The index of Britain’s biggest public companies shot up nearly 200 points this morning, as investors welcomed the $200bn Treasury bail-out of the two US mortgage giants over the weekend. As long as doubts persisted over the short-term viability of these huge institutions, there was no chance of the US housing market recovering – and that has knock-on effects for markets around the world, including the UK. So it’s no wonder the move has been seen as a positive step (trading must have been brisk - the London Stock Exchange fell over).
Freddie and Fannie have been hit hard this year by the decline in the US housing market, suffering huge losses and a big decline in investor confidence (their share prices have tanked by 80%). The institutions are so huge – together they own or back about £3,000bn in mortgage loans, about half of the US market – that their failure was unthinkable. ‘Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets at home and around the globe', as Treasury Secretary Hank Paulson put it yesterday.
That’s why the US government has stepped in. Although it’s not strictly nationalising the two companies – they’ll technically be in a temporary state of ‘conservatorship’ – it basically amounts to the same thing. The Treasury’s injecting up to $200bn to shore up their cash positions, guaranteeing all their outstanding loans and buying some of their new mortgage bonds – in exchange for about 80% of the equity and complete management control (it’s even appointed new CEOs to sort out the mess.)
This should be good news for the UK. In an interview with the BBC on Saturday, embattled HBOS chief Andy Hornby said the credit crunch wouldn’t end until the US housing market picked up, encouraging banks to start lending money on the wholesale markets again. He predicted this would take 18 months, but Fannie and Freddie’s new-found security might speed the process up.
Housing market woes are also behind the deal that will see Nationwide swallow up smaller lenders Derbyshire and Cheshire Building Societies, both of whom are struggling in the tougher economic climate. The FSA-backed deal seems to make sense for all sides – and provides an interesting counterpoint to the situation in the US. OK, so these companies are an awful lot smaller – but it seems ironic that we’re talking about a market-driven solution here in the UK, on the same day that over in the supposedly sink-or-swim US, we’re seeing the biggest state bail-out in financial history. Certainly offers a new perspective on the Northern Rock debate...
In today's bulletin:
Britain bounces after US mortgage bail-out
Primark bounces back with further growth
EDF powers back into British Energy deal
Falling management pay bucks union claims
Rose wine provides some consolation