US government rescues Fannie Mae and Freddie Mac

The US government has stepped in to save mortgage giants Fannie Mae and Freddie Mac.

Both have been put into a conservatorship and their chief executives replaced.

The companies are crucial for the US property market as they keep cash flowing through the system and own or guarantee around half of all home loans in the country.

However, the property slump has hit both hard and their share prices have fallen by around 90 per cent since the start of the credit crunch.

There has been speculation for some time that the government would not allow the companies to fail but shareholders have expressed fears that if this happens, their shares will become worthless.

Treasury Secretary Henry Paulson said: "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," he added.

Under the plan, the government will create a new class of shares in the companies, which will allow it to pump cash into Fannie Mae and Freddie Mac.

This will have the effect of diluting the value of existing shares, however.

Fannie Mae was founded in 1938 as part of Roosevelt's new Deal to provide liquidity to the mortgage market.

Along with Freddie Mac, created in 1970, the companies buy mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors.