Scandal of the Freddie and Fannie bail-out

The nationalisation of America's mortgage industry - or to use the US Treasury's coy term, its placing under "conservatorship" - will surely go down as one of the great scandals in financial history: £110bn of taxpayers' money to shore up £3 trillion of American home loans issued in the housing market frenzy of the past few years.

For a brief moment, however, stock markets from Tokyo to London rallied as once again the prospect of a far deeper financial crisis was averted.

British banks were reported to be relieved because they have invested billions in bonds insured by Freddie Mac and Fannie Mae, the two US firms who underwrite around half of America's mortgage market and have had to be bailed out. Fewer losses for British banks means more money to lend to hard-pressed British consumers. Or so they say.

Asian central banks were also breathing easier. They have been buying hundreds

of millions of Freddie and Fannie bonds in recent years as they viewed them as a low-risk dollar-denominated investment.

Shareholders in the two firms, however, stand to lose everything. For years, Fannie and Freddie have been two of the most popular stocks in ordinary Americans' portfolios. They were steady performers and seen to be less risky than other firms because of the implicit guarantee that they were backed by the government.

The conservatorship plan, however, erases most of the equity value in the firms, which will cause pain to millions of retirement saving accounts.

Henry Paulson (left), the US Treasury secretary, argued that the bail-out would return America's economy to health by enabling consumers to get home loans, car loans and other forms of credit. "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," he said.

In the short-term, the plan should restore some faith in America's battered housing