Thursday, July 17, 2008

Fannie Mae and Freddie Mac

Why should the world be concerned about these US housing mortgage companies’ health?

It was on 13th July that we noted first about them. Look at it here. Their full names are Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). One can’t help but feel a sense of déjà vu when reading about them again and again. The figures being reported about their liabilities keep going up.

The two institutions are now reported to have bought or guaranteed almost half the $12 trillion housing mortgages. As government-sponsored entities, their debt had been regarded as almost as good as gilts and hence is held by many central banks worldwide. Amazingly, it now transpires that their direct and guaranteed liabilities were almost 65 times their regulatory capital at the end of the first quarter.

The US government is trying to rescue the mortgage giants whose shares came under acute selling pressure last week on fears that they are not adequately capitalised. Under the plan, the US treasury will be authorised to increase its existing $2.25 billion lines of credit to Fannie and Freddie. No wonder the treasury plan, which is set to add some or all of their $5,000 billion in liabilities to the government’s balance sheet, more than half the US national debt of about $9,000 billion, has shaken already fragile world confidence in the US economy.

In the light of this, can the dollar remain strong? If the world’s central banks start withdrawing or redeploying their funds from them, that is enough to send the dollar down.