China’s first seven star hotel to be built in Sanya, Hainan
China’s first seven star hotel in Hainan, SanyaYou won’t have to go to Dubai to enjoy seven-star luxury anymore as the world’s second seven star hotel — and China’s first — is going to be built in Sanya, Hainan. Construction of the 120m high hotel will begin later this year and will be completed by 2011 to be managed under the Fairmont Hotels & Resorts brand. Shanghai Daily tells us more:
Located in the center of Haitang Bay in Sanya City, the hotel will spread over 150 square kilometers and include a luxury yacht club, a golf course and the biggest ocean park in Asia.
It will be among another 20 five-star hotels in the area and will be a major landmark in Sanya when it is completed.
The hotel will be designed by UK-based W.S Atkins plc which designed the world’s first seven-star hotel, the Burj Al Arab, in Dubai.
A 150 square kilometer hotel?! Good heavens, that’s one-seventh the size of Chongming Island and one-fifth of Singapore. And that’s not all. According to the Hainan Daily, Sanya’s urban planning authority have announced that the city will build not one, but two seven-star hotels.
Really, we’re just a slight tad disappointed they didn’t decide to go one up and build the world’s first eight-star hotel instead.
Bank of China to watch Fannie, Freddie mkt reaction - paper
BEIJING, Sept 9 (Reuters) - Bank of China (3988.HK), which has the largest exposure among Chinese lenders to Fannie Mae (FNM.N) and Freddie Mac (FRE.N) debt, said it would cut holdings further if necessary, a Chinese newspaper reported on Tuesday.
The Shanghai Securities News cited its spokesman, Wang Zhaowen, as saying the bank would closely watch market reaction to the U.S. government's measures to rescue the two agencies and take appropriate steps, though Wang did not provide details.
After battered financial stocks outside of China rallied and investors sold safe-haven bonds on Monday, some analysts cautioned that the bailout plan announced on Sunday was more a sign of the perilous state of the global financial system rather than of an imminent recovery.
"If there is need to cut some positions, the bank will do so," Wang said.
Bank of China (601988.SS), the country's flagship foreign exchange lender, had already slashed its securities holdings related to the troubled U.S. mortgage firms to $12.67 billion as of Aug 25, from $17.3 billion at the end of June.
On Monday, it's Hong Kong shares rose 5.5 percent while it's Shanghai-traded shares rose 1.2 percent, but the bank's shares were lower in early trade on Tuesday.
The People's Bank of China, the country's central bank, said on Monday that Washington's plan would help stabilise markets and boost confidence.
China owned $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie, as of mid-2007.
The Chinese-language paper also quoted an unnamed senior executive at CITIC Bank (601998.SS) as saying the bank was still not sure about the impact of the U.S. government's latest measures, while a spokesman at China Construction Bank (0939.HK) (601939.SS) declined to comment.
Taxpayers take on trillions in risk in Fannie, Freddie takeover
By Stephanie Armour and James R. Healey 7 Sept 2008
WASHINGTON — The unprecedented federal takeover of mortgage giants Freddie Mac and Fannie Mae announced on Sunday is a bold attempt to stabilize financial markets and restore the faltering housing market, but it thrusts trillions of dollars of risk directly onto taxpayers' shoulders.
"You can call it a bailout, you can call it a safety net or you can call it a rescue package, but the bottom line is the American taxpayer is left footing the bill," says Richard Yamarone, director of economic research at Argus Research.
At a Sunday morning news conference, Treasury Secretary Henry Paulson and James Lockhart, director of the newly formed Federal Housing Finance Agency (FHFA), announced that Fannie Mae (FNM), based in Washington, D.C., and Freddie Mac (FRE), based in McLean, Va., will begin operating immediately under a federal government conservatorship. Unlike a receivership, the arrangement leaves hope for shareholders that investments may regain some value. President Bush signed housing legislation in July that gives the government clear authority to intervene as it has.
If the plan settles the bond market as government officials hope, borrowers may find mortgages at slightly lower rates. In taking over the companies, the government ousted their CEOs; otherwise, work continues as normal.
Though the companies haven't been at imminent risk of collapse, deep losses from the housing meltdown have raised concerns from investors around the world about their ability to meet financial commitments.
"I have determined that the companies cannot continue to operate safely and soundly and fulfill their critical public missions without significant action to address our concerns," Lockhart said.
Freddie Mac and Fannie Mae combined own or guarantee $5.4 trillion in outstanding mortgage debt. The government's decision to place both agencies into a conservatorship — in essence, taking on responsibility for that debt by wresting control from the corporations — is an historic move.
It is still uncertain how much capital the companies may need from the government. What that means to taxpayers ultimately depends on what happens with the faltering housing market. To the extent homeowners continue to make timely mortgage payments, pressure on the government is lessened. Continued foreclosures and troubles in the mortgage market could run up an expensive tab.
