The financial stability of Fannie Mae and Freddie Mac would have to be protected at all costs, as their falls would cause cataclysmic effects not just in the US but the rest of the world, including Australia.

Speaking at the 2008 Russell Australasian Investment Summit in Melbourne yesterday, David Frazer, client services and marketing manager at Western Asset Management said both housing agencies were critical financing mechanisms for the US housing market and for many years have fulfilled that role down to a tee.

Combined, the two entities control around a whopping $5 trillion worth of debt. A ratings downgrade of these two entities would spiral the US housing market - and overall economy - into meltdown mode, which in turn would drive problems in overseas markets.

"The reason why they matter today is because [these] agencies are now basically underwriting all the lending in the US housing market.

"The concept of these two entities getting into trouble or potentially failing… the repercussions for the financial markets are horrendous," he said.

Both agencies were not directly involved in the sub-prime debacle because they did not underwrite or guarantee sub-prime loans. They did however boast retained portfolios of these loans, which in turn saw them burn tens of billions of dollars due to sub-exposure on their balance sheets.

However, Frazer is confident that the Fed would move swiftly - and if needed, brutally - to sustain the financial health of twin giants.

"The consequences of Bear Sterns failing for example, was [seen as] too much of a risk. The Fed basically moved to engineer a takeover by JPMorgan, and the same will be true here [with the two entities]," he said.