli +1.212.553.4173 Authority (Caa2 negative) defaulted by way of a forced extension of an unrated BAN Senior Vice President/Mgr/RPO maturity, deemed a distressed exchange and default by Moody's definition. [email protected] » Municipal defaults and bankruptcies have become more common in the last Sarah Jensen +1.214.979.6846 AVP-Analyst decade but are still rare overall. The average five-year municipal default rate since [email protected] 2010 was 0.13%, compared to 0.08% for the entire study period. In contrast, the average Varun Agarwal +1.212.553.4899 five-year global corporate default rate was 6.3% since 2010 and 6.7% since 1970. The VP-Sr Credit Officer average rating of municipal issuers is much higher than the average rating of corporates. [email protected] » Fewer ratings changed in 2019 compared to 2018. Rating volatility fell to 7.8 notches Kumar Kanthan +1.212.553.1428 Senior Vice President/Mgr/CSR per 100 credits in 2019 from 8.6 notches per 100 credits in 2018. Compared to rating [email protected] volatility for global corporates, rating volatility for municipals has been significantly lower. Daniel Gates +1.212.553.7923 In 2019, rating upgrades outpaced rating downgrades, but through the first half of 2020, MD-Gbl Rtgs&Process Oversight rating drift has been close to zero. [email protected] » Municipal ratings have successfully differentiated defaulters from non-defaulters. Simon Simoski +1.212.553.3653 Associate Analyst Over the study period, the three-year average defaulter position was 93.9% for [email protected] municipals compared to 87.8% for global corporates. The five-year average defaulter Kuan-Heng Chen +1.212.553.2162 position was 92.2% for municipals and 86% for global corporates. Associate Analyst/MDG [email protected] » Municipal credits continue to remain highly rated since the recalibration to Moody's global long-term rating scale in 2010. Cumulative default rates by rating CLIENT SERVICES category for municipals and corporates have been comparable since recalibration. Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE A data supplement, US municipal bond defaults and recoveries, 1970-2019 - Excel supplement, was published along with this study. Introduction This study analyzes the performance of Moody's municipal ratings and their consistency with ratings for global corporates (which include both non-financial corporates and financial institutions). It covers public underlying ratings for all public finance issuers, including US state and local governments, municipal utilities, not-for-profit hospitals, housing agencies, colleges and universities, as well as other municipal issuers with long-term debt ratings. It also includes certain municipal infrastructure and project finance credits that are tracked in parallel in our infrastructure default study. Default rates that incorporate the better of an obligor's underlying and enhanced ratings are presented in Appendix B. Insured and letter of credit-backed ratings are excluded from the study. Although the US public finance sector is notable for infrequent defaults and extraordinary stability throughout the study period, it is evolving in fundamental ways, as we have observed in our series of annual default studies since 2013. The once-comfortable aphorism that “munis do not default” is no longer credible: rating volatility, rating transition rates and cumulative default rates (CDR) have all increased since 2010, though they had begun to stabilize before the current virus-related stresses. Moreover, there is a growing awareness that legal security, while important in recovery, is a weak shield against default when credit fundamentals are poor. More recent challenges confronting the sector are substantial increases in pension and retirement healthcare leverage, and the associated heightened exposures to equity markets and demographic shifts. The growth of total leverage is significant and in stark contrast to the earlier decades of low bonded debt and long-term economic expansion. The recoveries and related court cases emerging from Puerto Rico have broadly confirmed the sectoral changes afoot. The past lessons for default and recovery – the liquidity-driven and relatively short-lived defaults of the Great Depression, in contrast to the debt-driven