Saturday, August 30, 2008

Foreign spigot being turned off to the U.S.

Fannie and Freddie have always borrowed at preferential rates. Mortgages are borrowed and bundled, which transformed mortgages into investments for banks, corporations and governments all over the world.

International investment is the foundation on which our home ownership was built. Well over US $1 trillion of our mortgages have been sold to foreign investors this way in the recent past. Over the past few years America has been borrowing over 50% of the world's internationally available savings.

Today we learn that the Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June. The sale by China’s fourth largest commercial bank is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities. Asian investors in particular have become net sellers of agency debt, said analysts.

This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil. Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments.

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