Paulson: No bail out for mortgage giants

WASHINGTON

The government stepped in on Friday to rescue a California bank, about to collapse under the weight of the mortgage crisis -- "IndyMac" bank of Pasadena.

Customers have withdrawn one point three billion dollars in the past 11 days. Federal regulators seized IndyMac's remaining assets on Friday, making it one of the largest bank failures in U.S. history.

Meanwhile, the troubles of two other big lending institutions, Freddie Mac and Fanny Mae, sent Wall Street into a tailspin on Friday. Their stocks lost almost a quarter of their value.

The Dow Industrials traded below the 11,000 mark for the first time in two years today -- it closed at 11,100, still down more than 100 points.

What does this say about the state of the economy?

Add to that list weak consumer spending and escalating fuel prices, which are really hammering businesses and specifically the airlines. So when you combine all these things, we have "the perfect storm," and economists say there is no quick fix.

Fannie Mae and Freddie Mac are the largest buyers of U.S. home loans.

"The majority of the loans in the country quite frankly, somewhere between 50 and 70 percent probably," said Leon Huntting from the California Association of Mortgage Brokers.

But because some of these loans have lost their value, they are low on capital to lend more money.

That could change the landscape of home ownership in the U.S.

"Those people who are qualified to buy a home probably would not be able to get a loan," said Huntting.

Meanwhile, the Bush Administration is downplaying any kind of crisis.

"Their regulator has made clear that they are adequately capitalized," said Treasury Secretary Henry Paulson.

Tom Davidoff is with the Haas School of Business. He says the government may eventually be forced to intervene.

"In the short run the government would be investing in Fannie and Freddie, essentially. They'd be saying don't sell off your assets we'll give you cash in and we get the assets when the market calms down," said Davidoff.

Congress has said it will also act quickly to support Fannie and Freddie.

Congress may also have to come to the rescue of the airlines. The industry blames speculators for the high fuel prices.

Speculators buy and sell commodities like oil and profit from fluctuating market prices.

"So there is a discussion that maybe congress should limit whether institutional investors can participate fully in the commodities market," said Mark Calvey from San Francisco Business Times.

According to the airlines, speculators are now buying 66 percent of the oil future contracts. But others believe the high cost of oil has more to do with supply and demand.

"China, other developing countries now have an appetite for gas and oil that they didn't have. They didn't used to be cars in China and now lots of people in China have cars and that's a very big country," said Davidoff.

High gas prices are contributing to weak consumer spending.

"Rising oil prices means higher gas prices, taking money out of consumer's wallets. So money that they are paying at the pump can't be used for the trip to Disneyland or the weekly trip to Wal-Mart. So these retailers are taking on the chin with higher oil prices," said Calvey.

Just on Friday afternoon, The U.S. Senate passed a huge housing rescue package worth $300 billion.

People at risk of foreclosure will be able to refinance with mortgages backed by the Federal Housing Administration. It now goes to House then to the president who has threatened to veto it, but now the White House says a compromise may be reached.

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