US takes biggest gamble in history
US Treasury Secretary Henry Paulson announced the nationalisation of Fannie Mae and Freddie Mac yesterday
Related Articles
THE world's biggest financial bail-out was staged by the American government yesterday in a bid to ease the global credit crisis.
The country's two biggest mortgage companies were nationalised amid fears that their bankruptcy would have triggered an economic collapse.
The multi-billion-dollar rescue of Fannie Mae and Freddie Mac will be funded by the American taxpayer. It represents a potential liability of €3,500bn.
The credit crunch began in America last year when banks saddled with huge mortgage debts began to foreclose on loans to millions of borrowers.
Its impact was felt around the world because banks in Europe and elsewhere were holding large amounts of the debt. As a result, lenders are reluctant to offer credit other than to the safest customers. Fannie Mae and Freddie Mac guaranteed about half of all of the home loans sold in the United States, but had run into severe difficulties as a result of the plunging American housing market which had seen hundreds of thousands of American homeowners default on their mortgages.
Shares in both companies had fallen by more than 80pc in the past six months. The US government announced that it would take control of the two companies, wiping out the value of any shares held in the company. However, holders of its mortgage-backed bonds should see their investments guaranteed.
Henry Paulson, the US treasury secretary, 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."
Cost
However, he admitted that the move came at an unknown cost to America taxpayers, saying: "In the end, the ultimate cost to the taxpayer will depend on the business results ... going forward." The takeovers will also see the departures of the chief executives of both companies, to be replaced by hand-picked outsiders.
Investors hope the move will be welcomed by stock markets around the world this morning when they open for business.
Ruth Lea, economic adviser to the Arbuthnot Banking Group, said: "This is good news for the global economy. The Fed has clearly taken a view that to allow these two to go under would have been horrendous."
Ray Boulger, of mortgage broker John Charcol, said: " If the US government is guaranteeing the bonds, it should allow companies to feel more confident. The problems in the US won't go away, but the US government might have stopped them getting worse."
The scale of subprime lending and the fall in house prices has caused a collapse in the value of such securities. The resulting losses have forced banks throughout the developed world to cut back on lending and raise interest rates, adding another downward spiral to the system.
- Harry Wallop and James Quinn in New York
