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To: Suma who wrote (61654)	7/7/2008 5:14:38 PM
From: Keith Feral	Respond to of 118717

Suma, you have to do what makes you go to sleep with the least amount of stress. There is no reason to rationalize a long term approach to the market with oil prices this high. I think the market stopped functioning when oil crossed the threshold at $125. High cost oil inflation has even made all the inflation industries less attractive in metals and mining. However, the pricing bubble popped in Europe last week when coal prices went from $225 to $200. Today was the first crack in crude prices. It will take more than 1 day of pullbacks to get the market back in order. Things could have been fine as if marking to market, deleveraging, and $145 crude oil weren't bad enough. Today, Lehman came out and said the new FASB rules might cause the mortgage companies to increase their capital requirements from 45 basis points on off balance sheet securities to 250 basis points, just like the securities they hold on the balance sheet. That would force FNM and FRE to increase their capital positions by 205 bp on $2.2 trillion and $1.7 trillion in off balance sheet securities. If if happens, that will force the 2 companies to raise $75 billion. There are only 2 ways out - give them an exemption or modify the capital requirements for on balance sheet securities. If they get an exemption, the higher capital requirements will squeeze in 12 months. The only hope is that Congress lowers the capital requirements for on balance sheet securities. It's really an awful situation since the GSE's are the only source of liquidity in the mortgage market right now. I hope they give it some thought before they waste their time with the $300 billion mortgage reform bill. It would be much easier to nationalize both the GSE's at this point.