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Monday, August 04, 2008 9:56 PM

US Blackmailed By China?

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Bloomberg is reporting Fannie's Mudd Soothed Asian Investors as Bonds Rose.

Fannie Mae Chief Executive Officer Daniel Mudd was sitting down to a glass of wine with his wife at their Washington home around 10 p.m. on Saturday July 12 when Treasury Secretary Henry Paulson called.

Concerns about the financial health of the biggest U.S. mortgage finance company had driven Fannie Mae's borrowing costs to the highest since March the previous week and its shares had tumbled 45 percent on the New York Stock Exchange. Investors in Asia, the biggest foreign owners of Fannie Mae's $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.

Paulson told Mudd he had a plan to restore confidence in Fannie and Freddie, the core of the Bush administration's efforts to revive the U.S. housing market. ``At that point, the proposal began to take form,'' Mudd, 49, said in an interview. ``We're trying to solve a crisis of confidence. Would this do it?''

The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week.

Asian investors were among the most important groups to soothe because central banks, financial institutions and funds in the region own $800 billion of Fannie Mae and Freddie Mac's $5.2 trillion in debt, according to data compiled by the Treasury. U.S. officials were concerned that sales from the region would push lending rates higher, said the people, who declined to be named because the discussions were confidential.

Paulson, the 62-year-old former CEO of Goldman Sachs Group Inc., "knows the markets; he's seen parts of this movie before," Mudd said. The decision to allow Fannie and Freddie to borrow from the Fed's so-called discount window was meant to "send a message to the markets that it wasn't just a someday aspiration, but those confidence building measures are in place right now before Tokyo opens on Sunday night," he said.
Karl Denninger wrote a scathing attack of Paulson's maneuver in Now We Know - There WAS A Threat. My thoughts on the so-called "confidence building measures" of this scheme follow.

Confidence Building?

  • How can anyone have confidence in the markets when the Fed, the SEC, or the Treasury Department has to intervene on a weekly basis?
  • How can anyone have any confidence in earnings statements when level 3, market to fantasy assets rise every quarter?
  • How can anyone have confidence in banks when Citigroup Holds $1.1 Trillion in Mysterious Off Balance Sheet Assets?
  • How can anyone have any confidence when the FASB Postpones Off-Balance-Sheet Rules for a Year, at Citigroup's request, because "It's not practical" to implement the rules now. (Please see Not Practical To Tell The Truth for more on this story).
  • How can anyone gave confidence in financial institutions when Deleveraging Risk Is High And Growing At Lehman and other broker dealers?
  • How can anyone have any confidence in banks when there are 25 Rock Solid Reasons To Believe The Banking System Is Unsound.
  • How can taxpayers have any confidence when Congress acts in the best interest of Fannie Mae executives, investors like Bill Gross who bet on a taxpayer funded bailout, and China, rather than the best interests of taxpayers and innocent citizens that had nothing to do with this housing mess?
  • How can anyone have confidence in the system if there is even the remotest possibility that the US financial system was held hostage by China?

Fannie Mae Chief Executive Officer Daniel Mudd called Paulson's move a "confidence building measure". Mudd cannot possibly be further from the truth.

Mike "Mish" Shedlock
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