Statement on Credit Exposure in the TIAA General Account and the TIAA-CREF Fixed-Income Portfolios as of June 30, 2008

The subprime lending crisis, which began in mid-2007, occurred largely as a result of a relaxation of lending standards and widespread availability of credit to many underqualified home buyers. As interest rates rose, many of these home buyers were unable to keep up with their higher monthly payments; this caused a sharp increase in residential mortgage defaults and home foreclosures. While the initial impact of the crisis was felt primarily within housing markets, the crisis has widened substantially, restricting access to consumer and commercial credit, reducing corporate earnings, slowing consumer spending, and curbing the nation's overall economic growth.

While subprime-related losses have been concentrated within those mortgage-backed and asset-backed securities that are not issued by government agencies, other types of fixed-income securities have been affected because credit conditions in general have worsened. These include auction-rate securities, bonds with direct or indirect exposure to monoline bond insurers, and SIV-issued debt. (All of these securities are defined below).

Throughout this unfolding situation, TIAA-CREF's fixed-income and guaranteed accounts have had, and have maintained, low exposures to subprime securities and other types of fixed-income securities that have been the focus of investor concern. As of June 30, 2008, losses or impairments as a result of such holdings have remained limited, reflecting the depth of fundamental credit analysis that TIAA-CREF applies in the selection of all securities purchases.

To address investor concerns about credit market conditions, we are providing a detailed description of our exposure to each type of fixed-income security that has been the focus of concern.

SUBPRIME MORTGAGES

Background: The effect of increasing mortgage defaults has been most directly seen within those mortgage- and asset-backed securities that are not issued by government agencies. A disproportionate share of subprime mortgage-related losses has been concentrated within a class of securities known as asset-backed securities collateralized debt obligations (ABS CDOs). These securities are, in many cases, made up of pools of lower-quality mortgages and/or home equity loans. As credit conditions have deteriorated, these lower-quality loans have experienced high default rates.

TIAA General Account ($178.2 billion in invested assets as of 6/30/08): Please note that no investor can invest in the TIAA General Account. Our current holdings in the subprime area are generally of high quality (largely AAA and AA rated) and represent a very small percentage (approximately 2 to 3 percent) of the General Account's holdings. More importantly, the General Account has extremely limited exposure to ABS CDOs, consisting of only one position, which is not meaningful given the size of the General Account.

Since the beginning of 2007, rating-agency downgrades have affected 48 subprime mortgage-related securities with a total value of $241.3 million (less than one-fifth of 1 percent of the General Account's assets). An additional 42 subprime mortgage-related securities with a total book value of $389.4 million (about one-fifth of 1 percent of assets) were affected by monoline-related downgrades. These downgrades occurred because the monoline bond insurers that insure these securities were themselves subject to downgrades on concern that they may not have sufficient capital to support the bonds they insure. Monoline bond insurers are discussed in more detail below.

In addition, from Jan. 1, 2007 through June 30, 2008, subprime realized losses within the General Account totaled $103.3 million (less than one-tenth of 1 percent of assets).

CREF Bond Market Account ($8.3 billion in net assets as of 6/30/08); CREF Inflation-Linked Bond Account ($6.6 billion); and CREF Money Market Account ($12.6 billion): Subprime holdings within the CREF Bond Market Account are generally of high credit quality and represent approximately 3 percent of account assets.

Although the Bond Market Account has realized no principal losses as a result of subprime holdings, since the beginning of 2007 the account has sustained two security downgrades, representing $862,000. An additional 12 subprime mortgage-related securities with a total market value of $83 million were affected by monoline-related downgrades. To a large extent, investments in insurance-wrapped securities are based on the cash flow structure and / or credit quality of the collateral and not solely on the insurance credit enhancement provided to the trust.

The Inflation-Linked Bond and Money Market Accounts have no subprime-related exposure and no ABS CDO holdings. 

MONOLINE BOND INSURERS

Background: Monoline bond insurers guarantee the timely repayment of a bond's principal and its interest; the term "monoline" refers to the fact that these insurers operate within single industries. As the credit crisis has deepened, attention has focused on monoline bond insurers such as Ambac and MBIA, which have been subject to credit downgrades because of a possible lack of sufficient capital to cover the bonds they insure. Such downgrades not only have impaired the valuations of debt securities issued directly by these insurers, but also have resulted in cascading downgrades across a wide range of insured bonds. While continued deterioration in the credit quality of monoline insurers has the potential to cause further credit market disruptions, the extent of further unanticipated losses has been limited to some extent by the early recognition on the part of investors and financial institutions of the reduced value of bond insurance, leading to early write-downs of insured bonds.

