Fannie and Freddie Default Exposes Transparency Issues in CDS Marketplace

The recent move by the Treasury to place Fannie (FNM) and Freddie (FRE) into conservatorship amounts to the equivalent of bankruptcy in the credit derivatives market, generating defaults, and causing dealers to unwind various credit default swaps (see Financial Times article).

The move once again highlights some of the problems with the CDS market, as no one really knows the real level of exposure. The notional protection outstanding is expected to be significant, but again, the exact amount is difficult to estimate. Settlement and trading procedures, as well as general transparency, needs to be improved.

While the Fannie and Freddie related CDS issues may have fewer concerns, given that the value of the agency debt is still high and is currently backed by the U.S. government, the next Bear Stearns-like (BSC) default may not provide as clear an exit plan. The powers-that-be need to act fast given that the growth of the CDS market is outpacing the current trading infrastructure, while the need for hedging credit risk has never been greater.

Comments

[johnthebear:]

PLEASE BLOCK "BIGTOURE" ADVERTISMENT.

2008 Sep 10 02:12 PM

[johnthebear:]

In 2005, 8,000 Professional Real Estate Appraisers (10% of appraisers) signed a petition to the Government complaining of the pressure placed on appraisers to "hit the number" or else loose status with the lender.

The petition was ignored in all respects ... the reason?

Fannie and Freddie paid $174,000,000 dollars of company funds to buy off Congress in both parties to not do legislative oversight! They got what they paid for!

So.... we have subprime.... Alt A etc. and phony appraisals, loan originators, investment banks selling securitized mortgages, (residential and commercial) that are all part of a huge ponzy scheme! Everyone from top to bottom, borrower to lender and investor had a hand in this massive failure of the world financial SYSTEM.


With so much money and huge up front fees available to Lehman, Merrill, Bear etc, no wonder real estate prices doubled and tripled both in the USA, UK, and even China and many other countries etc.

How will it end.... Likely in GREATER DEPRESSION than ever seen before!

IT IS GLOBAL.... BETTER CYA!

2008 Sep 10 02:18 PM

[johnthebear:]

THE ONLY ANSWER IS TO FIRE CONGRESS,

BOTH PARTIES

AND BRING IN NEW BLOOD

THAT WILL WORK FOR THE AMERICAN

PEOPLE RATHER THAN POLITICAL SPECIAL

INTEREST TO MAKE THE IN-CROWD RICHER.

2008 Sep 10 02:23 PM