SeriousBull

The Fannie Mae Special Olympics!

Tags: Economy + Fannie Mae + Fed Discount window + financials + FNMA + Freddie Mac + Mortgage-backs + Treasury

The US economic picture by all accounts (except George Bush’s) is deteriorating with forecasts by that as many as 100 US banks may fail and that Stagflation is becoming an ever greater reality (stagnant growth accompanied by rising inflation). US investors concerned that Fannie Mae and Freddie Mac would not be able to manage their debt service when combined with their payoff guarantees on $12 trillion of US mortgages, sold both company’s stock calculating that a Fed bailout was certain and that stockholders would loose out. Russia, and perhaps other sovereign investors, likewise

have reason to sell their US government sponsored holdings. Russia as payback to the Bush Administration’s aggressive and unfriendly behavior politic—think missile defense systems in the Czech Republic and the US intervention to derail World Bank loans for Russian oil pipelines. But not China; China reportedly increased their holdings in US Government mortgage-back securities a thousand-fold from 2000-2006 according to the US State department. And recently, according to a Bloomberg news report by Andy Mukherjee, China Investment Bank for the 12 months ended April again sharply increased their holdings in Fannie and Freddie debt some 26% compared to a year earlier by purchasing an additional $67 billion more debt.

Now we can assume that China is a contrarian investor seeking to catch a falling knife using its foreign reserves to speculate for gain, or we can speculate that China may have an inside track to the US Treasury—that China has been reassured by Treasury Secretary Paulson that they have no need to fear and also sell. Indeed Treasury would be much obliged if they (China) would purchase Russia’s redemptions as well, because the US Treasury will stand behind the debt. No SB has no final proof of this potential scenario, but go figure—no buyers in the US and China already holding an estimated $1 trillion in this toxic waste. Why not concentrate the debt in one holder’s hand and work out the details later? Besides under this scenario, Treasury appears to be flush not printing more dollars and we just have to go to the Beijing Olympics and support China’s one nation status with regard to Taiwan and Tibet. No moral hazard in that?

July 18, 2008 - Economy, Markets, Politics