Sidebar: More toxic than Chinese Drywall

So, the Chinese were sending us toxic building materials….and held the toxic debt they were bought with.

While looking into the role of the CRA in the subprime crisis, I also did some research on Fannie Mae and Freddie Mac, the two GSE’s that many Republicans like to say were complicit in the debacle due to their buying the mortgages to free up capital for the banks and mortgage companies to make more subprime loans.

Some of the information was quite contradictory. First there was this from Businessweek published in September, 2008:

“Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.”

I don’t believe that, because Fannie and Freddie WERE buying mortgages from Countrywide, one of the worst offenders in the subprime mortgage fiasco. Of course, maybe these mortgages were not the “no doc/teaser rate" type—but I think it's safe to say that they did not meet all of Fannie and Freddie’s so-called strict lending standards.

Then of course there was that perception of “government backing” that enabled Fannie and Freddie to get low-interest loans. From Wikipedia: “Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae….Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae.”

My younger brother, a former stockbroker, told me that Fannie Mae was considered a “granny” stock, with a stable price and steady dividends that made it an ideal retirement investment. When the crisis hit, the stock collapsed to under a dollar and had to be re-listed to the OTC pink sheets. So, a lot of “grannies” got hit with losses. To my surprise, it wasn’t just them.  From the Washington Post:

“…The move [placing Fannie Mae under government conservatorship] may calm some Asian markets, where central banks and other financial institutions have become among the largest investors in Fannie Mae and Freddie Mac and therefore one of the largest sources of mortgage finance in the United States.

Uncertainty over whether and how Treasury would intervene has caused some major investors to reduce their holdings of the agencies' debt, according to analysts. That threatened to make it more costly for the companies to get financing, increasing mortgage rates and delaying the housing recovery.

Victor Wang, a banking researcher at UBS Securities Asia, said that Chinese banks, the largest foreign holder of agency debt, did not know how to read the possibility of a Treasury intervention.”

So, is that what the Fannie/Freddie/bank bailout really was—the replacement of the capital the Chinese lost when the mortgage bubble broke? And what does this say about the Chinese, who are also the largest holder of our T-bills? I’ll just conclude with a quote from the Chinese military general and strategist Sun Tzu, and not the one about deception from the movie Wall Street (the original): “…To subdue the enemy without fighting is the supreme excellence.”