The Government-Sponsored Enterprises Group Members: Bogoss, Mario Du, Qizhen Hu, Tianyan(Beam) Li, Chenqi(Eric) Mou, Ruo(Maggie)

Agenda Overview Development Features & Purposes Conservatorship Functions Crisis Observation & Recommendation Projections GSEs in China

Overview No reform of GSEs after the 2008 crisis Dodd-Frank only highlights the role they played Secretary of treasury delayed the blueprint outline for the 2 giant GSEs: Freddie Mac and Fannie Mae

Development Fannie Mae was created in response to the Great Depression, in the hope to stabilize the mortgage market for the FHA(Federal Housing Administration). In 1970, the U.S. congress chartered the Freddie Mac to compete with Fannie Mae.

Features & Purposes Exempt from state and local income taxes and certain SEC requirements Had access to U.S. Treasury Can use the Federal Reserve as its fiscal agent, etc. To provide stability in the secondary market To provide ongoing assistance to the secondary market for residential mortgages To promote access to mortgage credit throughout the Nation

Fannie Mae in Conservatorship Conservator -- Federal Housing Finance Agency ATM – Treasury Adverse Effects Main Business Lines Conflicted Missions

Guaranty Obligation Risk

Model of Guarantee GSEs Mortgage Originators Conforming Mortgage Payment Private Investors MBS Receipt Guarantee Guarantee Fee Inadequate compensation received Barren capital for bearing default risk

GSEsSPE & Trust MBS Portfolio Investors Agency Bond PaymentReceipt Lower borrowing cost Implicitly but partially guaranteed by government Exposed to default risk Prime Mortgage Subprime Mortgage Alt-A Mortgage Other high-risk holdings Rationale of “Hedge Fund”

Swelling risky private-label securities Excessive lending to low- income households Leverage up to purchase MBS GSEs in U.S. Housing Bubble

Reasons behind the Crisis Implicit subsidy from taxpayers to GSEs Great demand for GSE debt from irrational foreign banks and wealth sovereign funds Congress and administrations imposed pressure upon GSEs to load up riskier MBS

GSEs: Too big to fail Reasons that GSEs were too big to fail: Default on debt---Investors may think US government no longer assured The loss of these guarantees might have curtailed the housing market Liquidation of MBS leads to value decreasing Possible losses on their counterparties in the derivatives market

Recommendations Hedge fund function of the GSEs should be discontinued. Guarantee function of the GSEs should be revisited and possibly discontinued. Fully nationalize the guarantee business for conforming loans. Fully privatize the guarantee business. Public-private hybrid, would see the GSEs disappear, but it would keep all conforming MBS guaranteed. The GSEs should get out of the business of promoting home ownership for low-income households and underserved regions.

Way Forward - Projections to the Future if the GSEs Are Not Fixed Some proposals on the future Hard to establish any new structure The rise in government debt-to-GDP ratio The U.S. government’s consolidation on its balance sheet No passed on explicit guarantees as implicit forms Neither mortgage guarantees nor MBS are held intensively by lightly capitalized institutions.

Large Mortgage Originators in China Five state-owned commercial banks—the Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Agricultural Bank of China (ABC) and Bank of Communications (BCM). Individual housing commercial loan is one of the major housing loans in China. Usually, lenders use the property (or other security acceptable to the bank) as collateral when applying for loans.

State Owned Enterprise (SOE) vs. GSE 100% backed / partially and contingently supported by government Composite of dominant shareholders and bondholders Limited suffering from housing bubble Comparable in China

Top 10 Bond HoldersAmount(RMB) China Life Insurance Company Limited 733,603,000 PICC Life Insurance Company Limited 361,000,000 New China Life Insurance Company Limited － 018L － FH001SH 230,000,000 Aviva-COFCO Life Insurance Company Limited 210,000,000 New China Life Insurance Company Limited － 018L － WN001SH 200,000,000 China Life Insurance (Group) Company 190,000,000 ABC Life Insurance Company Limited 150,000,000 The Great Wall Life Insurance Company Limited 150,000,000 China Pacific Insurance (Group) Company Limited 126,970,000 ABC-CA Fund Management Company Limited 124,233,000 Poly Real Estate (Group) Co., Ltd. (08’ Poly Bond)

Top 10 ShareholdersNumber of Stocks Poly South Group 3,007,916,449 Guangdong Huamei Investment Group 147,565,000 China Poly Group 139,031,682 China Social Security Fund ,438,764 China Galaxy Securities Company Limited 91,411,776 Guosen Securities Company Limited 83,295,108 Chinalife Insurance Company Limited FH002 74,722,124 Industrial and Commercial Bank of China 66,492,457 China Social Security Fund ,975,651 Zhu Qianji 56,415,360 Poly Real Estate (Group) Co., Ltd. (Poly Common Stock Ending Q1 2013)

Questions? Thank you