The biases in Chinese SOEs

Chinese state-owned acquirers often seem motivated by non-commercial impulses, which complicates matters. By carrying out directives to “go out and buy” businesses that fit with Beijing’s industrial policy, state-owned companies and even a few of their private counterparts win kudos in the Communist party hierarchy. That helps them tap into official largesse, such as approval for expansion plans and backing from state banks and capital markets.

“State-owned enterprises have high incentives to increase their size, and they use plans outlined by [government agencies] as weapons to expand both domestically and internationally,” says Victor Shih, professor at University of California San Diego. “The bigger they are, the more political weight and more room for rent-seeking can be enjoyed by senior management.”

That is from a longer and excellent FT feature story on Chinese SOEs.


So what's new? I'm first, old news.

Staying up late, eh Raymond? We have our own crony capitalism in the US of A, so this is no shock.

Yeah, I'm bad. My sex life is suffering from reading this blog...sorry gf.
Yes, the US of A is in decline, and soon people won't even care if elections are rigged or bought, just like they are in developing countries. Here in the Philippines, vote buying is so common, I even know the price: about $5 to $25 a vote, depending on whether it's for neighborhood 'captain' or for mayor, governor, etc. You know when $25 a vote is paid for, and you spend 25000 dollars for 1000 votes, that you expect to 'recoup your investment' with bribes while in office. Imagine how much a congressman, who has to buy 100k or even 1M votes, has to 'recoup' while in office.

N.B.- the boxer M. Pacman is also running for office, I think Senator (elections this year in May, including for president, watch out for the proto-fascist "Duarte", pronounced 'Do Dirty') but Pacman's a good man. He's a sponsor of chess, mostly Fischer Random (Chess 960) which I hate but he gives nice prizes.

PS - it's illegal for me to discuss politics in any way while on a tourist visa in the Philippines, per a law passed last year. I could get deported in theory, but in practice I'd just have to pay a fine / bribe.

I hope China fares better than . . .

Indeed, this is old news.

Recent US examples include FNMA (FNM) and FHLMC (FRE). FNM/FRE ended owning or guarantying 50% of US residential mortgage loans.

FNM/FRE frequent, large increases in conforming (maximum) loan balances for loan purchases.

FNM/FRE purchased MBS with subprime underlying loans in amounts of $1.6 trillion. Bernanke book.

There were 27 million subprime loans in 2008: FNM/FRE - 12 million; FHA - 5 million; HUD - 2.2 million; banks - 7.8 million.

FNM/FRE Lobbying: "Fannie, Freddie spent $200M to buy influence," by Lisa Lerer

Here I was, thinking you were going to mention Boeing or Airbus.

Those Fannie Freddie numbers are highly misleading, based on a made-up definition of subprime:

"In a nutshell, Pinto claimed that there were about 27 million subprime and Alt-A loans, something close to half the national total. he also claimed that about 12 million of those high risk loans were held by Fannie and Freddie. He came up with these numbers by using definitions of “subprime and “Alt-A” that were unique to Pinto alone. The FCIC uncovered a glaring disconnect between actual delinquency rates and Pinto’s categorizations. When it came to actual performance, there was almost no overlap. “High risk” loans held by the GSEs had serious delinquency rates that had only 1/4 the delinquency rates of subprime loans (using everyone else’s definition) and 1/3 the delinquency rate of traditionally defined Alt-A loans. For context, the GSEs’ “high risk” loans had a serious delinquency rate that was below the 6.3% national average at the time

"it’s good to have Mike Konczal reminding us that Pinto’s definition of “subprime-like” mortgages is just something he made up — and that it turns out that his supposed high-risk categories weren’t that risky at all, that in fact they look more like traditional conforming mortgages than like true subprime. The paper from which this figure is taken, by David Min, makes it clear that Fannie-Freddie loans were much less risky than those originated in the private sector — and in particular that “private-label” mortgage-backed securities, which were essentially unregulated, were vastly riskier than anything the government was promoting.

The point is the outlandish growth and extraordinary influence seized by the US GSE's may be analogous to the China examples.

