FHFA’s Office of Inspector General (OIG) yesterday released an analysis of GSE interest-rate risk (IRR) that makes sobering reading and confirms our longstanding view that enterprise risk goes well beyond the credit ones that have long dogged Fannie, Freddie and the FHLBs. For example, the report notes that Fannie and Freddie could lose up to $2 billion in the fair value of their assets with an interest-rate move of only one percentage point (taking hedging into account to reduce risk from an estimated $8 billion). Seemingly small potatoes for such large books, but not when one recalls that Fannie and Freddie hold negligible capital. If they have positive earnings, they may be able to absorb IRR, but only at the cost of contributions to Treasury that reduce taxpayer risk. And, if earnings suffer and risk spikes, we’re back to looking for the Treasury backstop that’s no longer there.

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