Zeev's Turnips Patch-No Politics (ZEEV)

[otraque]

excerpts from Fleckenstein on FRE/FNM http://www.thestreet.com/p/rmoney/marketrap/10093350_3.html (pay site)
<<The same, however, cannot be said for Fannie Mae (FNM:NYSE - news - commentary - research - analysis) and Freddie Mac (FRE:NYSE - news - commentary - research - analysis), which were both under pressure again, as if folks had finally connected the dots and realized there might actually be some significant trouble in leveraged-finance land. (More about Fannie and Freddie below.) As an aside, and in the what-us-worry department, not only does Easy Al not see a housing bubble -- surprise, surprise -- but Franklin Raines, the head of uber-leveraged Fannie, also sees no housing bubble, according to a story that passed on Bloomberg this morning.>>
<< A Derivatives Dawning: It's interesting to watch government officials scurrying away from Fannie and Freddie. The snowman had comments in New Mexico about how they needed more transparency/regulation. Members of the illustrious Fed board have said the same thing. Congress is, of course, talking about holding investigations, and likewise the SEC and the attorney general. My guess is, something big must be wrong there for everybody to be acting like it's not their problem.


The fact that these two behemoths with an unfathomable amount of moving parts could regularly hit their earnings targets and have smooth, steady growth almost assures you that earnings were being managed. Financial institutions have the accounting option of picking between assets held to maturity, or available for sale.

When hedging, they can choose between a cash-flow hedge, which affects the balance sheet, or a fair-value hedge, which affects the income statement. Given that they can change their mind if the hedge doesn't track, it seems unlikely to me that Fannie and Freddie did not manage their earnings.

Will this turn into a ticking time bomb? It sure could. The fact that the markets had a muted response means nothing. We have seen many, many problems and scandals initially be deemed by the market as company-specific, before turning out to be a big deal.>>