Guess who created the latest derivative product

Yep, you guessed it, the federal government. The Financial Times reported today that Freddie Mac will sell a new kind of derivative that will get private investors to take on the risk of default of $22.5 billion in mortgages. From the story:

Freddie is selling a new financial product it calls structured agency credit risk, or Stacrs, pronounced “stackers”, which will absorb some of the losses on a pool of government-guaranteed mortgages that it currently holds in its portfolio.

And investors will apparently be gobbling it up. And why not. The riskiest tranche pays a yield of 715 basis points above interbank lending rates, says the FT.

A little math and the risk goes away.

A little math and the risk goes away.

It’s actually a very good piece of financial engineering to move the risk off the federal government’s books. But let’s all remember this the next time some banking regulator cries that it was derivatives that sank the financial markets five years ago.

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About vincentryan2013

Editor in chief, Digital Platforms, at CFO Publishing
This entry was posted in Bank balance sheets, Banking, Financial crisis, Regulation, Too Big to Fail and tagged , , , . Bookmark the permalink.

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