Independent UK: Calamity as distressed US mortgage companies head for the buffers

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Jeremy Warner's Outlook: Calamity as distressed US mortgage companies head for the buffers

Saturday, 12 July 2008



Could this be the big one? All market firestorms require a defining, cataclysmic event to mark the bottom and establish a floor from which confidence can rebuild. Northern Rock, in international terms a smallish, regional mortgage bank, was never likely to be it. Personally I thought Bear Stearns might be, but that too has proved insufficient an explosion to put out the flames.

Now Freddie Mac and Fannie Mae, which together account for more than half of all domestic mortgage finance in the US, are teetering on the brink, forcing the White House to consider "conservatorship", or to use the British expression, nationalisation, to prevent complete meltdown in the US housing market.

Hank Paulson, the US Treasury Secretary, insisted in a statement apparently designed to discourage talk of an immediate government bailout, that his intention was to support the two companies "in their current form".

If this sounds familiar, it is because it is the same sort of language that was used by our own Chancellor, Alistair Darling, in the run-up to nationalisation of Northern Rock. Right up to the last moment, the UK Government was trying to avoid outright nationalisation by finding a private-sector solution.

Mr Paulson will likewise be desperate to avoid the blow to reputation and confidence involved in taking these two companies into national ownership. Yet, in the end, he may have no option, for however embarrassing conservatorship might be, it won't be half as bad as the damage that would be done if these two linchpins of the US mortgage market were allowed to go to the wall. Deprived of its biggest source of mortgage finance, the US housing market would collapse, economic confidence would evaporate, and the losses currently being sustained on mortgage-backed securities would be multiplied many times over. ......(more)

The complete piece is at: http://www.independent.co.uk/news/business/comment/jeremy-warner/jeremy-warners-outlook-calamity-as-distressed-us-mortgage-companies-head-for-the-buffers-865925.html