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China Eyes Fannie Mae, Freddie Mac Bailout

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China Eyes Fannie Mae, Freddie Mac Bailout

China Eyes Fannie Mae, Freddie Mac Bailout

China Eyes Fannie Mae, Freddie Mac Bailout

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The government takeover of Fannie Mae and Freddie Mac is making waves far off American shores. China is watching the events closely because some 10 percent of China's gross domestic product is invested with the troubled mortgage giants. NPR's Adam Davidson talks with host Jacki Lyden about China's stake in the U.S. mortgage industry.


One investor paying a lot of attention to today's announcement is the People's Bank of China. So why would China care so much about the U.S. mortgage industry? Well, about 10 percent of China's gross domestic product is invested in securities guaranteed by Fannie Mae and Freddie Mac. In fact, the two mortgage giants are central to the U.S./China economic relationship.

NPR's Adam Davidson covers international business from New York, and he's with us now. Hello, Adam.


LYDEN: So Adam, one-tenth of China's entire economy has been lent to underwrite these two companies? Why?

DAVIDSON: China has a big problem and Fannie Mae and Freddie Mac have turned out to be the solution to that problem. Everybody in America buys lots and lots of stuff from China, but what you might not think about is that that means that dollars are piling up in China. China doesn't know what to do with them, the U.S. can't do that forever, and we end up stopping buying Chinese stuff.

Well, China takes all those dollars we send to them and they turn around and use those dollars to buy Fannie Mae and Freddie Mac bonds. That effectively recycles the dollars you and I use to buy cell phones and T-shirts back into the U.S. economy in the form of debt. China is lending us that money so that we can go on and buy some more stuff made in China.

LYDEN: But to have so much Chinese money securing this debt seems like a big risk for both countries, especially given that relations with the Chinese are not always the smoothest, and for American investors and mortgage holders, it seems very risky.

DAVIDSON: Only if China decides to do something that will really, really hurt themselves more than it would hurt us. This is really not unlike the nuclear balance of terror; its mutual assured destruction. If China decides to hurt us by selling all their Fannie Mae and Freddie Mac bonds or just to stop buying Fannie Mae and Freddie Mac bonds, they'll have to hurt themselves a lot more.

LYDEN: So what does today's announcement mean for this highly interdependent relationship?

DAVIDSON: Today clears things up. This is good news for China. It means that China has more confidence than they did, that the debt they are buying from Fannie Mae and Freddie Mac is good, that the U.S. government is standing behind it and they don't have to worry that 10 percent of their GDP will suddenly be worth nothing one day.

LYDEN: Well, what about us? Do you think that any changes are contemplated as a result of this?

DAVIDSON: I think everybody who looks at this, left wingers, right wingers, anyone with a degree of financial and economic sophistication knows that the current system is not sustainable in the long run. In the short run, it would be extremely painful to make a quick adjustment from this current situation to one in which we live within our means.

China doesn't grow as fast, we don't buy as much stuff, our quality of life would diminish, China's miracle would be not so miraculous. It would be very painful to make that adjustment. And while everyone thinks that adjustment has to happen, it's hard to imagine a politician, especially in an election year in the U.S. or in China getting up and saying, hey, this situation is untenable, we're going to raise your taxes a lot.

We're going to stop spending on government programs, we're going to ask you to live within your means. That's not a winning political strategy, even if it is a winning economic strategy. So I don't see that kind of grown-up mature solution happening anytime soon.

LYDEN: NPR's Adam Davidson joined us from New York. Thanks a lot, Adam.

DAVIDSON: Thank you, Jacki.

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U.S. Takes Over Troubled Mortgage Giants

Adam Davidson On Housing And The Takeover

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In Depth: Planet Money Blog

The U.S. government has taken control of mortgage giants Fannie Mae and Freddie Mac, and their top executives have been removed, Treasury Secretary Henry Paulson said. The intervention comes after the companies lost billions in the housing market turmoil, with no sign that things are getting better.

In a news conference Sunday, Paulson said that the two companies will be put into conservatorship, similar to a condition of Chapter 11 bankruptcy. The Federal Housing Finance Agency, which regulates the two companies, will manage Fannie Mae and Freddie Mac on a temporary basis.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said.

Fannie Mae and Freddie Mac were created by Congress in an effort to free up money for the mortgage market.

While they were eventually privatized, the two have always operated to some extent with the implied guarantee of the federal government backing them up. Together, they are tied to roughly half of the nation's $12 trillion mortgage market.

Stockholders in the two companies have already seen the value of their shares fall by more than 80 percent this year.

The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

With reporting by NPR's Jack Speer and The Associated Press.