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Russia Urged China To Dump Its Fannie, Freddie Holdings Before GSE Bailout

Tyler Durden's picture




 

This is how the cold war will look like in the post-Lehman era (when all the debt risk is held on the public balance sheet): one country urging another to sell a third's bonds. According to Hank Paulson's soon to be released memoir, Russia had urged China to sell its GSE holdings in August 2008 "in a bid to force a
bailout of the largest U.S. mortgage-finance companies." China refused... That time. Of course, what has transpired since is that China, through the Fed custodial account, has rotated a vast majority of its GSE holdings into Treasuries, in essence doing just what Pimco's Bill Gross has been doing since the beginning of 2009: offloading hundreds of billions of Fannie and Freddie bonds straight to the Federal Reserve. Alas, the Fed is 93% done with MBS QE... What happens when residual selling of bonds finally hits the public market, and the bottom falls out?

Bloomberg reports:

The Russians made a “top-level approach” to the Chinese
“that together they might sell big chunks of their GSE holdings
to force the U.S. to use its emergency authorities to prop up
these companies,” Paulson said, referring to the acronym for
government sponsored entities. The Chinese declined, he said.

Paulson learned of the “disruptive scheme” while
attending the Beijing Summer Olympics, according to his new
memoir, “On The Brink.”

“The report was deeply troubling -- heavy selling could
create a sudden loss of confidence in the GSEs and shake the
capital markets,” Paulson wrote. “I waited till I was back
home and in a secure environment to inform the president.”

Of course, the Russians were very prophetic, with the formal GSE conservatorship announcement following a few short days later on September 6, 2008. They also knew how to put their money where their mouth was:

Russia sold all of its Fannie and Freddie debt in 2008,
after holding $65.6 billion of the notes at the start of that
year, according to central bank data. Fannie and Freddie were
seized by regulators on Sept. 6, 2008, amid the worst U.S.
housing slump since the Great Depression.

The implications of this revelation are troubling, as in a newly multi-polar world, in which China is now the second largest economy, and merely needs a block of one other major power, be it Russia or Japan, in order to precipitate a selloff in critical U.S. securities, be they MBS (not so much these days), or, more relevantly, Treasuries.

Curiously, the bailout of the GSE was based on the premise that placating China and other major US security holders (both in the public and private arena) is critical. It explains the lack of impairment of both the Sub debt in the GSEs as well the sub debt in all the bank holding companies. If indeed China had been considering selling its bonds, it means that it had likely approached the proper senior level officials with its concerns, and could have been a material influence in bailout policy in the days surrounding the Lehman collapse. Which makes an even bolder case for the observation that the U.S. is nothing more than a vassal state of its largest creditor: if China can dictate domestic policy, which these days typically amounts to yet another bailout decision, then why do Americans need to pretend their government is at all relevant any longer?

 

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Fri, 01/29/2010 - 10:36 | 210797 Cursive
Cursive's picture

So, it has come down to a matter of national security?  So much for poking fun at the tin foilies.  This country needs a new austerity program, instead, TPTB keep telling us to go shopping.

Sun, 01/31/2010 - 14:11 | 212541 Anonymous
Anonymous's picture

The Fed, IRS, and Treasury have a major disconnect here, you cannot spent your way out of debt.

Fri, 01/29/2010 - 10:41 | 210803 Cognitive Dissonance
Cognitive Dissonance's picture

I've often talked about the average (American) Joe being deep captured by "the system" by way of his/her job, pension (public or private), social security, personal investments in the stock market and so on. When your livelihood depends upon the same oppressive unfair economic system that's oppressing you, how hard will you resist? That's not a rhetorical question.

The same applies to the good old USA. Saber rattling only works when you own the saber, can manufacture it and aren't dependent upon your enemy purchasing your government bonds to enable you to purchase more sabers.

The absurdity continues.

Fri, 01/29/2010 - 10:49 | 210816 el Gallinazo
el Gallinazo's picture

Can't you just lease the sabers with borrowed funds?

Sat, 01/30/2010 - 05:57 | 211772 Anonymous
Anonymous's picture

But have you noticed that the real military technology is still manufactured in the U.S.A??