TIAA General Account and CREF Bond, Inflation-Linked Bond, and Money Market Accounts: Direct exposure to bond insurers and exposure to insured (or insurance-wrapped) securities within the TIAA General Account represent less than 2 percent of the account's assets; the majority of this exposure is related to insurance-wrapped holdings. Since the beginning of 2007, monoline-related realized losses in the General Account have totaled $93 million (less than one-tenth of 1 percent of account assets.).

The CREF Bond Market Account has no direct exposure to bond insurers, although approximately 2 percent of its holdings consist of insurance-wrapped securities. The Inflation-Linked Bond and Money Market Accounts have no exposure to bond insurers or insurance-wrapped securities. To a large extent, purchases of insurance-wrapped securities are based on the credit quality of the underlying issuer and not on the degree of credit enhancement provided by insurance in place.

TIAA-CREF Institutional Mutual Funds—Tax-Exempt Bond Fund II: Approximately 46 percent of the Tax-Exempt Bond Fund II holdings are insured. This relatively high level of insurance-wrapped bond exposure reflects the prevalent use of bond insurance as a means of credit enhancement in the municipal bond markets. As indicated above, purchases of insurance-wrapped securities are based on the credit quality of the underlying issuer and not on the degree of credit enhancement provided by insurance in place.

AUCTION-RATE SECURITIES

Background: Auction-rate securities are a type of debt security that have a long-term stated maturity but pay an interest rate that is reset at frequent intervals through auctions typically held every seven, 28, or 35 days. Because of the frequent auctions and rate resets, auction-rate securities generally pay interest rates that are tied to short-term rates. Municipal securities represent a large percentage of the auction-rate market.

Due in part to concerns over the credit quality of monoline bond insurers that commonly insure auction-rate securities issues, a number of auction-rate securities have failed to find buyers in some auctions over the past several months, causing interest rates for some of these securities to increase sharply. Disruptions within this market have caused some auction-rate security issuers to seek alternative means of financing and have caused concerns among holders of those securities about reduced liquidity and potential losses in this class of investments.

TIAA General Account: The TIAA General Account holds no auction-rate securities.

CREF Bond Market, Inflation-Linked Bond, and Money Market Accounts: None of these accounts holds any auction-rate securities.

COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS)

Background: In the first quarter of 2008, reduced availability of credit and concern about the vulnerability of commercial real estate properties in an economic downturn resulted in a sharp increase in the yields of commercial mortgage-backed securities (CMBS). While these higher yields indicated higher expected default rates among such securities, commercial real estate fundamentals (e.g., property valuations, occupancy rates and rental growth) have retained a degree of stability, and CMBS delinquencies remain at historically low levels. In the second quarter of 2008, amid acknowledgment of better-than-anticipated fundamentals, CMBS performance improved.

TIAA General Account: Commercial mortgage-backed securities holdings represent approximately 12 percent of the General Account's holdings. Our CMBS portfolio emphasizes high-quality issues that are diversified across various dates of issue. Since the beginning of 2007, CMBS realized losses have totaled $16 million (less than one-hundredth of 1 percent of the General Account's total assets).

CREF Bond Market, Inflation-Linked Bond, and Money Market Accounts: CMBS represent slightly less than 6 percent of the CREF Bond Market Account's holdings, while the Inflation-Linked Bond and Money Market Accounts contain no CMBS holdings.

SIV-ISSUED COMMERCIAL PAPER

Background: During the fourth quarter of 2007, concern over commercial paper (short-term debt securities) issued by entities known as structured investment vehicles (SIVs) reached high levels. These securities faced liquidity problems because many of them had exposure to mortgage-backed securities.

SIVs typically issue short-term, asset-backed commercial paper and use the capital raised to buy to short- and medium-term floating rate debt holdings, including mortgage-backed securities. Prior to the onset of subprime-related problems, SIV-issued debt was frequently purchased by money market funds and other holders of short-term securities.

The deteriorating credit quality of SIVs caused some money market funds to incur losses, but a larger-scale crisis was averted when a number of SIV assets were absorbed onto related bank balance sheets and existing SIV-issued commercial paper matured.

TIAA General Account and CREF Bond Market, Inflation-Linked Bond and Money Market Accounts: Previous holdings of SIV-issued commercial paper have matured, and the TIAA General Account and the CREF Bond Market, Inflation-Linked Bond, and Money Market Accounts currently have no exposure to SIV-issued commercial paper or other SIV-related debt. In addition, none of our accounts or funds has sustained any losses or impairments related to SIV-issued securities.