Fannie Mae and Freddie Mac
On September 8, 2008 the Treasury nationalized both Fannie Mae and Freddie Mac. Combined, their assets are over $5 trillion. These firms serve in helping guaranteeing most of the mortgages in the U.S. The Treasury has replaced the management of both companies and will oversee their operations. By doing this, the government has acknowledged that the mortgage market and the institutions to make it operate in the U.S. are broken.
Fannie Mae and Freddie Mac were set up to support the housing market. Provided they met certain standards, they helped guarantee mortgages by issuing their own debt which was backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. Based on this, they were supposed to use the government guarantee to reduce mortgage costs to homeowners. Instead, Fannie and Freddie used this government funding to make large profits and squeeze the private sector out.
Both Fannie and Freddie were not adequately supervised and the end result was that they strayed from their core mission. They used their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over this last year, Fannie and Freddie did not have enough capital to cover losses on these subprime mortgages. Had these mortgages been defaulted on, there would have been collapses everywhere. In response, the Treasury announced that it would explicitly guarantee the debt. Once the debt was guaranteed to be secure, no self-interested investor was willing to supply more equity to help out in the l ...