defaults and repudiations of state debt from the 1840s – are sobering.1 Ultimately, the character of public finance going forward will be shaped by the sector's ability to accommodate these new challengesgiven its long-standing tendency to defer or defuse risk and otherwise preserve market access, while continuing to function. Nearly every one of the crises that the municipal sector has undergone, whether before or after 1970, are different in causation and character; the sector is now enduring a very unique set of stresses stemming from the virus-related shutdowns. An important observation from the 50-year study period covered by this report is that any one default may only reflect the idiosyncrasies of that individual credit, and not be representative of any general sector trend. This particularly applies to the long period up to 2008, during which general government defaults were exceedingly rare. Other observed defaults may be tightly clustered with credit events within a specific subsector that have common underlying drivers, such as the elevated incidence of multi-family housing defaults between 2003 and 2008. Broader default patterns may emerge as a subsector’s risk profile shifts, driven, for example, by changes in consumer preferences or remote office work. Emerging trends No new municipal defaults in 2019. While there were no new rated defaults in 2019, we continue to see notable developments concerning default, bankruptcy and recovery. The California Statewide Communities Development Authority pension obligation bond pool financing 2007 Series A-2 (Caa2 positive) is unusual for severe credit stress following a natural disaster but has continued to avert default. The small town of Paradise is the pool financing's largest participant, whose share is currently 40%. The town suffered near complete destruction and substantial loss of life in the late 2018 wildfires. Nevertheless, Paradise was able to make its scheduled bond payment deposit due August 1, 2019 through insurance settlements and state backfill of lost property tax revenue, avoiding a default and ensuring a June 2020 bond payment. As a result, there continue to be no rated defaults due to natural disasters. Paradise so far demonstrates that willingness to repay debt can overcome many obstacles, including, in this case, very small scale and near total destruction. While multiple Commonwealth of Puerto Rico (Ca negative) entities remain in default in 2019, there have been no new defaults; notably, several of the Commonwealth's distressed entities have not defaulted, most prominently the University of Puerto Rico (C negative) and the Puerto Rico Aqueduct & Sewer Authority (PRASA water/sewer enterprise; Ca negative) which may well be restructured before any current payment default occurs. Puerto Rico, although a US Territory, reinforces one pattern we have seen elsewhere, which is that a bankruptcy or bankruptcy-like proceeding may not only affect recoveries differently across separate debt 2 15 July 2020 US Public Finance: US municipal bond defaults and recoveries, 1970-2019 MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE classes but may simply not impair all debt classes to begin with. A key decision on the relative status of general obligation debt, which is also the subject of a repudiation effort, is still forthcoming. 2020: Black Swan or Pink Flamingo? Earlier editions of our annual report advanced the concept of a “new normal” for public finance given the conditions that lingered from the preceding 2009 financial crisis. Despite the persisting changed expectations about default, including recovery and the relative importance of legal pledges, and the still growing burden of defined benefit pensions, high fixed cost charges and asset market risk, there has been one very significant change: economic growth rebounded from the anemic 1-2% earlier in the decade, bringing with it a radical and even historic drop in unemployment. This growth has underlaid the strong performance of Moody’s-rated municipal issuers in the past two years, which not only have seen no defaults but broadly have managed to rebuild reserves. This trend largely explains why a number of state ratings have either been upgraded or changed to positive outlooks in the year leading into Q1 2020.

