In this report, we examine the allegations raging over Freddie’s inverse floaters.  Going over the complex history of when Freddie decided to float these instruments and – most importantly – why, we conclude that the GSE and its regulator are taking a bum rap for an ill-fated effort to address growing GSE liquidity risk.  However, right or wrong, the flap exacerbates the political risk that now attends even the most well-intentioned GSE activity, signaling ongoing strain on the GSEs and FHFA that could exacerbate paralysis or, perhaps, force one or another into action that, given their clout, would redefine the strategic landscape.

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