The rescue of Fannie Mae and Freddie Mac announced by Henry Paulson, US Treasury secretary, on Monday was the inevitable consequence of the "marketisation" of banking that has transformed central banks from lenders of last resort to buyers of last resort. These government-sponsored agencies own or guarantee $5,000bn of mortgages, equal to half of US government debt. Full Story »
Posted by Derek Hawkins
Fannie and Freddie have been ticking time bombs since the late 1980s. As Government Sponsored Enterprises, (GSEs) they could borrow money at the lowest cost the Fed provides, buy mortgages with that money, bundle them up into securities and sell them on Wall Street raking in enormous profits. The implied government guarantee erased any investor fears of default. Many warned that sooner or later something will occur that will call the government's bluff on that and taxpayers will end up on the hook. And now it's happened.
