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Here's an interesting article, that fills in some of the details about why WEB and CM turned sour on the two federal mortgage companies about two years ago. Apparently, Freddie Mac held $1.70 in derivatives for every $1 in assets, as of the end of 2001, suggesting that it was doing more than just hedging risk. Nine months later, it had reduced its notional value derivatives position from $1 trillion to $700 billion, still larger than the much larger Fannie Mae's position. The article speculates that, when a large player turns from being a persistent buyer to a seller (unwinding its position, in other words), it can get very costly.

The rest of the article is here:

http://online.wsj.com/article/0,,SB105605688774882600,00.html?mod=home_whats_news_us
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