Fri, 01/29/2010 - 10:42 | 210805 taraxias
taraxias's picture

Okay, help me out here, since when have we started believing ANYTHING Hank Paulson has to say?

Fri, 01/29/2010 - 10:51 | 210822 Chopshop
Chopshop's picture

it's not so much what Hanky Panky from the farm at 85 broad says but rather how he says it.

the stoic satisfaction oozing out of patterned pores with each smarmily uttered truism, inflected as if travaille, while proving pure pleasure.

... so miss Rummy Q&A's.  just priceless.

Fri, 01/29/2010 - 21:37 | 211625 Anonymous
Anonymous's picture

Aaaah Rummy. Completely agree, he was even better than the Iraq information minister.

Fri, 01/29/2010 - 10:47 | 210814 THE DORK OF CORK
THE DORK OF CORK's picture

 Late 19th century geopolitics was characterised by the so called Great Game - this came to a head in 1914 and when round 2 was finished we had the Bi-polar cold war , after the party of the 1990s -Putin arrived to announce that the Great Game was beginning again.

I think this is going to be a interesting century

Fri, 01/29/2010 - 12:44 | 210966 DoChenRollingBearing
DoChenRollingBearing's picture

Yes, it will be an interesting century.  Indeed.

But, both China and Russia are loaded up with serious problems of their own.

We should fix our own home (America).  With leadership that is relaxed regarding forign relations, we will not have to worry much about Russia and China.  The Libertarians have this right, as usual.

Let's mind our own business, get our financial system transparent and start insisting on NO MORE LIES from .gov.

Fri, 01/29/2010 - 15:02 | 211184 THE DORK OF CORK
THE DORK OF CORK's picture

Indeed China is actually in a poor strategic postion ,Catastrophically poor geopolitical mistakes by America is the only reason that China is now a superpower.In fact I believe that certain internationalist forces have decided to impoverish America.

I admire the Libertarian viewpoint but to abandon the Persian gulf without developing domestic energy infrastructure would permanently put America in the poorhouse and probably lead to some unexpected political events in the US

Fri, 01/29/2010 - 15:11 | 211198 Shameful
Shameful's picture

We sorta already have them.  NAFTA forces Canada to kick up a huge share of their oil production.  To the point where unless they violate the treaty they don't have a choice.  Still get a fair amount of oil from Mexico as well.  Sure Mexico is going dry but there are still other sources in this hemisphere.  We don't consume oil from over there by and large.

Sure it might create price stability or not.  After all there is a big geopolitical threat with us crazy American's swarming around all over the Middle East.

Fri, 01/29/2010 - 15:58 | 211257 THE DORK OF CORK
THE DORK OF CORK's picture

Americas energy policey is a very strange beast - back in the 70s you had enough capital to engage in a major nuclear program but decided to spend money on goodies.

In the 80s and 90s natural gas was being utilised for electricity when you could have developed for transport and heating etc.

Then W decided that utilising one years photosynthesis for transport fuel was better then burning oil that accumulated over eons.

Above all that there was a crazy  policey of almost no tax on petrol and diesel which was responsible for a large part of the  bad investment decisions that we see today.

I could go on and on but underpinning all these decisions was a strange  flawed belief that the market determines energy policey when infact energy was always a poltical beast and always will , simply because it goes to the heart of what power means in all of its manifestations.

 

Fri, 01/29/2010 - 15:38 | 211239 Orly
Orly's picture

Sorry, Dork, you couldn't be more wrong.

No one has America over a barrell that we didn't put ourselves over.  We have the technology right spanking now to use an abundant natural resource to power our needs for the next 150 years.  Of course, I am talking about Natural Gas.

We need to stop being so dependent upon the petro-oligarchy to tell us what to think.  Once we realise that, it is plain to see that Saudi and Iran can go to hell in a hand-basket together.  No one will care.  Let them fight it out and get it over with.

Fri, 01/29/2010 - 16:10 | 211271 THE DORK OF CORK
THE DORK OF CORK's picture

Orly there ain't enough NG to do everything - to use NG for electrical production is the dumbest use of a resource I have ever seen.

