Page last updated at 11:44 GMT, Monday, 8 September 2008 12:44 UK
US rescues giant mortgage lenders



Freddie Mac headquarters
The bail-out has global implications

In today's global economy, the sharp rise in worldwide banking stocks following the US government's takeover of troubled mortgage giants Freddie Mac and Fannie Mae was to be expected.

With the US Treasury moving to shore up the US housing market, its action will inevitably also offer a knock-on boost to mortgage provision around the world.

In time it should help to restore both confidence and available funds in the global credit market.

It may also help the US avoid a consumer-led recession that would drag down the global economy, starting with firms that export to the United States.

Direct investment

Overseas commercial banks - especially those in China and Japan - have directly invested billions of dollars in Freddie Mac and Fannie Mae.

It showed the positive attitude of the US government, we welcome it
ICBC spokesman Xie Taifeng

In addition, foreign banks have billions of dollars invested in US mortgage securities - effectively debt packages resold by US banks - that are guaranteed by the two agencies.

It was the high level of bad debt in these securities that caused the global credit crunch, as banks around the world realised that they had made significant losses on these investments.

As a result, the US government's bail out of Freddie Mac and Fannie Mae - and the hope that it can see normality return to the American mortgage market - is an immediate and direct boost to a great many global lenders.

It will also inevitably greatly relieve global central banks, such as the Bank of England and the European Central Bank, which since last year have had to help UK and European lenders affected by the global credit squeeze.

In the UK, one lender, Northern Rock, ultimately had to be nationalised.

'Positively guarantee'

Chinese banks have been among the first to welcome the US government's move.

Bank of China branch
Chinese banks have invested heavily in the US

Flush with cash due to China's economic boom, China's commercial lenders have in recent years become the biggest overseas investors in Freddie Mac and Fannie Mae as part of their wider purchase of US bonds.

The US government's action makes both this direct and indirect Freddie Mac and Fannie Mae debt far more secure.

China's three largest lenders - Industrial & Commercial Bank of China (ICBC), Construction Bank of China, and Bank of China - have $10.5bn (5.9bn) directly invested in Freddie Mac and Fannie Mae between them.

"We think this is good for Fannie and Freddie because the US government used to be invisibly guaranteeing them, but now it is taking explicit action to positively guarantee them," said Bank of China spokesman Wang Zhaowen.

ICBC spokesman Xie Taifeng added: "It showed the positive attitude of the US government, we welcome it."

'Eases worries'

The US government's move has also been warmly welcomed in Japan, which after China is the second-biggest direct overseas investor in Freddie Mac and Fannie Mae.

"I think it will have a positive impact on the world economy, as it eases worries over the US economy through more stable financial markets in the US," said Japan's Finance Minister Bunmei Ibuki.

Japan's three largest banks - Mitsubishi UFJ Financial, Mizuho Financial and Sumitomo Mitsui Financial - had about $43.29bn in US mortgage debt securities, including those controlled by Fannie Mae and Freddie May by the end of March.

Japan's government, like its Chinese counterpart, also directly owns US bonds, but both do not disclose any exact figures.




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