Fannie Mae and Freddie Mac are not exactly America’s answer to Dubai World. But creditors of the two mortgage finance giants should not forget that, like Dubai’s investment arm, they have only implicit government backing.
So far, investors are sleeping just fine at night. The Treasury’s $400 billion equity line for the two companies has a lot to do with that, as does federal ownership of more than $1 trillion of Fannie and Freddie debt and mortgage-backed securities. The government would be shooting itself in the foot if it were to allow them to default on their more than $1.6 trillion of outstanding debt.
On top of that, the role of the two government-sponsored enterprises in the nation’s housing finance market is pivotal. Even setting aside domestic concerns, a default by the two on what has long been seen as quasi-sovereign debt would torpedo America’s reputation in international financial markets.
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