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Are China and Saudi Arabia behind the Fannie and Freddie bailouts?

It seems that the US arranged for foreign governments to buy Fannie Mae and Freddie Mac bonds with their dollar holdings, to get a higher return than from US government securities while still enjoying the safety of an "implicit" US government guarantee. Or so writes Martin Mayer in the NY Times...

Historically, foreign central banks that found themselves with excess dollars as the result of the American trade deficit invested that money exclusively in Treasury notes and bills. As a service, the New York Fed made those investments for them, guaranteeing them the best current price and retaining legal custody of the paper as their agent.

However, by the mid-1990s the countries that had large trade surpluses with the United States — primarily in East Asia and the Persian Gulf — began to demand a better return on investment than that offered by Treasury paper. In response, the New York Fed began to buy them “federal agency” paper — including large amounts of obligations from Fannie and Freddie. This paid somewhat better interest, and while it was not officially guaranteed by the government in the way Treasury bills were — well, you know, if push came to shove, Washington could be counted on to do the right thing.

These foreign-government accounts now hold $985 billion worth of Fannie and Freddie paper. It explains why, in mid-July, Secretary Paulson (as well as Senator Chris Dodd, the Connecticut Democrat who heads the Senate Banking Committee) began giving press conferences about how sound the two firms really were, no need to worry. Behind the scenes, Treasury officials overseas made phone calls to the local central banks and finance ministries, stressing that the two mortgage giants would weather the storm...

If the government had not guaranteed the full payments of principal and interest on their paper, the foreign governments that own so much of it might have had to show losses on their dollar-denominated accounts. To say the least, this would make them reluctant to continue to finance our trade deficit, our wars and the strength (such as it is) of our dollar. Our interest rates, and not just for mortgages, would soar.

So the debate about whether dishonest lenders and dumb borrowers should have been bailed out was really meaningless — the conclusion was foregone.

The international position of the dollar had to be defended against even the hint of possible failure at Fannie and Freddie; they had to be saved at all costs....