December 31, 2008

Volume 1, Issue 1 RRMS Market Insights

A Publication of RRMS Advisors, LLC

In this Issue… Editor’s Note

Welcome to RRMS Market
• General Market
Insights. This newsletter is
Overview
intended to add value to our
• Credit Spreads clients and friends by providing
a brief overview of
• Residential Housing developments in credit, real
• Litigations estate and financial services
markets during December, 2008
• RRMS in the Press with a focus on the collective
expertise of our Managing
• Quote of the Month
Partners (credit spreads,
• RRMS Advisors recourse management,
community banking, mortgage
related securities and assets,
etc.). All credit spreads are as of
the end of 2008.
In most cases, references to “I”
and “We” will reflect the opinions
and observations of the Editor or
the Firm. An informed debate
among experts can be expected
in any environment, and a
boutique advisory firm is no
exception. We are happy to
respond to requests for clarity on
information or issues presented
in his publication, so please feel
free to make use of the email
links on our website,
www.rrmsco.com
Most importantly, RRMS Market
Insights is an invitation to ask
questions and provide outside
commentary.
We look forward to your input!

General Market Overview

Making the headlines during December was
the anticipated but “confused” bailout of
General Motors and its finance arm, GMAC, a
joint venture between the private equity firm
Cerebrus and GM. The combination of
reversals in position, leniency to private
investors, overall willingness to negotiate terms
and the absence of clear conditions as to the
use of proceeds and objectives, represents
one of the more obvious cases of government
sponsored uncertainty to compound stressed
conditions in the credit markers. No doubt, the
haphazard nature of communications and the
related deal structure reflected the strong
desire on the part of the outgoing
administration to avoid collapse of one of the
big three as the last chapter of its legacy.
Nevertheless, there are many who believe
that structure of the bailout will create
unreasonable future expectations and
empower other institutions seeking financial
assistance. One standout was the waiver of
capital requirements originally be imposed by
regulators as a condition to Bank Holding
Company status, suggesting that a desperate
conclusion was reached that a TARP award
to GM would lose its significance without a
resuscitated financing arm.

RRMS Markett Insights
Credit Spreads
Two events had the greatest impact on credit
spreads for debt securities during December:
1) The Fed’s announcement that it will
purchase up to $500 billion in GSE
securities as part of an initiative to bring
down home mortgage rates; and
2) The bailout of GM through a TARP infusion
of $6 billion for GMAC and TARP loan
commitments totaling $9.4 billion.
The announced purchase of GSE securities
appeared to be the primary factor in a
tightening of spreads to like term treasuries,
although the net benefit after some
backtracking wound up in the 20 basis points
range. Still the month ended with spreads to
treasuries at 160-170 bps – extremely wide by
historical standards.
The auto bailout seemed to have encouraged a
slight tightening of 5%-10% of spreads across
a broader class of debt securities, most
significantly high yield corporates.
Nevertheless, spreads continue to be at
historically high levels. The biggest winners in
the high yield markets were GMAC bonds, with
gains of 28-30 cents on the dollar for some
maturities and Residential Capital Bonds
improved by 22 cents on the dollar. I disagree
with the implied bet on value recovery at
ResCap, as any dilution of TARP resources
best dedicated to supporting survival of the
core auto manufacturing business is likely to
incite a political backlash.
Another big winner was Washington Mutual
Bonds, as bankruptcy proceedings brought to
light considerable asset values that were
apparently grossly underestimated or not
initially transparent.
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CMBS spreads also slightly tightened in
November, driven primarily by a technical
recovery from soaring increases during
November. With spreads on AAAs
approaching 1000 bps, some investors found
the returns too appealing to forego.
Treasuries ended the month at another
record breaking low, with the 10 year treasury
nearing the 2% mark and even the 30 year
treasury below 3% at 2.62%
Observations:
The GSE purchases to be executed in
January are already priced into the market.
There is a serious question whether these
purchases will achieve the anticipated
declines in home mortgage rates as investors
may perceive yields below the current 3.6% -
3.7% level, unattractive given the duration
and asset/liability risks. Moreover, with the
considerable rise in the dollar over recent
months, foreign investors may take profits
and accelerate plans to scale back on GSE
holdings, mitigating some of the benefits of
the Fed purchases. Even so, under current
circumstances, the mammoth level of
purchases seem to present a win/win
scenario for the Federal Reserve since
spreads to comparable treasuries of 160-170
bps on a risk free basis are extremely
attractive. The growth in the government’s
balance sheet should generate revenues to
offset some of the costs associated with
bailouts and other remedial strategies to pave
the way to economic recovery. Of course,
with the GSEs under conservatorship and the
related securities guaranteed by the
government, it is a misnomer to characterize
this as a risk free spread.

