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TechnoratiUS Treasury to Spend Billions in Bailout of Freddie Mac and Fannie Mae
WASHINGTON - The US Government took dramatic steps to prop up America's financial system last night, announcing that it was prepared to pump billions of dollars into the country's mortgage market in a desperate measure to prevent the economy going into a tailspin.
In a late-night announcement designed to calm increasing panic on Wall Street before today's market opening, the US Treasury Department and the Federal Reserve issued a joint statement in which they pledged to spend billions of dollars of taxpayers' money to bail out the two American mortgage giants that collectively underpin the entire housing market "if needed".
The Fed said it would offer cheap financing to the giants, Freddie Mac and Fannie Mae, through its so-called discount window. The Treasury separately said that it would propose to Congress that lines of credit to the two should be extended temporarily. Furthermore, Henry Paulson, the US Treasury Secretary, said that the Treasury would purchase equity in both organisations if needed.
The two groups together account for more than half of America's $12,000 billion of outstanding mortgages. A failure of Freddie and Fannie would drive up mortgage payments significantly as a crucial source of financing dried up and would have a domino effect across the debt market, affecting everything from car loans to student loans.
The Fed and the Treasury would require approval from Congress for an injection into Fannie or Freddie, which would be done through buying newly issued shares in the groups.
The value of shares that could be bought in the two groups if the recapitalisation goes ahead was not disclosed but is thought to total about $15 billion.
Mr Paulson said: "[Their] continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore, we must take steps to address the current situation as we move to a strong regulatory structure."
The Government also said that it would give the Fed a role in regulating Fannie and Freddie, working with the present regulator, the Office of Federal Housing Enterprise Oversight.
The sweeping measures to restore confidence in Fannie and Freddie - and the housing market in general - came ahead of a critical attempt by Freddie to borrow $3 billion from Wall Street today. The Government worked furiously behind the scenes over the weekend to ensure that Freddie Mac is able to sell the $3 billion of short-term debt in the group in a "Dutch auction" today - and at an acceptable interest rate. Treasury officials took the highly unusual step of calling leading banks and urging them to buy Freddie's debt.
Fannie and Freddie are fundamental to the smooth running of the US housing market. They buy mortgages from banks and other lenders and package them into bonds, which they sell on to pension funds and other investment firms. The banks use the money they receive from selling their mortgages to Fannie and Freddie to make further loans to new homeowners. Fannie and Freddie guarantee payments on mortgage bonds they create, in the event of a default on the underlying home loans, and they also retain on their balance sheets hundreds of billions of dollars of the mortgages they buy.
Expectation of government intervention in the companies last Friday sent their shares plunging. Fannie's shares were down by as much as 50 per cent and Freddie's by 48 per cent at one stage. Fears of wider fallout from the mortgage market problems hit other financial groups, with Lehman's shares falling 20 per cent. The Dow Jones industrial average fell below the psychologically important 11,000 level for the first time since 2006.
The US Securities and Exchange Commission (SEC) last night stepped in to issue a warning against rumour-mongering. The SEC said that it would check that no false information was being spread to enable stock manipulation to take place. It did not name companies it felt might be victimised.
© Copyright 2008 Times Newspapers Ltd.
10 Comments so far
Show AllShould The US government bail out American corporations?
Does corporate America share its profits with the tax payers? The answer is absolutely not.
Do they share the profits with their employees? The executives are paid millions.
The US Government should bail out all corporations large and small is that right? The answer is no. If it is a viable business, they can raise the money from investors, if not, let them close shop.
If the government decides to bail them out if should be at a cost (like shares in the company) where the government will make money and have a say in running the company. Even better have a public referendum where the voters decide.
Carmakers want money from the government; the financial institutions want money - where does it stop?
It is about time corporate America should learn they have to stand on their own feet. Where is corporate America financial responsibility?
They claim the government is abusing its financial responsibility; it seems Corporate America is no better. They also go to their workers to take a pay cut, is that fair? It seems the little guys are the ones that always pay the price for corporate financial abuse and miss-management.
Other corporations in the world are not asking to be bailed out - they go out of business.
Jay Draiman
PS
The corporate barracudas have no conscience they will step on anyone, stab anyone in the back and fudge the numbers to climb up the corporate ladder and receive the hefty bonuses.
As family values have declined in the last half a century so has corporate integrity and honesty, it seems that corporate America will do almost anything for the buck ($) no holes barred.
What a shame that corporate America has sunk so low.
The government is no different, honesty and integrity is a foreign language, they only serve the special interest groups. (We all know why).
What happened to the American people who placed their trust in the government? (The public officials they voted for).
We are faced constantly with another corporate or governmental scandal of wrongdoing. When is the American public going to wake up and demand an honest government and honest corporate America? Americans wake up before it is too late.
Jay Draiman
Hup!...If you really want a shocker..go an take a look at this..AMAZING piece in Mother Jones..here is a TASTE!
"Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown. Yet has Gramm been banished from the corridors of power? Reviled as the villain who bankrupted Middle America? Hardly. Now a well-paid executive at a Swiss bank, Gramm cochairs Sen. John McCain's presidential campaign and advises the Republican candidate on economic matters. He's been mentioned as a possible Treasury secretary should McCain win. That's right: A guy who helped screw up the global financial system could end up in charge of US economic policy. Talk about a market failure."--David Corn May-2008
The article..is..well..WOW!..Unbelievable..frankly..MJ is FREE online..PLEASE..if you want to know WHO di this..and HOW..it is right there..short and sweet..here is the link:
http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html
Yeah..this one was..IS...being done by the guy REPRESENTING the financial policies of the ..Republican ticket..OOOh..la-la..AND WHERE is the "LIBERAL MEDIA"...CNN? MSNBC?..This SHOULD..derail McSame..in a REAL Republic..in which the CITIZENRY had "commercial News" based on the cocept of ACTUAL 4th Estate..rather than the Corporate 5th Column we have now...in THAT world..McSame would be..DONE!..His "Policies" are..as of this moment..brought to you by th very peon..almost SOLELY RESPONSIBLE for the "Legal Framework" and "Boiler Plate" that has produced the "Mortgage Crisis"..Deragulated the banking Industry..etc..etc..etc..PHIL GRAMM...Way to GO!..McSame! McSame!..McSame!..USA! USA!USA!....
Please..read the Mother Jones article..and you will UNDERSTAND WHO and WHY and HOW...I was AMAZED!...
Knowledge is DANGEROUS..as a result..Freedom isn't free!
Eric J-D,
Check out this link:
http://www.commondreams.org/archive/2007/04/19/635
This might give you a bit of insight as to why some of us would like to see Freddie Mac and Sallie Mae collapse.
Paul Krugman got to the heart of the problem of the proposed bailout of Fannie and Freddie. That problem stems from Fannie and Freddie's mixed nature: they are private companies that are government sponsored and (implicitly) underwritten.
In Krugman's words that means that "profits are privatized but losses are socialized" ("Fannie, Freddie, and You" NYT 7/14/2008).
It may very well be the case that Fannie and Freddie are simply too big and too important to be allowed to fail. If they were allowed to fail, it would certainly have disastrous effects on the American economy, leading to further defaults on mortgages, a decrease in the ability of banks to extend loans, etc. But the government's assurance that it will back the two firms could have other terrible consequences for the economy. The government's willingness to add to the U.S.'s already enormous national debt burden will no doubt prompt further devaluation of the dollar as investors grow skeptical of the government's ability to cover the nation's financial risks.
In many ways this is a damned-if-you-do damned-if-you-don't situation.
When you find your public services cut, government fees increased, regressive taxes up and inflation and job insecurity gnawing away at your family life...remember it is all to pay the bond holders who have wisely invested in Fannie Mae and Freddie Mac with the understanding that the US Government will bail them out at the tax-payers expense. And who hold huge chunks of bonds in the Freddies and Fannies (among others - including big American institutional investors) the Chinese, Russians and Gulf States. So - hello Argentina - watch your savings melt away and pension denominated in toilet paper! The flag-waving, taxpaying American chumps will pay at the pump and pay through the nose to prevent the whole game from imploding. And largely to finance our splendid little war for Israel (which was...according to Wolfowitz and Feith) ...supposed to pay for itself!
wolf123,
Yes, and the S&L scandal in the 80s. Even though I was quite a bit younger then, I do remember Congress' (empty) promise. I fully agree with you about Congressional term limits.
claudius July 14th, 2008 4:43 pm
More like the S&L scandal in the 80's. Remember congress (demorats and repusakins) promising this would NEVER happen again. They would put in oversight safeguards. right, IT'S TIME WE THE PEOPLE DEMANDED TERM LIMITS ON CONGRESS. Two terms and YOU ARE out!!!
This is very reminiscent of the Gilded Age.
Outrageous! In how many ways is this the wrong thing to do?
These two politically well-connected Companies have been eating at the trough of government largess for decades. Fannie Mae - every government guaranteed student loan. They get a cut (5%) on each for "processing and maintainance" PLUS the ever increasing Interest.
These Corporations made BAD business decions based on unmitigated greed. They are financially AND morally deserve to go Bankrupt.
Moreover, when the Government "buys into" a Company, that is tantamount to Nationalizing that Company. I thought that was anathema to the "Free Market"???
What kind of Control will exist? Will some US Treasury officials sit on the Board of Directors??
Speaking of the "Free Market"...what does all of this really say about the incredible shenagans of these Crooks in high places ! Totally unregulated Cosmic Criminals. Now, we, the Taxpayers are going to Bail them out???
Their collective asses should be Prosecuted FIRST, throw them in Jail, THEN confiscate all their Assets ! Just like we do with common criminals.
This money can then be used to help as many Mortagees as possible.
The Freddie Mac auction looks like a success. Bullet dodged. But we're not out of the woods yet on this.