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Another Derivatives Loss at Freddie Mac


Freddie Mac is blaming declining interest rates for the problem?! Let's take a look at declining rates.

Losses on its derivatives portfolio and a widening credit spread teamed to deliver a hit to Freddie Mac's first-quarter results, with the mortgage-finance giant reporting Thursday a loss of $211 million. The McLean, Va.-based company's per-share loss amounted to 46 cents a share, compared to earnings of $2 billion, or $2.80 a share, recorded in the first quarter a year ago...

Declining Rates?

Freddie Mac (FRE) is blaming declining interest rates for the problem?! Let's take a look at declining rates.

The chart shows that the only rate declining is at the very short end of the curve (the three month treasury). Even then, I need to point out that the $IRX is a discount, not a yield, so the spread is almost, but not quite, as big as shown. Is a steepening yield curve not good for Freddie in general or just for the way they are currently hedged?

Margin Calls at Bear Stearns?

Bear Stearns is raising cash for margin calls and redemptions.
A hedge fund managed by Bear Stearns Cos. Inc. is scrambling to sell large amounts of mortgage-backed bonds in a potentially troubling sign for the broader mortgage-backed bond market, The Wall Street Journal reported in its online edition...

Perhaps it's not the hedge fund that should be shut down, but Bear Stearns itself for misrepresenting the value of those CDOs it was trying to unload. Sadly, the odds of that happening are about 0%, regardless of any improprieties they have committed. See Bear Tracks & CDOs and A Bear's Bath for more details on the debacle at Bear Stearns.

See Monte Carlo Simulation of CDOs for a discussion about conflicts of interest between rating companies and the deals they are involved in. In this case Bear Stearns is acting as a rating company and the deal maker, with the deals stinking to high heavens.

Global Saving Glut

Also talking about interest rates today is Caroline Baum in Global Rate Increase Yields Haze of Explanations.
We in the media are forced to explain these events, often tripping over ourselves in the process. For example, on June 7 Treasuries came under repeated attack, sending the yield on the 10-year note up almost 20 basis points in a single session. The dive in note and bond prices was attributed to a surprise rate increase by the Reserve Bank of New Zealand...

Hmm. Perhaps there was no global glut of savings in the first place. That indeed seems to be what Caroline is suggesting. See Global Savings Glut Revisited and In Response to Ben Stein (the later by Professor Succo) for a refutation of the global savings glut idea.

In discussions about the yield curve, I would be remiss to not mention gold, so I will also direct you to Lance Lewis's article Gold Bulls Get Defensive...For Now.

There is no doubt that the steepening of this yield curve is bad for all kinds of undercapitalized derivative players. But, like the blowup in subprime lending, it's hard to get traction going if all anyone cares about is the latest IPO. As long as there is funding, the party can continue.
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