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Freddie Hides in the HedgesBy Susan LeeMember of the Editorial Board THE WALL STREET JOURNAL July 15, 2003 “It seems likely that Freddie Mac engaged in overhedging or speculation so that its portfolio did even better than one would expect,” says Janet Tavakoli, head of Tavakoli Structured Finance. “If the hedges were biased to do well when rates fell, then it’s probable the portfolio was underhedged for a potential rise in interest rates." If Ms. Tavakoli is right, then Fred's gains would be a delicious counterpoint to what happened at Fannie Mae last year. Fannie, which was underhedged for a fall in interest rates and thus possibly speculating that interest rates would go up, lost billions of dollars when rates moved down. Another possibility of course is that Fred was neither speculating nor hedging. The misplaced gain might have been hidden in a derivative designed to defer income or create the appearance that income occurred in later years -- a ploy that Fred disguised as a hedge. END OF EXCERPT 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). TSF makes some information available to the general public. Please
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Janet Tavakoli, President:
jt@tavakolistructuredfinance.com
TEL: (312) 540-0243 |