The Mortgage Bankers Association reported Friday that more than 4 million homeowners, or 9% of those with mortgages, were delinquent by at least one payment or in foreclosure at the end of June. It's the highest rate ever, the MBA says.
Terms of the government takeover call for drastically reducing, over time, the roles that Freddie Mac and Fannie Mae play in the mortgage market. Government officials say the duration of the conservatorship is indefinite, and Paulson said policymakers need to use the time to decide whether the role of the companies is best played by private corporations, the government, or hybrids such as Fannie Mae or Freddie Mac.
Although Fannie and Freddie are public companies, owned by shareholders, their debt has had an implicit government guarantee.
Paulson and Lockhart unveiled a four-part plan to come to the aid of the companies, which have sustained combined losses of $14 billion in the past four quarters.
Key elements of the plan:
• Government purchase of mortgage-backed securities. Initially, the government will spend $5 billion to buy the securities, to demonstrate Treasury support for continued mortgage availability.
• Gradual portfolio reduction. Starting in 2010, the companies' mortgage portfolios will be reduced at a rate of 10% per year.
This would dramatically reduce the role that Freddie and Fannie play in the mortgage market. Together, their market share of all new mortgages reached more than 80% earlier this year, but is now falling.
• A new lending program. The companies will have access to a new line of government credit if they run into serious trouble borrowing funds on the open market. Treasury officials say they consider it a symbolic step to provide confidence to investors in Fannie and Freddie debt.
• Purchase of preferred shares. The government would be allowed to buy new preferred shares that pay dividends that would be considered senior to the current common and preferred stock. The Treasury may purchase up to $100 billion of this new senior-preferred stock in each company to preserve the companies' positive net worth. Fannie Mae and Freddie Mac must give Treasury $1 billion in senior preferred stock today, as an upfront fee for agreeing to consider doing this in the future.
A closer look
The move to put Freddie and Fannie into conservatorship was triggered in part by closer government scrutiny of the agencies, prompted by the July housing legislation.
The Treasury Department recently signed a contract with Morgan Stanley to investigate the financial position of Fannie and Freddie, with help from the FHFA.
"Based on what we have learned about these institutions over the past four weeks, including what we learned about their capital requirements, and given the financial markets today, I concluded that it would not have been in the best interest of the taxpayers for the Treasury to simply make an equity investment in these enterprises in their current form," Paulson says.
Lack of confidence in the agencies has meant that to build capital, Fannie Mae and Freddie Mac have had to pay more for borrowing in the bond market and have had to tighten credit standards. The takeover is intended to boost confidence in the two companies. They could then find it easier to get funding, which could lead to lower mortgage interest rates. That could spur buyers and help rejuvenate the housing market.
"It'll bring (mortgage rates) down a little bit," says Bert Ely, a banking consultant in Alexandria, Va. "Freddie and Fannie now are piggybacking on the credit of the United Sates government, and that will allow them to borrow more cheaply" and, in turn, lend more cheaply. "It might not happen overnight. But it sure won't drive up interest rates."
"Effectively, this is nationalization," Paul Miller, an analyst at investment firm Friedman Billings Ramsey, said before the announcement. "Freddie and Fannie need help. This is the best way."
But Sung Won Sohn, an economist at California State University, warned that the government's financial standing could get shakier. "The U.S. government has trillions of dollars of debt outstanding. With the takeover of Fannie and Freddie, the government will add trillions more to the burden, because the Treasury will, in fact, guarantee all the Fannie and Freddie debt," he said.
Widespread backing
But many supported the move, since financial problems at Freddie and Fannie risk inflaming problems far beyond the U.S. housing market. Fannie Mae and Freddie Mac shares each are down about 90% from a year ago. Central banks around the world hold their securities.
Bond investors traditionally have believed that the U.S. government would backstop the companies, even in the absence of an explicit guarantee. The action Sunday removes any doubt.
In a statement Sunday, Bush supported Paulson's move, saying, "As we determine the appropriate role for the companies in the future, it is crucial that they not pose similar risks to our economy or the financial system again."
Republican presidential candidate John McCain told CBS television program Face the Nation that it was a necessary step. "We've got to keep people in their homes," he said. "There's got to be some confidence that we've stopped this downward spiral."
Democratic candidate Barack Obama told ABC News he's "inclined to support some form of intervention to prevent a long-term, much bigger crisis."
Federal Reserve Chairman Ben Bernanke said in a statement Sunday that "these necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."
Spokesmen for Freddie and Fannie had no comment Sunday.
The takeover also means the ouster of current CEOs at Freddie and Fannie. At Fannie Mae, Herbert Allison, former CEO at mutual fund company TIAA-CREF, replaces Daniel Mudd. At Freddie Mac, David Moffett, who was vice chairman of U.S. Bancorp, replaces Richard Syron. Syron and Mudd will remain as consultants for an undetermined time.
