Troubled Times Ahead

Terence R. Wilken writes: What is happening in the markets could impact all of us.  It could even impact the two biggest sources of money that fueled the housing boom.  These two sources are Fannie Mae, and Freddie Mac.  I have been asked several times why I am so interested in these two institutions.  Well now I will answer that question.  In their own way they were following the policies of Enron before Enron thought it was the right thing to do.  They were given the task of making housing affordable to everyone, even those who did not have a sound financial footing.  This meant that they took big risks with their money.  Of course they did not worry as they were backed and supported by the faith and credit of the federal government.  They did however hedge their risk in several ways.  Not only to protect themselves in the case of default, but also in the situation of rising long term interest rates.  The method of hedging took the form of establishing derivative positions in the markets.  Where have we heard that word before?  The only problem is that it is hard to protect yourself in the case of a rapidly falling bond market.    The situation occurring now could bode ill for them and for all of us. (08/07/03)
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