China SAFE Denies It Faces Half A Trillion In GSE Losses

Tyler Durden's picture

We were wondering how long it would take for China's State Administration of Foreign Exchange (SAFE) to come out with a report refuting yesterday's statement by Lu Zhengwei that China should immediately proceed to start selling its GSE concurrent with today's announcement by the administration that the "Fannie, Freddie model is dead", as well as the supposed upcoming end of QE2 (don't worry, it won't end) which would send fixed income prices much lower. The answer: less than 24 hours... although not really. Dow Jones reports: "China's foreign exchange regulator on Friday denied a media report that
said it could face losses of up to $450 billion on its holdings of
securities issued by U.S. housing-mortgage giants Fannie Mae (FNMA) and
Freddie Mac (FMCC).  The State Administration of Foreign Exchange's statement didn't specify which report it was denying, but it appeared to be referring to a report on Thursday by Chinese newspaper International Finance News, which said a forthcoming plan from the Obama Administration to gradually phase out the two government-controlled companies could lead to the losses. SAFE said the report was "groundless," and that is has been receiving regular payments of interest and principle on the bonds it holds from the two companies." Well, duh. The alternative is a technical bankruptcy of the US. What, however, was not denied anywhere is that China may and will commence selling GSE notes soon. Especially since as we reported yesterday, it had already been selling out of its GSE holdings for the past two years. And if they start offloading GSEs, what happens to USTs? Although with the Fed now holding over $1.13 trillion in debt, or over 10% more than China, the answer to that question is increasingly irrelevant.

More from Dow Jones:

 At issue are three kinds of Fannie and Freddie securities. The two companies' stock prices have plunged to nearly zero, but SAFE said in its statement Friday that China has never invested in the stock of the two companies, so it hasn't been affected by the decline.

The real concern is over the debt issued by the companies, as well as asset-backed securities that the companies have packaged out of mortgages and sold to investors. However, the Obama administration has committed unlimited amounts of aid to ensure that the firms meet their obligation to holders of those bonds and securities. The commitment has cost U.S. taxpayers $134 billion so far.

Lu Zhengwei, a senior economist at China's Industrial Bank Co. said in his report on Thursday that such reassurance from the Obama administration amounts to an "empty check" without the support of the U.S. Congress.

"However, looking at the current political situation in the U.S., for the U.S. congress to give a clear guarantee on this issue is almost impossible," Lu said.

And since the estimate of China's GSE holdings is woefully old, nobody really knows what kind of market impact a possible commencement of disposition could have.

According to the U.S Treasury's report on foreign holdings of U.S. securities, China held $454 billion of long-term U.S. agency debt as of June 30, 2009. That includes $358 billion of "asset backed securities...backed primarily by home mortgages," and $96 billion of other long-term agency debt. The bulk of those holdings are likely in Fannie and Freddie bonds and securities, though it also includes debt from other U.S. government agencies such as the Government National Mortgage Association.

That said, for the Obama administration to declare the GSE model dead, and expecting a gradual wind down in Fannie and Freddie portfolios, perhaps they can clarify just who they expect on selling these hundreds of billions in annual bonds to, now that China is becoming increasingly ambivalent about holdings GSE bonds, let along buying more.

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Sudden Debt's picture

I'll take four shots. How much is it?

jus_lite_reading's picture

For the first time in my life I feel an all out global war is about to occur.

tmosley's picture

$700 billion each.  Buy now, prices are rising quickly!

BRAVO 7's picture

TIIIIMBER!!!  watch out below, 70 trillion in falling frn's can do a lotta damage.

umop episdn's picture

July 16, 2008: Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” So sayeth the Gen Ben. As good as gold-plated tungsten!

jus_lite_reading's picture

As I said, it takes a PhD to F$%^& things up this bad. Hip hip horray BEnron! Save you banker friends!

Sudden Debt's picture

Last week I bought  "the Code of Ethics", a internal document from former Enron on Ebay.

I just crossed it while surfing and just had to have it :)

350$ but I think it'll be worth 20 times that much in 10 years :)


Going Loco's picture

Nobody will know what or who Enron was by then. A re-writing of history usually follows comprehensive systemic collapse. And the thought of trading 5oz AU for a piece of paper sounds unlikely to me.

Sudden Debt's picture

So what if I told YOU that I will give YOU 6 X 1oz GOLD COINS for this little piece of paper? :


I'd frame it and hang it in my toilet.

Matt's picture

I'll accept that trade if you'll accept a duplicate from the gift shop. depending where you are, i may even agree to hand-deliver it.

Sudden Debt's picture

Yeah... and the Pope isn't a pedophile and was never in the Hitler jugend!


crosey's picture

I gotta put the brakes on you about the Pope-pedophile cheap shot.  Not appreciated.

snowball777's picture

He only covers for pedophiles?  The swasti-costume was for Halloween?

zaknick's picture

Baaaaahhhhh. Baaaaahhhhh

Sheep alert!

The poopoo and his gay gang are scum.