Freddie and Fannie were chartered by the government in an effort to help stabilize the mortgage market by buying loans from lenders. Fannie Mae was first established in 1938, during the Great Depression, and Freddie followed in the 1970s.
China and Japan hail U.S. mortgage rescue as doubts linger
Yoko Nishikawa and Mike Dolan
TOKYO/LONDON Sept 8 (Reuters) - China and Japan, the biggest buyers of Freddie Mac and Fannie Mae bonds, on Monday praised Washington for rescuing the ailing mortgage giants, but investors said the bailout had not ended global credit market misery.
As battered financial stocks rallied and investors sold safe-haven bonds, analysts cautioned that the plan announced on Sunday was more a sign of the perilous state of the global financial system than of an imminent recovery.
"We find it difficult to see how it is bullish that the heavy hand of government is needed to such an extent," Merrill Lynch economist David Rosenberg said.
"In our view, the takeover of Fannie and Freddie is actually a testament to how broken the financial system is at this time."
China and Japan, the biggest and the second-biggest holders of the Fannie and Freddie bonds, welcomed the bailout.
"I think it will have a positive impact on the world economy as it eases worries over the U.S. economy through more stable financial markets in the United States," Japanese Finance Minister Bunmei Ibuki told reporters on Monday.
BOND MARKET
Freddie and Fannie bond holders are the most likely long-term beneficiaries of the U.S. government's move which puts existing shareholders last in line in any claims.
Bonds from the agencies - around US$180-billion of which mature by the end of the year, according to Reuters data - were trading a full percentage point above U.S. Treasuries on Friday.
On Monday the bonds they were effectively as safe as U.S. government debt, but bond dealers said none had changed hands during morning trade in London.
"We think a compression is likely," Goldman Sachs said in a note to clients, of the spread over Treasuries.
The price of U.S. government bonds sank on Monday and yields jumped as the bailout removed some of the fear that had crept back into markets in recent weeks and had fuelled a 'safe-haven' bid to bonds
The cost of insuring against the risk of a U.S. government default on its debt rose, with credit default swaps (CDS) widening on five-year and 10-year Treasury debt.
STOCK FUTURES
U.S. stocks futures and Asian and European share markets soared after the news of the takeover that could become the costliest U.S. bailout ever. UBS and Mizuho Financial, two casualties of the year-long credit crisis, jumped 10% and 11% respectively, leading rallies among banks in Europe and Asia.
Financial firms have posted over US$500-billion in credit losses and write-downs since credit markets seized up a year ago after defaults on U.S. home loans.
"We expect the action would lead to stabilize the U.S. MBS (Mortgage-Backed Securities) market, financial market and the international financial market," Bank of Japan Governor Masaaki Shirakawa told reporters in Basel on the sidelines of the Bank of International Settlements meeting in Switzerland.
According to U.S. Treasury data, Japan is the second-biggest holder of U.S. agency debt with $229-billion, after China with $376-billion as of mid-2007.
"Different people may have different responses. From my point of view this is positive." China's central bank governor Zhou Xiaochuan said.
PAULSON AND G7
U.S. Treasury Secretary Henry Paulson said in an interview with U.S. radio broadcast on Monday that the plan had been structured in a way to protect U.S. taxpayers.
He also told WAMU radio, monitored via the Internet in London, that the move had been taken after the Treasury had found "major structural flaws" in the two agencies.
Paulson was due to explain the details of the rescue to his Group of Seven counterparts later on Monday, Japan's Ibuki said.
By rushing to the rescue of institutions that own or guarantee almost half of the US$12-trillion in U.S. home mortgage debt, Washington has removed one source of anxiety that has plagued markets and helped push Japan, Europe and United States toward recession.
BANK SHARES VS. ECONOMY
But investors and analysts were quick to point out that a risk of collapse of the lenders and a U.S. housing market meltdown were not the only threats looming for the world economy.
"You've got to try and separate this GSE deal and what's going on with the banks (shares) from what's going on in the economy. That's not changed because of what has happened with Fannie Mae and Freddie Mac," said Kenneth Broux, financial markets economist at Lloyds TSB in London.
The cost of protection against default in U.S. Treasury debt edged up and the dollar gained against the yen, but lost to the euro and several other currencies.
The Treasury took $1-billion in preferred senior stock in each company, but its equity stake could reach as much as $100-billion in each.
Freddie Mac shares tumbled more than 50% in Frankfurt when trading began on Monday. Freddie and Fannie, which serve a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.
Paulson had hatched a plan in early July to shore up the struggling firms with a promise of fresh loans and a government injection of capital if either company was pushed to the brink of collapse.
Fannie Mae and Freddie Mac were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said.
But talks on an aid package ended abruptly in the past few days and policymakers decided to seize the firms, industry sources with knowledge of the events said.
"We were given an ultimatum - do you want to die slowly or do you want to die quickly?" one company source said.
