Sovereign Wealth Fund

1. U.S. government’s portfolio mainly consists of Treasury debts, while Sovereign Wealth Funds invest in various asset classes.

Risks in the US government’s portfolio include interest rate risk, default risk and prepayment risk. However, those risks are transferred to tax-payers. They claim residual benefit after creditors, but also absorb the contingent losses of the portfolio.

Besides, risks in the sovereign wealth fund portfolio include interest rate risk, foreign exchange risk, and country risk. There is no maximum loss of the portfolio. It contains higher risk, also higher return.

2. The investment strategy of Fed is similar to a hedge fund: highly levered and aiming to earn huge profits. However, the goal of Fed is to regulate the U.S. banking system and maintain stability of financial system, while the purpose of a hedge fund is to realize absolute return through active management. Moreover, hedge fund managers are usually compensated “2%+20%” while employees in Fed earn much less.

3.

(1) Credit constraints and credit ceiling:

FHA, Fannie Mae and Freddie Mac have looser credit constraints for borrowers than private financial institutions. Basically, government agencies require lower down payment and permit higher loan-to-value ratio. Government agencies target at low-income residents, have lower credit ceiling than private financial institutions.

(2) Risks and fees:

For both approaches, mortgage lenders bear similar risks, including credit risk, prepayment risk and interest rate risk, etc. And their fee structures are similar. However, FHA and GSEs bear higher risks since they are supposed to pay for the loss in case of default. Hence, they charge higher fees and premium for mortgage loans than banks and other private institutions.

(3) Subsidy and fiscal effect:

Both approaches affect pricing and allocation in credit markets. Government approach usually provides embedded subsidies for borrowers since the fees they charge are lower than the fair value of credit risks they are bearing. And the credit policies provided by