HERE IT GOES

The current global financial crisis has resulted into nationalisation of Fannie Mae & Freddie Mac in United States and has affected banks and economies worldwide. Here, In Australia the collapse of US banking giant (Lehman Brother) has impacted Blue Mountains City Council’s (NSW -Australia) only because it has $11million in investments administered by the banking behemoth (Lehman Brothers). (DAMIEN MADIGAN - Blue Mountain Gazette 17/09/2008). $14.5 trillion, or 33%, of the value of the world’s companies has been wiped out by this crisis (Anup Shah - Global Issues March 2, 2009). It remains to be seen the long lasting effects of current financial crisis on all economies.

One of the simple reason for other economies getting affected due to this event was because its financial system has direct or indirect exposure to US sub-prime mortgage market. Adam Davidson reports that failure of Freddie and Fannie might have eclipsed great depression of 1929. Fannie Mae and Freddie Mac, the twin giants of the home mortgage industry, own or guarantee assets of $5.3 trillion, almost half of the $12 trillion housing market in the U.S. These assets have been disappearing in value due to the collapse of the housing bubble. So, It can be very well imagined the situation if they were not nationalized. According to congressional budget office their bailout would cost American taxpayers anywhere between zero to $100 billion dollars while the U.S. government’s commitment to solving the financial crisis has already tuned to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages. (Mark Pittman and Bob Ivry Feb. 9 - 09 (Bloomberg)

Former Finance Minister of Italy comments "The bankruptcy of Fannie and Freddie would have meant Armageddon." Further Adam reports that majority of banks around the world own bonds from both this mortgage agencies and their failure would had made this bonds of far less value. Peter Costella for Australia pointed out that for such a long period of time, the U.S. was a force for stability in world markets but know this example has set exporting instability of United States. (NPR April 20, 2009 Adam Davidson)

All OECD countries are facing financial crisis at this point of time and with dropping interest rates around the world all of them are coming with stimulas package to improve economic situation. It should also be notes that difference in Finance industry regulations here and in the US are stark. The five major banks are underwritten by the Fed (Reserve Bank of Australia) and reporting, compliance, share market requirements and company law are far stricter. The effect of profit-driven FanMac affair has proven costly not only to US homeowners but also here in Australia and throughout Europe which is an alarm bell for financial regulators, customers and the media alike. US citizens and free market economies through-out the world must demand financial law reform in the US. Aussie families are losing their homes as we also suffer from exposure to the credit crisis caused by low-doc loans written by FanMac and co (NPR April 20, 2009 Adam Davidson).

Global leaders (G20) have pledged an additional $1 trillion to restore credit, growth and jobs in the world economy recently, exceeding expectations in their plan to deal with the financial crisis. The Group of 20 nations also agreed to renounce protectionism outlined a raft of policies to rebuild trust in the financial system (AP Business Writer Jane Wardell Apr 2,08).

Fannie Mae is a Government Sponsored Enterprise (GSE)—a monopoly with special privileges, including borrowing money below market-interest rates, exemption from state and local taxes, and a credit line at the U.S. Treasury. It was created by Congress during the Great Depression to provide stability and liquidity in the US mortgage market thereby raising the levels of home ownership and the availability of affordable housing. Fannie Mae and Freddie Mac play central — if quiet — roles in maintaining the U.S. position in the global economy (On Feb. 17, the Wall Street Journal).

Fannie Mae’s stock value has dropped to less than a Dollar due to current financial crisis in US. Its primary aim was to accumulate huge profits for its corporate heads and big-time investors but that got adversely affected due to the unexpected housing market collapse.

Fannie Mae being the largest non-bank financial services company in the world and its junior partner, nicknamed Freddie Mac, have grown rich over the years. Their combined assets are 45 percent greater than those of the nation’s largest bank. On the other hand, their combined debt is equal to 46 percent of the current national debt which explains Federal reserves step of nationalising both Fannie Mae and Freddie Mac. (Fannie Mae.com - Wikipedia).

Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties they may be having. In the event of financial collapse, investors believe U.S. taxpayers will be responsible for hundreds of billions in outstanding debt.

One of the primary reason for nationalising of Fannie Mae was that if it went down, the entire housing industry would had collapsed. The mortgage behemoth is integrated into Wall Street banks and other major financial institutions. Fannie Mae borrows from the banks, which profit from unloading high-risk mortgage portfolios back to them. Fannie Mae in turn packages and guarantees these volatile high-risk mortgages, and sells them to the highest bidders in the billion-dollar secondary mortgage market. It receives high fees for the same.

Since European and Asian banks, private and public, have invested billions in the U.S. housing market, any significant downturn would have incalculable worldwide repercussions.

The collapse of America’s Fannie Mae and Freddie Mac necessitated a bailout of the highest order, because if the two institutions, which form a linchpin of the housing bubble and in fact the entire financial system, were allowed to crash, dozens of major banks would be right behind them.

Also, the current global financial crisis in the US has resulted into job losses for Fannie & Freddie directors and top executives, Shareholders losing on their dividends, voting rights, and most importantly their ownership stake, while agreeing to pay dearly for the government’s money and backing. On the other hand, unharmed will be holders of trillions of dollars in Fannie and Freddie debt — or securities backed by mortgages that Fannie and Freddie have insured against default — who will get all their money back, with interest.”