I alluded to the lobbying payments to liberal politicians and to leftist front groups. I didn't mention the accounting scandals, SEC fines, and huge salaries/bonuses taken by the political hacks running the GSE's. Dare I say corruption?

I can't understand your desire to defend FNM/FRE.

Subprime residential loans rose from less than 5% in 1995 to 20% in 2005 - Bernanke book.

Generally, banks and thrifts did not originate subprime and Alt-A loans. That was mainly done at (basically unsupervised) mortgage banks, e.g., Countrywide. Some (large) banks owned mortgage bank subsidiaries. Many banks provided credit lines to mortgage banks. Mortgage banks sell the loans they originate. Subprime loans were then securitized and sold to many financial service companies.

I didn't say the GSE's caused the crisis. But, it's likely it couldn't have happened without the excessive housing liquidity they pumped into the system causing soaring prices. N.B. the large increases in conforming loan maximums and the volumes of purchases and guaranties sales.

What's your definition of subprime? The Alt-A definition is amorphous and confusing. Here's my take on the loans that took down the economy. They were below 680 FICO scores, NINJA (no income, no job, appraisal) loans; No documentation/Low documentation; negative amortization; if underwritten at all, underwritten based on payments at low teaser rate, not actual rate due the loan; assumed loan would refinance or sell collateral before real interest rate kicked in; faith-based lending - housing prices always rise, never drop: here's where FNM/FRE extra housing liquidity came in.

FNM/FRE didn't purchase subprime loans because they were non-compliant with their underwriting standards. They got around that, as Bernanke writes, by purchasing $1.6 trillion in private label RMBS backed by subprime loans.

If, as you say, FNM/FRE were holding good paper, why did it need to be placed into a $200 billion conservatorsjhip? The two GSE's were insolvent and could not cover the implied US guaranties (the reason FNM/FRE could borrow at low rates) without hundreds of billions from the US taxpayer. Legislation passed that the UST would buy FNM/FRE stock, protected debt holders from loss, and forced reforms.

In 3Q2008, FNM losses were three-times expected.

Bernanke's book (I assume he used Fed information) sates that FNM/FRE owned or guarantied $5.3 trillion, or 50% of US housing finance.

I agree with David, and I support removing distortions in the housing markets. The Pinto study was an unnecessary distraction in the debate over GSEs. Instead of using his worthless analysis to form an easily disprovable link between GSEs and the financial crisis, we should have been looking at the link between GSEs/CRA/(mortgage interest deductions) and housing as a percentage of household wealth and income.

"The GSEs were guaranteeing nearly half of all mortgages in the late 1990s and early 2000s. But from 2002-2005, they saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans.

Moreover, this point also papers over the fact that PLS loans have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans).”

This is from the Min article, the links from Rortybomb and Krugman don't work anymore:
"Loans made to borrowers with FICO scores under 620 account for only $60.8 billion of the $1.077 trillion in “high-risk” loans Pinto claims are held by Freddie Mac, and a similarly small percentage of the “high-risk” loans Pinto claims are held by Fannie Mae. As a result, whether or not one criticizes Pinto’s description of these loans as “high risk” is immaterial. Adding them to FICO 620-659 loans held by Freddie Mac yields us a serious delinquency rate of 11.4 percent, compared to the 10.04 percent serious delinquency rate I listed for FICO 620-659 loans.

In other words, whether one criticizes or does not criticize Pinto’s characterization of loans made to borrowers with FICO scores under 620 as “high risk” is irrelevant. It does not change the basic point that these loans look categorically different from truly high-risk loans, which were originated almost entirely for private-label securitization and suffer a serious delinquency rate of more than 28 percent."

Money talks, BS walks. Capitalism, in the firm of credit, it's about getting your money back plus interest and fees. No one else has ever come close to matching the outstanding loan performance of the GSEs, which is why the anti-GSE narrative it's aptly characterized as The Big Lie.

GSE critics ignore loan performance and other empirical data and instead make false insinuations based on class bigotry. This propaganda technique is favored by academic subsidiaries of the Koch Brothers, such as Mercatus.

Comments for this post are closed