The Fannie Mae decision to reduce the number of financial institutions holding its asset left banks reeling this week. While no exact figures have been announced, estimates as high as $100 billion have been discussed. Banks dropped by the troubled U.S. mortgage finance agency had no choice but to liquidate short-term securities and Treasuries as a means of generating adequate capital to return to the company.
Open market borrowing to raise the cash contributed to a spike in short-term interest rates across domestic loan markets. Banks had cross lent Fannie Mae's cash to each other in the federal funds market. Overnight interest rates on federal funds and repurchase markets also rose as a consequence.
Fannie Mae has yet to speak out on the matter.
The mortgage company last made headlines earlier in the week when they announced that they would request further government funding to help them through difficult times. As of now, Fannie Mae and sister company Freddie Mac have been among the most expensive bailouts of the financial crisis.
At the close of last year, the company reported cash and cash equivalent holdings of approximately $69 billion. An estimated $54 billion of that comprised of fed funds and repurchase agreements.
The majority of banks dropped by Fannie Mae were foreign.
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