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From the FT article:

The total cash flow hedge losses in AOCI are the sum of the realized and unrealized derivative gains and losses. Therefore, one can arrive at the realised losses by subtracting the unrealised amount from the total. Fannie Mae does not disclose the unrealised figure. However, the vast majority of its $1,072bn derivatives portfolio gets classified as cash flow hedges.

Fannie Mae breaks down the notional value of its various derivatives positions. The Financial Times concluded the best method of estimating the amount of realised cash flow hedge losses is to apportion gains and losses by notional value.

When net values are broken down by proportion in this manner, the unrealised cash flow hedge losses would total $1.1bn.

At the end of the third quarter, Fannie Mae's AOCI was negative $24.757bn on a pretax basis (on an after-tax basis, the total was $16.092bn). If AOCI is the sum of realised and unrealised derivatives positions, then subtracting the $1.1bn would mean Fannie Mae's total realised derivatives losses would be $23.653bn (or, on an after-tax basis, $15.375bn).

I have a question of methods. Are you comfortable with FT's decision to apportion according to notional value? I think you can see that apportionment as Table 25 on page 74 of the following PDF. Notice how notional and net fair value figures change from 2001 to 2002 for each entry:

I don't know enough to have an opinion in that regard, and am more asking an inquisitive question about FT's methods than posing an opinion in the form of a question.

My other question is, aren't unrealized losses expected to compensate for realized gains for other parts of their balance sheet, assuming they've properly hedged?

Those questions asked, what strikes me is the sheer monumental challenge of trying to hedge with derivatives such a massive portfolio of liabilities and assets. There was a recent story in the press about Fannie's outdated IT. Here it is:

Fannie Mae relies extensively on manual financial editor systems that "carry significant risk of error" and should address the problem, Fannie's regulator told the company this week.

The Office of Federal Housing Enterprise Oversight said in a letter dated Tuesday that it was concerned about Fannie's lack of fully automated systems for certain accounting functions and its reliance on more than 70 manual systems for reporting its financial results.

I mean, on a $1 trillion asset base, $25 billion becomes little more than a 2.5% hedging error.

These are complicated questions, I've not quite the tools to dissect, and I'm not sure what I'm supposed to think.

Provacative posts here today, by the way,

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