How important are Freddie Mac and Fannie Mae?

Sandy Rothschild, a former executive of the Home Builders Association of St. Louis and now head of his own firm, Sandy Rothschild & Associates, said if Freddie Mac and Fannie Mae had gone under a snowball effect would have been set in motion that first would have affected the granting of mortgages and would have continued into the housing market in general to paralyze it.

“It would be essentially what caused the Depression,” he said. “Lost confidence.”

The situation is bad, he said. “We are in a recession, and the collapse of Freddie Mac and Fannie Mae would have been devastating.”

Even though the giant quasi-governmental organizations are mostly known for real-estate (they hold or back approximately 50 percent of all mortgages), Sarah Bakewell, president of Edward L. Bakewell Inc., Realtors, Clayton, told the Beacon, “The current Fannie Mae and Freddie Mac upheaval just emphasizes the volatility in the U.S financial markets overall. The agencies were set up initially to protect the consumer, by ensuring constant cash flow of mortgage money, and now that very protection is in jeopardy.

“Should the federal government intervene to stabilize the situation? Ideally, no, realistically, yes, as the downside of an eventual failure would be disastrous to the consumer, who has always relied on the solubility of Fannie Mae and Freddie Mac, and is simply not prepared for what to do next."

But the stability of Freddie Mac and Fannie Mae is, of course, essential for real estate.

"It is a big wake-up call in terms of creating financial options for consumers in the future," Bakewell said. "The housing market depends on it.”

Treasury Secretary Hank Paulson, after consulting with Fed chairman Ben Bernanke, announced that the government wants Congress to give it unlimited authority to lend money to Fannie Mae and Freddie Mac and invest in their equity. And the Federal Reserve plans to give the mortgage giants access to emergency funds on the same terms as banks. See Financial Times story.

See New York Times story.

See Washington Post story.

The Senate is ready to pass legislation intended to bail out about 400,000 families by allowing them to obtain more reasonable mortgage rates. The $1.7 billion package requires further consideration by the House; President Bush has threatened a veto. See Washington Post article.

William Poole, former head of the Federal Reserve Bank in St. Louis, said the institutions were already insolvent - a comment that helped spur events. See the Washington Post article. 

What is the government doing with Fannie Mae and Freddie Mac, and what does it mean to the average person? | Newsday

Bets continue to mount against Fannie, Freddie stock. | CNN Money

What's going on with Fannie Mae and Freddie Mac? | CNN Money  

Editorial cartoon by John Sherffius | The Daily Camera, Boulder, Co.

The St. Louis Connection: Who is William Poole?

By Mary Delach Leonard, Beacon staff

Although William Poole retired in March after 10 years as president of the Federal Reserve Bank of St. Louis, he has emerged in many of the recent articles about the problems with Fannie Mae and Freddie Mac. Poole has long shared his concerns about these government-sponsored enterprises. To read some of his articles and speeches, click here .

After his remarks to a Bloomberg News reporter about the increasing chances that Fannie Mae and Freddie Mac may need a government bailout were reported worldwide, stocks in the government-sponsored mortgage companies tumbled on Friday. (Disclaimer: we're noting correlation, not causation).

The St. Louis Fed serves the Eighth Federal Reserve District, with branches in Little Rock, Ark., Louisville, Ky., and Memphis, Tenn. During his tenure, Poole was known as a proponent of Fed transparency and pushed for clear communication about economic policies. To that end, he was a frequent public speaker before business, college and community audiences.

Poole was active in the community, serving as a director of the United Way of Greater St. Louis from 1999 to 2006. He was a member of the Webster University Board of Trustees from 1999 to 2007 and the Chancellor's Council of the University of Missouri-St. Louis from 1999 to 2003. He and his wife Geraldine have four grown sons.

Poole, 71, has been appointed distinguished scholar in residence at the University of Delaware and will join the faculty of the Lerner College of Business and Economics in the fall.

Poole is a native of Delaware. He earned a bachelor's degree from Swarthmore College and an MBA and doctorate in economics from the University of Chicago.

Poole was a senior economist with the Federal Reserve System before joining the faculty of Brown University in 1974. He served as an economic adviser in the first Reagan administration, as an adjunct scholar at the Cato Institute and as an economic adviser for the Congressional Budget Office.