Fannie Mae and Freddie Mac
Fannie Mae (FNMA) and Freddie Mac (FHMLC) as the most important players on the secondary mortgage market and great providers of loans and financial derivatives for investors and stock-holders have particularly crucial influence on the American economy. They are government-sponsored and, hence, are in the sphere of interest of international investors, including states and national banks. Current fiscal and mortgage crisis severely hit American economy and affected the majority of banks, financial institutions and companies involved in mortgage market.
Freddie Mac and Fannie Mae were not the exception, as their credit resources were lost, leaving extensive debt obligations. FRS policy after September 2007 were directed at easing the consequences of the crisis and revitalizing credit capacities and liquidity of Wall Street banks and FNMA and FHMLC. However, as the crisis has proven to be so severe and deep that even extensive decreasing of FED discount rate and massive credit bail-out did not prevent from bankruptcy such banks as Bear Stearns.
Fannie Mae and Freddie Mac, which are the corner stone and the main regulators of US mortgage market and moreover, the own more than half of its 6 trillion share. Their possible bankruptcy can have negative effects on the future of US economy and its credibility vis-a-vis international investors and international community. In current research paper, we will attempt to analyze Freddie Mac and Fannie Mae role in the contemporary financial crisis, evaluate possible actions on the half of FED and American government and assess consequences of these companies’ upcoming nationalization.
Financial crisis in the United States – the consequences for Freddie Mac and Fannie Mae. Companies’ background Fannie Mae (FNMA) is in private ownership and is considered to be sponsored by American government. Its primary activity is to provide with loans and various loan guaranties for the wide spectrum of investors and creditors including banks, foreign state banks etc.
The importance of Fannie Mae for the American economy may be understood, if we pay attention to the fact that it is the most crucial market-maker in the American mortgage market, which makes it possible for banking institutions to provide housing companies with loans, which are necessary for creating booming housing sector . (Muolo, Padilla, 2008). Together with Freddie Mac as of 2008, Fannie Mae guarantee and owned approximately the half of the American huge mortgage market (Roubini, 2008). Freddie Mac as the second largest institutional player at the mortgage market has also effect on the future of the American economy.
During the conservatorship process start the US Treasury acquired nearly and $1 billion of the Freddie Mac stock, which means paying at the rate of nearly 10% annually, and as the analyst predict, the total cost of investments may consequently rise to 100 billion dollars (Christie, 2008) The subrime mortgage crisis in 2007-2008 in the United States had a devastating consequences for the stability of the abovementioned companies, which has potential risk for further downturn of housing market, skyrocketing inflation, dollar crisis and booming prices on oil.
All of these components are interconnected phenomena and are the most crucial parameters for every economy, not to say about the American one (Rodrigue, 2008). The crisis on the mortgage market resulted in massive “non-return” of financial liabilities and loans of booming housing companies to their investors, among which Fannie Mae and Freddie Mac were the most prominent. As the result, Fannie Mae and Freddie Mac experienced the massive extension of their own debt liabilities vis-a-vis other investors, financial institutions, foreign Central Banks and what is more important American citizens.
The circle closed, resulting in the greatest crisis in the United States since Great Depression of 1929-1932. Russian Central Bank, for instance, is one of the basic holders of Freddie Mac and Fannie Mae financial obligations, risks to loose its important assets in the case of their bankruptcy. Freddie Mac capitalization value have fallen to its history lows and it was worth of one US dollar as of September 8, 2008 . Besides this, Fannie Mae and Freddie Mac crisis resulted in FRS changing its fiscal and financial policies.
To save almost bankrupt companies, the FRS initiated extensive decreasing of the discount rate and produced massive bail-out, giving cheap money on low and not urgent interests to these companies in order to restore their liquidity. These efforts on behalf of FRS had immediate negative effects on the American economy and its future prospects. The inflation immediately skyrockets and the dollar exchange rate essentially decreased vis-a-vis Euro and other important international currencies.
Hence, as we can see, the crisis inside Fannie Mae and Freddie Mac, almost immediately affected American investment climate, purchase ability and well-being of the American citizens and the soundness of the entire American economy. All American institutional creditors and Asian Central banks in particular experienced tremendous losses from the rising American debt and devaluation of U. S. dollar. Besides this, the attempts to make leverage on Fannie Mae and Freddie Mac debts was not successful, resulting in the further deterioration of their financial position.
