Monday, 14 July 2008

Fannie Mae and Freddie Mac - Chinese to lose out?

I have been saying this for a while but the Chinese government's obsession with US paper could well be the largest transfer of wealth from developing to developing countries.

This story was sadly almost inevitable. So is a bail out good or bad news? It appears that some in the US would rather see these two giants fail that pay to bail out Chinese and Japanese governments and investors. There is something unpleasant about this whole process.

Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds [WSJ]

WASHINGTON, Jul 11, 2008 (BUSINESS WIRE) -- As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."

1 comment:

Anonymous said...

For readers' possible interest, here is a link to an excellent newly-published research report on China's economic outlook: