This article is from the source 'bbc' and was first published or seen on . It will not be checked again for changes.

You can find the current article at its original source at http://news.bbc.co.uk/go/rss/-/1/hi/business/8239033.stm

The article has changed 5 times. There is an RSS feed of changes available.

Version 0 Version 1
The US couple behind the housing crisis The US couple behind the housing crisis
(31 minutes later)
A reworking of Grant Wood's famous painting of a 'homely, dependable-looking' mid-Western coupleA reworking of Grant Wood's famous painting of a 'homely, dependable-looking' mid-Western couple
By Greg Wood BBC North America business correspondentBy Greg Wood BBC North America business correspondent
Fannie Mae and Freddie Mac sound like a homely mid-Western couple - dependable, perhaps slightly dull.Fannie Mae and Freddie Mac sound like a homely mid-Western couple - dependable, perhaps slightly dull.
But these two almost destroyed the US housing market and their downfall was the overture to the global financial crisis.But these two almost destroyed the US housing market and their downfall was the overture to the global financial crisis.
CRISIS TIMELINE 2008 7 SEPT: Fannie Mae nationalised15 SEPT: Lehman bankruptcy18 SEPT: Lloyds takes over HBOS19 SEPT: $700bn US bail-out plan29 SEPT: Bradford and Bingley nationalised5 OCT: Bail-out plan agreed by Congress12 OCT: UK bails out RBS and Lloyds-HBOS 2008 CRISIS TIMETABLE 7 SEPT: Fannie Mae nationalised15 SEPT: Lehman bankruptcy18 SEPT: Lloyds takes over HBOS19 SEPT: $700bn US bail-out plan29 SEPT: Bradford and Bingley nationalised5 OCT: Bail-out plan agreed by Congress12 OCT: UK bails out RBS and Lloyds-HBOS
On 7 September 2008, these giants of the financial world had to be nationalised by the US government.On 7 September 2008, these giants of the financial world had to be nationalised by the US government.
Fannie Mae was a child of the Great Depression.Fannie Mae was a child of the Great Depression.
The Federal National Mortgage Association was set up in 1938. A government agency, its job was to buy home loans from mortgage providers.The Federal National Mortgage Association was set up in 1938. A government agency, its job was to buy home loans from mortgage providers.
The mortgage providers would use the money they received from Fannie Mae to make more home loans. Freddie Mac, set up in the late 60s, did the same thing.The mortgage providers would use the money they received from Fannie Mae to make more home loans. Freddie Mac, set up in the late 60s, did the same thing.
But once Fannie and Freddie held all these mortgages on their books they had to do something with them.But once Fannie and Freddie held all these mortgages on their books they had to do something with them.
Slice and diceSlice and dice
The nationalisation was meant to draw a line under the financial crisisThe nationalisation was meant to draw a line under the financial crisis
The answer was "securitisation". It's a process which works a bit like a layer cake.The answer was "securitisation". It's a process which works a bit like a layer cake.
You stack up all the mortgages horizontally and then slice them vertically.You stack up all the mortgages horizontally and then slice them vertically.
Each slice contains a little bit of all the mortgages in the "cake" and can be sold on the financial markets as a "security" - an investment like a share or a bond.Each slice contains a little bit of all the mortgages in the "cake" and can be sold on the financial markets as a "security" - an investment like a share or a bond.
But there was a flaw in the model.But there was a flaw in the model.
If a sufficiently large number of homeowners defaulted on the underlying loans, then the value of those mortgage-backed securities would collapse.If a sufficiently large number of homeowners defaulted on the underlying loans, then the value of those mortgage-backed securities would collapse.
Fannie Mae and Freddie Mac would also be landed with the - very large - bill for the mortgage repayments.Fannie Mae and Freddie Mac would also be landed with the - very large - bill for the mortgage repayments.
Turning badTurning bad
That's what began to happen when the US housing bubble burst in 2007.That's what began to happen when the US housing bubble burst in 2007.
It was the first in a series of crisis Sundays as the US government grappled with a cascade of financial disastersIt was the first in a series of crisis Sundays as the US government grappled with a cascade of financial disasters
