Socializing the costs, privatizing the profits...American "capitalism" has become "socialism for the rich".
The Chinese Government is the top foreign holder of Fannie Mae and Freddie Mac Bonds, followed by Japan, the Cayman Islands, Luxembourg, and Belgium. It's estimated that foreign investors hold over $1.3 trillion in these agency bonds. Lately, politicians are screaming for taxpayer bailouts and a government takeover of Freddie Mac and Fannie Mae.
FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries." Bondholders want the extra yield so bondholders should have to pay the price for the risk!!
"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."
adapted from Mike "Mish" Shedlock's posts at
http://globaleconomicanalysis.blogspot.com
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Further stoking my anger...this from Bloomberg...
Not only does China hold a lot of these securities, it has, of late, been buying them with gusto (26 percent increase from a year earlier). Ever since the bailout of Bear Stearns, China must have been doubly confident that Freddie and Fannie weren't going under: Sooner or later, Treasury Secretary Paulson and U.S. Federal Reserve Chairman Bernanke would ease the crisis of confidence by making the implicit government guarantee on agency debt explicit. From China's perspective, is a perfect outcome if it succeeds in lowering the risk premium on Freddie Mac's 10-year debt over U.S. Treasury notes of similar maturity. The capital gains that this narrowing of spread will produce for China will be quite a bonanza.
Furthermore, Paulson's comments about a possible recapitalization of Freddie and Fannie helped the U.S. dollar to strengthen in Asian trading yesterday. If the dollar rally is sustained, the yuan, up almost 7 percent this year, may get a breather from further appreciation. China's increasingly vociferous pro-growth lobby, complaining about the loss of export competitiveness, may be able to rest a little easier.