This week's huge bailout of US mortgage lenders Fannie Mae and Freddie Mac demonstrated yet a again what a key figure Treasury Secretary Henry "Hank" Paulson has become. With the credit crunch showing no signs of easing and a lame-duck president serving out the last six months of his term, the former Goldman Sachs boss is now the most important member of the Bush administration.

Eleven months after it began, the credit crunch still grinds on remorselessly. This month, it threatened to go nuclear when Fannie Mae and Freddie Mac, the two federally supported financial institutions which underpin the US housing market, briefly threatened to go bust. If this had happened, the consequences for the US and global economies would have been catastrophic.

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) own about half of the $12 trillion US residential mortgage market between them.

Repackage

They buy mortgages issued by the commercial banks, thus freeing up funds for fresh lending, and repackage them as bonds, which are sold to investors. With their implicit federal guarantee, they can issue mortgage-backed bonds at far lower interest rates than other financial institutions.

These two companies play a vital role in the functioning of the US mortgage market. Their ability to issue low-interest bonds means that mortgages remain cheap and plentiful for US homeowners. Ever since Fannie Mae was first founded by FDR in 1938, the system has worked as intended by fostering widespread home ownership and it remains a centrepiece of American economic and social policy.

The credit crunch and the sharp downturn in the US housing market -- with prices down by 17pc over the past year -- has raised doubts about the solvency of both companies. As more and more Americans default on their home loans it became clear that Fannie Mae and Freddie Mac were facing billions of dollars in losses on the mortgages they bought.

Over the past nine months, the two companies have reported combined losses of $8bn. Investors fear that there may be much, much worse to come. The companies themselves acknowledge that they could lose a further $24bn over the next few years.

However, that is almost certainly a huge underestimate with most analysts putting the likely figure at somewhere between $40bn and $100bn.

These doubts came to a head on Friday, July 11, when the share prices of both companies collapsed by 50pc. As the extent of the crisis emerged, something close to panic struck official Washington.

Matters weren't helped when, entirely coincidentally, it was announced that Federal Regulators were seizing Californian mortgage bank IndyMac Bank, in the largest bank failure since the early 1990s.

On Friday morning, Paulson implied that no government takeover of Fannie Mae or Freddie Mac was imminent. However, by 3pm, Democratic Senator Christopher Dodd, the chairman of the Senate banking committee, was saying that the US government was considering a support package for the two companies, including emergency loans.

Then, after the markets had closed, the Federal Reserve stated that it had offered neither of the firms emergency funding through its discount window. Quite clearly, the left hand didn't know what the right hand was doing.

With the markets in turmoil, it was clear that the administration would have to come up with a more convincing response by Monday morning, when Freddie Mac would be seeking to sell $3bn of fresh debt. The consequences of allowing the auction to fail were too awful to contemplate.

Rescue

Over the weekend, a rescue package was assembled by the US Treasury Department and the Federal Reserve. Under the terms of the bailout, both Fannie Mae and Freddie Mac will, contrary to what the Fed was saying on Friday night, be allowed to borrow through the discount window. Both companies credit lines with the US Treasury will also be increased from a combined $4.5bn to a possible $300bn.

While Paulson deserves credit for finally putting the rescue package together so quickly, he left until very late in the day, with potentially disastrous consequences. As late as Thursday of last week (July 10), he was telling the House Financial Services Committee that there wasn't a "silver bullet" to restore market confidence, yet by Sunday (July 13) he was reassuring journalists from the steps of the US Treasury building that the rescue plan he was about to announce would be "a bazooka in my pocket to pull out when we need to shoot it [the financial crisis] down".

Faced with such a humiliating about-turn, it is difficult to see how either of Paulson's two predecessors as George Bush's Treasury Secretary, Paul O'Neill and John Snow, could have survived. Paulson need have no such worries. With Bush's popularity ratings at historically low levels and the credit crunch showing no signs of easing, the lame-duck president needs the former Goldman Sachs boss more than he needs the president.

Both O'Neill and Snow came to grisly ends. O'Neill was fired in early 2003 when his doubts about the huge budget deficits being run by the Bush administration became too loud to ignore. Snow lasted a bit longer before being dropped in May 2006 when the economic consequences of the Bush deficits became all too apparent.

Pedigree

Unlike his two predecessors, Paulson's pedigree gives him a stature within the Bush administration which makes him all but unsackable. Apart from the four years years he spent as a staffer with the Nixon administration after he graduated with an MBA from the Harvard Business School, Paulson spent his entire career with Goldman Sachs (AKA Golden Sacks), Wall Street's most consistently successful investment bank.

He joined the firm's Chicago office in 1974 and became a partner in 1982. By 1988, he had become head of the Chicago office.

Paulson became joint boss of Goldman's investment banking operations in 1990 and was promoted to chief operating officer in 1994. When Jon Corzine was elected as a Democrat to the US Senate, in 1998, Paulson succeeded him chairman and chief executive.

Soon after he was appointed boss, Goldman shed its old-fashioned partnership structure and floated its shares on the New York Stock Exchange, in 1999 -- a move that made Paulson seriously rich. His net worth was estimated at $700m at the time of his appointment as US Treasury Secretary in 2006.

Unlike many of the Bush administration's appointees, Paulson's appointment was a popular one, with his nomination being approved unanimously by the Senate.

It probably helps that, in an administration largely dominated by climate change-deniers, Paulson, a keen conservationist, has never hidden his opinion that climate change is at least partially due to human activity.

The knowledge that Paulson is his own man rather than a neo-conservative automaton has greatly strengthened his position with the Democratic majorities in both the House and Senate.

This worked to his advantage last weekend when senior Democrats quickly came out in support of Paulson's Fannie Mae and Freddie Mac rescue package, and diplomatically ignored his previous wobbles on the issue.

With the Republicans almost certain to lose the presidential election in November, Paulson's term as US Treasury Secretary will come to an end next January.

Given the high regard in which he continues to be held, there will be no shortage of Wall Street job offers when he hangs up his boots at the US Treasury.