US Financial Crisis: Fannie Mae and Freddie Mac at the Core
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Code : ECC0022
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Region : US |
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Fannie Mae and Freddie Mac In 1930, during the Great Depression, many mortgage borrowers defaulted on their payments leading to the erosion of cash with banks. As a result, banks could not afford to give home loans and hence mortgage market collapsed. In 1938, to provide liquidity for home loans, President Franklin Roosevelt's New Deal created Fannie Mae. The Failure of Mortgage Giants: Federal Takeover From 1970, Fannie Mae and Freddie Mac ruled the secondary mortgage market in US. The two giants, by linking lenders and investors, provided continuous funds to the housing market. Government support enabled these two companies to borrow funds at low interest rates from foreign and domestic investors, thusmaking their funding cheaper to the needy. The investors were confident about the companies because of the loans they guarantee (They were not into guaranteeing subprime lending initially). The giant twins made earnings from the difference in interest rates – difference between the high interest paid by borrowers and low interest charged by lenders. |
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The Bailout of Fannie Mae and Freddie Mac The bailout of the twin giants is analysed in different ways by many analysts. It is opined as an act of preventing impending doom in the US financial system and more specifically in the housing market.
Alan Greenspan, former chairman of US Federal Reserve, defended the bailout by saying "This is a once-in-ahalf- century, probably once-in-a-century, type of event. I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions – and this is one of them – it's desirable to prevent them from liquidating in a sharply disruptive manner."
