BEIJING -- A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic," Yu said in e-mailed answers to questions yesterday. "If it is not the end of the world, it is the end of the current international financial system."

Freddie and Fannie shares touched 20-year lows yesterday on speculation that a government bailout will leave the stocks worthless. Treasury Secretary Henry Paulson won approval from the U.S. Congress last month to pump unlimited amounts of capital into the companies in an emergency.

China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.

Industrial & Commercial Bank of China yesterday reported a $2.7 billion holding. Bank of China Ltd. may have $20 billion, according to CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA. CLSA puts the exposure of the six biggest Chinese banks at $30 billion.

... 'Beyond Imagination'

"The seriousness of such failures could be beyond the stretch of people's imagination," said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view.

I find this last line somewhat interesting and entertaining. It is almost as if the writer is annoyed that Mr. Yu didn't explain why he feels the way he feels. The reason he doesn't explain it is because the people whose imagination it is beyond are people like the writer himself.

I am reminded of the old Warren Buffett story about the poker game. The story points out that there is always a patsy in every poker game. It also points out that if you are having trouble discerning who the patsy is in the poker game in which you are involved, that's because it's you.

The more into our dream we become immersed, the more difficult it will be for us to tell the dreamworld from the world of reality. In China people work all day long just to eat. That's reality. In America a 23 year old man comes into the emergency room with a blister on his hand and asks for a note to excuse him from his new job because he's "been overworked." He doesn't even feel shame about this. That is a dream world that cannot last. Its end will be catastrophic, just as Mr. Yu states. Bull