[Fractal Trader]

Are GSE's the real source of our economic malaise? Which is worse, Freddie Mac irregularites or Martha Stewarts charges? Who should really be going to jail?

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[palmer]

Excellent article, thanks for the ping.

[Marysecretary]

Oh, there's probably room in jail for both...

[Soren]

Martha Stewart seems like a smoke screen to me- run it through the papers until the public gets sick of financial scandals and has no interest when it comes time to prosecute the big time criminals. I don't condone what she did, but $50,000 doesn't even qualify as chickenfeed. Meanwhile, the major Wall Street players are getting fined left and right and the story has no legs.

[steveegg]

Thanks for the ping. Short answers...

A big source, but hardly the only one; Freddy Mac; and at least the folks that run Mac for a good long time.

[groanup]

Thanks for the ping

[groanup]

Back when I was trading governments Fannie, Home Loan and Freddie were issuing some weird stuff. A lot of it was embedded with a host of options that left the buyer exposed and the GSE's holding all the cards. Remember Orange County, Cal. in 1994? They went under because the Fed hiked rates all year and they were holding billions of this stuff and got wiped out.

Most of it (I call it toxic waste) was based on the movement of some underlying interest rate. For instance, they would issue debt that had a tremendous rate of return as long as interest rates stayed within a certain range. If rates got out of that range then, whoops, the holders got burned and the GSE's scoop in the pot. All of this stuff is hedged with derivatives. Back when it was issued a lot of assumptions were made and certain scenarios were considered to be acceptable risks. I'm sure no one foresaw that rates could go as low as they have. It's been almost ten years since I traded any of this stuff so I don't know much about it now but a lot of the stuff I saw would have been trashed and burned with these rates.