Why Doesn't China Get A Haircut?

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KHufford

5320 Posts

Posted - 07/30/2008 : 5:57:42 PM

Why Doesn't China Get a Haircut? (By Henry Paulson)

Now that Congress has approved the bailout of housing giants Fannie Mae and Freddie Mac, those who voted "yes" are soon going to be asked an uncomfortable question: Why are you taking money from U.S. taxpayers to bail out the Bank of China and other nations' central banks?

It turns out the biggest supporter of the Fannie Mae and Freddie Mac bailouts has been the Chinese government. The Chinese own about half a trillion dollars in Fannie and Freddie securities and they've put the warning out to Treasury Secretary Hank Paulson they expect to be repaid in full. The fear among Mr. Paulson and other Treasury officials is that if Fannie and Freddie debt isn't repaid at 100% par, the Chinese may start dumping their hundreds of billions of dollars of Treasury securities, possibly causing a run on U.S. government debt and sharply raising Uncle Sam's borrowing costs.

China isn't the only foreign nation with a big stake in the bailout legislation. Many foreign governments have loaded up on Fannie and Freddie securities, according to data gathered by the Council on Foreign Relations. No. 2 on the list is the central bank in Russia, which holds about $200 billion in these twin housing giants' securities. The oil nations in the Gulf region also own large holdings of the debt as well.

The Chinese, Russians and Saudis evidently can't tell the difference between the full faith and credit of the U.S. government, which is what stands behind U.S. Treasury securities, and the once officially-denied "implicit guarantee" that some in the market chose to see behind Fannie and Freddie paper. The federal bailout that President Bush agreed reluctantly to sign has effectively conferred upon Fannie and Freddie securities equal status to Treasury securities. This means going forward, the housing GSEs now effectively have unlimited use of every taxpayer's credit card.

Naturally, this has conservative fiscal watchdog groups like Dick Armey's Freedom Works and the National Taxpayers Union up in arms. There's a reason that Fannie and Freddie paper has paid out interest rates roughly half a point higher than Treasury securities over the years: higher risk of nonpayment. Former House Majority Leader Mr. Armey asks why Congress now feels compelled to pay back Fannie and Freddie's lenders 100%? Why not pay back, say, 90 cents on the dollar? Their lenders already have been compensated for higher risk of default, and this would not only save taxpayers money but also help delineate Treasury bills from GSE debt going forward.

So far, just about everyone has been made whole in this financial fiasco except taxpayers. Why Democrats and Republicans think it's good economics, let alone good politics, to put the interests of the Chinese and Russian governments ahead of their own constituents is a question members should be asked over and over between now and the election

canoe

63 Posts

Posted - 07/30/2008 : 6:01:26 PM

China , did get a haircut , we sold them about 45 Billion of worthless mortgage backed securitys, and they bailed out a few of our mortgage backed hedge funds, thats why Hank paulson of the treasury keeps going over to China.

KHufford

5320 Posts

Posted - 07/30/2008 : 6:03:09 PM

quote:
Originally posted by canoe

China , did get a haircut , we sold them about 45 Billion of worthless mortgage backed securitys, and they bailed out a few of our mortgage backed hedge funds, thats why Hank paulson of the treasury keeps going over to China.

You obviously did not read the full article..

Carlsbadd

745 Posts

Posted - 07/30/2008 : 6:16:12 PM

quote:

You obviously did not read the full article..

For someone in the business it seem that you may have jumped to the head of the class without reading the textbook.

The reality is that Wall Street rated securities as AA when they were really b,c,d and sold them to everyone (including China and Russia)
Uncle Sam had little to do with it other than not regulating this mess.
While a free market is what we should always try to strive for a deceptive one isn't!
China, Russia and other investors and countries that bought into the incorrect bond rating now have little choice but to try to go after Fannia and Freddie, since they are the only one's still standing.

Don't worry though, "green enegry" will be the next big bubble everyone will try to cash in on and will pull us out of the housing woes, untill of course that crashes..

vburek

507 Posts

Posted - 07/30/2008 : 6:32:24 PM

China buying all those MBS has helped all of us make more money. they are helping to keep our rates low. if china wasnt buying our MBS, our mortgage rates would be much higher then they are today.

KHufford

5320 Posts

Posted - 07/30/2008 : 6:43:26 PM

quote:
Originally posted by vburek

China buying all those MBS has helped all of us make more money. they are helping to keep our rates low. if china wasnt buying our MBS, our mortgage rates would be much higher then they are today.

So all of you guys agree on bailing out fannie and freddie at 100% payback? So you agree they own us then, and we are in their hands basically..? Do whatever it costs the tax payers to make them "whole"?

KHufford

5320 Posts

Posted - 07/30/2008 : 6:43:59 PM

quote:
Originally posted by KHufford

[quote]Originally posted by vburek

China buying all those MBS has helped all of us make more money. they are helping to keep our rates low. if china wasnt buying our MBS, our mortgage rates would be much higher then they are today.

MisterVA

5999 Posts

Posted - 07/30/2008 : 6:50:22 PM

The greater the risk, the greater the return. One of the basic tenets of investment. So now the govt is trying to remove the 'risk' part.

kdwall

208 Posts

Posted - 07/30/2008 : 6:58:24 PM

Fannie and Freddie were easier to get approval on a loan than sub prime. 60+% dti's etc. Regardless of bailout HEADS at those to Goverment supported Agencies should be falling.

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