Before the credit crisis started last July (exactly 1 year ago), I cautioned that US government officials going to China and asking them to invest in our mortgage backed securities was a very bad sign. I called the post “China Mae” for a reason. Since it was short, I’ll duplicate it in its entirety:
The Bush Administration via US Housing and Urban Development Secretary Alphonso Jackson is trying to get China to buy more government-backed mortgage bonds - specifically more Ginnie Mae offerings. Read this excellent article from Bloomberg. First off, unlike Senator Clinton, I am not concerned about China or other foreign sources of capital investing in our securities. In fact, there are significant consequences for our economy if we don’t have their support or if it is withdrawn rapidly. But I don’t want to turn this into one of my diatribes on international finance, protectionism, currency risk, inflation, trade deficits, etc.
However, what strikes me about this story is that our government has to go on a sales call to convince people to buy mortgage backed securities. Bulls will tell you that the mortgage market is not as bad as the doom-and-gloom crowd has warned. If that is the case, would we need to solicit demand from foreign sources? And if we need to do this for mortgage backed securities that carry the guarantee of the US Federal Government, what does this mean for FNM, FRE, SLM and AGM? More importantly - consider the implications for higher interest rates.
So when you hear smart people like Mish suggest that the US government bailout of Fannie and Freddie is akin to a bailout of China’s position in GSE debt - please don’t dismiss the idea.
Our financial industry diversified sold our crappy debt to the rest of the world, and so did our government salespeople. Sometimes making good on guarantees and promises can cause a bankruptcy.
In this case, it might be too late to cause our government to fail but it certainly will challenge the notion I called “The Ultimate Counterparty” 10 days before the Bear Stearns bailout (note the last 3 paragraphs).
