Bailout of US Mortgage Firms Designed to Ease Worry Over American Economy

The big news of the day is the US government’ “rescue” of giant mortgage firms Fannie Mae and Freddie Mac. It is hoped the move will calm fears about the US economy and restore some stability to the US housing market. The two firms own or guarantee close to half of the $12 trillion in outstanding mortgage debt in the US, but have close to $1.6 trillion in debt outstanding.

Mounting losses were the driving force behind the bailout decision.The two firms have been placed into a government-controlled conservatorship, which allows their stock to continue being traded while putting common shareholders last in line for any claims. As reported on globeandmail.com, stocks in both companies plunged on the news, as investors reasoned that the move would “wipe out shareholders but fully guarantee their bonds.” The news was welcomed by many Asian central banks who are some of the biggest holders of the companies” bonds.

Equity markets around the world surged when the bailout was announced, in hopes that the long-awaited government action would restore faith in shaky world financial markets.