US bails out Fannie Mae and Freddie Mac

Monday, 8 September 2008 12:00 AM

The US government has stepped in to save mortgage giants Fannie Mae and Freddie Mac.

Both have been put into a conservatorship and their chief executives replaced - in what is the largest bail-out in US history.

Stock markets rallied in Asia and Europe following the move, designed to protect the faltering US from "an unacceptable risk" according to president George Bush.

The FTSE 100 was up 3.60 per cent in early trading, following the worst week in five years last week.

The companies are crucial for the US property market as they keep cash flowing through the system and own or guarantee around half of all home loans in the country.

However, the property slump has hit both hard and their share prices have fallen by around 90 per cent since the start of the credit crunch.

Over recent months the companies had lost billions of dollars, with much of their bond debt ultimately held by Asian banks.

These banks had recently begun withdrawing their investments.

There has been speculation for some time that the government would not allow the companies to fail but shareholders have expressed fears that if this happens, their shares will become worthless.

Treasury Secretary Henry Paulson said: "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.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," he added.

The most recent official figures show about nine per cent of US homeowners were behind on their payments or faced repossession.

Under the plan, the government will create a new class of shares in the companies, which will allow it to pump cash into Fannie Mae and Freddie Mac. It is thought the cost of the deal could come to $200 billion (£100 billion).

This will have the effect of diluting the value of existing shares, however.

Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.

Fannie Mae was founded in 1938 as part of Roosevelt's new Deal to provide liquidity to the mortgage market.

Along with Freddie Mac, created in 1970, the companies buy mortgages on the secondary market, pool them, and sells them as mortgage-backed securities to investors.

Sarah Routledge & Chris O'Toole

Tags:
• uk property news