US Government seizes control of the mortgage giants to protect global economy

The US Government has seized control of mortgage finance companies Freddie Mac and Fannie May in a desperate bid to prevent global financial turmoil and the potential collapse of the US banking system.

The US Government has seized control of mortgage finance companies Freddie Mac and Fannie May in a desperate bid to prevent global financial turmoil and the potential collapse of the US banking system.

Freddie and Fannie own or guarantee almost half of America’s $12 trillion in outstanding home mortgage debt, and government officials were concerned that the mounting losses at both companies was undermining the parlous state of the US housing market and wider economy.

“Our economy and our markets will not recover until the bulk of this housing correction is behind us,” US Treasury Secretary Henry Paulson said overnight. “Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

President George Bush said that the US regulator, the Federal Housing Finance Agency, had determined the two companies couldn’t continue to operate safely and soundly.

“Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing.”

The Government has sacked management at both companies and will take a $US1 billion stake in both companies. It could inject up to $US100 billion in each firm if needed.

While the bailout – which commentators are already calling the biggest in financial market history – shows just how desperate conditions are in the US economy, bankers and traders across the world will be breathing a sigh of relief that the Government has stepped in.

More than 60 central banks own stock in Freddie Mac and Fannie Mae, as do several large US investment banks.

The Australian sharemarket, the first to trade since the US Government’s announcement, has surged more than 2% this morning, with bank stocks leading the way.

Read more on Freddie Mac and Fannie Mae

 

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