Takeover of US housing giants 'was preventable'

The US federal takeover of troubled US mortgage giants Fannie Mae and Freddie Mac could have been prevented if Congress had acted on its recommendations, the White House said today.

“It is exactly the kind of event we warned about and tried to prevent over the years,” said White House press secretary Dana Perino.

“Remember that we have highlighted the systemic risk posed by Frannie Mae and Freddie Mac because of the very large role they play in housing markets and because of their business practices.”

She said that the White House has asked Congress “for years” to establish a strong independent regulator to oversee the institutions.

Ms Perino also stressed that the takeover will allow time for Congress and the next administration to determine the appropriate future role for the companies.

She said their primary mission should be to increase the availability and affordability of home mortgages.

“Whatever eventual long-time solution is decided for Fannie Mae and Freddie Mac, it is crucial that there are reforms so they do not pose similar risks to our economy or the financial system again,” Ms Perino said.

President George W Bush said he believed the move will help the housing market recover.

“Our economy will not return to strong job growth until the housing correction is behind us,” she said.

The Bush administration yesterday announced it was taking control of the two institutions to avert the potential for major financial turmoil.

The companies, which together own or guarantee about five trillion dollars in home loans, about half the nation’s total, have lost 14 billion dollars in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie. The executives and board of directors of both institutions are being replaced.

In a statement, Mr Bush called the moves temporary until the appropriate role for the companies can be determined.

He said they must be reformed so that “they do not pose similar risks to our economy or the financial system again.”

Treasury Secretary Henry Paulson said the actions were being taken because the failure of either of the mortgage companies “would cause great turmoil in our financial markets here at home and around the globe”.

The huge potential liabilities facing each company could cost taxpayers tens of billions of dollars. But Mr Paulson stressed that the financial impact if the two companies had been allowed to fail would be far more serious.

Mr Bush said the federal regulator for Fannie Mae and Freddie Mac determined they could no longer operate safely and conduct their public mission.

He said that posed “an unacceptable risk to the broader financial system and our economy”.

The bail-out saw stocks mostly advanced today as investors rushed to lay bets on a recovery in the financial and housing sectors.

The US government’s plan also touched off a global stock rally.

Foreign investors holding debt of the companies were relieved as were investors simply looking for stronger growth from the US economy, particularly as many economies abroad give off signs they are slowing.

Japan’s Nikkei stock average jumped 3.4% and Hong Kong’s Hang Seng index surged 4.3%. Britain’s FTSE 100 jumped 3.81%, Germany’s DAX index rose 3.06%, and France’s CAC-40 surged 3.42%.