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I won't pretend to understand all of that (reading about derivatives hurts my brain). But it seems to me that derivatives used as intended, to hedge against interest rate risk in this case, should be a lot simpler than that. To have your derivative portfolio escalate to the point where even Warren Buffett can't figure out what you're trying to do is madness.

What are they? A mortgage lender? Or some kind of professional gambling outfit?

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Perhaps they'll become more transparent as the CEO and CFO were ousted last nigh. Stock got another bounce. I've posted about FNM before and the derivative markets. As long as there's someone on both sides of the derivative trade and they're solvent it shouldn't be a problem. The key question to me is the solvency of the players ie are there standards and regulations for this? I don't know for sure.