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Risk of investing in Fannie Mae and Freddie Mac controllable

By Xu Shenglan (chinadaily.com.cn)
Updated: 2008-07-24 17:01

Bank of China (BOC) has denied a report that it has $20 billion in bonds issued by troubled US mortgage lenders Fannie Mae and Freddie Mac.

The risks from Bank of China (BOC) investing in the two mortgage companies are viewed as under control, said bank president Li Lihui yesterday, although he did not reveal BOC's exact bond holdings.

In the meantime, China Construction Bank (CCB) denied the reports that it holds about $7 billion in bonds issued by Freddie Mac and Fannie Mae.

"These reports are groundless and not in line with the facts," said the spokesman.

The spokesman added that bond prices of Freddie Mac and Fannie Mae have not fluctuated significantly despite a fall in their share prices, because the bonds are widely viewed to carry an implicit government guarantee. The spokesman said that as a result there is no pressure to revalue their holdings.

Broker CLSA estimated earlier this month that BOC's holdings in the two mortgage companies may amount to $20 billion, or about 2.6 percent of total assets, the highest among Chinese mainland banks, while CCB may hold $7 billion, or about 0.83 percent of total assets. The figure was widely cited in media reports.

Now US real estate market turmoil is affecting many financial institutions. However, the threat of Asian banks suffering losses from holdings of Fannie Mae and Freddie Mac mortgage securities is "limited" and default risk is "miniscule" because Asia's banking industry has a good capital adequacy ratio, according to Moody's Investors Service.