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2010 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-08323 CIGNA Corporation (Exact name of registrant as specified in its charter) Delaware 06-1059331 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Two Liberty Place, 1601 Chestnut Street Philadelphia, Pennsylvania 19192 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code (215) 761-1000 Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011 Commission file number 1-08323 CIGNA CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 06-1059331 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Two Liberty Place, 1601 Chestnut Street Philadelphia, Pennsylvania 19192 (Address of principal executive offices) (Zip Code) (215) 761-1000 Registrant’s telephone number, including area code (215) 761-3596 Registrant’s facsimile number, including area code Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark Yes No • whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. • whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). • whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION ------------------------------------ x In the Matter of, LYNN TILTON Administrative Proceeding PATRIARCH PARTNERS, LLC, File No. 3-16462 PATRIARCH PARTNERS VIII, LLC, PATRIARCH PARTNERS XIV, LLC and Judge Carol Fox Foelak PATRIARCH PARTNERS XV, LLC Respondents. ------------------------------------ x DECLARATION OF LISA H. RUBIN IN SUPPORT OF RESPONDENTS' MOTION TO COMPEL MBIA TO PRODUCE DOCUMENTS RESPONSIVE TO RESPONDENTS' SUBPOENAS I, Lisa H. Rubin, hereby declare as follows: 1. I am Of Counsel in the law firm of Gibson, Dunn & Crutcher LLP, attorneys for the above-referenced Respondents. I submit this declaration in support of Respondents' Memorandum of Law in Support of Respondents' Motion to Compel MBIA to Produce Documents Responsive to Respondents' Subpoenas, dated September 26, 2016. 2. I submit this declaration based on my personal knowledge· and a review of Gibson Dunn's files. 3. Attached hereto as Exhibit 1 is a true and correct copy of the New York Department of Financial Services' Report on Examination of MBIA Insurance Corp., as of December 31, 2011. 4. Attached hereto as Exhibit 2 is a true and correct ·copy of the Memorandum of Law in Support of Plaintiff's Motion to Remove Confidentiality Restrictions in MBIA Insurance Corp. v. Countrywide Home Loans, Case No. 6028252008, 2012 WL 8024565 (N.Y. Sup. Aug. 6, 2012). 5. Attached hereto as Exhibit 3 is a true and correct copy of MBIA' s Q2 2016 Results Earnings Call Transcript, dated August 9, 2016. 6. Attached hereto as Exhibit 4 is a true and correct copy of the subpoena Your Honor issued to MBIA at Respondents' request on May 27, 2015.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 or ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-9583 MBIA INC. (Exact name of registrant as specified in its charter) Connecticut 06-1185706 (State of incorporation) (I.R.S. Employer Identification No.) 1 Manhattanville Road, Suite 301, Purchase, New York 10577 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (914) 273-4545 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class Trading Symbol(s) on which registered Common Stock MBI New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

NEW YORK PENNSYLVANIANEW YORK New York Association of Independent Adjusters, Inc. PennsylvaniaNew York Association AssociationCorporate of of Independent Independent Structures Insurance Adjusters, Adjusters Inc. 1111 Route 110, Suite 320, Farmingdale, NY 11735 1111 Route 110,110 Suite Homeland 320, Farmingdale, Avenue NY 11735 E-Mail: [email protected] section presents an alphabetical listing of insurance groups, displaying their organizational structure. Companies in italics are non-insurance entities. The effective date of this listing is as of July 2, 2018. E-Mail:Baltimore, [email protected] MD 21212 www.nyadjusters.org www.nyadjusters.orgTel.: 410-206-3155 AMB# COMPANY DOMICILEFax %: OWN 215-540-4408AMB# COMPANY DOMICILE % OWN 051956 ACCC HOLDING CORPORATION Email: [email protected] AES CORPORATION 012156 ACCC Insurance Company TX www.paiia.com100.00 075701 AES Global Insurance Company VT 100.00 PRESIDENT 058302 ACCEPTANCEPRESIDENT INSURANCE VICECOS INC PRESIDENT 058700 AETNA INC. VICE PRESIDENT Margaret A. Reilly 002681 Acceptance Insurance Company Kimberly LabellNE 100.00 051208 Aetna International Inc CT 100.00 Margaret A. Reilly PRESIDENT033722 Aetna Global Benefits (BM) Ltd Kimberly BermudaLabell 100.00 033652 ACCIDENT INS CO, INC. HC, INC. 033335 Spinnaker Topco Limited Bermuda 100.00 012674 Accident Insurance Company Inc NM Brian100.00 Miller WEST REGIONAL VP 033336 Spinnaker Bidco Limited United Kingdom 100.00 058304 ACMATVICE CORPORATION PRESIDENT 033337 Aetna Holdco (UK) LimitedEXECUTIVEWEST REGIONAL SECRETARYUnited Kingdom VP 100.00 050756 ACSTAR Holdings Inc William R. WestfieldDE 100.00 078652 Aetna Insurance Co Ltd United Kingdom 100.00 010607 ACSTARDavid Insurance Musante Company IL 100.00 091442 Aetna Health Ins Co Europe DAC WilliamNorman R.

