(Update, according to WSJ) The deal in summary: the US treasury dept. will put up to 200 billion ($100 billion each) to support the mortgages loss from Fannie and Freddie; the treasury will buy $1 billlon of preferred shares for 10% divivend, the preferred are senior to all other preferred previously issued (I believe all the other preferred holders won’t have much left); the treasury will have warrant to buy FNM and FRE up to 79.9% of company common stock for a nonimal (i.e. the current shareholders such as Legg Mason, Dodge Cox mutual funds will be diluted 1:5 after recent big stock price drop).
(Source: Yahoo Tech-ticker)
It appears the direct cause of the bailout is Chinese and Russian goverments are no longer willing to buy the debt of Fannie/Freddie. So what US goverment did is “all right, we will eat our own dog food”, and hopefully Chinese and Russians will follow.
Did China got a deal?
Short term I think it’s a deal. But long term (it seems nobody is caring about long term these days), why should China continue to buy the Fannie/Freddie debt, for some premium over the US treasuries with substantial mortgage market risk (liquidity). I agree the US treasuries and Fannie/Freddie debt are corelated. It seems the greenback will be a large percent of China foreign exchange holdings.
But think a minute, if the United States can not sort out the mortage thing, why should China/Japan mess with it? I think the implication of this mortage crisis will be much greater than many peoeple (convention wisdom) think. The house will NOT always go up. The housing sector and homeownership are good thing, but sometimes too much of a good thing could be a bad thing.
I think the people in China state investment Cos. should seriously think about their strategy.