Está en la página 1de 4

Footnote Exhibits - Page 1014

From: Krishnamurthy, Ananth [ananth@3ainvestors.com] Sent: Thursday, February 08, 2007 4:05 PM To: Paolo Pellegrini Subject: RE: Nice meeting you ... I am back from the underground. Crazy volatility, huh? I know we are incredibly slow given the quick movements in the market. I have been "intensely" looking at manager selection on this. I want to confirm something with respect to Paulson's capabilities based on my conversations with you. The attached email is probably helpful as a context point. Paulson projects defaults and loan performance at a LOAN LEVEL, using your default model incorporating (a)HPA forecasts for the individual loan's geography based on metropolitan area forecasts (using your own sources); and (b)using loan characteristics (all the typical variables from Loan Performance). Then you aggregate across all the loans to create pool cash flows. Then you run this through the ABS cash-flow engine (ie: intex). What makes this hard isthat there is no off-the-shelf way to do this and you had to write the code and the plumbing/interfaces. This allows you for example to compare forecasts for two pools without using a higher level of aggregation. And allows you to compare tranches off two different deals to examine sensitivity to for example specific variables at a loan level.

-- Original Message-From: Paolo Pellegrini [mailto:Paolo.Pellegrini@paulsonco.com] Sent: Sunday, January 14, 2007 4:23 PM To: ananth@3ainvestors.com Subject: RE: Nice meeting you ... AnanthThe probability of writedown of BBB (not just BBB-) RMBS bonds is bond-specific, although some key inputs are common. The most important common input is home price appreciation (HPA) nationally, regionally and at the "metropolitan area" level. HPA drives indidual loan prepayments, defaults and losses. Another common input is interest rates. Interest rates may affect home price appreciation and consequently, though indirectly, prepayments, defaults and losses. Ifinterest rates result in positive HPA, they may also affect prepayments directly (refinance incentive) and default and losses indirectly (prepaid loans don't default). Ifinterest rates do not result in positive HPA, their direct effect on prepayments and indirect effect on defaults and losses is less important (it is very difficult for subprime borrowers to refinance if their property has not appreciated). Bond-specific inputs fall into two categories: collateral characteristics; and deal structure. The most relevant collateral characteristics at origination are FICO, combined loan-to-value ratio (including simultaneous second-lien loans), level of documentation and geographic location (back to HPA). For seasoned collateral, performance after origination, in terms of prepayments, delinquencies, defaults and losses, provides additional insight. The most relevant deal characteristics are overcollateralization, excess spread, step-down triggers and interest rate exposure. We focus primarily on overcollateralization and the so-called delinquency trigger. Excess spread (including the effect of unhedged interest rate exposure) is more important for residual holders than for debt holders, given the timing of realization of losses. Also because of the timing of realization of losses, the cumulative loss trigger (the other step-down trigger) is usually inconsequential. Permanent Subcommittee on Investigations Wall Street & The Financial Crisis Report Footnote #1331
FOIA Confidential Treatment Requested by

PAULSON-ABACUS 0234459

Footnote Exhibits - Page 1015


We evaluate the prospects for home price appreciation with the help of our board of advisors. Not only do we believe that home prices are overvalued on most measures, but we also believe that the Federal Reserve will have to manage interest rates in order to restrain households' continuing equity extraction from their homes at the current unsustainable rate ($400 billion annualized as of the most recent quarterly reading). Even though subprime borrowers are suffering from excessive leverage and debt-service burden, mainstream borrowers still have enormous leverage capacity, predicated on arguably overvalued real estate holdings. Increasing leverage drives consumption and the trade deficit and leaves the dollar and U.S. long-term rates at the mercy of foreign investors' willingness to recycle export receipts into U.S. financial assets, a very unstable arrangement. It istrue that the market is not pricing the subprime RMBS wipeout scenario. In my opinion this situation isdue to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while "real-money" investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based the "news" available everywhere are actually realized. If you want to discuss specific analyses of bond expected losses, we could set up a conference call for the week of the 22nd. I will be in Wyoming but I can do early calls before I go skiing. Please let me know. Paolo -Original MessageFrom: Krishnamurthy, Ananth [mailto:ananth@3ainvestors.com] Sent: Friday, January 12, 2007 3:17 PM To: Paolo Pellegrini Subject: Re: Nice meeting you ... We can do that. The core focus iswhat the logical underpinning - very granularly - is for a wipeout of the BBB-. In some sense itdoesn't take much. But how plausible is it. Clearly the market is not pricing this scenario. It is looking for serial downgrades and pricing to next event, ie: just spread widening. Why does this disconnect exist? Jacob, for example, would say - "the news is everywhere, why isn't this priced in already?"

