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Ongoing US mortgage crisis – Fannie Mae collapsing

Treasury Secretary Henry Paulson leveraged the power of the federal government behind Fannie Mae and Freddie Mac, the companies in crisis that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking yesterday on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in the companies and lend to them, aiming to avoid collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank, which effectively equivalates with free-interest money sent to their treasuries. Fannie and Freddie shares rose in New York trading.

The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that’s been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs.

“They appear to be crossing the Rubicon,” Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar’s invasion of Rome to set up a dictatorship.

The announcements followed weekend talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week.

Source – Bloomberg

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