Tuesday, September 9, 2008

Freddie Mac Fannie Mae Bailout

Readers Question: Interesting article (Nationalisation of Freddie Mac and Fannie Mae). But could you explain what do you mean by "The banks need to be nationalised because of an unprecedented rise in mortgage delinquencies (an American term for mortgage defaults) leaving investors nervous about whether they could survive." Who could survive? The investors, or the banks. - William Wallace

The markets were concerned that the big two banks were at risk of becoming insolvent under the weight of bad mortgage loans. Between April and June they lost over $3bn. They tried to raise money on the financial markets, but, this was becoming difficult because nobody wanted to lend them money with more losses still to come.

The two mortgage lenders supply funds to nearly all major US banks and mortgage companies.

It is to prevent the two big mortgage companies going bankrupt that the Fed effectively nationalised the Bank. Existing shareholders in Freddie Mac and Fannie Mae, will be the last to be reimbursed. It means if losses mount the old shareholders will probably lose everything. (The Share price fell to $1)

Good article here at BBC - Freddie Mac and Fannie Mae

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