I liked the story but wondered whether Freddie’s position was a hedge. Eisinger argues that it probably wasn’t:

As far as the argument that perhaps these inverse floaters were used to hedge other risks in Freddie’s portfolio, bond traders we spoke with say that Freddie could have easily bought options or swaptions to hedge its prepayment and/or interest rate risk. Entering into inverse floaters as a hedge - or to offset a hedge - seemed to these traders to be cumbersome and expensive for Freddie. One said comparing inverse floaters to hedging tools is not just apples and oranges - it’s more like apples and cars. They just have nothing to do with each other.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.