Interesting figures in the New York Times on Monday highlight why the escalating problems at troubled US mortgage giants Fannie Mae and Freddie Mac are far from being just a US problem. Among foreign investors at least, the Chinese and Japanese clearly have the greatest cause for concern, but there are many more affected by the recent turmoi, from sovereign wealth funds to small quasi-government agenciesl.
In a neat breakdown of the figures, the NYT reports that about one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies - some $1,500 bn worth - were held by foreign investors at the end of March. In effect, “one out of 10 American mortgages is… in the hands of institutions and governments outside the US”, the paper adds.
Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
Asian institutions and investors hold some $800bn in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376bn and Japan $228bn as of June 2007, the most recent country-specific Treasury figures.
In Europe, roughly $39bn in Fannie and Freddie debt is held in Luxembourg and $33bn more in Belgium, countries that are home to large investment management firms. UK investors hold $28bn billion, and Russian buyers hold $75bn. Middle Eastern SWFs are also believed to be big investors in Fannie and Freddie debt.
The trillions in securities issued by Fannie and Freddie and backed by US mortgages were never explicitly guaranteed by the US government, but foreign and domestic investors alike “have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested”, notes the NYT.
Indeed.
