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As Daniel Mudd walked into the Washington DC offices of the Federal Housing Finance Agency (FHFA) on Friday afternoon, the chief executive of Fannie Mae knew it was the beginning of the end.
Flanked by his in-house lawyer, and by H. Rodgin Cohen, head of Wall Street law firm Sullivan & Cromwell, he was resolute.
Within 15 minutes, Jim Lockhart, head of the newly-created FHFA, had begun to explain the process by which Fannie, along with younger brother Freddie Mac, would be nationalised. The process ends a 70-year experiment that began as an attempt to get a struggling nation back on to its feet, and has ended in the largest privatisation in history.
Although neither Fannie nor Freddie owned or invested in mortgages given to those with poor credit histories, they have been tainted in a spectacular way by the subprime mortgage crisis in the United States.
The essential role the pair play in propping up the American housing market is mired deep in US statute.
Essentially, banks loaned people money for mortgages, the banks then sold on loans to Fannie or Freddie, which in turn packaged them into bundles to create bonds external investors could purchase.
This process worked for decades, with Fannie and Freddie's bonds perceived - and therefore priced - as US government bonds, because of a belief that there was some implicit guarantee in the way the companies were established that would not allow them to fail.
Debate
Whether such a guarantee ever actually existed is the subject of much financial debate - complicated by the 'government-sponsored enterprise' (GSE) label attached to the pair - but when, in the past 12 months, investors began to stop investing in bond issues by the pair, the US mortgage market began to seize up.
Despite protestations from both companies that all was well - and that they were adequately capitalised under the guidelines set by the Fair Housing and Equal Opportunity (FHEO) - the predecessor to the FHFA - no one, and certainly not their largest investors, which included the national banks of China and Japan, appeared to believe them.
As a result, shares in each company plunged more than 80 per cent in the past six months, while Fannie and Freddie were forced in recent weeks to pay record yields on relatively small bond issues simply to get them away, as investors became concerned that there was a sizeable risk.
As was the case in mid-March of the near-collapse of Bear Stearns - the investment bank rescued by JPMorgan Chase - in the end it was perception rather than actuality that crucially damaged the pair.
Of course, by essentially bringing both institutions into the public sector, the Bush administration has closed off one set of problems, and opened a whole set of others. The aim of nationalisation is two-fold. As GSEs, Fannie and Freddie had a limit on how much they could borrow. Under FHFA control, the only such limit is the extent to which the US government can continue to borrow.
Second, the US Treasury hopes that, given the way it has structured the nationalisation, external investors will return to invest in Fannie's and Freddie's debt issues, thereby easing somewhat the untold burden on American taxpayers.
The third conundrum in all of this is that this is an action taken by a lame-duck presidential administration, with less than four months of its second term to go. By the end of January, President George W. Bush will be gone, and whoever replaces him will be left with a hefty burden - both financially and politically.
Over the weekend, Barack Obama, the Democrats' presidential nominee, said that the rescue 'must protect taxpayers'.
But ironically, the situation will pose more of a problem for John McCain, the Republican nominee and an ally of President Bush, who is an avowed believer in a smaller government and lower taxes. The takeover of Fannie and Freddie implies the exact opposite.
Sarah Palin, McCain's vice-presidential running mate, said Fannie and Freddie had got 'too big and too expensive to the taxpayers', promising that if successful, she and McCain would make them 'smaller and smarter'.
Whether this is possible remains to be seen, particularly given the vital importance of both companies to the housing market, the health of which is crucial to the wider economy.
"At Fannie Mae, we are in the American Dream business," the company once boasted. For the American people - and whoever may lead them - the dream business has turned into a costly nightmare.
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