By Andrew Wood in Hong Kong and Patti Waldmeir in Shanghai September 8 2008
The Shanghai stock market on Monday hit a 21-month low as investors shrugged off the impact of the Fannie Mae and Freddie Mac bail-outs and a Chinese government attempt to reduce the supply of shares on the market.
The Shanghai composite index finished 2.7 per cent down at 2,143.42 points – the lowest close since December 11 2006. The gains made in 2007, when Shanghai was Asia best-performing market, have been wiped out.
It is now this year’s worst-performing market in Asia, with the composite index falling 65 per cent since peaking at 6,124.04 points in trading on October 16 2007.
Hopes that the government would boost the market to coincide with the international prestige of hosting the Olympics proved unfounded, with the index falling by a fifth since the start of trading on the opening day of the games in Beijing a month ago.
The authorities did cut a tax on share trading in April, when the market was worth half its peak value, and the composite index jumped nearly 10 per cent in one day in response.
The fall in prices has brought valuations back to more realistic levels. The market had been trading as high as 50 times annual earnings at the peak in October. That has now fallen to a price-earnings ratio of 11.9 times next year’s estimated profits – little different to 11.7 times for the S&P 500 in the US.
Prices have also been depressed in anticipation of previously untraded shares from listings being released on to the market as lock-up periods expire.
Investors seemed to dismiss the China Securities Regulatory Commission’s attempts to address the problem by allowing institutional shareholders of listed companies to issue bonds that could be exchanged into shares later. This should defer the release of some shares on to the market.
Steven Sun, China strategist at HSBC in Hong Kong, called the proposals “a good try” but repeated his call for the government to force state shareholders to give 10 per cent of their previously untraded holdings to the country’s National Social Security Fund.
Some disgruntled Chinese investors pointed to the US government’s intervention to draw an unfavourable comparison with their own government. “There is no doubt that our government should learn from the American government,” said one comment on a Chinese stock market investor’s blog.
Stocks have borne the brunt of Beijing’s attempts to tame inflation, which reached a 12-year high of 8.7 per cent annualised in February.
The government takeover of beleaguered mortgage finance giants Fannie Mae and Freddie Mac will benefit its debt holders, but could pose questions for major holders of US treasury bonds, such as China and Japan, analysts said.
But the central bank described the move as positive. "Chinese investors have a certain amount of exposure" to the companies, Zhou Xiaochuan, governor of the central bank, said Monday.
"I think they welcome the new policy, but we still need time to have a further study. From my point of view, I think this is positive."
The de facto nationalization of the financial heavyweights will anchor the US and global financial market, analysts agreed. "It is good news for Chinese holders of mortgage-backed debt in the two companies," said Dong Yuping, an economist with the institute of finance and banking at the Chinese Academy of Social Sciences. "If the US government hadn't extended a helping hand, their insolvency would have brought serious losses to Chinese holders."
The deal was also done to prevent the government-sponsored companies from being declared insolvent, so it clearly benefits bond holders, said Stephen Green, a senior economist at Standard Chartered Bank in Shanghai.
The two companies account for $5 trillion worth of mortgages in the US - about 40 percent of its national total. Some $1.5 trillion of the debt is held by foreign investors.
At the end of June, Chinese commercial banks held a total of $24 billion in the mortgage-backed debt of Fannie and Freddie. Bank of China alone held more than $17 billion. They began reducing their holdings after the US subprime crisis broke last year.
"Since the US government intervened, the risks for Chinese holders have become fairly marginal," She Minhua, a Shanghai-based economist, said.
But the government bailout will not improve the US housing market's fundamentals, and the underlying risks from the market will remain, Dong said. "They (the government measures) will only work temporarily to stabilize market sentiment."
The housing market is still suffering from increasing payment defaults and more funds are needed to fill the gap, he said. As the government uses fiscal resources to bail out Fannie and Freddie, taxpayers may deem it necessary to save for future contingencies, affecting consumption.
Moreover, after it takes over the problematic mortgage companies, the US government will have to find ways to pool resources to inject into them. It has promised to inject up to $100 billion into each as needed to ensure they can meet debts. It would also buy mortgage bonds backed by these companies, starting with an initial $5 billion purchase, and provide an unlimited liquidity facility until the end of next year.
"It may pool the money through issuing new treasury bonds," Dong said. But as China's holding of US treasury bonds depreciates on the declining dollar, it faces a dilemma over whether to increase holdings.
China and Japan, the largest holders of US treasury bonds, have a hard decision to make, Dong said. If they increase their holdings, no one knows where the market will head for. If they don't, their asset value may continue to fall.
China is believed to hold about $500 billion worth of US treasury bonds. "The challenge for China is that it cannot simply sell its official agency holdings, even if it wanted to. Given that it holds such a large amount, that would be a huge international market event and would do serious harm to the dollar," Green from Standard Chartered said.
