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07-09-2008, 07:47 PM
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US Govt Bails Out Mortgage Giants
The US government has taken temporary control of troubled American mortgage giants Fannie Mae and Freddie Mac in the largest state bailout in history.
http://news.sky.com/sky-news/content/StaticFile/jpg/2008/Jul/Week2/15033401.jpg
The firms have lost billions of dollars because of the US sub-prime crisis and the global credit crunch, and their share prices have fallen by 90% in the past year.
The companies are being placed in a government "conservatorship" to help the financial system recover from massive housing losses, officials said.
Fannie Mae and Freddie Mac own or guarantee about five trillion dollars in home loans, around half America's total mortgage market.
The past year has seen market confidence wane as property prices have plummeted in the worst US housing slump in decades.
Fannie Mae and Freddie Mac do not lend directly to homebuyers, but buy mortgages and sell them on.
This means they have to pay out when homeowners cannot meet their payments. The rise in defaults and repossessions has seen losses of $14bn (£7bn).
The latest announcement could cost the US taxpayer $25bn (£12.5bn) - but the US government thinks it is a price worth paying.
Sky's business reporter Joel Hills said: "This is a situation similiar to the one we saw with (British bank)Northern Rock, only much, much bigger.
"The scale of this is colossal. It's Northern Rock times 25, certainly in terms of the scale of the money that's at stake here.
"The markets are likely to react well to this. The implication of allowing these institutions to fail would be terrible both for the banks, who would be left carrying the can for people defaulting on their mortages.
"But also it would make mortgages in the US that much more expensive and that could have a terrible effect on the US housing market and therefore on the US economy."
Unless a political leader is willing to let the US sink into depression with the rest of the world following close behind, there is no choice but to save Fannie Mae and Freddie Mac
The US Treasury said it was prepared to invest $100bn (£50bn) each to shore up Fannie Mae and Freddie Mac.
US Treasury Secretary Henry Paulson has outlined the reasons for the takeovers.
He said it was because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
Both companies will be temporarily run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate the mortgage giants.
Also, the executives of both institutions have been replaced.
Herb Allison, a former vice chairman of Merrill Lynch, has been selected to head Fannie Mae, while David Moffett, a former vice chairman of US Bancorp, has been picked to lead Freddie Mac.
US financial analyst Peter Kenny said: "It's probably a good move for the markets in the short term.
"This is a stop gap measure that I think was widely seen as something that was going to have to happen, it's nothing shocking. It's not going to address declining house prices.
"How much confidence do people really have at this stage in the Treasury? That rug has been run a bit thin. They're doing what they have to do. It's not the most creative plan. Their hands are somewhat tied.
"This is an enormous announcement but it was kind of assumed that at some point this was going to be tacked together on the part of the Treasury."
US Govt Bails Out Mortgage Giants
The US government has taken temporary control of troubled American mortgage giants Fannie Mae and Freddie Mac in the largest state bailout in history.
http://news.sky.com/sky-news/content/StaticFile/jpg/2008/Jul/Week2/15033401.jpg
The firms have lost billions of dollars because of the US sub-prime crisis and the global credit crunch, and their share prices have fallen by 90% in the past year.
The companies are being placed in a government "conservatorship" to help the financial system recover from massive housing losses, officials said.
Fannie Mae and Freddie Mac own or guarantee about five trillion dollars in home loans, around half America's total mortgage market.
The past year has seen market confidence wane as property prices have plummeted in the worst US housing slump in decades.
Fannie Mae and Freddie Mac do not lend directly to homebuyers, but buy mortgages and sell them on.
This means they have to pay out when homeowners cannot meet their payments. The rise in defaults and repossessions has seen losses of $14bn (£7bn).
The latest announcement could cost the US taxpayer $25bn (£12.5bn) - but the US government thinks it is a price worth paying.
Sky's business reporter Joel Hills said: "This is a situation similiar to the one we saw with (British bank)Northern Rock, only much, much bigger.
"The scale of this is colossal. It's Northern Rock times 25, certainly in terms of the scale of the money that's at stake here.
"The markets are likely to react well to this. The implication of allowing these institutions to fail would be terrible both for the banks, who would be left carrying the can for people defaulting on their mortages.
"But also it would make mortgages in the US that much more expensive and that could have a terrible effect on the US housing market and therefore on the US economy."
Unless a political leader is willing to let the US sink into depression with the rest of the world following close behind, there is no choice but to save Fannie Mae and Freddie Mac
The US Treasury said it was prepared to invest $100bn (£50bn) each to shore up Fannie Mae and Freddie Mac.
US Treasury Secretary Henry Paulson has outlined the reasons for the takeovers.
He said it was because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
Both companies will be temporarily run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate the mortgage giants.
Also, the executives of both institutions have been replaced.
Herb Allison, a former vice chairman of Merrill Lynch, has been selected to head Fannie Mae, while David Moffett, a former vice chairman of US Bancorp, has been picked to lead Freddie Mac.
US financial analyst Peter Kenny said: "It's probably a good move for the markets in the short term.
"This is a stop gap measure that I think was widely seen as something that was going to have to happen, it's nothing shocking. It's not going to address declining house prices.
"How much confidence do people really have at this stage in the Treasury? That rug has been run a bit thin. They're doing what they have to do. It's not the most creative plan. Their hands are somewhat tied.
"This is an enormous announcement but it was kind of assumed that at some point this was going to be tacked together on the part of the Treasury."