This has got to be one of the most under-reported, yet significant stories related to the housing debacle so far. See, America, the Olympics may be officially over, but China is still commanding some attention, this time where the U.S. credit markets are concerned.
Yu Yongding, a former Chinese Central Bank advisor, (who occasionally still advises the Chinese government) made a key statement on Bloomberg via e-mail. He said, "If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic."
Knowing that Mr. Yongding's prophetic viewpoint remains under-reported is the good news in this post, at least for Treasury Secretary Hank Paulson, who would like us to believe that he's got a good grip on dealing with this credit crisis. The bad news is that the Chinese are most likely going to be quite serious about their stake in the $376 billion of agency debt they carry (much of it in Fannie and Freddie assets).
Keep your eye on China....this may end up being a race of wit and tenacity. China v. U.S. in Let's Make a Deal. Now, who deals quickest? The Treasury will have no choice but to appease the Chinese, and the manner in which Paulson deals with Fannie and Freddie will have an effect on mortgage markets, the dollar and the federal deficit. How Paulson plans to compensate the shareholders of the two giant, privately owned, government backed hybrid entities will in no uncertain terms effect the global credibility of the United States financial system and most likely trigger a more brutal leg down in the global credit crunch.