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Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds.



July 12, 2008 – Comments (16) | RELATED TICKERS: FMCC , FMN

I closed my Fannie and Freddie picks on Friday. I got out of FRE at $4.15 it closed $7.75 and I got out of FNM at $7.43 it closed at $10.25. I guessed the Hank "$800 million in GS" Paulson would engineer some financial magic to rescue the companies over the week end, he of course showed up on Friday and caused a rally.

FYI - Mish has the story here of who we are bailing out the money quote is at the bottom: 

U.S. Taxpayer Bailout of China Over Fannie Mae

If the US bails out Fannie Mae bonds as suggested in We're All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable, inquiring mind just might be wondering "Who is the biggest beneficiary?".

It's a good question too. Please consider Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds.

As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."There is $376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts.

If China and Japan were dumb enough to invest in US agencies (and they were), then China and Japan should suffer the consequences, not US taxpayers.

Mike "Mish" Shedlock


16 Comments – Post Your Own

#1) On July 13, 2008 at 1:22 AM, SemperGumby77 (66.22) wrote:

This is an excellent post abitar. I've heard quite a bit of talk about the nationalization of FNM and FRE lately. Usually the rationale is that they are "too big to fail." But what exactly does that mean?

What exactly is "too big to fail", and what would happen if they did? Would it cause a bank run of epic proportions? Would it seize up the credit markets? Would Christmas be cancelled forever and children be forced to give away the family puppy?

What would be the ramifications? And why is the Fed and the government strongly considering it?

I'd really like to hear both sides to this story..... 


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#2) On July 13, 2008 at 2:19 AM, hansthered0 (< 20) wrote:

Bring on another great depression...maybe we need it.

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#3) On July 13, 2008 at 12:08 PM, abitare (29.95) wrote:

FYI - theBigPicture has some good posts on these two:

Fannie & Freddie Heading for "Conservatorship" Posted by Barry Ritholtz on Friday, July 11, 2008 | 06:00 AM in Credit | Real Estate | Taxes and Policy 

Uh-Oh! Bad Sign on Fannie & Freddie Posted by Barry Ritholtz on Thursday, July 10, 2008 | 07:44 PM in Contrary Indicators | Credit | Politics | Real Estate | Taxes and Policy  


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#4) On July 13, 2008 at 6:14 PM, abitare (29.95) wrote:

FYI from Finacial Ninja:

FNM and FRE Make Me Angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

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#5) On July 13, 2008 at 6:16 PM, abitare (29.95) wrote: 

Fannie, Freddie Downgraded by Derivatives Traders (Update1): “Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.”

Wait. Where have I seen this before?

Aaaah, right! MBIA (MBA) and Ambac (ABK) were “treated by derivatives traders as if they were rated five levels lower” long before the clowns over at the ratings agencies even began to think about maybe, possibly putting these names on some kind of ‘negative watch’ list.

“Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression.”

Hmmmmm. Let’s do some quick, back of the envelope math. 1% of $1.45 trillion is $145 billion. Suppose then that Fannie Mae (FNM) and Freddie Mac (FRE) end up with losses of 1% on their portfolios. FNM has a market cap of 17.19 billion, $133.05 billion in cash and $761.05 billion in debt. FRE has a market cap of $8.70 billion, cash of $132.24 billion and $759.77 billion in debt. It would appear to me that these entities could not weather a $145 billion hit should it occur over a short period of time.

Recent estimates, which I covered in IndyMac: Failure by Friday? Fannie, Freddie: We Need Capital, are that they have to raise a combined $75 billion as FAS 140 forces off-balance sheet entities back onto the books.

It is likely that FNM and FRE would eventually get exempt from implementing this new accounting rule, but even having to raise the much smaller $75 billion would be damn near impossible in these market conditions.

Now imagine trying to raise about $145 billion with your credit rating under assault.

Imagine also that their portfolios start to show losses greater than 1%...

I’m betting against the Bulltards on this one and going with the derivatives traders…

Oh and this isn’t going to help at all:

Pending U.S. Home Resales Decline More Than Forecast (Update2): “Contracts to buy previously owned U.S. homes declined more than forecast in May, a sign prices that have been sliding for more than two years have yet to touch bottom.

The index of pending home resales fell 4.7 percent following a revised 7.1 percent gain in April that was greater than previously reported, the National Association of Realtors said today in Washington.

