Cast No Shadow. pt 2

According to an off-hand comment in today's W$J, Hank Paulson's new book includes the revelation that Russia approached the Chinese in August 2008 with a plan to dump trillions of dollars worth of Fannie Mae & Freddie Mac bonds. Shouldn't the SEC be looking into this? Russia Tried to Force a Bailout of Fannie & Freddie

Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the "disruptive scheme" while attending the Beijing Summer Olympics, according to his memoir, "On The Brink."

The Russians made a "top-level approach" to the Chinese "that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies," Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia's five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games.

Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that "war has started," according to Dmitry Peskov, Putin's spokesman.

"The report was deeply troubling — heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets," Paulson wrote. "I waited till I was back home and in a secure environment to inform the president."

Call me crazy, but isn't this the sort of story that's worth a little publicity? There was a UPI story, a story in the Denver Post, and a couple scattered blog posts. But, most of the public discussion has focused on what Paulson "thought" of Sarah Palin (whom he only talked to on the phone). The American public is often accused of being ignorant, but it's always mind blowing to consider the type of information that is often kept out of the public consciousness. In fact, Fannie and Freddie have consistently benefited from this sort of controlled release of information. I'm sure that has nothing to do with their fictional status as "private" companies and their very real status as a conduit for an off-the-books national housing policy by progressives in and out of government.

As might be expected, Zero Hedge provided the most comprehensive coverage and analysis: Russia Urged China To Dump Its Fannie/Freddie Holdings Before GSE Bailout

The implications of this revelation are troubling, as in a newly multi-polar world, in which China is now the second largest economy, and merely needs a block of one other major power, be it Russia or Japan, in order to precipitate a selloff in critical U.S. securities, be they MBS (not so much these days), or, more relevantly, Treasuries.

Curiously, the bailout of the GSE was based on the premise that placating China and other major US security holders (both in the public and private arena) is critical. It explains the lack of impairment of both the Sub debt in the GSEs as well the sub debt in all the bank holding companies. If indeed China had been considering selling its bonds, it means that it had likely approached the proper senior level officials with its concerns, and could have been a material influence in bailout policy in the days surrounding the Lehman collapse. Which makes an even bolder case for the observation that the U.S. is nothing more than a vassal state of its largest creditor: if China can dictate domestic policy, which these days typically amounts to yet another bailout decision, then why do Americans need to pretend their government is at all relevant any longer?

We keep hearing that America is "ungovernable," its politics gridlocked because of partisanship. But, the real problem is that we've spent ourselves into a hole with no way to get out on our own, and the rope held by the likes of Vladimir Putin. The public is in an uproar. There is a growing sense that untrammeled public spending has to come to an end; yet all the present leadership in DC wants to do is convene a blue-ribbon commission, instead of convening the "commission" - that would be Congress - we already have. For decades, Democrats have been nurturing and defending the New Deal/Great Society from all comers. It may yet be that their hand will be forced by the sort of hostile foreign elements that they believe they can engage diplomatically. We can only hope that, after the crash, we understand how we got there and how we can dig our way out.