Freddie (FRE) & Fannie (FNM) 01 (May 08 - Feb 12)

[millionairemind]

Published July 16, 2008

China will hold on to Fannie and Freddie
The ailing mortgage financiers have a safety net in the Asian nation, which has reserves reaching US$1.8t in June

By ANDY MUKHERJEE

LENDERS to Fannie Mae and Freddie Mac were being skittish for no reason.

The risk premium on the beleaguered mortgage financiers' debt began rising in May and was, until last week, headed towards levels seen before the collapse of Bear Stearns Cos in March. Equity investors, not knowing how an eventual rescue will affect their interests, had reason to be nervous. Bondholders' pessimism was uncalled for.

The latter, after all, had China on their side.

And that means a lot.

Even if commercial creditors harboured any doubts about the intent or ability of Henry Paulson and Ben Bernanke to save Freddie and Fannie, they shouldn't have expected China to twiddle its thumbs, accept a big loss and still be willing to provide more capital to the United States.

Foreign central banks, led by China and Russia, hold at least US$925 billion in US agency debt, including bonds sold by Freddie and Fannie, according to official US statistics.

That figure 'is almost certainly an understatement,' says Council on Foreign Relations economist Brad Setser, who estimates the total is more likely to be about US$1 trillion, or a fifth of outstanding agency debt.

The so-called government-sponsored enterprises are too big, too vital to housing and too important to the Chinese 'for their debt ever not to be honoured on time and in full', Mr Setser says.

Other economists say the very reason behind the rescue plan is to prop up the debt.

'In the short term, it's been critical to support GSE debt - key to the value of the dollar and held by all sorts of central banks,' said a report by Washington-based Federal Financial Analytics Inc.

Russia's Finance Ministry issued a statement yesterday saying that it had placed a 'limited amount' of its international reserves - though none of its oil riches - in US agency debt.

Not a word from China.

Not only does China hold a lot of these securities, it has, of late, been buying them with gusto. In the 12 months through April, official Chinese additions of US agency debt - purchases net of sales - amounted to US$67 billion, a 26 per cent increase from a year earlier.

Ever since the bailout of Bear Stearns, China must have been doubly confident that Freddie and Fannie weren't going under: Sooner or later, Treasury Secretary Paulson and US Federal Reserve Chairman Bernanke would ease the crisis of confidence by making the implicit government guarantee on agency debt explicit.

From China's perspective, Mr Paulson's 'Three-Part Plan for Immediate Action' is a perfect outcome if it succeeds in lowering the risk premium on Freddie Mac's 10-year debt over US Treasury notes of similar maturity. The capital gains that this narrowing of spread will produce for China will be quite a bonanza. The process may already be under way: The excess yield fell to 73 basis points yesterday from 94 points on July 10.

Mr Paulson's comments about a possible recapitalisation of Freddie and Fannie helped the US dollar to strengthen in Asian trading yesterday. If the dollar rally is sustained, the yuan, up almost 7 per cent this year, may get a breather from further appreciation. China's increasingly vociferous pro-growth lobby, complaining about the loss of export competitiveness, may be able to rest a little easier.

The yuan dropped for the first time in three days yesterday.

Finally, if the resolution of the Freddie/Fannie saga marks the beginning of the end of troubles in the sub-prime-ravaged US financial industry, that will mean good news for China Investment Corp.

The sovereign wealth fund's stakes in Blackstone Group LP and Morgan Stanley have shrivelled since China Investment picked them up in May and December last year, respectively. At present, this is a bit far-fetched.

There's little reason to believe that the worst in the US housing crisis is over.

Analysts at Goldman Sachs Group Inc and CreditSights Inc warned of dividend cuts and additional capital-raising plans at US regional banks, following the collapse last week of IndyMac Bancorp Inc, a California mortgage lender.

Besides, to the extent the US has to resort to using real money to shore up confidence in Freddie and Fannie, the result may not be all good for China. A key risk is that Mr Paulson's bailout plan may expand the US budget deficit, which may be inflationary and push Treasuries lower.

At last count, China owned US$502 billion in Treasuries. Including agency debt, its holdings are more than US$1 trillion, about a quarter of China's gross domestic product, Mr Setser says.

Will China panic and dump US assets? Perhaps not.