If I may be critical of the American mindset - you have to make decisions,strategic decisions or else events will be forced upon you

To believe you can do everything without repercussions in some other field is naive in the extreme

Fri, 01/29/2010 - 10:49 | 210818 ChickenTeriyakiBoy
ChickenTeriyakiBoy's picture

i recall reading that paulson had been to a super double-secret goldman board meeting in moscow in june of 2008. not to err too conspiratorially, but i wonder if there is any connection

Fri, 01/29/2010 - 11:02 | 210837 RossInvestor
RossInvestor's picture

Given Geithner Christmas pledge to provide unlimited funds to Fannie and Freddie, the Fed is honoring its pledge to end its support to the GSE's.  So, the Treasury takes over and buys the GSE junk, then sells UST's to the Fed.  Housing is still supported and the Fed's B/S looks better because it is growing its holdings of increasingly worthless UST's.  It is just a different variation on the Kabuki dance.

Fri, 01/29/2010 - 11:05 | 210845 Assetman
Assetman's picture

This simply sounds like the Russians read the situation correctly.  The Chinese had a chance to front run the market before things really got crazy, but they held fast.

Good thing that the Chinese got the benefit of bEnron's generous MBS purchase program, or they would have been up the Yellow River without a paddle.

Fri, 01/29/2010 - 11:12 | 210853 A Man without Q...
A Man without Qualities's picture

This was a very shrewd way of making a threat without being overtly hostile.  Sounds like Paulson got schooled in old style Chinese diplomacy....

Fri, 01/29/2010 - 11:13 | 210856 Anonymous
Anonymous's picture

So may be,just may be, GS and while there plane was in Moscow,informed the Russians of how bad the housing market was in the US. I am sure they know through their FED connections how much all foreign parties own and in what. And hence the Russians instigation. But this theory has to dig deeper to know what is in it for GS if the goverment overtook Fannie and Freddie.A proof of a possible connection here,would be very interesting. Because it would go to show that while GS was digging a whole for the taxpayers(not very strange for them)they ended up saved by the same taxpayer who they tried to shove with trillions of dollars(and that happened in the end anyway).

Fri, 01/29/2010 - 11:18 | 210860 Anonymous
Anonymous's picture

Silly Russians. They don't have to assist the US in committing financial suicide. We'll do it of our own sweet volition. If the Russians were really smart, they should have been buying those Fannie Freddie bonds at a discount, then sell them to Ben Bernanke for 110% of par.

Fri, 01/29/2010 - 13:16 | 211008 Assetman
Assetman's picture

Perhaps they maintained some ownership in PIMPCO funds left that dirty work to the likes of Bill Gross.

Just saying...

Fri, 01/29/2010 - 11:38 | 210881 Anonymous
Anonymous's picture

What everyone should be asking themselves right now is : Why doesn't the US hold an equally large amount of Chinese debt. The answer may be quite illuminating....

Fri, 01/29/2010 - 11:48 | 210898 Anonymous
Anonymous's picture

Well, Frannie really *was* insolvent. That looks like a mutually beneficial case of intelligence-sharing to me.

Fri, 01/29/2010 - 11:48 | 210899 Anonymous
Anonymous's picture

Well, Frannie really *was* insolvent. That looks like a mutually beneficial case of intelligence-sharing to me.

Fri, 01/29/2010 - 11:59 | 210915 Anonymous
Anonymous's picture

Paulson forgot the portable cone of silence while in China, perhaps he could have diverted us from going to the brink!

http://www.youtube.com/watch?v=gcKHBgZ_QKU

Fri, 01/29/2010 - 12:10 | 210920 bugs_
bugs_'s picture

Our friends.

Fri, 01/29/2010 - 12:20 | 210930 trav7777
trav7777's picture

So everyone else is not fucked worse?  I thought the dollar was their problem?

I was surprised that China did not step in with its FX dollar reserves and serve as lender of last resort in lieu of the Fed for nations in dollar scarcity during the DXY spike.

