Monday 8 September 2008

Freddie and Fannie - or how the US Government saved the world

Front page news on the free paper this morning (that which is the Metro) was about the $3trn to 'save the world'.

Freddie Mac and Fannie Mae have been (in essence) underwritten by the US Government (by means of the tax dollar) to ensure their continued healthy financial operations. The first thing I was pleased to discover was, despite the pictures of a building labelled 'Freddie Mac' both these institutions have proper names - Fannie Mae is short for Federal National Mortgage Association, Freddie Mac short for Federal Home Loan Mortgage Corporation. My mental images of two old timers from the Wild West - the finely dressed bar lady with the garter and the old chap smoking his pipe on the porch have now gone up in smoke!

The exact function of these two companies is difficult to understand as there is no direct equivalent here in the UK. Essentially they buy mortgages from approved lenders and sell them on to investors. Between them they apparently guarantee (or own) about half the mortgages in the US. Failure of one (or both) would have brought chaos upon the already unstable global financial markets.

The financial benefit is being seen already as shares in Asia and across Europe rose by up more than 3% already today.

As most people agree that the sub-prime mortgage crisis in the US was at least partly (if not wholly) to blame for the start of the credit crunch it is only right that the solution to the problem should start on that side of the pond too. The BBC had this excellent article on who is to blame for the credit crunch.