Investors fret on Fannie Mae and Freddie Mac

Henny Sender in Hong Kong and Michael MacKenzie in New York

Financial Times

October 10, 2011 ET

Asian and Mid­dle East­ern central banks and sovereign wealth funds are increas­ingly anxious about the safety of their invest­ments in the debt of Fannie Mae and Freddie Mac, despite the as­sur­ances of US govern­ment of­ficials.
Spooked by US po­lit­ical wran­gling, leading investors including the National Pen­sion Ser­vice of Korea and the Kuwait Invest­ment Au­thor­ity have sold their holdings of the debt of the US Treasury-backed hous­ing agencies since the 2008 glob­al financial cri­sis.
Of­ficials from central banks, including the Bank of Japan, say they will be far more cautious in fu­ture. “The GSEs [govern­ment sponsored               

enterprises] are not safe,” said one top of­ficial at an Asian central bank, who added that his in­stitution was re­luc­tant to sell its exis­t­ing holdings because of fears of spooking the mar­ket.

Fannie and Freddie - which own or guar­antee the major­ity of US mortgages - were made wards of the Treasury just before the fail­ure of Lehman Broth­ers in 2008. Since then, they have been dependent on its financial support.
Many for­eign investors are not re­assured by the increas­ingly explicit US govern­ment guar­antees, and are wary of the debt the two hous­ing agencies issue.
The po­lit­ical fall­out over the US debt ceiling this summer and the consequent Standard & Poor’s downgrade of US sovereign debt intensi­fied fears that politics might de­rail the                     

govern­ment promise to backstop the debt.

“We have become hostage to the ir­responsible behaviour of politicians,” said Bad­er al-Saad, head of the KIA, in a New York speech last month. “What hap­pened dur­ing the debt negotiations will make many countries think twice about the invest­ment envi­ron­ment of the US.”
Investors are also worried that if the Fed­eral Reserve keeps print­ing mon­ey, the val­ue of that debt in terms of their own currency will lose val­ue.
The Council on For­eign Relations in July re­leased a study showing that pur­chases of Fannie and Freddie debt by the central banks of Brazil, Russia, India and China had dec­lined.
“At the peak, Asian central banks accounted for       

40-50 per cent of the pur­chases,” said a se­nior an­a­lyst at one leading Wall Street firm, re­ferring to the pe­riod before the glob­al financial cri­sis hit in 2008. “Today, it is be­tween 10 and 20 per cent.”

Since its peak in mid 2008, for­eign central banks holdings of GSE debt have fall­en by 26.4 per cent, to $724bn today, accord­ing to Bloomberg research.
The Fed­eral Hous­ing Finance Agency, which reg­ulates Fannie and Freddie, has sought to re­assure investors, saying they have recourse to the Treasury in the case of any default.
Howev­er, data from Cred­it Su­isse show a ma­te­rial change in investors’ ap­petite for debt, which dropped sharply from July.
For example, Asia took only 3 per cent of $4bn