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China’s first seven star hotel to be built in Sanya, Hainan
China’s first seven star hotel in Hainan, SanyaYou won’t have to go to Dubai to enjoy seven-star luxury anymore as the world’s second seven star hotel — and China’s first — is going to be built in Sanya, Hainan. Construction of the 120m high hotel will begin later this year and will be completed by 2011 to be managed under the Fairmont Hotels & Resorts brand. Shanghai Daily tells us more:
Located in the center of Haitang Bay in Sanya City, the hotel will spread over 150 square kilometers and include a luxury yacht club, a golf course and the biggest ocean park in Asia.
It will be among another 20 five-star hotels in the area and will be a major landmark in Sanya when it is completed.
The hotel will be designed by UK-based W.S Atkins plc which designed the world’s first seven-star hotel, the Burj Al Arab, in Dubai.
A 150 square kilometer hotel?! Good heavens, that’s one-seventh the size of Chongming Island and one-fifth of Singapore. And that’s not all. According to the Hainan Daily, Sanya’s urban planning authority have announced that the city will build not one, but two seven-star hotels.
Really, we’re just a slight tad disappointed they didn’t decide to go one up and build the world’s first eight-star hotel instead.
Bank of China to watch Fannie, Freddie mkt reaction - paper
BEIJING, Sept 9 (Reuters) - Bank of China (3988.HK), which has the largest exposure among Chinese lenders to Fannie Mae (FNM.N) and Freddie Mac (FRE.N) debt, said it would cut holdings further if necessary, a Chinese newspaper reported on Tuesday.
The Shanghai Securities News cited its spokesman, Wang Zhaowen, as saying the bank would closely watch market reaction to the U.S. government's measures to rescue the two agencies and take appropriate steps, though Wang did not provide details.
After battered financial stocks outside of China rallied and investors sold safe-haven bonds on Monday, some analysts cautioned that the bailout plan announced on Sunday was more a sign of the perilous state of the global financial system rather than of an imminent recovery.
"If there is need to cut some positions, the bank will do so," Wang said.
Bank of China (601988.SS), the country's flagship foreign exchange lender, had already slashed its securities holdings related to the troubled U.S. mortgage firms to $12.67 billion as of Aug 25, from $17.3 billion at the end of June.
On Monday, it's Hong Kong shares rose 5.5 percent while it's Shanghai-traded shares rose 1.2 percent, but the bank's shares were lower in early trade on Tuesday.
The People's Bank of China, the country's central bank, said on Monday that Washington's plan would help stabilise markets and boost confidence.
China owned $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie, as of mid-2007.
The Chinese-language paper also quoted an unnamed senior executive at CITIC Bank (601998.SS) as saying the bank was still not sure about the impact of the U.S. government's latest measures, while a spokesman at China Construction Bank (0939.HK) (601939.SS) declined to comment.
Taxpayers take on trillions in risk in Fannie, Freddie takeover
By Stephanie Armour and James R. Healey
7 Sept 2008
WASHINGTON — The unprecedented federal takeover of mortgage giants Freddie Mac and Fannie Mae announced on Sunday is a bold attempt to stabilize financial markets and restore the faltering housing market, but it thrusts trillions of dollars of risk directly onto taxpayers' shoulders.
"You can call it a bailout, you can call it a safety net or you can call it a rescue package, but the bottom line is the American taxpayer is left footing the bill," says Richard Yamarone, director of economic research at Argus Research.
At a Sunday morning news conference, Treasury Secretary Henry Paulson and James Lockhart, director of the newly formed Federal Housing Finance Agency (FHFA), announced that Fannie Mae (FNM), based in Washington, D.C., and Freddie Mac (FRE), based in McLean, Va., will begin operating immediately under a federal government conservatorship. Unlike a receivership, the arrangement leaves hope for shareholders that investments may regain some value. President Bush signed housing legislation in July that gives the government clear authority to intervene as it has.
If the plan settles the bond market as government officials hope, borrowers may find mortgages at slightly lower rates. In taking over the companies, the government ousted their CEOs; otherwise, work continues as normal.
Though the companies haven't been at imminent risk of collapse, deep losses from the housing meltdown have raised concerns from investors around the world about their ability to meet financial commitments.
"I have determined that the companies cannot continue to operate safely and soundly and fulfill their critical public missions without significant action to address our concerns," Lockhart said.
Freddie Mac and Fannie Mae combined own or guarantee $5.4 trillion in outstanding mortgage debt. The government's decision to place both agencies into a conservatorship — in essence, taking on responsibility for that debt by wresting control from the corporations — is an historic move.
It is still uncertain how much capital the companies may need from the government. What that means to taxpayers ultimately depends on what happens with the faltering housing market. To the extent homeowners continue to make timely mortgage payments, pressure on the government is lessened. Continued foreclosures and troubles in the mortgage market could run up an expensive tab.
