Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds

[MikeWB]

Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds
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By Michael McKee and Alex Nicholson


Jan. 29 (Bloomberg) -- Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the "disruptive scheme" while attending the Beijing Summer Olympics, according to his memoir, "On The Brink."

The Russians made a "top-level approach" to the Chinese "that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies," Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia's five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games. Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that "war has started," according to Dmitry Peskov, Putin's spokesman.

"The report was deeply troubling -- heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets," Paulson wrote. "I waited till I was back home and in a secure environment to inform the president."

Russia never approached China about dumping U.S. bonds, Peskov said today. "This is not the case," he said by phone.

Russia sold all of its Fannie and Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data. Fannie and Freddie were seized by regulators on Sept. 6, 2008, amid the worst U.S. housing slump since the Great Depression.

Putin 'Combative, Fun'

Paulson said he was surprised not to have been asked about the Fannie and Freddie bonds during a trip to Moscow in June. "I was soon to learn, though, that the Russians had been doing a lot of thinking about our GSE securities," he said of his meeting with Dmitry Medvedev, who succeeded Putin in the Kremlin the previous month.

Putin kept Paulson waiting before their meeting at the government's headquarters and made the conversation "fun" by being "direct and a bit combative," Paulson said. "He never took offense and we could spar back and forth," he said.

Paulson's book is scheduled to be released Feb. 1, though Bloomberg News bought a copy at a New York bookstore.