[pierrem15]

Ouch. Bad for banks, and potentially the taxpayer if Federally guranteed banks go under.

I also realized after I posted that somone using mortgages at low rates to hedge is also screwed if their primary positions go bad, because there are no buyers for the lower yielding portfolio unless a substantial discount is offered, in which case a loss in the primary position is magnified, not lessened, by the 'hedge'.

So why is the Fed raising rates?

[VegasCowboy]

So why is the Fed raising rates?

They are apparently more worried about inflation than they are about FNMA and FHLMC. I can tell you that most banks are pretty good about monitoring their interest rate risk. Its funny (but not unexpected) that the quasi-governmental entities are the ones who are totally unprepared for an increase in long-term interest rates, while the privately owned financial institutions who are accountable to shareholders are the ones who will make it through with nothing but some earnings blips.

Yet another argument against governments and bureaucracies.