Treasury To Save Mortgage Giants

Fanny Mae and Freddie Mac are to be saved from almost certain collapse by the American taxpayer. In an announcement by the US Treasury secretary, Henry Poulson today said that action was needed and Federal Housing Finance Agency (FHFA) Director James Lockhart added

“Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

The FHFA will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. They will take over from the executives in each and will get rid of their dividends.

Fannie Mae and Freddie Mac act as guarantors for 50% of the US mortgage market some $5 trillion. If the companies were to collapse it would send shockwaves through the market place. The financial markets reaction to this news “will be difficult to tell” said Kim Ghattas, BBC Washington correspondent said today.

Is this a sign that the troubled US markets are not past the worst? Will will be the knock-on effects as the US cuts spending in order to counter-balance this enormous injection of funds (said to be the biggest since the Great Depression) in the bedrock of the US home-loans market?