As McClatchy confirms a major motive to bailout Freddie and Fannie was to appease foreign investors.
What [Paulson] didn’t say publicly is that foreigners, among other big institutional investors, had lost confidence in one of the most vital and plain-vanilla U.S. investments. In a sense, they were losing confidence in the world’s largest economy, and he needed to reverse matters.
"That’s the unstated objective," said Vincent Reinhart, a former chief
economist of the Federal Reserve’s rate-setting Open Market Committee.
But as I noted on Sunday:
Paulson today still did not give an explicit government guarantee but pushed that task to Congress.
There is not much in Paulson’s acts that will give China and Russia a more secure feeling about their F&F MBS holdings. I therefore expect them to continue their sell off of these papers.
Indeed. Russia is quite open about this:
"For the Bank of Russia, one of the holders of the agencies’ debt, nothing has changed substantially (after the U.S. decision)," the bank’s first deputy chairman Alexei Ulyukayev said in an interview at the Reuters Russia Investment Summit.
"However, we are not making any pledges. Most likely we will continue to decrease the share (of U.S. agency’s debt) a little but we will look into the situation as a whole," he said at the event, held at the Reuters office in Moscow.
I have yet to see an official from China making a remark on this, but the unofficial voice urges caution:
"China has bought a lot of asset-backed securities, and there might be short-term improvement in price," said He Fan, an economist with the Chinese Academy of Social Sciences.
…
He said the takeover was the last resort for the U.S.
government, underlining that the credit crunch was far from
over."This shows that the risks involved are greater than we thought. As such, Chinese banks should be cautious and prudent," the researcher added.
With less buyers or even net sellers of F&F debt like the Russians, the market price of F&F bonds will sink and the interest rate they will have to offer on new bond issues needs to be higher.
That is of course the opposite of what Paulson claimed he intended. But he only pushed the real solution down the road and over to the next president and congress. They will have to make explicit guarantees for all of Freddie and Fannie’s debt or the buyer strike will continue and mortgage rates will continue to go up significantly.
With a record inventory of houses for sale and still increasing numbers of foreclosures, higher interest rates will make the situation worse and prolong the time to recovery.