It is very important that government protects debt holders, because this includes foreign governments like China, as well as sovereignty funds, mutual funds, and pension funds worldwide. If these international investment sources dry up, the U.S. could no longer finance its enormous fiscal and trade deficits. It’s the Armageddon scenario.

Thus within the overall context of the debt-based financial system run by the Federal Reserve, Fannie Mae and Freddie Mac are the most important business entities in the U.S.—more so than Exxon-Mobil, Microsoft, General Motors, GE, or IBM.

Big companies like Exxon-Mobil at least have tangible assets they use to produce real goods and services. But the financial industry—including Fannie and Freddie—have only pieces of paper that represent someone’s ability to make payments in an economy going downhill, with thousands of people losing their jobs daily.

For the last decade, the U.S. economy has been built on a foundation of housing debt as its financial engine. It’s a foundation of sand. The lunacy has been a long time coming, though the “rest of the story” is little known, even to experts.

Few decades back, the international financial elite which runs the Western world decided that the U.S. would no longer be allowed to maintain its status as the world’s greatest industrial democracy (Introduction of Euro).

In 1999, then President Bill Clinton instructed the Fannie Mae Corporation to ease credit requirements on loans to ethnic minorities and low-income earners. In this nationwide scheme, the pilot program alone involved 24 banks. This was to include what became known as the sub-prime sector. Fannie Mae's chairman and chief executive in 1999 said that in addition to "reducing down payment requirements" the corporation would underwrite loans in the sub-prime market.( The Australian, Oct 1-2008)

Fannie Mae was exempt from taxation and with any losses guaranteed by public monies, although shares of profits go overwhelmingly to investors, executives and board members with shares. Fannie Mae held a virtual monopoly of what became known as the US secondary mortgage market until 1968, when Lyndon B. Johnson converted it into a private corporation or, rather, a government-supported enterprise.

It is important to note that Fannie Mae does not lend money directly to consumers, it purchases loans that banks make on the secondary market. This was made possible by Fannie Mae being allowed, uniquely, to borrow money from overseas at low interest rates backed by the US government. It passed this on to borrowers in low down payments and fixed rate mortgages.

However, the strategy announced in 1999 was to spur the banks to make more loans to people with poor credit rating, and especially to blacks and Hispanics. Not everyone was convinced this was a good idea. Peter Wallison of the American Enterprise Institute warned: "If they fail, the government will have to step up and bail them out." The US Senate finance committee in 2005 considered a bill to increase scrutiny of Fannie Mae and its accountancy mechanisms. By this time, combined debt at Freddie Mac and Fannie Mae was equal to 46 per cent of then national debt. The then US Federal Reserve chairman, Alan Greenspan, warned of forthcoming financial collapse if Fannie Mae's activities were not reined in. The trigger that caused the bubble to burst was the raising of interest rates by the Federal Reserve in 2006 and 2007, to ward off a perceived risk of inflation. This sent mortgage payments through the roof and hundreds of thousands of Fannie Mae's customers defaulted on their payments. To make matters much worse, the banks had been buying and selling loans from each other before selling them to Fannie Mae. With the collapse in the housing market came the collapse of Fannie Mae and the loans it had purchased from the banks. Before long, the banks were collapsing too, not all of them but those that had bought and sold sub-prime loans. Defaults are now running at almost 3per cent of all mortgages in the US, representing hundreds of thousands of loans.(The Australian, Oct 1-2008)

The culprits in all of this are the executives and board members of Fannie Mae for buying unsecured and risky loans, the Federal Reserve for putting up interest rates too far and too quickly, and the banks for what almost amounts to pyramid selling of bad debt based on fools' mortgages. Fannie Mae's structural flaws were an accident waiting to happen.

But there is another culprit. The Clinton administration, in pressuring Fannie Mae, created the policy of lending initially good and then bad money to people who were themselves bad credit risks. This was done for good political - not to say politically correct - reasons: the targeted extension of home ownership to minority groups. But this social engineering has been achieved at a heavy cost, not least to those who have lost their houses and taxpayers who may now have to pick up the cost of an emergency package.

Alternatively, there are mortgage insiders who believe that the housing bubble was created to allow George W. Bush to fight his wars of conquest in the Middle East. Once Bush became president it begin the wholesale falsification of mortgage applications so people could buy houses who had no business doing so. A push by state attorneys-general to investigate the mortgage fraud was blocked by Bush’s Treasury Department.

The bubble resulted in the tremendous inflation of housing and real estate prices that today is unraveling. Housing is still so overpriced, however, that many people can no longer afford to buy a home or can no longer get credit because financial institutions have become so reluctant to lend.

Housing inflation has powered the U.S. economy for the last decade. In its heyday it accounted for fifty percent of all economic growth. Take away the housing bubble, and the U.S. economy is dead in the water. That is why the government has taken over Fannie Mae and Freddie Mac. Unfortunately, there are no further bubbles waiting in the wings. When they gave up their homes to debt, the American people gave up the last thing they owned of value.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Lehman Brothers was the fourth-largest investment bank in the United States.

It was considered one of Wall Street's biggest dealers in fixed-interest trading and was heavily invested in securities linked to the US sub-prime mortgage market. Its exposure to hard-to-value mortgage-backed securities.

had adverse effect on its balance sheet. already the US tax payer has been put at risk of shouldering the burden of billions of dollars of losses, and it is becoming politically less acceptable for the government to keep bailing out private companies. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.