Millions of people defaulted on their home loans. The value of mortgage-backed securities began to fall.Millions of people defaulted on their home loans. The value of mortgage-backed securities began to fall.
So too did the share prices of Fannie Mae and Freddie Mac.So too did the share prices of Fannie Mae and Freddie Mac.
Both organisations were incurring massive losses - $14 billion in the 12-month period up to September 2008 - as they paid out the guarantees on millions of bad home loans.Both organisations were incurring massive losses - $14 billion in the 12-month period up to September 2008 - as they paid out the guarantees on millions of bad home loans.
This put them desperately in need of new capital to fill the hole in their balance sheets.This put them desperately in need of new capital to fill the hole in their balance sheets.
But Fannie and Freddie had lost so much in the housing market that private investors were unwilling to provide the new money they needed.But Fannie and Freddie had lost so much in the housing market that private investors were unwilling to provide the new money they needed.
They were on the brink of bankruptcy.They were on the brink of bankruptcy.
Falling giantsFalling giants
That event had the potential to trigger a collapse in the global financial system.That event had the potential to trigger a collapse in the global financial system.
Fannie and Freddie, by this time privately owned, were the two biggest financial institutions on the planet.Fannie and Freddie, by this time privately owned, were the two biggest financial institutions on the planet.
Hank Paulson said Fannie and Freddie posed a risk to the entire systemHank Paulson said Fannie and Freddie posed a risk to the entire system
Their bonds and securities were held by investors around the world, including many governments.Their bonds and securities were held by investors around the world, including many governments.
Together they owned or guaranteed half the mortgages in the United States - a staggering $5 trillion in home loans.Together they owned or guaranteed half the mortgages in the United States - a staggering $5 trillion in home loans.
Fannie and Freddie were then responsible for financing 80% of all new mortgages in the US.Fannie and Freddie were then responsible for financing 80% of all new mortgages in the US.
If they went bust it would be almost impossible for anybody in the States to get a home loan.If they went bust it would be almost impossible for anybody in the States to get a home loan.
Fateful weekendFateful weekend
This was the situation facing the government as it entered the weekend of 6 and 7 September a year ago.This was the situation facing the government as it entered the weekend of 6 and 7 September a year ago.
By the Sunday, the fateful decision had been made and Hank Paulson strode down the steps of the Treasury Department building in Washington DC like some prophet of doom with his gaunt expression and whispering voice.By the Sunday, the fateful decision had been made and Hank Paulson strode down the steps of the Treasury Department building in Washington DC like some prophet of doom with his gaunt expression and whispering voice.
The condition of Fannie Mae and Freddie Mac posed a "systemic risk" to the entire financial edifice, he told the nation.The condition of Fannie Mae and Freddie Mac posed a "systemic risk" to the entire financial edifice, he told the nation.
They could not continue in the present state, so the government was taking them into "conservatorship".They could not continue in the present state, so the government was taking them into "conservatorship".
In plain language, these twin pillars of the mortgage market were being nationalised.In plain language, these twin pillars of the mortgage market were being nationalised.
It was the first in a series of crisis Sundays, as the US government grappled with a cascade of financial disasters in the hope of resolving them before the markets re-opened for business at the start of another fraught week.It was the first in a series of crisis Sundays, as the US government grappled with a cascade of financial disasters in the hope of resolving them before the markets re-opened for business at the start of another fraught week.
The nationalisation of Fannie Mae and Freddie Mac was supposed to draw a line under the financial crisis.The nationalisation of Fannie Mae and Freddie Mac was supposed to draw a line under the financial crisis.
Instead, it merely acted as a prelude to the far more shocking events that were soon to unfold before an astonished world.Instead, it merely acted as a prelude to the far more shocking events that were soon to unfold before an astonished world.