World markets are at new lows and as the first of what should be many profit downgrades are coming through in Australia, a new doomsday scenario is playing out in the US: the insolvency of Fannie Mae and Freddie Mac.
These are the two government-sponsored enterprises in the US that support the mortgage market. They own or guarantee about half the $US12 trillion in home loans outstanding in the US and are responsible for about 80 per cent of new loans since last August.
The problem is that they seem to be broke, or at least the market thinks they are. Their share prices have crashed this week and their debt, which is usually rated AAA because of an implied Government guarantee, is trading as if it is rated single A.
This morning the Wall Street Journal is carrying a story that the Bush administration is considering what to do if they fail.