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Fannie Mae and Freddie Mac are like a sweet old couple who have suddenly become unhinged and taken their neighbours hostage. For decades, they have been the backbone of US housing, using their implicit government backing to raise cheap financing to take on or guarantee millions of mortgages – about 43 per cent of the overall market currently.

In other words, the already dreadful US housing market would implode if the two government- sponsored enterprises went under. That is why fears of outright failure are misplaced – Washington could not let it happen. Officials insist the GSEs have excess capital. The problem is no one knows how far down house prices will go. Raising more capital looks unavoidable and legislation currently being debated could force Fannie’s and Freddie’s hand in doing so. The realisation on the part of shareholders who believed they enjoyed government protection is why Fannie’s and Freddie’s already battered shares fell by as much as half on Friday.

Given the GSEs’ combined market value of just $14bn, however, this is a side issue. More important is what the crisis means for the financial system. Talk of the US government taking on some $5,000bn of liabilities looks overblown, ignoring Fannie’s and Freddie’s substantial assets and other options, such as a capital injection from the government of perhaps tens of billions of dollars.

However, the GSEs’ bluff has been called. Their activities will be scaled back as part of the deleveraging now general across the financial system. That means lower house prices and a muted eventual rebound, pressuring consumers further. The race for the White House could turn more populist. Meanwhile, forget about higher interest rates, complicating matters for central banks everywhere. Even if nationalisation is avoided, Fannie’s and Freddie’s crisis will have a profound impact – extending well beyond their immediate neighbourhood.

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