Fannie and Freddie's New Derivatives Cliffhanger

The bailout triggers settlement of $1.4 trillion in unregulated credit-default swaps. Do the hedge funds have the money?

In taking over Fannie Mae (FNM) and Freddie Mac (FRE), Henry M. Paulson Jr. and the U.S. Treasury Dept. cleared up uncertainty surrounding the companies' common stock, preferred shares, and senior and subordinated debt. But Uncle Sam's intervention also triggered a default event, according to the International Swaps & Derivatives Assn., and now roughly $1.4 trillion in outstanding credit-default swaps, a type of derivative contract, must be settled.

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