Please see below for my note to Jeremy at the bottom and his reponse.   I 
have placed Mark Ruane's yields against a mid November default frequency 
table.   Note there may be a slight shearing in dates, but the concept is 
more important:


Market implied cumulative default rates (%):

                 1 year     5 year     10 year
AAA         0.51           5.74         14.54           
AA            0.67           6.39          16.61
A               0.98           8.98          21.03
BBB         1.17           9.88          22.39
BB             3.27        18.62          37.51
B                4.65         24.21         46.27



S&P Historical default rates (%):

                 1 year     5 year     10 year
AAA         0.00           0.13          0.67           
AA            0.01           0.33          0.90
A               0.04           0.47          1.48
BBB         0.21           1.81           3.63
BB             0.91          8.82          14.42
B                5.16         20.95         27.13


In looking at the One-Year transition rates as a very rough proxy for how 
many more defaults occur in a recession (1991) versus average (1981-1999)  
historical default rates (%):


                             Investment grade                Non-Investment 
grade
Avg. 1981-99            0.07                                             4.21
1991                            
0.12                                           10.40
Multiple                      1.7x                                            
2.5x


Looking at where the market implied default rates divided by the historicals 
default rates to obtain a "multiple" (how much more severe than historical):


                 1 year     5 year     10 year
AAA         infinite      44.2x       21.7x
AA            67.0x        19.4x       18.5x
A               24.5x         19.1x      14.2x
BBB           5.6x           5.5x        6.2x
BB             3.6x           2.1x         2.6x 
B                 1.1x           1.2x        1.7x


On the 10 year historical figures,  we need to be careful as the S&P static 
pool figures show a definite seasoning (lower defaults in late years probably 
due to prepayment) versus our contracts.  Secondly, the S&P figures have 
Withdrawn ratings, which usually mean they are stale, but loosing some 
information content.   

I will ask Emy to set up a meeting to discuss further.







---------------------- Forwarded by Michael Tribolet/Corp/Enron on 12/11/2000 
07:06 AM ---------------------------
From: Jeremy Blachman@EES on 12/10/2000 07:21 AM
To: Michael Tribolet/Corp/Enron@Enron
cc:  

Subject: Default rates

Thanks. I would STRONGLY  suggest an offsite sooner than later with a handful 
of the right people so that we can step back and design the right 
architecture for looking at credit in our deals. It is broken, not clear, 
killing our velocity and true capabilities. We also need to look at staffing, 
skills sets, the credit reserve model etc. Perhaps you should take a crack at 
an agenda.
---------------------- Forwarded by Jeremy Blachman/HOU/EES on 12/10/2000 
07:08 AM ---------------------------


Michael Tribolet@ENRON
12/09/2000 03:51 PM
To: Jeremy Blachman/HOU/EES@EES
cc:  
Subject: Default rates

I visited with Vince Kaminski for about 20 minutes today regarding the market 
implied defaults rates  and the disconnect in investment grade land.  He is 
seeing the same anomaly and agreed that we as a company need to revisit the 
methodology employed in calculating the implied figures.     I will follow 
through and report back.