Paulson: Russia tried to exacerbate US financial crisis

Russian interests attempted to force the U.S. government bailout of Fannie Mae and Freddie Mac by selling off its holdings in the two entities in 2008, then urging China to do the same, according to former U.S. Treasury Secretary Henry Paulson.

Paulson's claim is carried by his forthcoming memoir, “On The Brink.” An early copy was obtained by Bloomberg News.

"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," Bloomberg reported. "The Chinese declined, he said."

He reportedly added that he waited until returning to the U.S. before informing former President George W. Bush of what he called a "disruptive plan."

The New York Post called it flirting with "financial war."

Indeed, Bloomberg adds that during the opening ceremonies of the Beijing Olympics, Russian Prime Minister Vladimir Putin warned Bush that “war has started,” according to Putin’s spokesman. The Kremlin has since denied that it urged the Chinese to sell bonds in Fannie and Freddie amid the height of the mortgage crisis.

In Paulson's memoir, he also claims that "Alistair Darling, the UK chancellor, blocked a rescue takeover of Lehman Brothers by Barclays Bank when he refused to support special treatment by UK regulators," Financial Times noted. He had allegedly been under pressure by New York Federal Reserve chief Timothy Geithner to waive the requirement of a shareholder vote to approve an accelerated merger between the two firms. Darling refused "without a hint of apology in his voice," Paulson claims.

Russia held some $65.6 billion in Fannie and Freddie bonds at the beginning of 2008, according to Bloomberg. They have since been sold off. U.S. regulators seized the banks in Sept. 2008.

Congressman Barney Frank (D-MA), who chairs the House Financial Services Committee, said recently that both banks could be abolished following a complete reformation of how home mortgages are handled in the U.S. He expects the committee to make a recommendation to that effect.

Peter Wallison, a former general counsel to the U.S. Treasury, estimated at the end of 2009 that taxpayers would lose in upwards of $400 billion for its support of Fannie and Freddie.