The Case for Saving Fannie Mae and Freddie Mac

After digesting some of the news, I am still not certain whether the government bailing out Fannie Mae and Freddie Mac is good news or bad news.

Here is one outsider's perspective on why Fannie Mae and Freddie Mac should not be allowed to fail. This view comes from Yu Yongding who is a former adviser to China's central bank. Yu is quite influential amongst Chinese government officials and investors, and has discussed economic issues with Chinese Premier Wen Jiabao this year.

He opined that a failure of Fannie Mae and Freddie Mac could be a catastrophe to the global financial system. He further stated that if the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately (meaning if China is not compensated adequately), it would be the end of the current international financial system.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, with the bulk of it held by the Chinese government.

It remains to be seen whether this move by the U.S. government will help ease the housing crisis in America and whether the shareholders of Fannie and Freddie will be wiped out in the process.