The Guardian 23 July, 2008
US government bails out mortgage giants
The US federal government unveiled a broad program to bolster troubled mortgage giants Fannie Mae and Freddie Mac, extending unprecedented support to the companies and proposing new authority to lend them money and even buy their stock.
Officials are also seeking permission from Congress to temporarily increase the amount the companies can borrow from the Treasury and enable the government to invest directly in the firms if conditions worsen. The two firms, which dominate the market for US mortgages, have been reeling amid investor concern that the companies might not have enough capital to handle their losses due to the rising number of bad home loans. Both firms’ stocks plummeted by almost half last week.
The Federal Reserve announced that it would allow Fannie Mae and Freddie Mac to borrow money on an emergency basis. The firms, should they experience a cash crunch, will be able to exchange certain assets for cash at the Fed’s discount window, a privilege long enjoyed by commercial banks and extended in March to struggling investment banks.
If Fannie Mae or Freddie Mac collapsed, it could cripple the US housing market, dealing a staggering blow to the wider economy, and would saddle the federal government with massive debts if it chose to seize control of either firm.
"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. [It] is important to maintaining confidence and stability in our financial system and our financial markets," said Treasury Secretary Henry Poulson.
Using taxpayers’ money
The Treasury secretary will also have the authority to invest government money in the firms by buying their stock, a step that would only be taken if the firms don’t have enough capital and are unable to raise it on private markets. "Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer," Paulson claimed.
The government’s actions are the most extensive intervention into the financial world since the US Fed rescued Wall Street investment bank Bear Stearns from bankruptcy in March. The present measures are designed to allow the companies to continue their roles making funding available for Americans to buy homes. Freddie Mac’s shares have tumbled 88 percent since their high in 2006, and Fannie Mae’s stock is down 85 percent since its most recent peak last year. Separately, the Securities and Exchange Commission announced yesterday that it and other regulators will immediately begin to examine whether securities prices have been manipulated by the intentional spread of false information. This action was timed in part to coincide with the government’s announcement on aid to Fannie Mae and Freddie Mac.
The Californian based bank IndyMac also faced a run by deposit holders last week but was also bailed out by the US government. A number of other smaller US banks are said to be running into difficulties as well.
The action by the US government shows yet again that the government and the Treasury are there to protect and finance capitalist enterprises whenever they get into trouble. They have no qualms about using billions of taxpayers’ money to shore up the capitalist corporate system. How many bail-outs will the government come up with before the whole system comes cashing down? There is no talk of putting these enterprises under public ownership, only of continuing to maintain that private enterprise is the best and only economic system in the world.