The Federal Reserve's Mortgage Market Rescue Efforts
After facing months of criticism for sitting on the sidelines as the U.S. mortgage market fell to pieces, the Federal Reserve board was very busy in November, taking drastic measures in an attempt to shore up the faltering lending industry.
On Sunday, November 21, Fed Chairman Ben Bernanke, current Treasury Secretary Henry Paulson, and next-in-line Treasury Secretary Timothy Geithner announced a new bailout package for the troubled Citigroup. The decision to invest an additional $20 billion dollars in the company's preferred stock comes hard on the heels of last month's move to inject $25 billion to help the company work off its bad debt and restore consumer confidence in the Citigroup's fiscal future.
The government has also promised to back $306 billion of the company's failing mortgages and other problem assets.
"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers," the agencies said.
Although the banking giant had the largest market share in 2006, Citigroup has fallen to fifth place among U.S. banks as the many subprime and other exotic loans on its books have soured.
Moreover, while the bold move by the Fed apparently had the desired effect (Citigroup's stock skyrocketed almost 60 percent the day after the announcement), many wonder if the taxpayers will be the hardest hit by this deal in the end. The government is committed to buying 254 million Citigroup shares at almost twice the current market cost.
This is certainly not the first of such actions by the federal government. Trying to stave of widespread financial panic, the Fed gave fiscal aid to JPMorgan Chase in March to buyout Bear Stearns.
The next big move was placing mortgage companies Fannie Mae and Freddie Mac in government conservatorship. "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system," Secretary Paulson said on September 7, "that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
A bailout of insurance corporation American International Group (AIG) took place at the same time.
Then, just two days after the second Citigroup rescue plan was announced, the Fed made the much talked-about but highly controversial decision to start buying up mortgage-backed securities (MBS) and direct obligations from Freddie and Fannie. The plan calls for $100 billion for purchasing the mortgage-related debt obligations and $500 billion for MBS transactions.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,'' the central bank said in a statement.
The Fed also issued a statement the same day pledging $200 billion to guarantee consumer loans like credit card debt, and car and student loans.
While the effect of all these Fed programs on the U.S. mortgage markets is still unclear, most analysts feel it is unlikely that we have seen the last of government intervention in the free market, at least not until the economy stabilizes at non-recession levels again.