The Mortgage Bankers Association reported Friday that more than 4 million homeowners, or 9% of those with mortgages, were delinquent by at least one payment or in foreclosure at the end of June. It's the highest rate ever, the MBA says.
Terms of the government takeover call for drastically reducing, over time, the roles that Freddie Mac and Fannie Mae play in the mortgage market. Government officials say the duration of the conservatorship is indefinite, and Paulson said policymakers need to use the time to decide whether the role of the companies is best played by private corporations, the government, or hybrids such as Fannie Mae or Freddie Mac.
Although Fannie and Freddie are public companies, owned by shareholders, their debt has had an implicit government guarantee.
Paulson and Lockhart unveiled a four-part plan to come to the aid of the companies, which have sustained combined losses of $14 billion in the past four quarters.
Key elements of the plan:
• Government purchase of mortgage-backed securities. Initially, the government will spend $5 billion to buy the securities, to demonstrate Treasury support for continued mortgage availability.
• Gradual portfolio reduction. Starting in 2010, the companies' mortgage portfolios will be reduced at a rate of 10% per year.
This would dramatically reduce the role that Freddie and Fannie play in the mortgage market. Together, their market share of all new mortgages reached more than 80% earlier this year, but is now falling.
• A new lending program. The companies will have access to a new line of government credit if they run into serious trouble borrowing funds on the open market. Treasury officials say they consider it a symbolic step to provide confidence to investors in Fannie and Freddie debt.
• Purchase of preferred shares. The government would be allowed to buy new preferred shares that pay dividends that would be considered senior to the current common and preferred stock. The Treasury may purchase up to $100 billion of this new senior-preferred stock in each company to preserve the companies' positive net worth. Fannie Mae and Freddie Mac must give Treasury $1 billion in senior preferred stock today, as an upfront fee for agreeing to consider doing this in the future.
A closer look
The move to put Freddie and Fannie into conservatorship was triggered in part by closer government scrutiny of the agencies, prompted by the July housing legislation.
The Treasury Department recently signed a contract with Morgan Stanley to investigate the financial position of Fannie and Freddie, with help from the FHFA.
"Based on what we have learned about these institutions over the past four weeks, including what we learned about their capital requirements, and given the financial markets today, I concluded that it would not have been in the best interest of the taxpayers for the Treasury to simply make an equity investment in these enterprises in their current form," Paulson says.
Lack of confidence in the agencies has meant that to build capital, Fannie Mae and Freddie Mac have had to pay more for borrowing in the bond market and have had to tighten credit standards. The takeover is intended to boost confidence in the two companies. They could then find it easier to get funding, which could lead to lower mortgage interest rates. That could spur buyers and help rejuvenate the housing market.
"It'll bring (mortgage rates) down a little bit," says Bert Ely, a banking consultant in Alexandria, Va. "Freddie and Fannie now are piggybacking on the credit of the United Sates government, and that will allow them to borrow more cheaply" and, in turn, lend more cheaply. "It might not happen overnight. But it sure won't drive up interest rates."
"Effectively, this is nationalization," Paul Miller, an analyst at investment firm Friedman Billings Ramsey, said before the announcement. "Freddie and Fannie need help. This is the best way."
But Sung Won Sohn, an economist at California State University, warned that the government's financial standing could get shakier. "The U.S. government has trillions of dollars of debt outstanding. With the takeover of Fannie and Freddie, the government will add trillions more to the burden, because the Treasury will, in fact, guarantee all the Fannie and Freddie debt," he said.
Widespread backing
But many supported the move, since financial problems at Freddie and Fannie risk inflaming problems far beyond the U.S. housing market. Fannie Mae and Freddie Mac shares each are down about 90% from a year ago. Central banks around the world hold their securities.
Bond investors traditionally have believed that the U.S. government would backstop the companies, even in the absence of an explicit guarantee. The action Sunday removes any doubt.
In a statement Sunday, Bush supported Paulson's move, saying, "As we determine the appropriate role for the companies in the future, it is crucial that they not pose similar risks to our economy or the financial system again."
Republican presidential candidate John McCain told CBS television program Face the Nation that it was a necessary step. "We've got to keep people in their homes," he said. "There's got to be some confidence that we've stopped this downward spiral."
Democratic candidate Barack Obama told ABC News he's "inclined to support some form of intervention to prevent a long-term, much bigger crisis."
Federal Reserve Chairman Ben Bernanke said in a statement Sunday that "these necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."
Spokesmen for Freddie and Fannie had no comment Sunday.
The takeover also means the ouster of current CEOs at Freddie and Fannie. At Fannie Mae, Herbert Allison, former CEO at mutual fund company TIAA-CREF, replaces Daniel Mudd. At Freddie Mac, David Moffett, who was vice chairman of U.S. Bancorp, replaces Richard Syron. Syron and Mudd will remain as consultants for an undetermined time.
