China owns a substantial amount of commercial paper and bond of these two companies. That is the fact. However, please remember the bond is NOT stock. The bondholder has the first priority to get the money back (in plain English), while the common stockholders are at the last.

The valuation of the bond depends on the cashflow and debt/earnings ratio. The Long Term Debt to Earnings ratio of FRE stands at -0.92 for FY09 (fiscal year 2009), which is risky. However, it stood at -9.42 in Fiscal Year 2007, which is way worsen than now. So put the whole thing in perspective, the FRE has the high short term risk but fair long term risk.

FRE is not just a company, it is created by US Congress. So the bankriptsy and disolve of these two companies will ultimately weaken the confidence of the investers and the financial community. The results? Watch the US long bond and, eventually the value of US dollar. Remember, this is a Democratic congress, and it is a election year. Nobody can afford another storm like this. NYSE and SEC's decision is just at the technic level. I'd view it as warning, but not the signal for exit.

To get the business back to normal, these two companies need re-capticalized. That is the time when China has to stand firm with ALL the bond holders. One of the common solutions is to convert the part of the bond obligation to the common shares. Usually, the major bond holders want the seat on the board and the preferrred class of share to enjoy the preferrable dividends to compensate the loss in bond. There are many things subject to negotiation. It is too early to tell. Obviously, US Congress will have to decide whether to accept Chinese bankers sitting on the board.

Hopefully, the things are not that bad, though. Just to prepare for the worst and hope for the best.

Bottom line, the Chinese investment in the bond is not lost.