US$5 trillion

Last September, I wrote to the Financial Times on the subject of the US sub-prime disaster. At a time when many banking commentators were trying to minimise the problems, I suggested that ‘a “buyer of last resort”, such as the Federal government, would probably need to emerge if this situation is to be stabilised’.
Yesterday, 10 months later, the government took a major step in this direction with its emergency measures to support Fannie Mae and Freddie Mac. Between them, these two lenders guarantee 47% of all US mortgages, worth over $5 trillion. That sum is equivalent to 10% of global GDP, or about the combined size of the French and UK economies.

This lending is supported by just $70bn in core capital. And according to Barrons, the leading US investment magazine, their total borrowings are leveraged 68-to-1. With US house prices already down 16%, its no wonder Bill Poole, a Fed Governor till last March, has said they may already be ‘technically insolvent’.
At the moment, Congress is still balking at the size of the bailout underway. But I think Poole was right to say yesterday that Fannie and Freddie will be ‘de facto nationalised’. They really are ‘too big to fail’. But this process will take a long time, probably till after November’s elections. In the meantime, chemical demand will suffer as US housing remains weak, and financial markets fragile.

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