In bailing out mortgage giants Fannie Mae and Freddie Mac, American taxpayers will end up assisting foreign central banks, including those of China and Russia, that hold nearly $1 trillion in Fannie Mae and Freddie Mac bonds.

Yesterday, Treasury Secretary Paulson announced a plan to expand Fannie and Freddie’s line of credit from the Treasury to $2.25 billion. He said the government could also buy stock in the two firms, which are publicly traded. In addition, the Federal Reserve Bank of New York now has the authority to lend to Fannie and Freddie at a rate of 2.25%, the same rate given to commercial and investment banks. “We are grateful for the leadership of Secretary Paulson and Chairman Bernanke,” the chief executive of Fannie Mae, Daniel Mudd, said in a statement. The chairman of Freddie Mac, Richard Syron, said his company had “a substantial capital cushion” above the 20% requirement; Freddie Mac is scheduled to sell $3 billion in short-term notes today in an effort to raise capital.

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The government-led plan to save Fannie and Freddie comes as the two companies have seen their stocks plummet: Fannie is down 45% in the past week to $10.25 a share, while Freddie is down 47% to $7.75 a share during the same period. Wall Street spent the last week in agony over whether the two could become insolvent in the wake of falling housing prices and increasing mortgage defaults. Should Fannie and Freddie fail, $5.3 trillion in mortgage debt, representing about half of the outstanding mortgages in America, would go unpaid.

America is not the only country that would feel pain from the failure of Freddie and Fannie. According to data from the Council on Foreign Relations, central banks own $925 billion in debt in the two companies. China tops the list with $420 billion in Freddie and Fannie debt; Russia and Japan come in second with a combined $407 billion in debt. Others countries that hold the debt include Singapore, Taiwan, and several countries in the Persian Gulf.

“If Fannie and Freddie were to fail, then some international financial institutions would be severely affected,” a fellow at the Council on Foreign Relations, Brad Setser, said. The central banks bought agency debt assuming the American government would guarantee the money, even though no formal promise from the American government exists. “That was the assumption they made, and we’ll see if it hurts them now,” he said.

Regardless of Fannie or Freddie’s fates, foreign central banks that own this debt will face losses, the president of Euro Pacific Capital, Peter Schiff, said. “If Fannie and Freddie go under, the debt will not be paid,” he said, adding that if the two companies are bailed out, the central banks “will own debt in dollars that is worth less due to inflation.”

The Bush Administration bailout as laid out yesterday would result in the American taxpayer covering the debt for both the foreign central banks and other holders of Fannie and Freddie debt. “Bailing these companies out will cost more than letting them fail,” Mr. Schiff said.

Some said the new plan could actually speed up the recovery of the housing market. The president of Naroff Economic Advisers, Joel Naroff, said that during the savings and loan crisis on the 1980s, government-backed Resolution Trust Corp. bought out failing savings and loans. “The RTC worked, and the short-term costs allowed us to get through the S&L mess and move on,” said Mr. Naroff. “Ultimately, if you have to use taxpayer money, that’s an investment that may work out most conveniently.”

Deposits in savings and loans had an explicit government guarantee from the Federal Savings and Loan Insurance Corporation. Fannie Mae and Freddie Mac debt has no such guarantee, or didn’t until Secretary Paulson’s announcement yesterday.

Others are wary of government interference. A professor at the University of Maryland School of Business, Peter Morici, said that the plan essentially entails the Treasury paying for Congress’ mistake. When Fannie Mae and Freddie Mac were originally conceived as government-sponsored entities, Mr. Morici said, they were not sufficiently capitalized with shareholder money.

“The problem is that 98.4% of the companies’ capital is borrowed, and only 1.6% was shareholder-raised,” he said.