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See: http://www.washingtonpost.com/wp-dyn/articles/A48730-2005Jan4.html
for Terrence O'Hara's [Washington Post]
Deloitte & Touche Hired as Fannie Mae Auditor

Ole Bear, Editor, Commentary

Creative Derivative Accounting and Swapping Peanuts for Watermelons

From this somewhat brief news snippet we get the following:

The chief accountant for the Securities and Exchange Commission said last month that Fannie had "developed its own unique methodology" for accounting for complex financial contracts known as derivatives and had misapplied accounting rules for certain expenses.

We basically are talking about $9 Billion Bux in Fannie's new applied science of applied derivative accounting. I am not worried about it, in case Fannie Mae blows up a few derivative portfolios on Wall Street. Neither are the Big Boy Derivative Houses on Wall Street. The Carpetbaggers inside the Beltway aren't too terribly worried about Fannie Mae blowing up either. We have Mr. Greenspan and the Federal Reserve Boys as the lender of last resort to bail out the Big Boy Derivative Houses on Wall Street. Developed its own unique methodology is a real hoot! -- sort of like walking on water, I suppose?

Most Jane and Joe Six-Pack's on Main Street America don't have the foggiest idea what a derivative is, and could care less. When we say "lender of last resort" most Six-Pack families would think that is the last place on earth they could get a 150% home equity loan without a realty appraisal. Then there are those who think that this is getting a loan at the beach while sun tanning and having a beer. A lender of last resort is a central bank which has the ability to buy anything it wants to and cover anybody's assets they want to, by printing money, and creating it out of thin air, using the Mandrake Mechanism. The trade of increased debt to print more money, obviously in the game of bailout, is inflationary to the money system, thereby decreasing the value of the existing supply. Inflation of the money system, generally increases the price for real estate, since it now takes more of the paper stuff to buy fewer goods and services.

Derivative? Keeping it simple stupid for the average guy on the street, a derivative is very similar to a put or call option, which are regulated by the SEC. Put and calls are basically bets which have a timeline where they expire. They have a strike price which indicates if they are in or out of the money. They are usually bets on stocks and stock indexes. When you place a call to phone home, you bet a stock/index will go up. A put you bet the stock/index goes down. The neat thing about simple derivatives is that you cannot lose more than the actual cost of the put or call. Not so in the unregulated world of the Derivative Big Bets with the Big Boys!

Big Derivative Bets made by the Power Brokers are not regulated, and the Federal Reserve does not want them to be regulated at all, because this is one of the mechanisms to inflate legal tender fiat paper funnie money and to keep the financial system a smoke and mirror to Jane and Joe Six-Pack. Big Derivative Bets are power brokered by some great financial econometric models that are pretty complex, even for Nobel prize winning econometrical wonderkinds, like the Gurus at Long Term Capital Management, who made losing millions and billions of Bux in minutes and hours a day when Russia blew up and defaulted back in the Dark Ages [ehhh 1998] a new art form. This is what we call Modern Financial Art.

This is also what we call systemic financial distress that tends to turn central bankers' hair gray over-night, as well as cause instant gall stones, and dysfunctional urinary systems. Simply put, Big Derivative Bets are puts and calls bets in the financial system as a hedge against losing money. Fannie Mae places big bets on interest rates, currencies, and only the Good Lord knows really what. They do this to protect their mortgage backed portfolio given swings in the markets that tend to shoot torpedoes in their portfolios. However, when these things blow up, they tend to blow up so fast and with the accelerated propensity to lose money so fast, the experts have a hard time as the hot air is going out of the Big Balloon, they don't know instantly what the counter-party is really worth to unwind and bail out of the suckers. "Ties" playing this type of financial gunsmoke [Russian Roulette?] don't count in the game... there is always a winner and a loser. If Fannie Mae wins the Big Derivative Bet, yahooo! -- Wall Street Investment Houses take it on the chin! If Fannie Mae bleeds red ink in their little bitty derivative portfolio -- they lose -- and the Big Boys on Wall Street win. Only if, Fannie Mae can't cover their bets to their counter-party since they ain't got no cash -- the Big Boys on Wall Street lose a lot of chump change in their money making counter-party. Bankers, Folks, never lose! Enter the Federal Reserve to cover Fannie Mae's Big Derivative Bets since they haven't the cash to cover the losing Big Bet. Now you see why Greenspan does not want Derivatives Regulated.

Now you see why I am not worried, taking the Alfred E. Newman approach.

What? Me Worry?

With the Federal Reserve as the lender of last resort...
this is like swapping peanuts [more debt] for watermelons [inflating real estate].
But with the FED, I suspect the peanut shells really are empty...
When you eat the watermelon you can always make pickles out of the rind... right?

Ole Bear, Editor
Columbia, Missouri

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