The United States government offered a bail out and agreed to back most of the loans that Fannie Mae and Freddie Mac hold currently. This happened on September 6, 2008. One thing that happened is that interest rates on mortgages dropped. The market seemed to rally a bit around the fact that these loans were guaranteed. However it means that the taxpayers are going to cover those that default on the loans. The government agreed to cover up to $200 billion in loans so that the market could remain liquid.
The Fannie Mae and Freddie Mac bailout was not enough to save the two biggest investing firms in the United States. Lehman Brothers declared bankruptcy the following week, and Merrill Lynch was sold to Bank of America. This caused a crisis on Wall Street and resulted in plummeting stock market prices in the United States and around the world. Consumer confidence was shaken as AIG faced a crisis as well.
AIG got into trouble by offering insurance products that guaranteed the loan amounts to investors when the loans went into default. With the recent increase of default the company found that they no longer had enough to cover all of the defaults. The United States government again stepped in and backed up AIG so that it would not go under as well.
Currently the government is planning on buying up more subprime mortgages. They hope to provide more liquidity to the market and to bolster investor confidence in the economy. Will this work? Currently we are waiting to see the long term effects of the government bailout.
Additionally will the government be able to continue to bailout companies that are struggling? The answer is that they will probably help out some, and not others. It is unclear how much longer this current crisis will last and how long it will last for. The effects are being felt globally, and it greatly increasing the amount of debt that United States government is taking on itself. The taxpayers will eventually pay for everything that is currently happening.
