Sunday, September 07, 2008

Fannie-Freddie Mae-Mac

This is the third time this year that the US authorities have made a big policy announcement – seizing control of battered mortgage behemoths Freddie Mac and Fannie Mae - on a Sunday. The first, on March 16, provided emergency support by the Federal Reserve to investment banks. It generated a rally in global markets that lasted only two months before grim reality set in again.
The second, on July 13, signalled that the government’s wallet stood behind Freddie and Fannie. This yielded market relief for just a month. In both cases, the affected segments of the US economy did not have enough time to clean up the debris and start the rehabilitation and reform process.

It just means de facto government control, though the Bush administration had been careful in not using the word Nationalization – in the US they call it `bailout’. Fannie and Freddie have $5,400bn in outstanding liabilities and guarantee three-quarters of all new US mortgages.

The objective - to bring down mortgage rates and ease financial market stress by making it clear that debt securities issued by these firms are safe since the US government will not allow either of them to fail. Outright government buying of new Fannie and Freddie mortgage-backed securities, plus increased government financial support for the companies should bring down spreads on the securities they issue, reducing the cost of mortgages.

These are days like never before. Let’s see if the levees hold!!!

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