Intel Corporation (INTC) Message Board

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Technology Stocks : Intel Corporation (INTC)

INTC 36.82

+1.5%

Dec 19 9:30 AM EST

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To: willcousa who wrote (174886)	6/23/2003 4:21:19 PM
From: GVTucker	Read Replies (1) of 186894

...which is the problem with Fannie Mae and the derivatives it holds--they really cannot completely contain their risk. This isn't like owning Intel and hedging it with a derivative like a put option. In that case, there is no basis risk because as long as the CBOE remains solvent, the put is exactly exchangeable with the common, hedging the downside risk. For Fannie Mae, there is significant basis risk involved. Mortgages are different, mortgage pools are different, and the prepayment risks can vary significantly under many different interest rate environments. It is quite possible that Fannie Mae could lose money on BOTH its derivative position as well as its asset position. That is why fair value accounting makes sense for Fannie Mae. It is impossible to hedge away the risk of a mortgage pool unless the strike directly addresses that mortgage pool. Mike Vranos found that out in a very harsh manner back when the liquidity squeeze of LTCM brought his mortgage pool down with it. And I stronly believe that Mike knows a heck of a lot more about mortgages and hedging than anyone at Fannie Mae knows.

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