China's dollar holdings are massive enough to do that.  Were they these shrewd chinamen like we constantly hear, they'd have done exactly that.  They have a position as big as the Fed's B/S at this point.

Fri, 01/29/2010 - 12:21 | 210933 Anonymous
Anonymous's picture

All this after 500,000 US casualties fighting for Stalins Communist Red Army. Where is the gratitude? We love communism just as they do. And we were willing to die for it/them.

Sat, 01/30/2010 - 06:38 | 211778 Anonymous
Anonymous's picture

This is the paradox of American thinking, illustrated.

While most of can distinguish propaganda lies from reallity in matters of recent past, say Iraq war, there is no critical thinking on matters going back 50 years what so ever.

Fri, 01/29/2010 - 12:32 | 210945 Bruce Krasting
Bruce Krasting's picture

The Russians were leaning on the Chinese to cause a problem after they had already sold.

I could sort of understand their action if they were a big holder. They could be worried about what they owned and called the chinese and said, "threaten to make a muck of this, that will force them to buy in the bonds and we will get fat". That would be sort of legit. Money is money.

But that was not the case. Therefore you have to assume that the Ruskies were just doing this to fuck with us. Nice.

Fri, 01/29/2010 - 12:51 | 210975 DoChenRollingBearing
DoChenRollingBearing's picture

In time Russia will get what is due them.  They have many serious problems that just are not discussed much here.

We only have to be what we were long ago.  The Shining City on the Hill, the world's refuge for freedom and the liberty to get wealthy.

Oh.  And the next time Russia or China has a problem?  Our telephone won't be working.

Fri, 01/29/2010 - 13:19 | 211011 Assetman
Assetman's picture

Well, hell, even in current times-- a great day in Russia isn't as good as a bad day here.

We are trying to catch up, though.

Fri, 01/29/2010 - 13:23 | 211016 Anonymous
Anonymous's picture

If it is true what this liar is telling, I would be intrested to know if there is a connection between the selling of GSE security's and the short war in Georgia that erupted during the Olympics.

Fri, 01/29/2010 - 13:37 | 211050 JimboJammer
JimboJammer's picture

Good  article....   More  to  come.. 

Fri, 01/29/2010 - 13:37 | 211051 JimboJammer
JimboJammer's picture

Good  article....   More  to  come.. 

Fri, 01/29/2010 - 14:10 | 211114 Anonymous
Anonymous's picture

So sorry. This my garden now.

Fri, 01/29/2010 - 15:00 | 211179 carbonmutant
carbonmutant's picture

Debt Wars.

Fri, 01/29/2010 - 16:58 | 211328 emsolý
emsolý's picture

how glad we can be that he made it "back home and in a secure environment"

Fri, 01/29/2010 - 23:50 | 211698 Anonymous
Sat, 01/30/2010 - 02:53 | 211754 Anonymous
Anonymous's picture

Is Hank's book going to be in the Fiction or Non Fiction section, cause this passage sure sounds like the former.

Sun, 01/31/2010 - 01:14 | 212303 bc0203
bc0203's picture

The one thing I didn't see anyone catch here is the connection to this being called "national security" and the subsequent redaction of all the information that came out during the AIG crisis a few months later. 

It might just be that the SEC was just being overly protective of the banks that needed protection in case they were similar targets of some sort of international malfeasance.

 

Tue, 02/02/2010 - 10:13 | 214595 Anonymous
Anonymous's picture

We do not need regulation! Regulation always fails. (Anybody got an example of regulation succeeding) What we need is responsibility. By responsibility I mean that if you fuck up big time, then you have to pay for it. As in you personally You do not get to hide behind a corporate veil or declare bankruptcy.
(You can declare bankruptcy if things happened that you had no reason to believe would happen, and all of your dealings were transparent, and you had little to do with) But you would need to prove this.

People will claim that then banks will take less risk. Risk is not risk if you can not loose. What risk did the bankers take? Instead of making 100 million, they only made 50 million? That is not risk.
If all those people who created these products would have lost their own money and their family money if the products failed --- well that would be risk and then I strongly doubt that we would be in the current situation.

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