Like most of China's economic policies, the nation's approach towards reserve diversification will also be gradualist.

With China's reserves reaching US$1.8 trillion in June - a US$280 billion increase this year - Freddie and Fannie, even after losing their yield premium, are assured of the Asian country's reluctant patronage. -- Bloomberg

The writer is a Bloomberg News columnist. The opinions expressed are his own.

[LenaHuat]

I recalled watching Hillary Clinton speak during one of her campaign TV interviews. When asked if the US should more rightfully be concerned abt the high level of foreign ownership of US sovereign debt papers (which I think she meant treasuries and GSE papers), I remembered her reply was : "They hold no more than 20%".

So this Freddie Mac and Fannie Mae rescue package is for ???, obviously their own domestic investors. Wonder why Jim Rogers is heckling the Treasury Dept : "Why should we save the Japanese Central Bank? Why save the Chinese (he appeared to hesistate on this)? The Japanese" on BBC TV.

[millionairemind]

With the heckling.. comes the counter offense.. DEFENSE

Treasury chief defends ‘blank cheque’By James Politi in Washington

Published: July 15 2008 21:06 | Last updated: July 15 2008 21:06

The sweeping US government plan to rescue Fannie Mae and Freddie Mac, the troubled mortgage companies, faced scrutiny in Congress on Tuesday as legislators quizzed policymakers on the proposal.

Testifying before the Senate banking committee, Hank Paulson, Treasury secretary, said the plan was “aimed at supporting the stability of financial markets, not just these two enterprises”.

In response to legislators who criticised him for demanding a “blank cheque” from American taxpayers, Mr Paulson said that the size of any possible intervention needed to be unlimited and the triggers for any Treasury investment could not be specified because doing so would undermine the effectiveness of the rescue plan.

Mr Paulson for the first time confirmed in writing that the powers being sought by the Treasury to increase the $2.25bn (€1.41bn, £1.31bn) credit line with Fannie Mae and Freddie Mac and to take an equity stake in the two groups would last through to the end of next year.

Also appearing before the panel along with Mr Paulson were Ben Bernanke, chairman of the Federal Reserve, and Chris Cox, chairman of the Securities and Exchange Commission. They spoke as shares in Fannie Mae and Freddie Mac continued to fall, by 17 per cent and 18 per cent respectively, in noon trading in New York, extending the heavy losses of the past week.

Support on Capitol Hill is seen as crucial to the rescue plan, since it requires changes to the housing legislation that has been winding its way through Congress in recent months.

The Democratic leadership in Congress endorsed the plan after extensive briefing over the weekend, making it more likely that it will be rapidly approved. Nevertheless, some scepticism and opposition to the rescue has started to emerge, particularly among Republican lawmakers and long-time critics of Fannie Mae and Freddie Mac.

Jim Bunning, a Republican senator from Kentucky and outspoken critic of the Fed, said: “When I picked up my newspaper on Tuesday I thought I woke up in France”. He then added that the March rescue of Bear Stearns with a $29bn loan from the Fed was “amateur socialism” compared with the plan to save Fannie Mae and Freddie Mac.

Richard Shelby, in this case arguably the most powerful Republican lawmaker as ranking member of the Senate banking committee, said it was “an opportune time to rein in” Fannie Mae and Freddie Mac.

“If Congress intends to reaffirm Wall Street’s view that the American taxpayer stands behind the government-sponsored enterprises [GSEs] debt, we will undoubtedly harden the so-called implicit guarantee...What exactly would we be getting in taking an ownership stake in the GSEs? What rights would the government possess as an owner? What impact would such actions have on the dollar and the broader economy?” he asked.

Meanwhile, Republican leaders in the House sought to delay the plan by demanding hearings. “It would be irresponsible for Congress to provide the proposed new authority without doing due diligence on the mechanics of the Treasury proposal and its potential implications for taxpayers,” said John Boehner, House minority leader.

Mr Bernanke said: “If there’s clarity which provides assurances the GSEs will have the financial strength they need, and [there] is also a very strong regulator that will protect the system and protect the taxpayer, I think the combination of those two things will be very constructive.”
Copyright The Financial Times Limited 2008

[winston]

Looks like both Fannie Mae and Freddie Mac are insolvent and in line to be taken over by the US government.