MBIA Inc. Quarterly Operating Supplement March 31, 2018 First Quarter 2018 Safe Harbor Disclosure 1 MBIA Inc. (Consolidated) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Adjusted Net Income (Loss) Reconciliation, Adjusted Net Income (Loss) Trend 5 Adjusted Book Value Per Share 6 Securities Buyback Activity 6 U.S. Public Finance Insurance Segment (primarily National Public Finance Guarantee Corporation GAAP Consolidated Balance Sheets 8 GAAP Consolidated Statements of Operations 9 GAAP Amortization of Gross Par, Gross Debt Service, Gross Unearned Premium and Net Cash Premiums Collected and Expected 10 Statutory Balance Sheets Summary 10 Claims Paying Resources 10 Investment Portfolio Including Cash and Cash Equivalents 11 Liquidity Position 12 Insured Portfolio Profile by Geography and by Bond Type 13 Insured Portfolio - 50 Largest Credits 14 Credit Quality Distribution, Top 10 Below Investment Grade (BIG) Credits 15 MBIA Insurance Corporation and Subsidiaries Statutory Balance Sheets 17 Statutory Statements of Income 18 Liquidity Position 19 Amortization of Gross Par, Gross Debt Service, Net Unearned Premium and Future Premiums 20 Claims-Paying Resources 20 Investment Portfolio Including Cash and Cash Equivalents 21 Insured Portfolio Profile Par Value by Bond Type, Par Value by Geography 22 Top 10 Below Investment Grade (BIG) Credits 23 Net Payment Activity on Second-lien RMBS Exposure 23 MBIA Inc. (Parent Company) Corporate Segment Balance Sheets 25 Liquidity Position 26 Glossary 27 (1) This report is unaudited. Safe Harbor Disclosure This Operating Supplement of MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA”, the “Company”, “we”, “us” or “our”) includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

GW Law Faculty Publications & Other Works Faculty Scholarship 2008 Rating Risk after the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability Jeffrey Manns George Washington University Law School, [email protected] Follow this and additional works at: https://scholarship.law.gwu.edu/faculty_publications Part of the Law Commons Recommended Citation Jeffrey Manns, Rating Risk after the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability, 87 N.C. L. Rev. 1011 (2009). This Article is brought to you for free and open access by the Faculty Scholarship at Scholarly Commons. It has been accepted for inclusion in GW Law Faculty Publications & Other Works by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. RATING RISK AFTER THE SUBPRIME MORTGAGE CRISIS: A USER FEE APPROACH FOR RATING AGENCY ACCOUNTABILITY* JEFFREY MANNS** This Article argues that an absence of accountability and interconnections of interest between rating agencies and their debt-issuer clients fostered a system of lax ratings that provided false assurances on the risks posed by subprime mortgage- backed securities and collateralized debt obligations. It lays out an innovative, yet practical pathway for reform by suggesting how debt purchasers—the primary beneficiaries of ratings—may bear both the burdens and benefits of rating agency accountability by financing ratings through a Securities and Exchange Commission (“SEC”)-administered user fee system in exchange for enforceable rights. The SEC user fee system would require rating agencies both to bid for the right to rate debt issues and to assume certification and mandatory reporting duties to creditors.

