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Adviser  >  News  >  September 2008  >  Could the Freddie and Fannie bail out be a turning point?

Could the Freddie and Fannie bail out be a turning point?

On Monday the US Government had to announce its intention to help out Freddie Mac and Fannie Mae, the institutions responsible for financing the majority of the US mortgage market. Freddie Mac and Fannie Mae were responsible for the financing or guaranteeing of nearly half of all out-standing US mortgage debt.

This is the third time that the US Government has had to intervene during the ongoing credit crisis.

It first acted following the collapse of Bear Stearns in March and once again had to intervene when news of Freddie Mac and Fannie Mae’s problems arose in July of this year.

This third intervention, however, is by far the largest and most significant. It actually makes the Northern Rock intervention look relatively tame (the rescue package is over 25 times as big).

Robert Talbut, CIO of Royal London Asset Management gives his view on why the US governments’ bailout of Fannie Mae and Freddie Mac is a positive move, but is not a solution to the broader issues in the US and Global economies.

"We view the recent rescue of the US GSE's to be a helpful event for both the health of the financial markets and the wider US economy. As it became obvious that these institutions were starting to run on empty some form of reorganisation became inevitable. Hence the rescue should probably be seen as a way of removing some of the downside risks that would have occurred if these businesses had failed in a disorderly fashion.

There is a reasonable hope that these actions will provide some relief in housing mortgage pricing which may have benefits in terms of the valuations of the securities reliant upon the health of the US housing market. However we do not see this as a panacea for all the concerns surrounding the health of the US and global economy.

It now appears that there is a generalised slowing taking place in the global economy which will put pressure on all sectors of the economy. This in turn will mean lower earnings forecasts for companies and hence further issues for the valuation of equities, corporate bonds and property. Hence overall we see this move as a helpful development but do not see this as reason to trigger a wholesale switch to a more aggressive investment stance."