The US Government took control of Freddie Mac and Fannie Mae, the stricken companies that underpin the American mortgage market, yesterday and promised to inject up to £110 billion of taxpayers’ money to keep them afloat.

The cash infusion was one of a series of measures designed to restore order to the stricken financial system that included the immediate removal of the chief executives of the companies and the elimination of future dividends to shareholders.

The US Government’s decision to guarantee the two groups’ survival is good news for British banks and, in turn, British homeowners. British banks have billions of dollars invested in bonds that are insured by Freddie and Fannie and they could have translated into huge losses if either group had gone under – leaving the banks with even less money to make available for mortgages.

Henry Paulson, the US Treasury Secretary and a key orchestrator of the rescue package, acknowledged that it was highly unusual for a government to intervene where publicly traded companies such as Freddie and Fannie were concerned. But he emphasised that the two struggling groups represented a special case because their survival was crucial to the health of the worst housing market since the Great Depression of the 1930s.

Times Archive, 1938: US Housing Bill signed

President Roosevelt has taken the first big step towards ending the business depression

Times Archive, 1967: Fannie Mae sold

President Johnson has managed to dodge a record budget deficit with the sale of government assets

• Times Archive, 1973: The weakness of US mortgage system

Related Links

• US bazooka trumps Brown's peashooter

• Intervention should assure recovery

• Record bail-out in US of Fannie Mae and Freddie Mac

Announcing the plan in Washington, Mr Paulson said: “It is necessary to take action. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

President Bush said the two struggling companies had posed an “unacceptable risk” to the financial system. “Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets,” he said in a statement.

Fannie and Freddie are crucial to America’s housing market, financing more than 80 per cent of US house purchases so far this year. Between them the two groups are responsible for $5,500 billion (£3,100 billion) worth of residential mortgages, just under half the value of America’s $12,000 billion worth of outstanding home loans.

Both institutions have teetered on the brink of collapse in recent months, becoming symbols of a faltering American economy that is now the No 1 concern of voters in the coming presidential election.

John McCain, the Republican nominee, seized upon the news to distance himself farther from the unpopular Administration of President Bush and to burnish his credentials as a maverick reformer of Washington.

He told CBS that Fannie Mae and Freddie Mac had both become “sprawling, massive bureaucracies, rife with corruption and cronyism” in which the needs of ordinary mortgage-holders were ignored.

Barack Obama, the Democrat contender, told ABC: “The economy is weak right now. The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we’re fragile.”

The Government is taking no chances. As well as seizing control of the banks, changing their senior management and pledging to inject up to $200 billion, it said that it would offer short-term loans on favourable terms to Fannie and Freddie, as well as to 12 so-called federal home-loan banks, which offer low-cost mortgages.

It is difficult to know how much of the $200 billion injection money at the Government’s disposal will eventually be used because it plans to provide cash infusions when they are needed, rather than injecting money upfront, based on an estimate. It will make its first injection, of $1 billion, this week.

Daniel Mudd and Richard Syron, the chief executives of Fannie and Freddie, will leave their roles. Herb Allison, a former vice-chairman of Merrill Lynch and now chairman of TIAA-Cref, one of America’s biggest pension fund managers, becomes chief executive of Fannie. David Moffitt, from US Bancorp, moves to Freddie.

Freddie and Fannie

— The Federal National Mortgage Association (Fannie Mae) was established in 1938 as part of Franklin Roosevelt’s New Deal to kickstart the mortgage market after the Great Depression

— Fannie Mae was privatised by President Johnson in 1968. The Federal Home Loan Mortgage Corporation (Freddie Mac) was set up in 1970 to provide competition to Fannie

— Fannie Mae and Freddie Mac buy mortgages from banks and other lenders and sell them on to investors. Together they own or guarantee just under half the total value of home loans in the US

— The rescue will provide up to $200 billion in new capital

— Fannie Mae employs 5,700 staff and Freddie Mac has 5,000

— Shares in both Fannie and Freddie have lost 90 per cent of their value this year

— Fannie Mae claims to have helped 55 million families to own their homes

Times Recommends

• Equitable Life halts £7bn sale on market turmoil
• Potential buyers emerge to save Woolworths staff
• Terrorist attacks close Bombay Stock Exchange