NEWS

036
HOUSING alization of Fannie and
CRISIS Freddie was just what
the Asians wanted.
Chinese bankers felt the
bonds “were like Treasuries,” says Yi
Xianrong, a researcher at the Chi-
nese Academy of Social Sciences, so
there was no question the U.S. had to
intervene. “We never had any doubt”
Washington would come to the rescue,
Zhou
Xiaochuan, says Ha Keun Cheol, economist in
governor of Seoul with the Bank of Korea.
the People’s
Bank of China Nowhere to run
Now that Treasury Secretary Henry
Paulson has made his move, will Asia’s

asia breathes
bankers be more comfortable with
relying so much on Fannie and Freddie
paper? The Sept. 7 intervention likely
makes their debt a safer option—and

A sigh of relief
central banks may have little choice.
“Those trade surpluses are U.S.-
­dollar-denominated,” and as many
European economies weaken, the euro
The effective nationalization of Fannie and Freddie isn’t a very attractive alternative, says
Goldman Sachs analyst Roy Ramos. For
reassures governments holding tons of their paper Asian bankers, “there’s only so much
you can do” to diversify away from the
greenback, Ramos says.
That’s not to say there’s no downside
By Bruce Einhorn lion.) Deepening problems at the two for Asia. The U.S. housing crisis is still
Hong Kong enterprises spurred urgent phone calls real, and the economy is struggling.
American home buyers to Washington. Chinese banks “were Already Chinese exports are slowing
haven’t been the only ones probably facing significant losses,” says as American consumers close their
counting on the supposed reliability of Logan Wright, an analyst with Stone & wallets. Continuing weakness in the
Fannie Mae and Freddie Mac. The two McCarthy Research. U.S. might further hurt Asia’s exports—
companies’ bonds have become favor- This summer, the foreigners started which could, of course, slow growth
ites of Asian governments looking for pulling back. In July, the Bank of China, in their foreign reserves and make big
somewhere to put the dollars generated a state-controlled commercial bank, investments in U.S. debt less necessary.
by big trade surpluses with the U.S. trimmed its holdings of the agencies’ For now, though, Asia’s central
Until recently, it made sense. The mar- debt by selling or choosing not to roll banks are emerging as winners. “They
ket was booming, yields were slightly over $4.6 billion of their bonds. After have nothing to complain about—
better than plain-vanilla Treasuries, increasing by an average of $22 billion a they’re made whole,” says Edwin M.
and everyone assumed Washington month in the first half of Truman, an econo-
backed the mortgage companies. 2007, central bank hold- mist who headed the
As the U.S. housing crisis deepened ings of Fannie and Fred- Foreign Funds Fed’s international
and Fannie and Freddie started sink- die securities in Federal finance division from
Top five non-U.S. holders of
ing, though, foreign bankers wanted Reserve custody fell by 1977 to 1998. “The
Fannie and Freddie debt*
assurances that their assumption $27 billion from mid-July fact of the matter is,
was correct. “Treasury saw foreign through early September, BILLIONS
if Fannie and Freddie
governments getting the willies,” says according to Brad Setser, China $376 can’t pay, you and I
one Senate aide. Especially those in a former Treasury Dept. Japan $228 will.” ^
Asia: Four of the top five international official and now a fellow –With Theo Francis
Russia $75
holders of Fannie and Freddie paper are at the Council on Foreign in Washington,
Nir Elias/AP Photo

Asian. Chinese hold $376 billion, Japa- Relations. “The threat South Korea $63 Chi-Chu Tschang in
nese have $228 billion, South Koreans of a central bank buyers’ Taiwan $55 Beijing, Moon Ihlwan
$63 billion, and Taiwanese $55 bil- strike was real,” he says. * As of June 30, 2007 in Seoul, and Hiroko
lion. (Russia is No. 3, with $75 bil- The effective nation- Data: Treasury Dept. (U.S.) Tashiro in Tokyo

BUSINESSWEEK I SE PTE M B E R 22, 2008