China Begins to Worry About Fannie and Freddie Bonds

In a House Financial Services committee hearing yesterday, some witnesses recommended that the U.S. force future losses from Fannie Mae and Freddie Mac's mortgage portfolio on bondholders, instead of taxpayers. One clear political problem with this proposal, however, is China. They hold about a half trillion dollars of this debt, so the Chinese might not be pleased if the U.S. forces them to take losses after assuring them that they would back up the mortgage companies' commitments. According to Dow Jones Newswires, senior China's Industrial Bank economist Lu Zhengwei has issued a warning about this political risk:

The Obama administration has committed unlimited amounts of aid to ensure that the firms meet their obligations to holders of their debt, as well as investors in asset-backed securities issued by the two companies. The commitment has cost U.S. taxpayers $134 billion so far.

Nonetheless, Lu said in his note that this commitment amounts to an "empty check" without the support of the U.S. Congress.

"However, looking at the current political situation in the U.S., for the U.S. congress to give a clear guarantee on this issue is almost impossible," Lu said.

China's complaints could endanger any proposal to force losses to bondholders. If the nation threatened to dump, or even stop purchasing, U.S. Treasury securities, then the U.S. would likely think twice about whether to try to push Fannie and Freddie's mortgage losses to investors.

Read the full story at Dow Jones Newswires.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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