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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: The Duke of URL© who wrote (2682)	5/23/2002 8:21:33 PM
From: Oblomov	Read Replies (1) \| Respond to of 306849

The counterparty on a derivative contract is merely the entity on the other side of the trade. In the case of FNM and FRE, it is generally investment banks that sell them swaps, or buy swaps from them. These swaps let them mitigate their risk. Let's say that FNM acquires a portfolio of 30-year mortgages, and the counterparty holds a portfolio of 10-year notes. The two parties might engage in a derivative contract that lets them "swap" the income stream of the 10-year Treasury note for the income stream of the mortgage portfolio. So, Fannie would hold a mortgage portfolio without the ordinary repayment risk (but with lower yield), and the counterparty would hold a portfolio of 10-year bonds with enhanced yields (but with mortgage repayment risk). I doubt that Fannie or Freddie are engaging in swaps contracts with themselves. Note that even if they did this (which would not make sense - the net effect would cancel out), it would be very different from what Enron did. BWDIK