In Augustthe Treasury decided it would send all Fannie and Freddie profits into the general fund. The entire financial system is built on trust. The government tried to avoid taking over the two GSEs, which were supposed to act as private corporation with a government guarantee. That set-up didn't work, and was part of the problem.

Federal takeover of Fannie Mae and Freddie Mac - Wikipedia

Fannie and Freddie took excessive risks to boost their stock prices, knowing they would be bailed out if the risks turned south. Investors rejected even the highly-rated mortgage-backed securities offered by the GSEs. Perhaps they didn't realize how derivatives had exported the subprime mortgage defaults throughout the entire financial world. These loans were also guaranteed by Fannie and Freddie.

Those programs gave borrowers ways to get out from under adjustable-rate loans before interest rates reset at a higher level and make monthly payments unaffordable. Unfortunately, it was too little and too late. Wall Street investors continued to pummel the GSEs stock prices, to the point that they couldn't raise the cash needed to pay off the loan guarantees they held. Stockholders wanted out -- before Fannie and Freddie were nationalized and their investments equaled zero.

Fannie Mae and Freddie Mac Bailout

Wall Street's fears that the loans would default sent Fannie's and Freddie's shares plummeting. This made it impossible for the private companies to raise the additional capital needed to cover the mortgages. Most people don't realize that the July bailout also included:. Paulson appeared on television throughout the weekend.

He warned that the economy would go through months of challenging times. As it turns out, it's been years of challenging times. He admitted, "The three big issues we're facing right now are, first, the housing correction which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high free stock market intraday tips priceswhich are going to prolong the slowdown.

However, he added " And you know, your policy-makers here, regulators, how much money did fannie mae and freddie mac get being very vigilant. AP, "Paulson Braces Public for Months of How much money did fannie mae and freddie mac get Times", July 21, Despite the bailout, mortgage rates continued to rise.

By August 22,rates on a year mortgage were 6. Those fell as investors fled to the safety of government-backed bonds.

Fixed mortgage rates usually closely follow that of Treasury bond yields, since the same type of investors like both. Hence, mortgage rates rose and Treasury yields fell. That forced to nationalize Fannie and Freddie. That's because the two Government Sponsored Entities GSE's are now private companies, and rely on the sale of stocks and bonds to finance their operations, just like any other corporation.

If they can't sell their bonds, which are mortgages, then they may run out of capital to buy stock market traders india mortgages. That would jeopardize binomial model put option housing recovery.

Nationalization meant the Treasury would take over the GSE's entirely, essentially wiping out stockholders' wealth. Fannie and Freddie's stock prices were declining due to fears of nationalization. That only made it harder for the GSE's to raise capital, thus making creating a self-fulfilling prophecy. The other option would be for the Treasury to start injecting large sums of cash to an essentially private company.

The Federal government stepping in to restore that trust by promising to bail out bad loans. It was meant to keep the housing slump from getting worse. Unfortunately, it was all funded by the U. Global concerns about the sustainability of U. However, the greater threat from the eurozone debt crisis has created a flight to safety.

Fannie Mae and Freddie Mac Bailout

When the world is in turmoil, the dollar looks strong, despite the high debt-to-GDP ratio of the U. Search the site GO. US Economy Hot Topics Subprime Crisis Financial Crisis Obamacare Economic Theory Supply Demand National Debt Fiscal Policy Monetary Policy Trade Policy GDP and Growth Inflation U.

Markets World Economy Economy Stats Glossary. Updated August 11, Most people don't realize that the July bailout also included: Approval for the Treasury Department to buy shares of Fannie's and Freddie's stock to support stock price levels and allow the two to continue to raise capital on the private market.

A new regulatory agency to oversee Fannie and Freddie, including executive pay levels. AP, "Paulson Braces Public for Months of Tough Times", July 21, Despite the bailout, mortgage rates continued to rise.

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