RRMS Market Insights
Credit Spreads - continued
Speaking in general terms with respect to non-GSE
credit spreads, there are no expectations of positive
fundamentals to sustain or continue a tightening of
credit spreads during the first quarter, and the
December reaction may be nothing more than a
artificial bounce, as has often been the case
following each bailout or Presidential appointment.
The wild card is rumored to be elevated activity by
private equity funds as resources are identified to
exploit perceived opportunities across the board.
While much of the widening of spreads over the
year is a direct by product of deteriorating economic
conditions that are expected to persist throughout
2009 and beyond, a considerable component of the
premium is driven by emotion and liquidity
concerns. Paraphrasing a poignant observation of
a respected portfolio manager - “the equity markets
have priced in a recession, whereas the bond
markets have priced in a depression”. The clear
implication is that there is less downside and
greater opportunity in the credit markets. We at
RRMS tend to agree and there are several
opportunities in the financial sector, and believe that
there are considerable opportunities in many other
sectors.
Should investors jump in during the first quarter, we
may see a tightening of spreads. We also may see
Quote of the Month
“At the scale of $50 billion, they should rename it the Madoff scheme and
officially retire the Ponzi name”
The Spirit of Charles Ponzi*
*Credit should be given to all bloggers and other editorial contributors that
expressed similar sentiments in various publications.
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some considerable variances in spreads
among securities with the same credit
ratings as investors identify positive
fundamentals that justify investment in some
sectors or asset classes versus others.
Elevated levels of investment are wholly
dependent on whether the private sector
has completed much of the deleveraging
that has exemplified the second half of
2008.
For CMBS, caution is warranted, regardless
of the attractive spreads. While the
deterioration may be less severe on the
whole, that market is in the early to mid
innings as compared to the RMBS market
and there is considerable downside risk.
Most notable is the Fitch forecast of
elevated delinquencies throughout 2009.
More importantly, a considerable population
of loans has balloon maturities and will need
to be extended or otherwise restructured in
2009 and beyond. At a minimum, this will
create considerable extension risk that
presents the probability of dilution to the
associated risk premiums.

