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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: Earlie who wrote (162557)	4/26/2002 8:56:14 PM
From: LLCF	Read Replies (2) of 436258

<<No question at this end that the economy itself is spinning down. As noted earlier, when the refinancing game comes a-cropper, it will be time to spread sawdust on the arena floor. My best guess is sometime this summer. Hard to believe that it might drag into the fall, but it might.>> Did you see FRE stating publicly that they may very well have negative convexivity [equivelent of being short straddles] problems if liquidity [OTC duration sold by I-banks] dry's up??? What this means is they are short premium and must buy/sell as the market moves [in that direction!] akin to portfolio insurance that took the market down 20% in '87: <<A top executive at Freddie Mac(NYSE:FRE - news), the No. 2 U.S. mortgage finance company, warned that $1 trillion in mortgage loans refinanced last year could make the U.S. bond market more volatile.>> <<"The swings in volatility and duration could be massive," said Freddie Mac Chief Investment Officer Greg Parseghian at a session at The Bond Market Association annual meeting here. >> biz.yahoo.com FNM has repeatedly said they are "hedged" and claimed counterparty risk of only 100million "assuming all derivatives defaulted". I was originally confused by this this claim and their claim that they were 'hedged'.... could it be that they could buy enough premium to be 'hedged' literally? Then this release.... my conclusion now is that they actually [hard to believe] have NO F*&King clue what they are doing. This guy from FRE is saying "we are not hedged" when he says his hedges must be "adjusted"... he's apparently the smartest of the bunch. If the bond market starts to crater we could see a bond version of '87 IMO. DAK

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