The Government-Sponsored Enterprises

Group Members:

Bogoss, MarioDu, Qizhen

Hu, Tianyan(Beam)Li, Chenqi(Eric)

Mou, Ruo(Maggie)

Agenda

• Overview • Development• Features & Purposes• Conservatorship• Functions• Crisis• Observation & Recommendation• Projections• GSEs in China

Overview

• No reform of GSEs after the 2008 crisis

• Dodd-Frank only highlights the role they played

• Secretary of treasury delayed the blueprint outline for the 2 giant GSEs: Freddie Mac and Fannie Mae

Development

• Fannie Mae was created in response to the Great Depression, in the hope to stabilize the mortgage market for the FHA(Federal Housing Administration).

• In 1970, the U.S. congress chartered the Freddie Mac to compete with Fannie Mae.

Features & Purposes

• Exempt from state and local income taxes and certain SEC requirements

• Had access to U.S. Treasury • Can use the Federal Reserve as its fiscal agent,

etc.• To provide stability in the secondary market• To provide ongoing assistance to the secondary

market for residential mortgages• To promote access to mortgage credit throughout

the Nation

Fannie Mae in Conservatorship

• Conservator -- Federal Housing Finance Agency

• ATM – Treasury

• Adverse Effects

• Main Business Lines

• Conflicted Missions

Guaranty Obligation Risk

Model of Guarantee

GSEsMortgage

Originators

Conforming Mortgage

Payment

Private Investors

MBS

Receipt

Guarantee

Guarantee Fee

• Inadequate compensation received • Barren capital for bearing default risk

GSEsSPE & Trust

MBS Portfolio

InvestorsAgency Bond

Payment Receipt

• Lower borrowing cost• Implicitly but partially guaranteed

by government• Exposed to default risk

• Prime Mortgage• Subprime Mortgage• Alt-A Mortgage• Other high-risk

holdings

Rationale of “Hedge Fund”

• Swelling risky private-label securities

• Excessive lending to low-income households

• Leverage up to purchase MBS

GSEs in U.S. Housing Bubble

Reasons behind the Crisis

• Implicit subsidy from taxpayers to GSEs• Great demand for GSE debt from irrational foreign banks and wealth

sovereign funds• Congress and administrations imposed pressure upon GSEs to load

up riskier MBS

GSEs: Too big to fail

• Reasons that GSEs were too big to fail: Default on debt---Investors may think US

government no longer assured The loss of these guarantees might have curtailed

the housing market Liquidation of MBS leads to value decreasing Possible losses on their counterparties in the

derivatives market

Recommendations

• Hedge fund function of the GSEs should be discontinued.

• Guarantee function of the GSEs should be revisited and possibly discontinued.

Fully nationalize the guarantee business for conforming loans.

Fully privatize the guarantee business. Public-private hybrid, would see the GSEs disappear, but it

would keep all conforming MBS guaranteed.

• The GSEs should get out of the business of promoting home ownership for low-income households and underserved regions.

Way Forward- Projections to the Future if the GSEs Are Not Fixed

• Some proposals on the future

• Hard to establish any new structure

• The rise in government debt-to-GDP ratio

• The U.S. government’s consolidation on its balance sheet

• No passed on explicit guarantees as implicit forms

• Neither mortgage guarantees nor MBS are held intensively by lightly capitalized institutions.

Large Mortgage Originators in China• Five state-owned commercial banks—the Industrial & Commercial

Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agricultural Bank of China (ABC) and Bank of Communications (BCM).

• Individual housing commercial loan is one of the major housing loans in China. Usually, lenders use the property (or other security acceptable to the bank) as collateral when applying for loans.

ICBC CCB BOC ABC BCM

95.40%86.59%

96.97% 91.83%

54.53%

Government Ownership

17%

19%

13%5%

47%

Allocation to Nationwide Mortgage

ICBC CCB ABC BCM Others

Value of Nationwide Mortgage: USD 1.32 Trillion

• State Owned Enterprise (SOE) vs. GSE• 100% backed / partially and contingently

supported by government• Composite of dominant shareholders and

bondholders • Limited suffering from housing bubble

Comparable in China

Top 10 Bond HoldersAmount(RMB

)

China Life Insurance Company Limited 733,603,000

PICC Life Insurance Company Limited 361,000,000

New China Life Insurance Company Limited－ 018L－FH001SH

230,000,000

Aviva-COFCO Life Insurance Company Limited 210,000,000

New China Life Insurance Company Limited－ 018L－WN001SH

200,000,000

China Life Insurance (Group) Company 190,000,000

ABC Life Insurance Company Limited 150,000,000

The Great Wall Life Insurance Company Limited 150,000,000

China Pacific Insurance (Group) Company Limited 126,970,000

ABC-CA Fund Management Company Limited 124,233,000

Poly Real Estate (Group) Co., Ltd.

(08’ Poly Bond)

Top 10 ShareholdersNumber of

Stocks

Poly South Group

3,007,916,449

Guangdong Huamei Investment Group

147,565,000

China Poly Group

139,031,682

China Social Security Fund 407

100,438,764

China Galaxy Securities Company Limited

91,411,776

Guosen Securities Company Limited

83,295,108 Chinalife Insurance Company Limited FH002

74,722,124

Industrial and Commercial Bank of China 

66,492,457

China Social Security Fund 402

59,975,651

Zhu Qianji

56,415,360

Poly Real Estate (Group) Co., Ltd.

(Poly Common Stock Ending Q1 2013)

Questions?

Thank you