US taking giant steps to steady housing, financial sectors

---

WASHINGTON, Sept 8 (AFP) The US government is taking an unprecedented step into the financial sector in a bid to steady an ailing housing market and ease a global credit crunch, analysts said. brA series of steps announced Sunday places the struggling mortgage finance giants in a conservatorship, which is the equivalent of a bankruptcy reorganisation under the aegis of the government. brIn what is likely the largest US government intervention in the private sector, the plan effectively adds some 5.4 trillion dollars in potential liabilities from the two firms to the Treasury-equivalent to the entire federal debt. brThe hope is that by opening up the vast coffers of the US government to the government-sponsored enterprises (GSEs), confidence will return to the housing and financial system, minimising any losses. brThere is no quick fix. This is not one, said Robert Brusca at FAO Economics. brBut it should help to stabilise markets and give the government the opportunity to use the GSEs to help extract us from this mess. brFannie Mae was originally a government agency created during great depression to help provide liquidity for housing. It was privatised in 1968 and Freddie Mac was chartered by Congress in 1970 to provide competition. brBut many officials and analysts argue there was a contradiction in the mission of the two, which tried to maximise results for shareholders at the same time seeking to lower the cost of mortgage credit. brI attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, Treasury Secretary Henry Paulson said in announcing the unprecedented takeover. brBecause the GSEs are in conservatorship, they will no longer be managed with a strategy to maximise common shareholder returns, a strategy which historically encouraged risk-taking. brBrusca said that the real problem was their mission, their organisational form as GSEs and their size. The mortgage mess was just an inconvenient truth that made it all less viable and exposed the warts that had been there all along. brThe takeover provides the US government with one billion dollars in a new class of preferred shares at no cost to taxpayers. The new plan does not eliminate the existing common and preferred shares, but means they would absorb any losses ahead of the government, Paulson said. brAnother step-authorised by emergency legislation passed by Congress in July-opens up a new, unspecified, Treasury line of credit to the two firms through the Federal Reserve. brPaulson also said Treasury is initiating a temporary programme to purchase mortgage-backed securities of Fannie and Freddie, to help provide liquidity in a financial market strained by a credit crunch. brDavid Kotok, chief investment officer at Cumberland Advisers, said the new initiative draws the line on moral hazard so the existing preferred and common shares do not get bailed out by the government. brThe existing shares most likely are worth a few pennies but the fate will not be known for some years until the crisis is over, Kotok said. brMeanwhile, Japanese officials today hailed the US takeover of ailing mortgage giants Fannie Mae and Freddie Mac, saying the move would help contain trouble on global financial markets. brThis will remove one factor causing instability in the US economy and have a good impact on the world economy, Finance Minister Bunmei Ibuki told reporters. brGiven that the dollar is an international currency, Japan welcomes the move, he said. brIbuki said that US Treasury Secretary Henry Paulson would hold a conference call later Monday to brief his counterparts in the other Group of Seven (G7) major economies. brThe US government Sunday seized control over the two government-chartered but shareholder-owned firms, which underpin trillions of dollars of home loans.