This follows a plan announced in July that allows the U.S. Treasury Department to guarantee as much as $25 billion in loans held by the two corporations, who hold or guarantee more than $5 trillion, or half, of the nation's mortgages. Wall Street's recent fears that these loans would default have caused Fannie's and Freddie's shares to tumble, making it more difficult for these private companies to raise additional capital themselves. (For more, read What Is the Fannie and Freddie Bailout?)
U.S. Treasury Secretary Henry Paulson is the major force behind the bailout, which was introduced to reassure financial markets that the banking system is solid soon after the failure of IndyMac Bank. However, many banks are still in jeopardy, since they also own much of the $36 billion in preferred shares of Fannie and Freddie. These would become worthless if the government takes the next step, putting the GSE's into receivership. (Source: CNN Money, Government Seizes Fannie and Freddie, September 7, 2008)What It Means to You
Fannie Mae and Freddie Mac buy mortgages from banks, a process known as buying on the secondary market. They then package these into mortgage-backed securities, and resell them to investors on Wall Street. The entire financial system is built on trust. That trust was shaken by the Subprime Mortgage Crisis.The Federal government is stepping in to restore that trust by promising to bail out at least $25 billion in bad loans. It was meant to keep the housing slump from getting worse. Unfortunately, it is all being funded by the U.S. Government, which already has a $9 trillion national debt. In fact, the provision to allow the debt level to be raised to over $10 trillion is acknowledgment of who exactly will be footing the bill for the bailout. Global concerns about the sustainability of this debt continues to depress the dollar which raises the price of imports.
