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To: willcousa who wrote (174886)	6/23/2003 4:21:19 PM
From: GVTucker	Read Replies (1) \| Respond to 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.

To: willcousa who wrote (174886)	6/23/2003 4:23:29 PM
From: The Duke of URL©	Read Replies (1) \| Respond to of 186894

Glib, but not true. No matter how you traunch or durate or position or split off or what ever other buzz word you use, NO ONE who really understands derivatives wants to lend 250,000 at 5.5% until the year 2003. And that is the bottom line.