Sunday, 3 October 2004

Crash or slow dead ?

The New York Times > Business > Your Money > A Seismic Shift Under the House of Fannie Mae
Interesting article in today's New York Times. We can read about current investigations of Fanny Mae accounting practices.
It's a big financial company by many parameters. Therefore, in case of any seriouse financial scandal, the US economy ( and world's economy ) could face itself with slowdown and many people could suffer as well( homeowners )
But still, it' s huge and complicated task to understand all these facts surrounding Fannie Mae business.
Basicly, Fannie is publicly traded company but it's investors have protection in case of losses that could be covered with taxpayers money.
Their main job is to buy mortgages from Banks , so that Banks can lend the money further.
It's called securatization of debt.
But the trouble is that Fannie Mae used derivatives ( hedging tool ) to shore up their financial positions. Derivatives are risky business, and sometimes it can get out of control ( specially, during volatile periods in the markets ).
The reasoning goes that Fannie mounted losses during the bear market on Wall Street ( from 2000-2003) regarding derivatives positions.
Therefore, they used aggressive accounting techniqe to hide this things out of public.
Many insiders talked about derivatives during various public sessions but it was very hard to prove and very hard to break the silent wall of Fannie Corp.
Because of a very important place in the US business financial system, Fannie's problems could make disruptins far wider than many think.

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