Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
“And yet, that wasn’t the mortgage market itself that forced the hand of U.S. Treasury Secretary Henry M. “Hank” Paulson: It was the $5.2 trillion in so-called Fannie and Freddie “agency debt” – of which more than $1.3 trillion, or about 25%, was held by foreign investors. Total U.S. agency debt of all types was said to be slightly more than $1.5 trillion. Without the bailout, China’s financial position may have been damaged: Of that country’s $1.8 trillion in foreign currency reserves, as much as 70% is held in dollar-denominated assets. With $376 billion in GSE debt, China was also the top holder of the bonds issued by Fannie Mae and Freddie Mac. If China were to lose confidence in the U.S. currency – dumping the dollar – it’s hard to say with certainty just how bad things could get. Should foreign investors rampantly discard the dollar, the greenback would plunge against other currencies.”
