This followed a plan announced in July 2008 that allowed the U.S. Treasury Department to guarantee as much as $25 billion in loans held by the two corporations, who held or guaranteed more than $5 trillion, or half, of the nation's mortgages. Wall Street's fears that these loans would default 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?)
Former U.S. Treasury Secretary Henry Paulson was the major force behind the bailout, which was introduced to reassure financial markets that the banking system was solid soon after the failure of IndyMac Bank. However, many banks were still in jeopardy, since they also owned much of the $36 billion in preferred shares of Fannie and Freddie. These would become worthless if the government took the next step, putting the GSEs 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 had a $9 trillion national debt at the time. In fact, the provision to allow the debt level to be raised to over $10 trillion was acknowledgment of who exactly will be footing the bill for the bailout. Global concerns about the sustainability of this debt depresses the dollar, raising the price of imports. (Article update September 5, 2010)
