Statement on TIAA-CREF's Holdings in Fannie Mae and Freddie Mac

The federal government's takeover of Fannie Mae and Freddie Mac has many investors asking how these developments will affect their portfolios. The following statement describes TIAA-CREF's holdings in the two companies, the effects that have been seen thus far and the outlook, as we see it, both for our funds and accounts and for the financial markets at large.

Key points

• TIAA-CREF views the government takeover of Fannie Mae and Freddie Mac as a positive development.
• It is important to note, however, that the value of agency-issued securities like these fluctuate based on non-credit-related factors, such as interest-rate movements, which could cause future price declines despite government backing. Also, the additional burden on the U.S. government caused by providing backing for agency-issued securities may result in higher yields and lower prices for U.S. Treasury securities.
• The effect of this action to date on TIAA-CREF investments in Fannie Mae and Freddie Mac has been minimal and in some cases positive. In general, the takeover has had a positive effect on the fixed-income securities issued by the two companies but an adverse effect on their stock.
  • TIAA-CREF's exposure to the common and preferred stock of the two companies totaled about $337 million as of July 31, 2008. This represents a very small portion (less than one-tenth of one percent) of the more than $420 billion in assets that TIAA-CREF had under management as of that date.
  • TIAA-CREF's exposure to Fannie Mae and Freddie Mac bonds and mortgage-backed securities totaled about $36 billion on July 31. The takeover gives these securities an additional degree of protection by the U.S. Treasury and thereby enhances their credit quality.
  • The commercial real estate holdings of the TIAA Real Estate Account bear no relationship to Fannie Mae or Freddie Mac securities, the underlying collateral of which consists primarily of single-family residential properties. The TIAA Real Estate Account also invests in short-term money market instruments, and a portion of these is invested in short-term Fannie Mae and Freddie Mac-issued discount notes; the credit quality of these holdings has been enhanced by the takeover.
• TIAA has one of the strongest financial records of any U.S. insurance company; it is one of three insurance companies to receive the highest credit rating from all major insurance rating agencies.*
• TIAA continues to have the financial strength to meet our long-term obligations — claims-paying ability investors count on for lifetime income.
• Fannie Mae's new CEO, Herb Allison, is a proven leader in overseeing complex and challenging financial issues and is well-suited to lead Fannie Mae.

Background and Asset Class Details

On Sunday, September 7, 2008 U.S. federal regulators announced their takeover of Fannie Mae and Freddie Mac, including control of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock.

As part of the takeover, Fannie Mae chief executive officer Daniel Mudd and Freddie Mac chairman and CEO Richard Syron will step down.

Former TIAA-CREF chairman and CEO Herb Allison will take over as CEO of Fannie Mae, while
U.S. Bancorp CEO David Moffett will be CEO at Freddie Mac.

With more than $420 billion in assets under management as of July 31, 2008, TIAA-CREF maintains varying degrees of exposure to Fannie Mae and Freddie Mac-issued securities within a number of equity and fixed-income portfolios. Although TIAA-CREF's exposure to Fannie Mae and Freddie Mac fixed-income securities is substantial, exposure to common and preferred stock is relatively modest and represents little potential for disproportionately large losses within any TIAA-CREF-managed funds or accounts.

The government takeover of Fannie Mae and Freddie Mac provides an added degree of protection by the U.S. Treasury against default of long- and short-term bonds that have been issued by and/or carry the guarantee of Fannie Mae and Freddie Mac; this enhances the credit quality of these securities.

To address investor concerns about TIAA-CREF's exposure to Fannie Mae and Freddie Mac-issued stocks and fixed-income securities, we are providing a detailed description of our exposure to each type of security that may potentially be a cause of concern. To remain in compliance with fair disclosure regulations, positions discussed are as of July 31, 2008.

