Jay Taylor''s new commentary cites work by GATA and Veneroso


Freddie's Derivatives Get A Closer Look

By Dow Jones Business News
Friday, June 20, 2003

Freddie Mac's efforts to hedge the risks of its mortgage
assets and its own borrowings enlarged the total size of
its derivatives-trading positions to nearly $700 billion
at the end of September, a 46 percent jump from 2000,
according to company documents, The Wall Street Journal
reported Friday.

The rapid growth and heft of its positions in derivatives
-- financial contracts whose values are tied to an
underlying security, commodity, interest rate or currency
-- raises risks for the government-sponsored mortgage-
finance company if interest rates or other markets
suddenly become more volatile, some traders say.

The expansion in Freddie Mac's notional, or underlying,
derivatives positions is under the spotlight because
government investigations are examining the company's
accounting after it recently ousted three of its top
executives. Freddie Mac could restate its earnings by
between $1 billion and $3 billion, people familiar with
the matter say.

No one is suggesting now that Freddie Mac's large
derivatives positions pose any systemic market danger.
Moreover, such notional values overstate the amount
the company has at risk because, among other things,
many derivatives offset one another. There isn't any
sign that the company has had any significant paper
losses on derivatives trades, despite the recent investor
concern over the management turmoil and regulatory

Indeed, Freddie Mac's most recent financial filings
indicate the company's derivatives have a total market
value of $5.6 billion as of Sept. 30, 2002. The derivatives
market itself is huge, with a notional value of
transactions at $142 trillion at the end of last year,
according to figures from the Bank for International

Yet the vastness of Freddie Mac's derivatives trades
-- which peaked in 2001 when they exceeded $1
trillion -- make the company one of the largest holders
of derivatives in the world. By comparison, the
company's larger rival, Fannie Mae, holds derivatives
with a total notional value of $657 billion. At year-end
2001, the last time the company produced an annual
report, Freddie Mac held derivatives roughly equal to
the amount held by Bank One Corp., the fifth-largest
commercial bank in the U.S., which also is a dealer
that trades derivatives for its customers.

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

A Freddie Mac spokesman declined to comment on
the company's derivatives positions.