Investor Attention and Municipal Bond Returns Kimberly Cornaggia1 John Hund2 Giang Nguyen1 1Penn State University 2University of Georgia Seventh Annual Brookings Municipal Finance Conference Cornaggia, Hund, and Nguyen Investor Attention and Municipal Bond Returns July 16, 2018 1 / 28 The Big Picture Question: how informationally efficient is the municipal bond market? Revised Question: do investors in municipal bond markets use readily available information from other financial markets? Answer: No. The market updates slowly and remains segmented from other linked markets. Method: A simple event study, complicated greatly by illiquidity and heterogeneity. More Detailed Method: When bond insurers become distressed and/or downgraded, we examine when and if returns on Aaa-rated uninsured bonds diverge from lower-rated insured bonds. Cornaggia, Hund, and Nguyen Investor Attention and Municipal Bond Returns July 16, 2018 2 / 28 Our Contributions 1 Clean and rigorous analysis of whether muni investors respond to shocks (and which type) affecting the value of their investments. Both retail and institutional municipal investors seem to ignore information in equity and CDS markets. Changes in ratings for insurers prompt some selling by institutions. Overall, the municipal market remains highly segmented from other markets. 2 Novel analysis of whether insurance is valuable. Returns of low-rated insured bonds are identical to Aaa-rated uninsured bonds when insured by Aaa-rated insurer. 3 Robust methodology for computing indices and abnormal returns in illiquid and heterogeneous markets for use in event study analysis (with statistical inference). Cornaggia, Hund, and Nguyen Investor Attention and Municipal Bond Returns July 16, 2018 3 / 28 We need an event date (x2) 1 Financial Distress revealed in equity market in Oct/Nov 2007 2 Loss of Aaa credit rating in June 2008 Importantly, the financial distress of the insurers is almost exclusively due to bad decisions to insure sub-prime CDO structures, and not due to credit deterioration in the municipal market.

FIXING FINANCE SERIES – PAPER 3 | NOVEMBER 2008 The Origins of the Financial Crisis Martin Neil Baily, Robert E. Litan, and Matthew S. Johnson The Initiative on Business and Public Policy provides analytical research and constructive recommendations on public policy issues affecting the business sector in the United States and around the world. The Origins of the Financial Crisis Martin Neil Baily, Robert E. Litan, and Matthew S. Johnson The Initiative on Business and Public Policy provides analytical research and constructive recommendations on public policy issues affecting the business sector in the United States and around the world. TH E O R IGI ns O F T H E F I N A N CIA L Cr I S I S CONTENTS Summary 7 Introduction 10 Housing Demand and the Perception of Low Risk in Housing Investment 11 The Shifting Composition of Mortgage Lending and the Erosion of Lending Standards 1 Economic Incentives in the Housing and Mortgage Origination Markets 20 Securitization and the Funding of the Housing Boom 22 More Securitization and More Leverage—CDOs, SIVs, and Short-Term Borrowing 27 Credit Insurance and Tremendous Growth in Credit Default Swaps 32 The Credit Rating Agencies 3 Federal Reserve Policy, Foreign Borrowing and the Search for Yield 36 Regulation and Supervision 0 The Failure of Company Risk Management Practices 2 The Impact of Mark to Market 3 Lessons from Studying the Origins of the Crisis References 6 About the Authors 7 NOVEMBER 2008 TH E O R IGI ns O F T H E F I N A N CIA L Cr I S I S SUMMARY he financial crisis that has been wreaking ing securities backed by those packages to inves- havoc in markets in the U.S.