Freddie and Fannie were chartered by the government in an effort to help stabilize the mortgage market by buying loans from lenders. Fannie Mae was first established in 1938, during the Great Depression, and Freddie followed in the 1970s.
China and Japan hail U.S. mortgage rescue as doubts linger
Yoko Nishikawa and Mike Dolan
TOKYO/LONDON Sept 8 (Reuters) - China and Japan, the biggest buyers of Freddie Mac and Fannie Mae bonds, on Monday praised Washington for rescuing the ailing mortgage giants, but investors said the bailout had not ended global credit market misery.
As battered financial stocks rallied and investors sold safe-haven bonds, analysts cautioned that the plan announced on Sunday was more a sign of the perilous state of the global financial system than of an imminent recovery.
"We find it difficult to see how it is bullish that the heavy hand of government is needed to such an extent," Merrill Lynch economist David Rosenberg said.
"In our view, the takeover of Fannie and Freddie is actually a testament to how broken the financial system is at this time."
China and Japan, the biggest and the second-biggest holders of the Fannie and Freddie bonds, welcomed the bailout.
"I think it will have a positive impact on the world economy as it eases worries over the U.S. economy through more stable financial markets in the United States," Japanese Finance Minister Bunmei Ibuki told reporters on Monday.
BOND MARKET
Freddie and Fannie bond holders are the most likely long-term beneficiaries of the U.S. government's move which puts existing shareholders last in line in any claims.
Bonds from the agencies - around US$180-billion of which mature by the end of the year, according to Reuters data - were trading a full percentage point above U.S. Treasuries on Friday.
On Monday the bonds they were effectively as safe as U.S. government debt, but bond dealers said none had changed hands during morning trade in London.
"We think a compression is likely," Goldman Sachs said in a note to clients, of the spread over Treasuries.
The price of U.S. government bonds sank on Monday and yields jumped as the bailout removed some of the fear that had crept back into markets in recent weeks and had fuelled a 'safe-haven' bid to bonds
The cost of insuring against the risk of a U.S. government default on its debt rose, with credit default swaps (CDS) widening on five-year and 10-year Treasury debt.
STOCK FUTURES
U.S. stocks futures and Asian and European share markets soared after the news of the takeover that could become the costliest U.S. bailout ever. UBS and Mizuho Financial, two casualties of the year-long credit crisis, jumped 10% and 11% respectively, leading rallies among banks in Europe and Asia.
Financial firms have posted over US$500-billion in credit losses and write-downs since credit markets seized up a year ago after defaults on U.S. home loans.
"We expect the action would lead to stabilize the U.S. MBS (Mortgage-Backed Securities) market, financial market and the international financial market," Bank of Japan Governor Masaaki Shirakawa told reporters in Basel on the sidelines of the Bank of International Settlements meeting in Switzerland.
According to U.S. Treasury data, Japan is the second-biggest holder of U.S. agency debt with $229-billion, after China with $376-billion as of mid-2007.
"Different people may have different responses. From my point of view this is positive." China's central bank governor Zhou Xiaochuan said.
PAULSON AND G7
U.S. Treasury Secretary Henry Paulson said in an interview with U.S. radio broadcast on Monday that the plan had been structured in a way to protect U.S. taxpayers.
He also told WAMU radio, monitored via the Internet in London, that the move had been taken after the Treasury had found "major structural flaws" in the two agencies.
Paulson was due to explain the details of the rescue to his Group of Seven counterparts later on Monday, Japan's Ibuki said.
By rushing to the rescue of institutions that own or guarantee almost half of the US$12-trillion in U.S. home mortgage debt, Washington has removed one source of anxiety that has plagued markets and helped push Japan, Europe and United States toward recession.
BANK SHARES VS. ECONOMY
But investors and analysts were quick to point out that a risk of collapse of the lenders and a U.S. housing market meltdown were not the only threats looming for the world economy.
"You've got to try and separate this GSE deal and what's going on with the banks (shares) from what's going on in the economy. That's not changed because of what has happened with Fannie Mae and Freddie Mac," said Kenneth Broux, financial markets economist at Lloyds TSB in London.
The cost of protection against default in U.S. Treasury debt edged up and the dollar gained against the yen, but lost to the euro and several other currencies.
The Treasury took $1-billion in preferred senior stock in each company, but its equity stake could reach as much as $100-billion in each.
Freddie Mac shares tumbled more than 50% in Frankfurt when trading began on Monday. Freddie and Fannie, which serve a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.
Paulson had hatched a plan in early July to shore up the struggling firms with a promise of fresh loans and a government injection of capital if either company was pushed to the brink of collapse.
Fannie Mae and Freddie Mac were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said.
But talks on an aid package ended abruptly in the past few days and policymakers decided to seize the firms, industry sources with knowledge of the events said.
"We were given an ultimatum - do you want to die slowly or do you want to die quickly?" one company source said.