-Original MessageFrom: "Paolo Pellegrini" <Paolo.Pellegrini@paulsonco.com> Date: Fri, 12 Jan 2007 15:11:39 To:<ananth@3ainvestors.com> Subject: RE: Nice meeting you ... I am out that week and back in the office on the 31st. Please let me know if you want to meet after the 31st. Thanks. -Original MessageFrom: Krishnamurthy, Ananth [mailto:ananth@3ainvestors.com] Sent: Friday, January 12, 2007 3:08 PM To: Paolo Pellegrini Subject: Re: Nice meeting you ... Hi - thx for getting back to me. I am keen to hear your thoughts on this. However, I am travelling next week. Can I circle up with you week of 22nd? -Original Message--From: "Paolo Pellegrini" <Paolo.Pellegrini@paulsonco.com> Date: Fri, 12 Jan 2007 13:15:21 To:<ananth@3ainvestors.com> Subject: RE: Nice meeting you ... AnanthSorry for the delay responding to you. I am available next week. We have our advisory board meeting on Tue pm and I will be in a better position to address your home price question after that. Ifyou have anything specific that you want me to ask

FOIA Confidential Treatment Requested by Paulson & Co.

PAULSON-ABACUS 0234460

Footnote Exhibits - Page 1016


of our board please let me know. Otherwise, please suggest times that work for you on Thu (excl. 10-11 amO or Fri. Regards. -Original MessageFrom: Krishnamurthy, Ananth [mailto:ananth@3ainvestors.com] Sent: Tuesday, January 09, 2007 4:12 PM To: Paolo Pellegrini Subject: RE: Nice meeting you ...
Hi - have read all the stuff.

I know market has moved nicely in your favor. Kudos! Would still be interested in continuing conversation. My core focus in talking with you will be on your homeprice deterioration thesis. Seems like the market is not pricing in a washout of BBB-s. Worst quartile of the index still has a 500bps average spread. Ifitwere pricing in a wipeout, itwould be trading 30c on the dollar. Let me know when you have some time to speak. Thanks Ananth -Original MessageFrom: Paolo Pellegrini [mailto:Paolo.Pellegrini@paulsonco.com] Sent: Wednesday, December 20, 2006 7:22 AM To: ananth@3ainvestors.com Subject: Nice meeting you ... AnanthI wish I had learned of your background and relationship with Jacob earlier in our conversation - I would have been a little
more specific in my remarks.

Redacted by the
Permanent Subcommittee on Investigations
With respect to Andys comments that Intex makes modeling errors, I would note that he cites his experience working on busted manufactured housing deals five years back as the basis for his assessment. I think that Intex has come a long way in terms of quality control. Besides, as John was saying, in this market we can make good trading decisions with our existing analytics. However, we will hire more people with relevant experience including somebody who could focus on reverse engineering the Intex models as such effort becomes more relevant. We have a very good relationship with Intex and have urged them to allow hosting of their data by 101 Odata and made some progress. Aside from being a cash flow engine, Intex isreally a database partly overlapping with LoanPerformance, partly additive to LP with respect to loan prepayment terms including penalties. Inthe context of analyzing seasoned deals, of which we do not do much now but will in the future, cross-checking monthly data between LP and Intex will be valuable. As for our research infrastructure, I am very happy with the choices we have made. I mentioned that we get loan data from LoanPerformance, historical and projected home price data from FISERV/Economy.com and deal data from Intex. Two decisions, however, put us ahead of the pack. The first such decision was to host LP and FISERV on 101 Odata. The second was to forgo integration of the LoanPerformance RiskModel into our analytical platform and to develop instead our proprietary, and extremely parsimonious, prepayment, default and severity model. The use of 101 Odata enabled the second decision because itmade possible to analyze historical data easily, quickly and with minimal initial setup time. Had we gone with LP RiskModel we would be stuck with a white elephant in the middle of a very deep river. Even with Andrew Davidson's more compact model, itwill be a stretch to find a processing platform that can deliver meningful results in a reasonable timeframe (I guess

FOIA Confidential Treatment Requested by Paulson & Co.

PAULSON-ABACUS 0234461

Footnote Exhibits - Page 1017


10+ parallel processors on PolyPaths). I am sure John explained our various strategies, including reverse inquiry sponsorship of bespoke CDOs, both fully-capitalized and synthetically tranched. You might be interested in learning more. Please say hello to Jacob and call me if you want to talk further. Best regards. Paolo M. Pellegrini Vice President Paulson & Co. Inc. 590 Madison Avenue, 29th Floor New York, NY 10022 Phone: (212) 956-4129 (direct) (212) 956-2221 (main) (212) 977-9505 (fax) This e-mail may contain confidential and/or privileged information. Ifyou are not the intended recipient or have received this e-mail in error, please notify the sender immediately and destroy/delete this e-mail. You are hereby notified that any unauthorized copying, disclosure or distribution of the material in this e-mail isstrictly prohibited. This communication isfor informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All information contained in this communication is not warranted as to completeness or accuracy and is subject to change without notice. Any comments or statements made in this communication do not necessarily reflect those of Paulson &Co. Inc.

FOIA Confidential Treatment Requested by Paulson & Co.

PAULSON-ABACUS 0234462

También podría gustarte