US Government stages world's biggest bail out
WASHINGTON – The world's biggest financial bail-out was staged by the American government in a bid to ease the global credit crisis.
The country’s two biggest mortgage companies were nationalised amid fears that their bankruptcy would have triggered an economic collapse.
The multibillion-dollar rescue of Fannie Mae and Freddie Mac – dwarfing the UK nationalisation of Northern Rock – will be funded by the American taxpayer.
It represents a potential liability of £2,900 billion. The move was welcomed by mortgage experts in the UK, who said it should inject some confidence into the British housing market, which is suffering from the steepest fall in prices since the 1930s.
The credit crunch began in America last year when banks saddled with huge mortgage debts began to foreclose on loans to millions of borrowers.
Although experts do not anticipate an immediate impact in the UK, they hope it will at least stop the rot in the housing market.
Jonathan Cornell, managing director at Hamptons mortgage broker, said: "I don’t think we should expect a white knight to come riding to the rescue of the UK market as a result of this. But it should help give confidence to international lenders to lend to British banks and building societies."And anything that supports the UK mortgage market has to be welcome. It’s a slow step to recovery."
Fannie Mae and Freddie Mac guaranteed about half of all of the home loans sold in the United States, but had run into severe difficulties as a result of the plunging American housing market which had seen hundreds of thousands of American home owners default on their mortgages.
Shares in both companies had fallen by more than 80 per cent in the last six months. The US government announced it would take control of the two companies, wiping out the value any shares that shareholders owned in the company.
However, holders of its mortgage-backed bonds should see their investments guaranteed.
Henry Paulson, the US Treasury Secretary, said: "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
However, he admitted that the move came at an unknown cost to America taxpayers, saying: "In the end, the ultimate cost to the taxpayer will depend on the business results… going forward."
The takeovers will also see the departures of the chief executives of both firms, to be replaced by hand-picked outsiders from well-known financial institutions.
Investors hope the move will be welcomed by stock markets around the world when they open for business.
The FTSE 100 index of leading shares endured its worst week in six years last week, falling by 7 per cent. The fall was, in part, prompted by figures which showed house prices in Britain were starting to fall almost as steeply as those in America, with the average price down by 12.7 per cent compared with a year ago – the worst annual fall since the 1930s, according to economists.
Ruth Lea, economic advisor to the Arbuthnot Banking Group, said: "This is good news for the global economy. The Fed has clearly take a view that to allow these two to go under would have been horrendous."
The sharp fall in UK house prices has been partly driven by British banks and building societies becoming increasingly nervous about lending to consumers.
Many institutions are worried that the assets that they hold are worthless because they are linked, either directly or indirectly, to the US mortgage market. The majority of UK financial institutions, from high street banks to pension funds, own mortgage-backed bonds issued by Fannie Mae and Freddie Mac.
With the US guaranteeing their value, these institutions should feel more confident about lending money to British consumers, including home buyers, experts said.
Ray Boulger, of mortgage broker John Charcol, said: "This is effectively the US doing a Northern Rock – nationalising part of its mortgage market. If the US government is guaranteeing the bonds, it should allow companies, including UK investors, to feel more confident.
"The problems in the US won’t go away, but the US government might have stopped them getting worse."
The full value of the rescue package will dwarf the UK government’s bail out of Northern Rock, with the US mortgage market worth £5,800 billion, but the rescue has been prompted by similar fears about their collapse.
The bail out also has similar political echoes, with both presidential candidates briefed over the weekend by the US Treasury about the deal they will be forced to inherit.
Sarah Palin, McCain’s vice-presidential running mate, said that Fannie and Freddie had "gotten too big and too expensive to the taxpayers," promising that if successful, she and McCain would make them "smaller and smarter and more effective for homeowners who need help."
It is not clear whether the Republicans, if successful, will be able to deliver on that promise.
At the weekend, the chief executive of Britain’s largest mortgage provider said the credit crunch is likely to last until 2010.
Andy Hornby, the chief executive of HBOS, said that he believed the global financial turmoil would continue for at least another 18 months. Confidence on both sides of the Atlantic would only return when the American housing market starts to recover.
Until then, Hornby said he did not believe American investors would put their money back into British banks.
As about two-thirds of wholesale funding received by UK banks comes from overseas, this means there will be less money for mortgage lending. He also implied that there was little the government could do to rectify the crisis.
Last week Gordon Brown announced a stamp duty gap year for people buying properties with a value of less than £175,000, in an attempt to re-energise the housing market.