Credit Call for Wachovia

Pick-a-Pay --The issue of Wachovia's centers on pick-a-pay loans, which is is payment option loan (ARM) and similar to Alt-A in terms of FICO (661) and LTV (current 85% vs origin 71%). --The size of the Pick-a-Pay loan is ~120 bil, 14% of asset. worst case scenario analysis --The default of loan is expected to reach 30%, while the highest level in S&L in commercial loan is just 12% and the highest delinquency level of subprime ARM is 22%. --the loss severity for Alt-A is 20%. Let's inflate it to 30%- 40% --the expected loss rate is 9% - 12%, ~10.8 bil - 14.4 bil loss. --The allowance in the second half of 2008 will reach 6.6 bil, so it might cover the potential loss. HEL --The next riskiest loan is HEL loan with a size of 62 bil, 28 bil first lien and 36 bil second lien worst case scenario analysis --first lien loss rate 3% - 5%, 1 bil - 1.4 bil --second lien loss rate 5% - 7%, 2 bil - 2.5 bil --total loss: 3 bil - 4 bil Commercial Real Estate --48.4 bil, loss rate 1% (0.3% historic peak), 0.5 bil Traditional Mortgage --52 bil, loss rate 1% - 2%, 0.5 - 1 bil Commercial Loan --160.6 bil, loss rate 1% - 2%, 1.6 bil - 3.2 bil --remaining exposure to RMBS (8k p36, http://www.blogger.com/post-create.g?blogID=3864161393184469427) ~4 bil --max loss: ~27 bil --allowance ~10 bil --incremental loss: -17 bil --capital equity: 75 bil, mkt 20 bil subor + junior: 34 bil Trading --10y bond 672 bp --5y CDS 1560 bp Credit Call --short 5y senior CDS and short 10 y bond --the risk of shorting CDS or long 10 y bond alone is the uncertainty of being acquired by another company. When JPM acquired WaMu, the loan is not made whole.