MachoMan's picture

How the hell is that a cheap shot?  That's like saying go figure about John Candy dying of a heart attack...  spade is a spade...

pyite's picture

plan from the Obama Administration to gradually phase out the two government-controlled companies

What part of "gradually" don't they understand?  It will take decades and in the mean time they will print enough money to pay off everybody.

LawsofPhysics's picture

The American taxpayer is the backstop for the balance sheet of the Federal reserve.  Talk about taxation without representation.  Didn't we already fight one revolution over this?

jus_lite_reading's picture

Couple that with Kraft foods saying more price increases on the way, coupled with empty shelves in the US and you've got an Egypt in the US

Whoops. The EU will disintegrate first. Do you hear that sound? The sound of cracking Portuguese tiles and Italian marble...

Stuck on Zero's picture

Translation: The Chinese can sell all their holdings and Ben will buy them with paper money still hot from the press.  The Chinese will then buy commodities with the paper hot money and we'll see more riots in the low latitude countries.

serotonindumptruck's picture

That appears to be a sound economic model.

For some odd reason, I'm reminded of the analogy WRT "the dog always returns to its own vomit."

It seems somehow appropriate. 

bankrupt JPM buy silver's picture

Whats up with Geithner's hair. What a fucktard.

johnnymustardseed's picture

Capitalism bailed out by communism. Haha FAIL!

uhb's picture

Serves them right! They should have thought about buying that sh1t in the first place ;)

SheepDog-One's picture

Whole lotta denial goin on!!

overmedicatedundersexed's picture

It's not a loss if you don't book it..hell it's an asset!!!

china knows how to play..did they buy JPM yet?

"all your banks and homes belong to us" is the motto in the new little red book.

sale of california coming soon.


SheepDog-One's picture

Already China planning 500 Chinese cities here in america, signed over on Hu's visit. 

In Fed We Trust's picture

That would why explain why Hank Paulson made 60 trips to China, buying Chiense banks, during his realm at Goldman,

that was why de didn't seeing the real estate thing in the US, ha ha

johnnymustardseed's picture

FASB say mark to market does not exisit, so there is no loss

Pure Evil's picture

Well, actually we know who will be the buyer of last resort, exactly the same guy that is the printer of last resort.

Once Uncle Ben has purchased every last GSE note the price of toilet paper should nose dive immediately.

In Fed We Trust's picture


They might be many levels of wall st bs between those houses and those GSE notes.


But way at the bottom, are physical homes, the ones we live in.


In Fed We Trust's picture

And with the help of hyperinflation the prices of these homes shall rise.

And did you ever think that maybe the fED wants to hold onto theses homes for 10 years or so. Give them a chance to thin out the population.

Every hear of Operation All Clear set for 2020?

reading's picture

4 years in an this is the best we can do.  The white elephants are dead, really, you just noticed?  And housing, already in terrible shape, only still has a pulse because the GSE's are doing the paper.  We couldn't survive in the mortgage market when the economy was good (or a lot better than now) without the GSE's -- save for a couple of years of the bubble top -- so it surely isn't going to happen now.  Less mortgage availability = less homes sold = economy continuing to suck for the forseeable future.  When in the hell will they finally figure this out?


That isn't to say I think the GSEs are a good thing...just wondering when the rest of the world is going to figure out that the US economy still sucks serious wind.

Bob's picture

Trump is showing every sign that he will be running for Prez in 2012 and is sounding the warpath against China.  This could get real interesting. 

zaknick's picture

Saw that. Wouldn't trust any rich bastard as far as I could throw him. Isn't he the one who declared bankruptcy like 5 times?

Still though, insightful. These scumbags bankrupt the country and now want to send us off to die in order for their ilk to dodge the bullet.

zaknick's picture

Saw that. Wouldn't trust any rich bastard as far as I could throw him. Isn't he the one who declared bankruptcy like 5 times?

Still though, insightful. These scumbags bankrupt the country and now want to send us off to die in order for their ilk to dodge the bullet.

Bob's picture

Isn't a Bankruptcy President just what we need, though?  Way over due. 

Buzz Wired's picture

The Chinese are shrewed & patient. They will dump their GSEs as fast as they can without collapsing the price to minimize their losses, same as their US T-Bills, though I'm sure those losses are mounting.

Bastiat's picture

Right.  Force feed the Fed like a foie gras goose.

Caviar Emptor's picture

The Chinese are shrewed & patient

Right! So they won't dump GSE and T paper, they'll keep the implicit threat alive and use that to extract deals from WH and CONgress:  favorable deals in ag, no veto on buying up oil and nat gas assets, no compete agreements for exports, and soon buy Michigan and Illinois

serotonindumptruck's picture

How do most wars begin? Trade embargoes, economic sanctions, official boycotts, naval blockades, etc...

Definitely something financial/economic. In the case of the USA, unsustainable debt/currency collapse.

Now China will begin firing the first real salvos by refusing to finance USA debt. And dumping their US dollar holdings.

This may be interpreted as a turning point in the economic war being waged between the USA and China (and the rest of the world).

The USA desperately needs a pretext for additional military action.

Bob's picture

Pretext is right.  So much for good sportsmanship.  Apparently, for America, the Game is sacred . . .  until you lose.