Fannie and Freddie in deeper trouble: Asians want a free lunch sponsorized by the US tax payer

After the two unofficial warnings from China regarding the US debt (first, second) and another one from Japan, it looks like the Asians are waking up to the biggest Ponzi scheme in the whole history, far far bigger than Maddof [$50 billion] and Stanford [$8 billion — WSJ reported that the scheme had been running for as long as 22 years!]: the US debt.

So, interestingly, the Asians want to have a full US government backing of the Fannie and Freddie debt.

Basically, Asians don't want to buy Freddie and Fannie debt unless it is fully backed by the US government. Question: If they were fully backed, what would be the difference between those debt securities and the T-bonds? Answer: None. So they would both yield the same, or maybe the same Asians want to have the higher yield for the same risk? In which case it would be a free lunch, paid by the US tax payer! The solution might actually be that the US will provide a full backing, but would then double the national debt. This would then make their bonds collapse and the yield will get a big boost.

The clear message is really that foreigner want a higher yield. And if the government doesn't provide it, the market will.

Also worth noting from the report:
  • Fannie and Freddie actually needed twice as much as what the government stated last year: $400 billion
  • Foreigner have become net sellers of these securities
  • The Fed might start buying $600 billion of that same securities (keep an eye on that for the resulting inflation!)
As a side note: I wrote previously that this crisis would uncover many Ponzi schemes, specially in the hedge fund industry, and it looks like we are headed for big numbers. Indeed the Hedge Fund is in deep trouble because now, hedge funds which are losing money see redemptions because of their poor performance but hedge funds which report positive performances look suspicious and see redemptions as well. The last decade might have seen the rise and fall of the hedge fund and fund of hedge fund industry... Wait & See...

The Bloomberg report is very interesting [emphasis mine]:
Feb. 20 (Bloomberg) -- Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and rebuild the nation’s largest mortgage-finance companies.

Even after President Barack Obama vowed on Feb. 18 to sink as much as $400 billion of capital into Fannie Mae and Freddie Mac, double the original commitment, “there is still a concern that there is no guarantee” from the government, said Shimomura, who oversees $4 billion in non-yen bonds for the arm of Japan’s largest bank.

“Looking at the risk, they’re not so attractive,” he said. “We need a guarantee before we’ll buy.”

Foreign investors sold $170 billion of agency debt and securities in the second half of 2008, the largest amount since the Treasury began tracking sales in 1977, according to the most recent data. Asians, the biggest non-U.S. block of owners in the category, unloaded $70 billion worth from July through December, after scooping up $55 billion in the second quarter and being net buyers during much of the last decade.

The sell-off and calls for a guarantee reflect a continuing lack of confidence among foreign investors five months after the U.S. seized control of Fannie Mae and Freddie Mac. The takeovers followed the biggest surge in mortgage defaults in three decades.
At a minimum, the Fed may have to spend more than $600 billion in its buying program for securities issued by Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, according to Margaret Kerins, an agency-debt strategist at RBS Greenwich Capital in Greenwich, Connecticut. The Treasury also bought $94.2 billion worth of mortgage-backed securities to make up for the withdrawal of foreign investors.
The Fed’s buying program resulted in a yield of 2.06 percent on Fannie Mae notes maturing May 2012 at the close of trading Feb. 18 -- 0.15 percentage point less than government- guaranteed Bank of America bonds maturing a month later and 0.12 percentage point less than similar Goldman Sachs Group Inc. debt, according to RBS Greenwich data.

Fannie Mae, based in Washington, and Freddie Mac, in McLean, Virginia, have about $1.7 trillion of corporate debt outstanding and $3.7 trillion of their guaranteed mortgage-backed securities held by other investors. The two mortgage companies finance almost half of the $12 trillion of residential loans outstanding.
“Overseas investors are looking for the full-faith-and- credit clarification,” Goodman said. Such a pledge would essentially about double the U.S.’s debt, potentially boosting the country’s own borrowing costs.
Sellers in the fourth quarter included Caribbean-based investors, often hedge funds, which dumped a net $35.8 billion of the agency debt and securities after buying $15.7 billion in September. China sold $10.4 billion in the period after unloading $8 billion in September, while South Korea got rid of $10.5 billion.

“China’s demand for U.S. agency bonds will gradually decrease because China has drawn lessons from the credit crisis and learned to invest smarter,” said Yi Xianrong, a researcher at the Beijing-based financial research institute of the Chinese Academy of Social Sciences, which advises the government. “We will try to stay away from these types of bonds.”

Fukoku Mutual Life Insurance Co. spent last year trimming “risky assets,” and it sold all agency holdings in the third quarter, said Satoshi Okumoto, general manager at the company in Tokyo, which has $63.5 billion in assets.

“It’s not really the same credit” as government debt, Okumoto said. “It’s one step below.”

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