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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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Fri, 02/11/2011 - 10:27 | 952498 Sudden Debt
Fri, 02/11/2011 - 11:24 | 952640 Michael
Michael's picture


Fri, 02/11/2011 - 10:29 | 952502 eigenvalue
eigenvalue's picture


Fri, 02/11/2011 - 10:30 | 952503 Sudden Debt
Sudden Debt's picture

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

Fri, 02/11/2011 - 10:36 | 952519 jus_lite_reading
jus_lite_reading's picture

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

Fri, 02/11/2011 - 10:40 | 952530 Sudden Debt
Sudden Debt's picture

On which channel?


Fri, 02/11/2011 - 11:46 | 952736 tmosley
tmosley's picture

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

Fri, 02/11/2011 - 10:38 | 952522 BRAVO 7
BRAVO 7's picture

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

Fri, 02/11/2011 - 10:30 | 952505 umop episdn
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!

Fri, 02/11/2011 - 10:35 | 952511 jus_lite_reading
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!

Fri, 02/11/2011 - 10:38 | 952526 Sudden Debt
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 :)


Fri, 02/11/2011 - 10:50 | 952566 Going Loco
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.

Fri, 02/11/2011 - 10:56 | 952581 Sudden Debt
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.

Fri, 02/11/2011 - 11:15 | 952624 snowball777
snowball777's picture


Fri, 02/11/2011 - 11:29 | 952670 Matt
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.

Fri, 02/11/2011 - 10:35 | 952513 Sudden Debt
Sudden Debt's picture

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


Fri, 02/11/2011 - 11:08 | 952612 crosey
crosey's picture

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

Fri, 02/11/2011 - 11:16 | 952629 snowball777
snowball777's picture

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

Fri, 02/11/2011 - 12:13 | 952846 zaknick
zaknick's picture

Baaaaahhhhh. Baaaaahhhhh

Sheep alert!

The poopoo and his gay gang are scum.

Fri, 02/11/2011 - 14:18 | 953470 MachoMan
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...

Fri, 02/11/2011 - 13:02 | 953110 pyite
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.

Fri, 02/11/2011 - 15:04 | 953524 cranky-old-geezer
cranky-old-geezer's picture

Just bansters actually.

Fri, 02/11/2011 - 10:31 | 952508 LawsofPhysics
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?

Fri, 02/11/2011 - 10:33 | 952509 jus_lite_reading
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...

Fri, 02/11/2011 - 10:35 | 952514 Stuck on Zero
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.

Fri, 02/11/2011 - 10:41 | 952533 uhb
uhb's picture


Fri, 02/11/2011 - 10:47 | 952546 serotonindumptruck
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. 

Fri, 02/11/2011 - 10:55 | 952579 Bastiat
Bastiat's picture


Fri, 02/11/2011 - 10:36 | 952516 bankrupt JPM bu...
bankrupt JPM buy silver's picture

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

Fri, 02/11/2011 - 10:54 | 952575 Bastiat
Bastiat's picture

B. Master's doll!!  Love it!

Fri, 02/11/2011 - 10:38 | 952524 johnnymustardseed
johnnymustardseed's picture

Capitalism bailed out by communism. Haha FAIL!

Fri, 02/11/2011 - 10:39 | 952529 uhb
uhb's picture

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

Fri, 02/11/2011 - 10:42 | 952536 SheepDog-One
SheepDog-One's picture

Whole lotta denial goin on!!

Fri, 02/11/2011 - 10:43 | 952537 overmedicatedun...
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.


Fri, 02/11/2011 - 10:45 | 952541 SheepDog-One
SheepDog-One's picture

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

Fri, 02/11/2011 - 11:22 | 952648 In Fed We Trust
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

Fri, 02/11/2011 - 11:14 | 952622 johnnymustardseed
johnnymustardseed's picture

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

Fri, 02/11/2011 - 10:48 | 952545 Pure Evil
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.

Fri, 02/11/2011 - 11:25 | 952663 In Fed We Trust
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.


Fri, 02/11/2011 - 11:28 | 952668 In Fed We Trust
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?

Fri, 02/11/2011 - 10:51 | 952549 reading
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.

Fri, 02/11/2011 - 10:51 | 952570 Bob
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. 

Fri, 02/11/2011 - 12:27 | 952937 zaknick
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.

Fri, 02/11/2011 - 12:28 | 952943 zaknick
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.

Fri, 02/11/2011 - 15:39 | 953774 Bob
Bob's picture

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

Fri, 02/11/2011 - 10:55 | 952580 Buzz Wired
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.

Fri, 02/11/2011 - 10:58 | 952587 Bastiat
Bastiat's picture

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

Fri, 02/11/2011 - 11:24 | 952654 Caviar Emptor
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

Fri, 02/11/2011 - 11:26 | 952665 serotonindumptruck
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.

