Freddie Mac Takes on Full House of Derivatives
Wall Street Journal - June 29, 2003
by Henny Sender

"Size is always a matter of concern," says Janet Tavakoli, President of Tavakoli Structured Finance, Inc., a Chicago consulting firm.

"Whenever you have a huge book of derivatives, you have to worry about the performance of the hedge related to the book of business," says Ms. Tavakoli, a former derivatives executive at Bank One and the now-defunct Kidder, Peabody & Co. "Hedging gives you the illusion of safety. But the hedge doesn't always perform in the way the model predicts for any scenario you chose."

In the past, Freddie Mac was seen as conservative because it relied far more on derivatives to hedge risk than did Fannie Mae. But some analysts believe Freddie Mac may be "overhedging," which can become more speculative. "If you are buying more than you need, you are taking a view," Ms. Tavakoli says. "You can try to make money and have it not be apparent to people that that is what you are doing."

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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


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