Shanghai stock market loses 65% in past year
By Andrew Wood in Hong Kong and Patti Waldmeir in Shanghai
September 8 2008
The Shanghai stock market on Monday hit a 21-month low as investors shrugged off the impact of the Fannie Mae and Freddie Mac bail-outs and a Chinese government attempt to reduce the supply of shares on the market.
The Shanghai composite index finished 2.7 per cent down at 2,143.42 points – the lowest close since December 11 2006. The gains made in 2007, when Shanghai was Asia best-performing market, have been wiped out.
It is now this year’s worst-performing market in Asia, with the composite index falling 65 per cent since peaking at 6,124.04 points in trading on October 16 2007.
Hopes that the government would boost the market to coincide with the international prestige of hosting the Olympics proved unfounded, with the index falling by a fifth since the start of trading on the opening day of the games in Beijing a month ago.
The authorities did cut a tax on share trading in April, when the market was worth half its peak value, and the composite index jumped nearly 10 per cent in one day in response.
The fall in prices has brought valuations back to more realistic levels. The market had been trading as high as 50 times annual earnings at the peak in October. That has now fallen to a price-earnings ratio of 11.9 times next year’s estimated profits – little different to 11.7 times for the S&P 500 in the US.
Prices have also been depressed in anticipation of previously untraded shares from listings being released on to the market as lock-up periods expire.
Investors seemed to dismiss the China Securities Regulatory Commission’s attempts to address the problem by allowing institutional shareholders of listed companies to issue bonds that could be exchanged into shares later. This should defer the release of some shares on to the market.
Steven Sun, China strategist at HSBC in Hong Kong, called the proposals “a good try” but repeated his call for the government to force state shareholders to give 10 per cent of their previously untraded holdings to the country’s National Social Security Fund.
Some disgruntled Chinese investors pointed to the US government’s intervention to draw an unfavourable comparison with their own government. “There is no doubt that our government should learn from the American government,” said one comment on a Chinese stock market investor’s blog.
Stocks have borne the brunt of Beijing’s attempts to tame inflation, which reached a 12-year high of 8.7 per cent annualised in February.
US bailout 'positive' move for markets - analysts
2008-09-09
The government takeover of beleaguered mortgage finance giants Fannie Mae and Freddie Mac will benefit its debt holders, but could pose questions for major holders of US treasury bonds, such as China and Japan, analysts said.
But the central bank described the move as positive. "Chinese investors have a certain amount of exposure" to the companies, Zhou Xiaochuan, governor of the central bank, said Monday.
"I think they welcome the new policy, but we still need time to have a further study. From my point of view, I think this is positive."
The de facto nationalization of the financial heavyweights will anchor the US and global financial market, analysts agreed. "It is good news for Chinese holders of mortgage-backed debt in the two companies," said Dong Yuping, an economist with the institute of finance and banking at the Chinese Academy of Social Sciences. "If the US government hadn't extended a helping hand, their insolvency would have brought serious losses to Chinese holders."
The deal was also done to prevent the government-sponsored companies from being declared insolvent, so it clearly benefits bond holders, said Stephen Green, a senior economist at Standard Chartered Bank in Shanghai.
The two companies account for $5 trillion worth of mortgages in the US - about 40 percent of its national total. Some $1.5 trillion of the debt is held by foreign investors.
At the end of June, Chinese commercial banks held a total of $24 billion in the mortgage-backed debt of Fannie and Freddie. Bank of China alone held more than $17 billion. They began reducing their holdings after the US subprime crisis broke last year.
"Since the US government intervened, the risks for Chinese holders have become fairly marginal," She Minhua, a Shanghai-based economist, said.
But the government bailout will not improve the US housing market's fundamentals, and the underlying risks from the market will remain, Dong said. "They (the government measures) will only work temporarily to stabilize market sentiment."
The housing market is still suffering from increasing payment defaults and more funds are needed to fill the gap, he said. As the government uses fiscal resources to bail out Fannie and Freddie, taxpayers may deem it necessary to save for future contingencies, affecting consumption.
Moreover, after it takes over the problematic mortgage companies, the US government will have to find ways to pool resources to inject into them. It has promised to inject up to $100 billion into each as needed to ensure they can meet debts. It would also buy mortgage bonds backed by these companies, starting with an initial $5 billion purchase, and provide an unlimited liquidity facility until the end of next year.
"It may pool the money through issuing new treasury bonds," Dong said. But as China's holding of US treasury bonds depreciates on the declining dollar, it faces a dilemma over whether to increase holdings.
China and Japan, the largest holders of US treasury bonds, have a hard decision to make, Dong said. If they increase their holdings, no one knows where the market will head for. If they don't, their asset value may continue to fall.
China is believed to hold about $500 billion worth of US treasury bonds. "The challenge for China is that it cannot simply sell its official agency holdings, even if it wanted to. Given that it holds such a large amount, that would be a huge international market event and would do serious harm to the dollar," Green from Standard Chartered said.
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