If so, their stocks will probably be worth zero. Interesting – everybody talks about what Warren Buffett is buying, little is said about what Buffett is selling.

A while back Buffett (Berkshire) had a very large position in Fannie Mae. Quietly, with no fanfare, Buffett sold his whole position in Fannie. Smart move, and a very quiet move at that. Warren, you clever devil.

– Richard Russell
Dow Theory Letters

[millionairemind]

Another very misunderstood aspect of WB - He buys stocks and companies and hold them forever

Try reading up on the book " Trade Like Warren Buffet"

[Aspellian]

Another very misunderstood aspect of WB - He buys stocks and companies and hold them forever

Try reading up on the book " Trade Like Warren Buffet"

Agree on the misconception of Buffet style. Most pple think its merely find outstanding companies and buy and hold and hold through ALL cycles.

But remember, many of Buffet's purchases are done when real blood is in the street (eg. AMex and current economic climate). Thus Buffet is able to truly practise his much advocated margin of safety. He also have huge cashpile ready to take advantage of Mr Market's wild mood swings.

He has also sold PetroChina when he feels that its over-valued. In the first place, many of us are not as smart to find such outstanding companies and even less so in determining what is the margin of safety.

Slowly evolve and find a style that truly suits u.

[mojo_]

A while back Buffett (Berkshire) had a very large position in Fannie Mae. Quietly, with no fanfare, Buffett sold his whole position in Fannie. Smart move, and a very quiet move at that. Warren, you clever devil.

Learning from WB, if I were holding any bond funds, I would be quietly asking the fund mgr if the portfolio includes anything related to Fannie and Freddie... for appropriate actions to be taken quickly...

[kennynah]

Another very misunderstood aspect of WB - He buys stocks and companies and hold them forever

Try reading up on the book " Trade Like Warren Buffet"

Agree on the misconception of Buffet style. Most pple think its merely find outstanding companies and buy and hold and hold through ALL cycles.

But remember, many of Buffet's purchases are done when real blood is in the street (eg. AMex and current economic climate). Thus Buffet is able to truly practise his much advocated margin of safety. He also have huge cashpile ready to take advantage of Mr Market's wild mood swings.

He has also sold PetroChina when he feels that its over-valued. In the first place, many of us are not as smart to find such outstanding companies and even less so in determining what is the margin of safety.

Slowly evolve and find a style that truly suits u.

in the first place, and the most important place, most of us dont know how to value a company other than making a guess. i am certain WB does no such thing as guess work. wana trade like WB, be as good as WB first in valuation process, else, it's just wishful thinking that one has found a "value" company with a good "margin of safety"...i repeat..i am a nag....forgive me...
no offence.

[iam802]

Swiss Re has $9.6 bln exposure to Fannie, Freddie

http://www.marketwatch.com/news/story/s ... MidSection

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LONDON (MarketWatch) -- Swiss Re said Wednesday that it has an exposure of around $9.6 billion to Fannie Mae and Freddie Mac, helping send shares in the reinsurance group to their lowest level in over five years.

In a note to analysts and investors, the firm said it holds a total of $5.2 debt from Freddie Mac (FRE) and $4.4 billion from Fannie Mae (FNM) , though its equity holdings in the firms are minimal.

Shares in Swiss Re (CH:001233237: news, chart, profile) , which were already trading over 3% lower before the announcement, extended their losses to trade down 7.5%, the lowest level since March 2003.
The group also said that at the end of March its 12.2 billion Swiss franc ($12.1 billion) portfolio of agency-backed residential mortgage-backed securities was split roughly 47% from Freddie Mac, 44% from Fannie Mae and 9% from Ginnie Mae.

The firm's total residential mortgage-backed securities portfolio at the time was 24.4 billion francs and its total structured products portfolio was 40.7 billion francs.

Swiss Re added it will provide a further update alongside its second-quarter results in early August.
Shares in the group have fallen close to 50% over the last year, having been buffeted by losses from a deal to insure a client's subprime mortgage portfolio and other exposure to risky debt.
Simon Kennedy is the City correspondent for MarketWatch in London.
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[kennynah]

duno whether UBS got exposure to fannie/freddie as well? i have a friend who invested in UBS a couple of months ago...just spoke to him this afternoon...

his expletives cannot be written here....hahahaha...