The default of up to $500bn (£284bn) of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US government’s seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months.
The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, are putting strains on the thus far unregulated $62,000bn credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system.
The precise number of credit default swaps – a kind of insurance against debt default – outstanding on Fannie and Freddie are not known, reflecting the private nature of the sector.
Star bond manager Bill Gross has netted $1.7bn (£968m) in profit after betting against ailing mortgage giants Fannie Mae and Freddie Mac.
Financial Times, Daily Telegraph