(an interoffice email)

> … He’s here w/me now & also is very concerned over the entire
> spectrum, especially all the 5/1 ARM’s & 2nd mgtg paper most
> refinancing this year. Ie: orginally good credits, now not. A ton of
> 5/1 Arm paper was done w/ escalations up 40/50% payment wise.

Presumably the borrowers qualified at the time based on the higher payments?

And I see refi’s ratcheting up nicely. Unemployment is about the same, incomes are up, so most borrowers should qualify for refis,
apart from the ones that slipped by with substandard credit in the first place?

> Guess w/these Insurance Cos being downgraded tomorrow will be BLACK Tuesday.
> So, how do we fix a crisis of CONFIDENCE? BB isn’t too convincing these days.

The risk is mark to market risk if there is forced selling by investors that must have rated credits and were relying on the insurance to comply with their ratings criteria.

Forced selling is disruptive for sure- sellers lose, buyers gain as prices go lower than economic and/or recovery value.

Not much the Fed or Congress can do apart from bailing out the bond holders by taking over some piece of the insurance, and operationally it’s hard to see them doing that on a timely basis. But it would ‘cost’ the govt. a relatively small amount of $ to do that, as first loss would still be the shareholders of the ins. companies, and the govt could insure maybe only 95% of the rest, limiting default losses for bond holders to 5 pts max, for example.

As before, none of this directly alters the real economy, apart from psychological effects that might slow demand for a while. This much like the crash of 87- large financial losses but the real economy muddled through until the Bush tax hikes…

All the best!


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