Fannie, Freddie Seizure May Trigger Default Swaps on $1.4 Trillion of Debt

September 8, 2008 by · 1 Comment
Filed under: Industry News 

Is this the event that put us over the edge? $1.4 trillion is no small number. It looks like Freddie and Fannie debt were one of the most actively traded CDS contract and the market makers and major dealers are in conference on how to settle these contracts. In the article they discuss that is the bond were to rally and trade near par value then the losses could be minimal but I wouldn’t bet on it. This will be interesting to follow.


Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.

Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

“This is a big deal,” said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. “The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.”

A settlement likely would be the largest in the market’s decade-long history. Credit-default swaps on Fannie and Freddie have been among the most actively traded the past few months, according to reports from broker GFI Group Inc. Both companies also are among 125 companies in the benchmark Markit CDX North America Investment Grade Index, the most actively traded contract in credit markets, which investors use to speculate on corporate creditworthiness or to hedge against losses.

Money Exchange

The actual money exchanged may be limited, though, according to analysts at CreditSights Inc. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent.

“If bonds rally and trade close to par, recovery could be close to 100 percent, with protection sellers having little to pay out despite a technical default,” analysts Richard Hofmann and Adam Steer wrote in a note to clients.

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One Response to “Fannie, Freddie Seizure May Trigger Default Swaps on $1.4 Trillion of Debt”
  1. Peter L Griffiths says:

    The conservatorship of Fannie Mae and Freddie Mac on Sunday 7 September 2008 was the credit event which activated numerous Credit Default Swaps. We think we know the losers, Lehman Brothers, AIG, Merrill Lynch etc. But some other body must have been paying to these institutions the premiums prior to the credit event in accordance with the Credit Default Swap agreements. I personally consider that Fannie Mae and Freddie Mac can be identified as this other body.

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