RRMS Market Insights
Residential Housing
According to the Case/Shiller report for
October, the home value index declined
2.2% from September and the year-to-date
decline is 18%. We can expect future
reports to reflect further deterioration in
market conditions, partly because of
seasonal slowdowns, but largely as a result
of declining economic conditions, most
significantly, increased unemployment. Any
improvement will only surface after the new
administration is firmly entrenched in the
issues and appropriate legislative and
resource allocation measures are in place –
given the reality of the process, that will be
well beyond the first quarter of 2009. More
important, it is the quality of the measures
taken and the cumulative synergy that will
be most critical to intervention proving
efficient in leading a recovery in housing.
Observations:
For well over 18 months, we have preached
that the prescription to a housing recovery
Litigations
On behalf of the lead plaintiff, Greenwich
Financial Services Distressed Mortgage
Fund 3, LLC, an investment vehicle
managed by William A. Frey, and other
investors, A Manhattan law firm has filed a
class action suit against Bank of America
and Countrywide relating to Countrywide’s
$8.4 billion settlement with various state
Attorney Generals in connection with
alleged predatory lending practices. The
agreed form of the settlement is mortgage
modifications totaling and economic value
of the settlement amount. The claim is
based upon the assertion that the
modification of securitized mortgages
effectively represents payment of the
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requires the concurrent implementation of three
initiatives which can be funded with TARP
resources:
• Accelerate the modification of securitized
mortgages without further compromising the
international credibility of America’s capital
markets;
• Accelerate the turnover of REOs through the
use of subsidies to new home purchases and
vacating occupants; and
• Collaborate with the Federal Reserve and
Treasury to restore, if not mandate, the
availability of historically prudent (pre-2004)
credit criteria that support the socioeconomic
demographic groups that comprise core
housing demand.
In the absence of a comprehensive and
coordinated effort, we are in for an extended
housing slump. No one remedial initiative on its
own can make a dent. The solution lies in the
cumulative impact of multiple strategies and the
cumulative costs will pale in comparison to any
avoidable delay in the housing crisis.
settlement with other people’s money and the
economic burden of the settlement should be
borne by Bank of America/Countrywide and not
investors.
Observations:
This case involves an isolated and unique set
of facts and is not representative of the
anticipated increase in investor prompted
litigation relating to impaired RMBS. There
have been positive legal developments that
promise to provide greater leverage in gaining
access to loan level information for forensic
purposes and counterparties will eventually
become inclined to put this mess behind them.
 Page 5 of 5
RRMS Market Insights Page 5 of 5
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Questions or Comments
relating to RRMS Advisors
should be directed to Robert
M. Pardes, Managing
Director
10 East 40th Street
New York, NY 10016
Litigation - continued
We hope and believe that much promise to further extend turmoil
of this can be accomplished on a in the credit markets and delay
non- adversarial basis, with the rebuilding of the liquidity
litigation considered a last resort created by the securitization
measure. The message to all is process – an innovation that
rational compromise. spurred the most fluid housing
Otherwise, the related off finance system in the world and
balance sheet expo
sures the envy of our trading partners.

PHONE: RRMS in the Press

(212) 843-9428
RRMS in the Press: RRMS The lead article in the
E-MAIL:
rpardes@responseco.com
Managing Director, Brian Lin was December 16th issue of
featured in the December 18th, Advisor Perspectives “TARP,
New York Times article regarding a Flawed Acronym, Not a
Visit us at: the relationship of Wall Street’s Flawed Mission” was
WWW.RRMSCO.COM compensation structure to the authored by RRMS Managing
breakdown in the system Director, Robert Pardes
http://dealbook.blogs.nytimes.co http://www.advisorperspective
m/2008/12/18/on-wall-street- s.com/newsletters08/Tarp-
bonuses-not-profits-were- A_Flawed_Acronym.html
real/?scp=2&sq=Brian%20Lin&st
=cse

RRMS ADVISORS
Tactical Mortgage Strategists

RRMS Advisors is a boutique firm of seasoned professionals that provides high level advisory services to
financial institutions and investors. Leveraging the diverse backgrounds of the management team,
primary areas of expertise include the assessment of exposures, loss mitigation and opportunities in the
credit markets, with a focus on real estate related (consumer and commercial) securities, whole loans and
financial institutions. Examples of our services include:

• Portfolio valuation, and validation of carrying values;

• Recourse management and recovery;
• Value opportunities in mortgage related securities, select
bank debt and equity and credit and servicing operations;
• Loss mitigation;
• Forensic oversight;
• Due diligence and credit restructurings (residential loan modifications and
troubled debt);
• Assessment, development and Implementation of policies/ procedures; and
• Litigation support.

RRMS Advisors is committed to partnering with its clients to refine and meet objectives, with a priority
towards preserving relationships (non-adversarial), maintaining a high level of ethics and professionalism.
For more detail as to the scope of services we can provide, visit us at www.rrmsco.com.