In this situation FRS further decreased discount rate and interests, announced compensations for all Bear Stearns investors, which suffered losses of this bank bankruptcy, and attempted to attracted loans into its Treasury papers from Middle East states such as Saudi Arabia and Qatar, which welcomed such kind of propositions. However, all these measures should be regarded as palliative actions, as the crisis is so deep that it is considerably difficult to avoid its future negative consequence not only for the American economy, but global economy as well.
The role of Fannie Mae and Freddie Mac in the future of the American economy essentially depends on the upcoming policies of the FED, and namely the dilemma of their nationalization. The possible nationalization of Fannie Mae and Freddie Mac is something that bothers all stakeholder involved in the process and will be analyzed in the next section of this research paper. Possible Fannie Mae and Freddie Mac’s takeover by the American state and its consequences
On the 7th of September, 2008 FHFA director James Lockhart said that he put Fannie Mae and Freddie Mac under the process of conservatorship (Goldfarb, Cho and Appelbaum, 2008). As Goldfarb, Cho and Appelbaum state, that action is “one of the most sweeping government interventions in private financial markets in decades” (Goldfarb, Cho and Appelbaum, 2008) This process dates back to July 2008, when American government representatives implemented measures aimed at easing financial crisis’ consequences for this companies.
Treasury representatives then said that Fannie Mae and Freddie Mac play the central role in the US housing market system and must be helped. Treasury Department and FRS took important steps to increase corporations’ confidence in Fannie Mae and Freddie Mac credibility. However, notwithstanding significant privileges and bail-outs for these corporations and investors, Freddie Mac and Fannie Mae stocks tumbled down by 90% from the previous year reports. Finally, On August 27, 2008 after the changes took place in Fannie Mae leadership with David Hisey becoming a new financial director of this company.
According to information from various resource close to American government, FRS now plans to crease a single stock for this two companies and appoint new officers, which practically means full nationalization of Fannie Mae and Freddie Mac, which if happens, would be the most enormous nationalization in the world history. It is important to note that the value of the common stock would be significantly diminished in order to maintain the liquidity and value of these companies.
The consequences of these actions for American economy are already evident. The national debt may increase to approximately $10,7 Trillion of dollars . (Herszenhorn, 2008). As a result, the tax burden for the American citizens also increase with additional 6 trillion of public debt distributed between taxpayers. American government also becomes the larges owner of hedges and assets in the world as it can inject over 200 billions of dollars into Fannie Mae and Freddie Mac.
If this nationalization happens, it will also be the largest leverage buy-out (LBO) in the world history with tremendous negative effects on the American citizens. To sum it up, we have analyzed the role of Fannie Mae and Freddie Mac in the current financial crisis and researched their impact on the future of American and global economy and found out that the prospects are not so optimistic. Works Cited Christie, Rebecca (September 7, 2008). “Paulson Engineers U. S. Takeover of Fannie, Freddie (Update4)”, Bloomberg.
Retrieved on 2008-09-07 from http://www. bloomberg. com/apps/news? pid=20601087&sid=ajcw4yxxPGJ8 Goldfarb, Zachary A. ; David Cho and Binyamin Appelbaum (2008). “Treasury to Rescue Fannie and Freddie: Regulators Seek to Keep Firms’ Troubles From Setting Off Wave of Bank Failures”, Washington Post, pp. A01. Retrieved on September 9, 2008 from http://www. washingtonpost. com/wp-dyn/content/article/2008/09/06/AR2008090602540. html? hpid=topnews Herszenhorn, David M. (2008-07-31). “Bush Signs Sweeping Housing Bill”, New York Times.
Retrieved on September 9, 2008 from http://www. nytimes. com/2008/07/31/business/31housing. html Labaton, Stephen; Andres Ross Sorkin (2008). “U. S. Rescue Seen at Hand for 2 Mortgage Giants”, New York Times. Retrieved from on 10 September, 2008 http://www. nytimes. com/2008/09/06/business/06fannie. html? _r=1&oref=slogin Prof. Tremblay Rodrigue (2008). ”A Fed Panic and a Massive Bailout of American Banks Paid for by the Entire World”. Global Research. Retrieved on September 10, 2008 from Global Research.ca: Center of the Research of Globalization Muolo, Paul, Padilla, Matthew (2008).
Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis. Hoboken, NJ: John Wiley and Sons. Roubini, Nouriel. “Nationalization of Fannie and Freddie: Most radical regime change in global economic and financial affairs in decades”. Global Research. ca: Center for the Research of Globalization. Retrieved from on 10 September, 2008 from http://www. globalresearch. ca/index. php? context=va&aid=10126
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