Hank Paulson: Russia Pushed China to Dump Fannie, Freddie Bonds

Some interesting details have emerged from Hank Paulson’s soon to be released memoir, “On The Brink.”

It appears Russia may have pushed China to dump its Fannie Mae (FNM) – Freddie Mac (FRE) holdings in a bid to force a bailout of the largest U.S. GSE’s and cause in the process the collapse of the U.S. financial system.

Paulson says in his memoir he learned of the “disruptive scheme” while attending the Beijing Summer Olympics.

Bloomberg: “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/Freddie debt in 2008, after holding $65.6 billion of the notes at the start of that year, according to central bank data.

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