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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: nextrade! who wrote (2642)5/23/2002 2:17:17 PM
From: The Duke of URL©Read Replies (1) of 306849
 
" The biggest danger may be counterparty risk: Fannie and Freddie are heavily dependent for their risk-management programmes on a handful of big banks. If there were an unexpected sharp rise in interest rates, those banks might be unwilling or unable to provide the derivatives Fannie and Freddie need to hedge their risks."

I sure wish the person who wrote this article understood what they were writing about.

What I think this means is that "counterparty" is code for a dummy entity. These same dummy entities were used by Enron, but Enron's problem, of course was that the money they received from these dummy entities was secured by its own stock. I am also guessing that since Fannie is buying these mortgages from these same banks, having these same banks guarantee these same obligations is circular and will lead to a crash of fannie mae when these banks stiff these same obligations.

Fannie Mae is set up to lay these risks off to the unsupecting public, but in order to increase its profit over the last couple of years, it has been keeping (or wherehousing) more and more of these loans and attempting to offset this risk with "deriviatives".

This sounds like why Buffett dumped the stock but:

But it would be nice not to guess.

Does anyone know, and be able to explain it without the 12 foot long buzz words????

TIA

duke.
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