I just saw this article at Zero Hedge "The Biggest Difference Between QE3 And QE2", which wonders aloud at the end:
But when more than half of the proceeds of QE to date... have ended up at foreign banks, perhaps at least a theatrical congressional hearing is in order?
That has brought to mind an article that I read yesterday in Japan's Nikkei Shinbun, which said part of the quantitative easing by the US Federal Reserve after the so-called "Lehman Shock" in September 2008 was not so much about helping the US domestic banks or the US housing market but about responding to the demand for the US action from foreign governments for their financial institutions, particularly from China and Japan, two largest foreign holders of the US treasuries AND mortgage-backed securities issued by Fannie Mae and Freddie Mac.
In the US, the purchase of mortgage-backed securities (MBS) issued by Fannie and Freddie by Federal Reserve has been explained as measures to support the housing market. It's that way even today.
From Nikkei Shinbun (11/10/2013; part):
Two months after the "Lehman Shock", the US Federal Reserve decided to purchase long-term bonds issued and guaranteed by the US government corporations [Fannie Mae adn Freddie Mac], as emergency response measures. It was the beginning of the extraordinary monetary easing that still continues today. What forced Chairman Ben Bernanke's hand was the cry for help and the pressure from foreign governments, including Japan and China.
November 24, 2008 at night, Federal Reserve Board in Washington DC. "I will announce it tomorrow. Prepare the package for additional measures as soon as possible. One-page summary, and quick." Bernanke instructed the staff with a slight quiver in his voice.
Early next morning on November 25, Federal Reserve Board called an emergency meeting and decided on the emergency response measures that centered on the purchase of long-term bonds issued and guaranteed by Fannie Mae [and Freddie Mac].
8:15AM US Eastern time. The announcement by FRB was typed on one page, in 13 lines. The total amount of purchase by Federal Reserve would, however, be 600 billion dollars. It was the beginning of an extraordinary measures whereby Federal Reserve, central bank of the US, would buy bonds directly from the market.
"Our first priority was to assure the market. There was little basis for the amount," says an aide to the chairman at that time.
Why did Federal Reserve choose to buy the long-term bonds issued by Fannie and Freddie? The official (ostensible) reason was "to support the housing market which was the cause of the financial crisis". However, there was an "international pledge" [as the real reason] that the US government had made right before the "Lehman Shock".
On the night of September 7, 2008. Treasury Secretary Henry Paulson had just announced the effective takeover of Fannie and Freddie, and he was now on the phone. "The US government will now fully back these companies." The Treasury Secretary was talking to the Chinese counterpart. Paulson also conducted a teleconference of G7 finance ministers, and made a pledge that the US government, for the first time, would guarantee the bonds issued by Fannie and Freddie.
It was clear that the collapse of the housing bubble left Fannie and Freddie deeply insolvent. In the meantime, the long-term bonds issued by them were estimated at that time to be about 1.5 trillion dollars. These bonds were considered high grade with implicit guarantee of the US government, and held by more than 130 entities such as governments, central banks, and institutional investors in Europe and Asia.
The two most worried countries were China and Japan, whose holdings were No.1 and No.2. President Hu Jintao of China pressured the US by threatening to sell its large holding of the bonds even at a loss.
At one time, a plan was being discussed whereby the Japanese government would take over (buy) part of the Chinese holding. If China dumped the bonds from Fannie and Freddie the damage to the international financial markets would be immeasurable. It didn't come to pass, but "Japan and the US were seriously considering the plan" (according to the source in international finance). The situation was very tense.
(Full article in Japanese at the link)
Slight quiver in his voice. That's poetic of Nikkei, but I think Mr. Bernanke's speaking voice always sounds like that.
By the way, how much Fannie and Freddie papers did China and Japan have at that time?
China had over 500 billion dollar worth of mortgage-backed securities from Fannie and Freddie, and Japan had over 250 billion dollars worth. The third largest holder was Russia, at slightly over 50 billion dollars.
From Nikkei (English labels are by me):
China and Japan were worried, Nikkei says. China threatened to dump, Japan was willing to buy what China would dump. In 20-20 hindsight, if China had dumped and Japan had picked up those MBS at a significant discount, maybe Japan would have no problem paying for the nuclear accident cleanup. Oh well.
Nikkei doesn't say why Federal Reserve was worried enough to start purchasing the MBS from Fannie and Freddie at that time. I don't remember the reason myself. All I remember was that the stocks of investment banks like Goldman Sachs, Citi, JP Morgan Chase were on a free fall in November, and a extra large downward pressure was on the stocks on November 21, 2008 which was Friday. After the announcement by Federal Reserve on November 25 next Tuesday, the stock markets were lifted somewhat, but all it did was to not fall for the duration of the year.