The prospect of further price declines may be discouraging offers, while rising mortgage rates and tougher lending standards make it harder to qualify for loans. Record delinquencies on home loans have led to concerns that Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, may need to increase their capital by $75 billion.”

Posted by Ben Bittrolff at 7:47 AM 2 comments  

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#6) On July 13, 2008 at 6:19 PM, abitare (29.95) wrote:

FYI - More from the Financial Ninja: 

Former Federal Reserve Presidents Says Fannie Mae and Freddie Mac are Insolvent

Former St. Louis Federal Reserve President William Poole says Fannie Mae (FNM) and Freddie Mac (FRE) are insolvent.

Nice. Nuff said.

Fannie, Freddie `Insolvent' After Losses, Poole Says (Update1): “Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.”

Poole only said what traders already knew: Fannie Mae, Freddie Mac: Downgraded by Traders.

It may not yet be too late. Using Fannie Mae and Freddie Mac as Disaster Insurance might still be feasible on bounces (Update1).

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#7) On July 13, 2008 at 6:28 PM, abitare (29.95) wrote:

FYI - Blum Says Freddie `Insolvent,' Fannie `Running on Fumes' Video 

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#8) On July 13, 2008 at 7:37 PM, lquadland10 (< 20) wrote:

The United States of China. Thank you BUSH SR. CLINTON AND BUSH JR. Oh Aba lets just speed up the eventual pain. Instead of Bailing out China in the form of freddie and fannie why don't the We the people use cash. By pass the banks like chase and bac. Use the money to buy gold jewerly and put it in a safty deposit box. That way your money is safe and the banks can't use it to buy more bad loans. FDIC is going to raise more money so does that mean they are going broke? Inquiring minds want to know. Have you planted your garden yet? They knew about Indymac Bank for the last year. What about the ones this year? So as the domanoes went up they will now fall.   

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#9) On July 13, 2008 at 7:54 PM, EScroogeJr (< 20) wrote:

Hmm, I thought China, Russia and Japan are now bailing out America. And it's a real shame that these governments are so friendly to us at their own expense. If they had a bit of brains and dumped the bond slime they hold, the whole house of cards would collapse at once.

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#10) On July 13, 2008 at 8:56 PM, abitare (29.95) wrote:

FYI - Mish Shedlock again:
Operation "Rescue Fannie" Underway - Paulson a Blatant Liar
On Friday Treasury Secretary Paulson Said Keep Fannie and Freddie in Current Form.

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#11) On July 13, 2008 at 11:24 PM, LordZ wrote:

How is it that such a large institution can get so mismanaged ?

Do we really need freddie and fannie ???

How can a possible 1% cause such a down fall ?

Weren't they smarter than this ?

Its ming boggling.

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#12) On July 13, 2008 at 11:35 PM, lquadland10 (< 20) wrote:

Question? If the gov, totally takes over fan and fred. then does that mean that China, Russia and Japan are the real owners of the USA? Are they part owners now? How does that work?

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#13) On July 13, 2008 at 11:56 PM, EScroogeJr (< 20) wrote:

That's not an ownership that would make one happy. A small debt is the problem for the debtor, a big debt is a problem for the creditor. China and Japan are now at the mercy of the Treasury. Russia's strategy is the best: they buy up worthless US paper, then borrow the same amount of dollars through state-owned and semi-private companies. This greatly weakens the incentive for the Treasury to renege on its promices because then the Russians can respond in kind.

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#14) On July 14, 2008 at 3:23 PM, lquadland10 (< 20) wrote:

What a mess this new world order is ops...  I mean globalization.......ops I mean one main banker calling all the shots. What happens if the intress rates rise? Wouldn't that mean that China and Japan would get a lot of money for the returns? LordZ I thought fred and fan had way more than that 5 trill. ? 45% of the eccomony? I thought China, Russia  when do the commist do anything to help people? What is the end game plan.

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#15) On July 25, 2008 at 3:44 PM, Donnernv (< 20) wrote:

Ummm...isn't 1% of $1.45 trillion $14.5 billion?

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#16) On July 25, 2008 at 7:35 PM, nuf2bdangrus (< 20) wrote:

Remember the adage.  f I owe you a little money, I have a problem.  If I owe you a lot of money, YOU have a problem.


The CHinese have a problem. 

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