Freddie Mac, Fannie Mae Fallout Comes to China

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By Jennifer Wu

July 14 – Much to the alarm of the United States government and investors everywhere, shares of Fannie Mae and Freddie Mac, the government-chartered mortgage financiers, plummeted last week. Fear bred in the midst of suspicion that the two largest home-loan lenders in America did not have enough capital to survive the housing crisis.

Having lost more than US$11 billion or around 50 percent of their value, the public-owned institutions have raised approximately US$20 billion of capital since the crisis started. Today, they guarantee about US$5 trillion of home-mortgage debt or half of the United States’ total.

As Washington now scrambles to bail out Fannie and Freddie, investors worldwide cannot help but nervously watch the fragile American economy attempt to avoid collapsing. The U.S. Treasury and Federal Reserve announced a plan yesterday to shore up the firms, suggesting money lending and equity purchase in the two companies if need be.

According to Reuters, calming the precarious world stock market is key in such times of uncertainty, especially as foreign central banks, by and large in Asia, hold US$979 billion worth of Fannie and Freddie’s bonds.

The newly publicized proposals by the U.S. Treasury and the Federal Reserve have done little though to allay growing concerns about the future of the American financial well-being. At this point, the government has had no choice but to step in and rescue Fannie Mae and Freddie Mac. Should the two institutions be allowed to fail, the effects would not only be an enormous blow to the U.S. economy but to worldwide investor confidence and to the global financial system.

As The Herald commented today, the impending government take-over of the two companies would signal a nationalization of the banking system, making the United States similar to China.

Any move towards socializing the American economy may ease tensions between the United States and China when it comes to financial management. According to The New York Times, China just last month had called America unfit to advise Chinese handling of their economy, even blaming U.S. policy for the stagnate U.S. financial system. Chinese economists have championed a more closely regulated system, citing resulting stability as a vital component of its development.

Following the 50 percent drop in Fannie and Freddie’s shares last week, China is indeed at the forefront of being affected by any global consequences. According to a U.S. Treasury Report of foreign holdings of U.S. securities, China is the leading foreign shareholder of Fannie Mae and Freddie Mac bonds.

Japan, another top Fannie and Mac shareholder, has been singled out as the only other foreign country which would probably suffer more than China would in the event of a complete Fannie and Mac breakdown. As The Wall Street Journal reports, the Japanese banking system in particular would experience the greatest effects of dissolving American agency debt value. In Japan, privately owned firms are quite vulnerable to the debt of U.S. financiers, while China on the contrary, keeps its agency securities in foreign reserves, a much safer option.

The continued fallout from the sub-prime crisis in the United States could add fuel to growing isolationist sentiment among conservatives. Some are already saying that any possible U.S. government bailout of the troubled mortgage finance companies “would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”