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, according to former-Treasury Secretary Henry Paulson, in his new book, On the Brink.
Paulson learned of the “disruptive scheme” while attending the Beijing Summer Olympics. In his memoir, Paulson writes, according to Bloomberg which was able to obtain a copy of the book before its official publication date of February 1, that 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.”
This is indicative of how dangerous the Chinese holdings of U.S. debt are. It is a huge financial weapon that the Chinese can use anytime they choose for any purpose they choose. But by selling only selective debt, rather then selling various random chunks of their U.S. debt, the Russians have brought to the attention of the Chinese, if they hadn't thought of it already themselves, how to launch a limited financial nuclear attack by getting them to focus on a particular type of debt, such as Fannie Mae or Freddie Mac. Such a surgical strike would do much to protect the overall investment the Chinese have in U.S. debt, but at the same time cause a severe headache for the U.S.