Bailout Stings Fannie, Freddie Stocks, Bolsters Debt

By Reuters -  |  Posted 2008-09-08 Email Print this article Print
 
 
 
 
 
 
 

Equity markets around the world surged on the bailout news of Freddie Mac and Fannie Mae as hopes rose that the U.S. Treasury's plan to take control of the companies -- which together back about half of the country's $12 trillion in home mortgages -- might put at least a temporary floor under troubled financial markets. The government action came as worries heightened over shrinking capital at the companies, with the congressionally chartered companies suffering combined losses of nearly $14 billion in the last four quarters.

NEW YORK (Reuters) - Shares in mortgage finance companies Fannie Mae and Freddie Mac plunged while their debt soared Monday, one day after the U.S. government took over the companies, as investors bet the action would wipe out stockholders but fully guarantee their bonds.

Equity markets around the world surged on the bailout news as hopes rose that the U.S. Treasury's plan to take control of the companies -- which together back about half of the country's $12 trillion in home mortgages -- might put at least a temporary floor under troubled financial markets.

The Dow Jones industrial average surged 2 percent but Fannie Mae's and Freddie Mac's stocks got hammered, losing about 80 percent of their value and trading only a few cents above $1.

The government action came as worries heightened over shrinking capital at the companies, with the congressionally chartered companies suffering combined losses of nearly $14 billion in the last four quarters.

Large holders of their debt, including overseas central banks, had shown increasing nervousness over their financial health. The take-over came as welcome news to China and Japan, the biggest buyers of the two companies' bonds, who praised Washington for its rescue for the mortgage giants.

On Wall Street, though, many said the takeover of the institutions, which could be the biggest U.S. government bailout ever, was merely a symptom of the dismal state of credit markets.

This is only the latest in a string of bailouts, analysts noted, none of which has achieved any lasting success.

"The rapid tide of the financial market deterioration combined with the persistent escalation in unemployment has managed to overwhelm the effectiveness of these interventions," said Ashraf Laidi, chief FX strategist at CMC Markets US.



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