A $50 million margin call? I'll short Wall Street.

Farstar Capital Management Co., Ltd.

FAR STAR CAPITAL MANAGEMENT LLC

To our investors and partners

July 7, 2008

An open letter regarding the current market environment and the investment stance of Farstar Capital.

Dear friends:

We don't usually discuss Farstar Capital's investment positions publicly. The nature of hedge funds is to find opportunities in the gaps in the market, and publicly discussing positions often narrows those gaps.

However, the current market environment has gone beyond the scope of "normal fluctuations." We believe it is necessary to frankly share our assessments of two core issues with our partners and the wider market participants.

I. On the Crude Oil Market

WTI crude oil prices have risen by more than 50% in the past six months and are currently trading around $140 per barrel.

We must be frank: current oil prices have significantly deviated from the reasonable range that fundamentals can support.

The actual global crude oil supply-demand gap, according to the latest data from the International Energy Agency (IEA), is approximately between 100 million and 150 million barrels per day. This gap is real, but it cannot explain the more than 50% price increase over the past six months.

The real force that propelled oil prices from $90 to $140 came not from gas stations and refineries, but from Wall Street trading desks.

Since the first quarter of 2008, passive funds flowing into commodity index funds have exceeded $550 billion. Most of these funds did not flow in based on independent judgments of the supply and demand fundamentals of crude oil, but rather on the pursuit of the macro narrative of "inflation hedging" and "dollar alternative assets".

When narrative—rather than fundamentals—becomes the dominant force in pricing, it's only a matter of time before prices decouple from their anchor.

Farstar Capital has held long positions in the energy sector over the past few months. We are currently systematically reducing these positions.

We do this not because we believe oil prices have inevitably peaked—nobody can.

In the short term, the momentum of speculative funds may still push prices even higher.

However, we believe that current oil price levels no longer provide reasonable risk compensation for bullish investors.

Furthermore, current oil prices have already worsened the situation of the real economy and people's lives, and Yuanxing believes that this cannot be sustained in the long run.

II. On the health of the U.S. financial system

This is the core of the letter, and the reason we decided to break our silence.

Bear Stearns’ collapse in March was interpreted by many as an isolated incident—a poorly managed investment bank reaping the consequences of its over-concentration on the subprime mortgage market.

We disagree with this interpretation.

The problems exposed by Bear Stearns—excessive leverage, opaque asset valuations, and over-reliance on short-term financing—were not unique to Bear Stearns. These structural vulnerabilities, to varying degrees and in different forms, are widespread across multiple core nodes of the U.S. financial system.

We would like to offer the market some prudent advice on the following aspects:

(1) Prudence in the valuation of commercial real estate related assets

The U.S. commercial real estate market is undergoing a significant revaluation. However, some financial institutions are still listing their commercial real estate holdings at prices close to historical peaks on their balance sheets.

We note that, in the current environment of credit tightening, there may be a significant gap between the actual realizable value of these assets and their book value.

We recommend that financial institutions holding significant exposure to commercial real estate initiate independent asset revaluation procedures as soon as possible, based on current market comparable transaction data, and provide investors with more transparent disclosures.

(2) Transparency of Level 3 Assets

Under FAS 157 accounting standards, assets held by financial institutions are classified into three tiers. Tier 1 and Tier 2 assets can be valued using market prices or comparable prices, but Tier 3 assets—those without active market prices and which can only be valued using internal models—are essentially a black box that cannot be independently verified by external investors.

We have noticed that the size of the third-tier assets of some institutions has reached a level comparable to or even exceeding their shareholders' equity.

We recommend that the boards of directors and audit committees of these institutions conduct independent stress tests on the valuation assumptions and model parameters of Tier 3 assets, and consider providing more detailed tiered disclosures in their next financial statements.

(3) Vulnerability of short-term financing structure

Bear Stearns' experience shows that an institution that relies heavily on the overnight repo market for daily financing can have its sustainability deteriorate sharply under extreme stress.

Confidence is the most important asset of such institutions, and also their most vulnerable asset.

We have noticed that following the Bear Stearns incident, some institutions have shown signs of a marginal tightening of repurchase financing conditions.

We recommend that financial institutions that are heavily reliant on short-term financing establish more adequate liquidity buffers as soon as possible and carefully evaluate financing alternatives under extreme stress scenarios.

III. Regarding the position of Farstar Capital

We would like to clarify the following points:

First, the above viewpoints are based on independent analysis of publicly available information. All data mentioned in this letter can be found in the publicly available financial reports and regulatory documents of the relevant institutions.

Second, we have not named any specific financial institution, nor do we intend to make any judgment on the operating conditions of any particular institution. The management of each institution knows its own true situation better than we do.

Third, Farstar Capital currently holds hedging positions related to credit risk in the U.S. financial system. These positions are established based on our overall assessment of the macroeconomic environment, rather than targeting any specific institution.

If our concerns are unfounded, we will gladly bear the financial loss for such excessive caution.

But if our concerns are unfortunately proven true, we hope people will remember that someone raised these questions openly and clearly when things could still be improved.

IV. A few personal thoughts

Over the past few months, I've been frequently asked the same question: "Are you betting on the collapse of the US financial system?"

My answer is: No.

I never gamble on a collapse. I just don't want to pretend everything is fine.

Anyone who's been in this industry long enough knows that the most dangerous time is never when everyone is fearful. Fear, at least, means that people are still watching the risk.

The most dangerous time is when everyone stops talking about risks, everyone talks about opportunities, and everyone celebrates how smart, powerful, and invincible we are.

We are in such a moment now.

Sincerely,

Lance Walker

Farstar Capital Management Co., Ltd.

Founder and Chief Investment Officer

new York

July 7, 2008