The NYT told readers that "because America’s relations with a host of countries are intricately tied to Fannie and Freddie, the only realistic option open to lawmakers may be to hand the Treasury Department that blank check, analysts say." It is certainly understandable that foreign investors and central banks would expect Fannie and Freddie's bonds to be honored, since they were sold with the implicit guarantee of the U.S. government, but there is no obvious reason that foreign investors should object if conditions like pay caps on executive pay and restrictions on leverage accompany a bailout. Investors have an interest in getting their money back, not in ensuring 7 and 8 figure salaries for executives at the mortgage giants. The article also refers to foreign investors desire to hold Fannie and Freddie bonds as "safe" assets. If foreign investors viewed Fannie and Freddie debt as safe, then they were very badly misinformed. Because of the sharp decline in the dollar the value of these bonds has fallen sharply measured in euros or in other major currencies. From the vantage point of sustaining the value of their assets, these investors could have done better holding a large variety of assets, including the debt of many developing countries. Given the large current account deficit that the U.S. has been running, the decline in the value of the dollar should have been expected by informed investors.
--Dean Baker