CASE STUDY IV FAIRHOLME Ignore the crowd. This presentation uses MBIA, Inc. (“MBIA” or the “Company”) as a case study to illustrate Fairholme Capital Management’s investment strategy for each of The Fairholme Fund, The Fairholme Focused Income Fund (“The Income Fund”), and The Fairholme Allocation Fund (“The Allocation Fund”), (each a “Fund” and collectively, the “Funds”). In the pages that follow, we show the Funds’ shareholders why we “Ignore the crowd” with regard to our portfolio positions that are currently out of favor in the market. However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold, or sell certain securities or any other investment mentioned herein. Our opinion of a company’s prospects should not be considered a guarantee of future events. Investors are reminded that there can be no assurance that past performance will continue, and that a mutual fund’s current and future portfolio holdings always are subject to risk. As with all mutual funds, investing in the Funds involves risk including potential loss of principal. Opinions expressed are those of the author and/or Fairholme Capital Management, L.L.C. and should not be considered a forecast of future events, a guarantee of future results, nor investment advice. The Funds’ holdings and sector weightings are subject to change. As of May 31, 2012, MBIA securities comprised 3.0% of The Fairholme Fund’s total net assets, 37.4% of The Income Fund’s total net assets, and 29.3% of The Allocation Fund’s total net assets. The Funds’ portfolio holdings are generally disclosed as required by law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end.

News Bulletin March 9, 2009 “Good Bank-Bad Bank” for Insurance Companies: Is MBIA Just CIGNA Redux, Plus CDSs? “Good Bank-Bad Bank” in the Current Financial Crisis1 In the early days of the financial crisis in late 2007 and early 2008, monoline financial guaranty insurers began to experience rating agency downgrades due, in part, to their wrapping of structured financial products such as collateralized debt obligations and asset-backed securities. Securities that are guaranteed by monolines are rated at the higher of the rating of the wrapping insurer or the published underlying rating of the security. Historically, this business required a “AAA” rating. In order to maintain the rating, monolines typically write to a “no-loss” or “remote loss” standard and limit their business to investment grade bonds. With a loss of their top ratings, the monolines effectively lost their ability to write new business. Insurers such as Financial Guaranty Insurance Co. (“FGIC”) announced plans to divide their businesses into legally distinct entities, one to house the troubled structured finance business and the other to hold their healthy traditional municipal bond business. At the time, a number of issues were raised as to the structure of “good bank-bad bank” reorganizations and the consequences of such restructurings. In particular, capital markets participants were particularly focused on the treatment of credit default swaps (“CDSs”) written on or referencing, and by, these restructured monolines. Ultimately, no restructurings were consummated. With the deepening of the financial crisis in 2008 and the enactment of various federal initiatives to mitigate the cascading effects,2 a number of proposals were considered to restore financial stability and investor confidence, including a government-sponsored good bank-bad bank model.

Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis Robert P. Bartlett, III* Abstract: Conventional wisdom concerning the causes of the Financial Crisis posits that insufficient disclosure concerning firms’ exposure to complex credit derivatives played a key role in creating the uncertainty that plagued the financial sector in the fall of 2008. To help avert future financial crises, regulatory proposals aimed at containing systemic risk have accordingly focused on enhanced derivative disclosures as a critical reform measure. A central challenge facing these proposals, however, has been understanding whether enhanced derivative disclosures can have any meaningful effect given the complexity of credit derivative transactions. This Article provides an empirical examination of the effect of enhanced derivative disclosures by examining the disclosure experience of the monoline insurance industry in 2008. Like AIG Financial Products, monoline insurance companies wrote billions of dollars of credit default swaps on multi-sector CDOs tied to residential home mortgages, but unlike AIG, their unique status as financial guarantee companies subjected them to considerable disclosure obligations concerning their individual credit derivative exposures. As a result, the experience of the monoline industry during the Financial Crisis provides an ideal setting with which to test the efficacy of reforms aimed at promoting more elaborate derivative disclosures. Overall, the results of this study indicate that investors in monoline insurers showed little evidence of using a firm’s derivative disclosures to efficiently resolve uncertainty about a monoline’s exposure to credit risk. In particular, analysis of the abnormal returns to Ambac Financial (one of the largest monoline insurers) surrounding a series of significant, multi-notch rating downgrades of its insured CDOs reveals no significant stock price reactions until Ambac itself announced the effect of these downgrades in its quarterly earnings announcements.