Because one third of their debt had maturities that

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rolling over their debt to new debt becomes small. Because one-third of their debt had maturities that were short-term in nature, their susceptibility to a massive run was quite high. But this wasn’t the run we most care about. Instead, perhaps, it was the potential run on the banking system resulting from the banking sector’s direct holdings of Fannie and Freddie’s debt. As described in Section 4.1.1, the banking sector held 17% of Fannie Mae’s and Freddie Mac’s debt obligations outstanding. To the extent that a number of the large commercial banks – Citigroup, Bank of America, JP Morgan Chase, etc. -- also use wholesale short-term funding that is not insured, these banks were exposed to runs. And the problem was that no one knew which institutions were exposed to the 17% of Fannie and Freddie’s debt; so, from the perspective of creditors, the prudent action would be to withdraw funds, so as “to not be the mug left without savings.” But, believe it or not, this also wasn’t the run we most care about. The Federal Reserve’s “Flow of Funds” data show that a large and increasing fraction of the agency debt is held by foreigners, often foreign central banks. Foreigners owned $492 billion in long-term U.S. agency debt in June 2002. This represented 10.8% of the outstanding amount. By June 2008, that number had almost tripled to $1,464 billion, a 21.1% share. Irrespective of claims to the contrary by Treasury officials through the years, if foreign countries viewed Fannie Mae’s and Freddie Mac’s debt as de facto government debt – after all, what else does the term ”government-sponsored enterprise” elicit? – then default on Fannie and Freddie’s debt would have consequences for confidence in the U.S. sovereign debt. In fact, the largest holders of agency debt are China and Japan. Given that these same foreign investors are holding two-thirds of U.S. Treasury debt as well, a default or even just a loss in valuation of agency debt would have enormous reputational effects for the U.S. Treasury, which could lead to a reduction in the foreigners’ willingness to hold U.S. bonds in general. Given the fact that of the $5.21 trillion U.S. Treasury debt outstanding in September 2008, a staggering $1.48 trillion were T- bills (i.e., less than one year in maturity), it is not inconceivable therefore that there could have been rollover risk in U.S. treasuries. The result would be higher interest rates for everyone at the least and more likely a significant upheaval in global financial markets. This is the run we care about.
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59 As Henry Paulson recounts in his book On the Brink, following the announcement in mid-July 2008 that the Treasury had acquired emergency powers to deal with Fannie and Freddie’s problems: From the moment the GSEs' problem hit the news, Treasury had been getting nervous calls from officials of foreign countries that were invested heavily in Fannie and Freddie. These calls ratcheted up after the legislation (granting powers to the Treasury to put GSEs into conservatorship but also to extend unlimited support to them). Foreign investors held more
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