Fri, 02/11/2011 - 11:31 | 952684 Bob
Bob's picture

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

Fri, 02/11/2011 - 11:11 | 952618 Seasmoke
Seasmoke's picture

just get rid of the Fed and leave them holding the bag

Fri, 02/11/2011 - 12:51 | 953059 gmrpeabody
gmrpeabody's picture

Too funny. Just stop doing business with the Fed, afterall, it's their balance sheet, let them keep it. 


Fri, 02/11/2011 - 11:21 | 952645 gwar5
gwar5's picture

Benocide is definitely on a one way trip to get rid of the USD as WRC by causing a currency crises

looks like the banksters are ready to move their criminal enterprise to an IMF WRC and a UN world government

IMF discusses plan to replace dollar as reserve currency - Feb. 10, 2011

Bancor: The Name Of The Global Currency That A Shocking IMF Report Is Proposing

IMF's Bancor Last Man Standing?

Perhaps they backed off the Bancor at Davos thinking the IMF SDRs are an easier sell for now

The IMF also wants to sell bonds. Pretty soon maybe you'll get your mortgage and your tax bill from the United Nations. Enforcement required. They'll give you a blue pill when you miss a payment or you're no longer needed. 




Fri, 02/11/2011 - 12:39 | 953003 zaknick
zaknick's picture

I dont see how they stay in power in the US (without total farcist police state) with the dollar crashing as a result of losing WRC status.

What the hell is the endgame? It could come as soon as June ( ebd of QE2).

Fri, 02/11/2011 - 12:43 | 953023 zaknick
zaknick's picture

I dont see how they stay in power in the US (without total farcist police state) with the dollar crashing as a result of losing WRC status.

What the hell is the endgame? It could come as soon as June ( ebd of QE2).

Fri, 02/11/2011 - 11:23 | 952651 topcallingtroll
topcallingtroll's picture

Pimpco might enjoy buying mbs/agency paper if the.chinese create a big enough discount

Fri, 02/11/2011 - 14:17 | 953462 hardcleareye
hardcleareye's picture


Fri, 02/11/2011 - 11:43 | 952726 Tense INDIAN
Tense INDIAN's picture

You might wanna short APPLE for the next 6 days.............

Fri, 02/11/2011 - 12:45 | 953032 Ned Zeppelin
Ned Zeppelin's picture

Once the Fed hits about $2 trillion in ownership of US debt, I think it will become obvious that we have crossed the event horizon into something new. What is the threshold of tolerable limits of monetization? What if it is practically limitless? The evidence as of now is the monetization has been well-tolerated and even cheered on by the system. 

Boggles the mind.  The Grand Uncontrolled Fiat Expansion Experiment continues.  But look down, there is no net. 

Fri, 02/11/2011 - 12:54 | 953071 gmrpeabody
gmrpeabody's picture

Number one rule... never look down!

Fri, 02/11/2011 - 15:29 | 953721 hardcleareye
hardcleareye's picture

Anybody read Krugman on the NYT today?

I have to confess.... I usually enjoy reading his work (not that I agree) but he usually writes well and is a good eco 101 teacher...  and I enjoy learning the underlying rational for different points of view....

I think he can be hung on his own petard with that piece.... very sloppy....

Fri, 02/11/2011 - 16:18 | 953923 thefedisscam
thefedisscam's picture

Those who really care about how much US$ debt China holds can go to the following web site, and calculate yourself!

Here is my calculation

As of November 2011, the total US Agency bond held by Mainland China  is $234,636,000,000. The total US$ debt is $864,577,000,000 (or $864.577 billion)

The Net (purchase - sale)

in Millions

Bonds &




Fri, 02/11/2011 - 20:01 | 954602 Buck Johnson
Buck Johnson's picture

Yea, who are they going to find to buy hundreds of billions (I think their portfolio is around 2.5 trillion) in mortgage bonds.  I think all this rearranging the chairs on the Titanic is lovely but it won't stop the physics of sinking ship of state.

Fri, 02/11/2011 - 22:46 | 954983 LMAOLORI
LMAOLORI's picture

“Bernanke said China holds at least $2 trillion of U.S. government bonds. That is more than double the widely cited official figure, which is published monthly by Treasury.”

“The dollars it has purchased in pursuing that policy now expose it to big risks: Scissors notes that China stands to lose hundreds of billions of dollars on its Treasury purchases should the yuan appreciate significantly, as U.S. policymakers would like.”

“Of course, there is also the question of just how the U.S. will pay off on all its promises. Testifying before the House Budget Committee, Bernanke said in response to a question from Rep. Tom McClintock that China holds as much as a quarter of outstanding U.S. government debt – “more than $2 trillion” of Treasury securities.”

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