Fannie Mae and Freddie Mac, America’s two largest mortgage companies, buy residential mortgages that are extended by banks and then securitize and sell them in global markets.
According to the U.S. Federal Reserve, foreign entities now own about $1 trillion of the securities held by Fannie and Freddie. Owners include central banks in China, Russia and Saudi Arabia and big financial institutions such as Mitsubishi UFJ in Japan and Swiss Re in Zurich.
The short-term future of Fannie and Freddie is fairly secure since there is no chance that the U.S. Treasury and the U.S. Federal Reserve will fail to provide all the capital the two institutions need to stay afloat. This action could add tens of billions of dollars to the U.S. debt, further weakening the dollar and consequently pushing up oil prices.
The subprime mess revealed an egregious lapse in regulation and morality on Wall Street and in Washington. What has happened to Fannie and Freddie is a result of that subprime disease. But the crisis at these two institutions is an even worse reflection on U.S. capitalism since the seeds of the GSE’s problems were sewn many years ago, when Washington decided to make these bodies into instruments of social policy—using them to facilitate homeownership—while preserving the façade that they were private-sector banks. This policy led to today’s mess because it allowed the shareholders and executives of these enormous banks to gain from any profits, while passing on losses to taxpayers.
Source: Newsweek, Jeffrey E. Garten, “Yet Another Domino Falls”