Common stock holdings

TIAA-CREF exposure to Fannie Mae and Freddie Mac common stock across all accounts and funds totaled about $137 million on July 31, 2008. As of that date, combined exposure to Fannie Mae and Freddie Mac common stock represented no more than one-quarter of one percent (0.25%) of assets of any single TIAA-CREF-managed fund or account. Since the value of these stocks has declined substantially since then, this exposure has subsequently been reduced.

Preferred stock holdings

On July 31, 2008, Fannie Mae and Freddie Mac preferred shares totaling approximately $200 million were held in a number of TIAA-CREF's fixed-income funds and accounts. A large share of these preferred stock holdings, about $115 million, was held in the TIAA General Account. In no case did Fannie Mae and Freddie Mac preferred stock holdings represent more than two-thirds of one percent (0.67%) of any fund or account's total assets as of July 31.

Bond and mortgage-backed securities holdings

Total exposure to Fannie Mae and Freddie Mac-issued debt and agency-guaranteed mortgage-backed securities totaled about $36 billion as of July 31, 2008 and represented a substantial portion of assets for a number of funds and accounts, including the TIAA General Account as well as the CREF Bond Market, Social Choice, and Money Market accounts and the following TIAA-CREF Institutional Mutual Funds: Bond, Bond Plus, Short-Term Bond, High-Yield II, and Money Market. This reflects the fact that, as of March 31, 2008, U.S. mortgage-backed securities, much of it issued by Fannie Mae and Freddie Mac, totaled $7.4 trillion, or nearly one quarter of the nation's total bond market.

No Fannie Mae and Freddie Mac-issued debt and/or guaranteed mortgage-backed securities were held in any of TIAA-CREF's equity funds and accounts or by the CREF Inflation-Linked Bond Account or the TIAA-CREF Institutional Mutual Funds Inflation-Linked Bond Fund.

From a credit quality standpoint, the explicit government backing of Fannie Mae and Freddie Mac debt issues is a positive development. However, current yields on Fannie Mae and Freddie Mac-issued subordinated debt still indicate a degree of investor concern. TIAA-CREF's holdings of Fannie Mae and Freddie Mac-issued subordinated debt have been modest, with no such exposure in the TIAA General Account as of July 31, 2008. Holdings within a number of other fixed-income-based accounts and funds (including the CREF Bond Market Account and the fixed-income portion of the Social Choice Account, as well as the TIAA-CREF Institutional Bond and Bond Plus funds) were limited to less than one-third of one percent (approximately 0.33% or less) of total assets.

The TIAA-CREF Institutional Short-Term Bond Fund maintained somewhat higher exposure to Fannie Mae and Freddie Mac-issued subordinated debt, which represented 1.3% of fund assets as of July 31, 2008. Other TIAA-CREF accounts and funds, including the CREF Inflation-Linked Bond and Money Market Accounts, as well as the TIAA-CREF Institutional Mutual Funds Inflation-Linked Bond, High-Yield II, and Money Market funds, had no exposure to Fannie Mae and/or Freddie Mac subordinated debt.

A note about the TIAA Real Estate Account

The TIAA Real Estate Account invests primarily in high-quality, directly-owned commercial real estate, including office, retail, industrial, and apartment properties. These commercial real estate holdings have no direct relationship to Fannie Mae or Freddie Mac-issued debt or mortgage-backed securities, the underlying collateral of which consists primarily of single-family residential properties. TIAA Real Estate Account also invests in short-term money market instruments. A portion of these short-term holdings is invested in short-term Fannie Mae and Freddie Mac-issued discount notes. The credit quality of these short-term debt securities has been enhanced as a result of the government takeover of Fannie Mae and Freddie Mac.

Outlook

TIAA-CREF views the government takeover of Fannie Mae and Freddie Mac as a positive development since it provides needed reassurance to the credit markets and is a step toward the resolution of uncertainty surrounding broader financial market conditions. This may provide a window for private-sector institutions to fully disclose mortgage-related exposures that may be subject to further write-downs and/or to raise additional capital as needed to alleviate investor concerns. TIAA-CREF will continue to closely monitor the progress of the takeover of Fannie Mae and Freddie Mac.