Fannie

So while much of the news concerning Freddie Mac and Fannie Mae has been concerning the common and preferred shares. A lot of attention hasn't been paid to the credit default swaps and index CDSs that many of the Fannie and Freddie issues are in (CDX IG9 and IG10)

While Fannie and Freddie are still current on their senior and subordinated debt, the credit event will still trigger defaults on those with CDS exposures.

So if one bought $5 million worth of long CDS protection on an issue for 90 cents on the dollar, he/she will earn 500,000 after the CDS position settles while the protection seller loses that amount.

Problem also is that the notional amount of CDSs that exist in the marketplace are also greater than the amount of the underlying contracts they are supposedly insuring. So if there are $5b worth of FNM 5.5%, having $20b worth of CDS on that creates a problem when it comes to CDS settlement.