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astasinim

The US government today took its most dramatic action against the housing crisis yet, as it announced plans to inject up to $200 billion worth of taxpayers' money into Freddie Mac and Fannie Mae, the mortgage giants that underpin America’s entire mortgage market.



The cash infusion was part of a series of sweeping measures designed to restore order to America’s stricken financial system, that also included the government assuming control of both companies, the immediate removal of their chief executives and the elimination of future dividends to shareholders.



Henry Paulson, the US Treasury Secretary and a key orchestrator of the rescue package, acknowledged that it was highly unusual for a government to intervene where publicly-traded companies such as Freddie and Fannie are concerned.
But he emphasised that these two struggling groups represented a special case because their survival was crucial to the health of the worst housing market since the Great Depression of the 1930s.

Announcing the plan in Washington yesterday, Mr Paulson said: "It is necessary to take action. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing."


"In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs [Fannie and Freddie] going forward."
Fannie and Freddie are crucial to America’s housing market, financing more than 80 per cent of US house purchases so far this year.
Between them, the two groups are responsible for $5,500 billion worth of residential mortgages, just under half the value of America’s $12,000 billion worth of outstanding homeloans.



However, Fannie and Freddie have teetered on the brink of collapse in recent months, wracking up about $14 billion of losses between them in the past year as the bottom fell out of the housing market and defaults on mortgages jumped.
The two groups face billions of dollars of additional losses in the coming months that, had action not been taken, could potentially have precipitated their collapse, triggering a domino effect that may have decimated the entire US financial system.
The US government’s decision to guarantee the two groups’ survival is also good news for British banks and, in turn, its homeowners.



British banks have billions of dollars invested in bonds that are insured by Freddie and Fannie, which could have translated into huge losses if either group had gone under – leaving the banks with even less money to make mortgages with.
Mindful of the need to prop up Fannie and Freddie, the American government is taking no chances. As well as seizing control of the banks, changing their senior management and pledging to inject up to $200 billion, the government said yesterday that it would offer short-term loans on favourable terms to the firms. It will also purchase mortgage assets from the two groups to help boost their cash reserves.



The US government is expected to plough billions more dollars into these cheap loans and asset purchases, although it declined to give a figure yesterday because it depends on how Fannie and Freddie fare over the coming months.
It is also difficult to know how much of the $200 billion injection money at the government’s disposal will eventually be used, since the government plans to provide cash infusions as and when they are needed, rather than injecting money upfront, based on an estimate. It will make its first injection, of $1 billion, this week.



A Treasury spokesman said: "These agreements are the most effective means of averting systemic risk and contain terms and conditions to protect the taxpayer. They are more efficient than a one-time equity injection, in that Treasury will use them only as needed and on terms that the Treasury deems appropriate."
Daniel Mudd and Richard Syron, respectively the chief executives of Fannie and Freddie, will leave their roles with immediate effect. Herb Allison, a former vice chairman of Merrill Lynch and now chairman of TIAA-Crefa, one of America’s biggest pension fund managers, becomes chief executive of Fannie. David Moffitt, chief executive of US Bancorp, is heading up Freddie.



Fannie and Freddie act by buying up mortgages from banks and building societies, packaging them into bonds (which they insure against default) and selling them on to pension funds and other investors. The banks and building societies use the money they receive from Freddie and Fannie to make new mortgages, theoretically ensuring there is also plenty of financing available for would-be homebuyers.



US government seizes control of Fannie Mae and Freddie Mac - Times Online

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bkkandrew

A bit late - I posted it here:

http://teakdoor.com/us-domestic-issu...tml#post749122 (A note of caution for those with deposits in US Banks)

I also forcast this happening in the same thread 4-months ago...

astasinim

Ooops sorry. Maybe a mod can delete it then.

lysander

"Us government seizes control of Fanny" is rather an unnerving headline...

Jesus Jones

Get ready for the rebound in the UK over this.

keda

Must be great being a major financial institution...take whatever risks you need to and pay little regard to the known and predictable cycle of lean times, but doesn't matter as long as you make money hand over fist in times of plenty to keep your investors sweet,...then when it starts going wrong threaten a belly up so your gov bails you (and the rest of the industry, and itself) out with more of the money you were trying to steal before.

A common enough scenario in the free West, and though it's often the only practical solution, since the bottomless public purse is always fair game, there ought to be at least the pretence of bloodletting in the form of personal liability at the top level.

Not enough for the gov to take control (who wants that?!) and remove its CEOs and eliminate future divis, all of which further erode confidence (though balanced by salvation)...200bn of even US$ is a lot of money, and certainly enough for a few criminal charges.

panama hat

^ Yes, and another blow for the US' free and unfettered market economics . . . about the same value as US democracy - great in theory, miserable in practice.