Wall Street soars after Fannie, Freddie takeover

McClatchy NewspapersSeptember 8, 2008 

WASHINGTON — Wall Street gave a vote of confidence Monday to the Bush administration's historic seizure of mortgage-finance giants Fannie Mae and Freddie Mac over the weekend.

The Dow Jones Industrial Average rallied 340 points minutes after the 9:30 a.m. opening of the New York Stock Exchange. The blue-chip stock index ended the trading day up 290 points, or 2.6 percent.

Treasury Secretary Henry Paulson announced Sunday that he was seizing the two entities and putting them under the control of their regulator, the Federal Housing Finance Agency. It will fall to the next president, he said, to determine whether they return as hybrid companies that operate for profit but enjoy implicit government backing.

The shares of most major financial institutions soared Monday morning during the run-up of stock prices. That reflects investors' belief that the weekend move to stabilize the mortgage-finance market may benefit the broader banking and finance sectors.

Some analysts saw trouble in the apparent euphoria, however.

"Jubilation over the fact that we had to take over, commit up to $200 billion of taxpayers' money, wipe out the equity of, destroy preferred investors in order to bail out the two largest financial companies in the world is insanity," warned Joshua Rosner, the managing director of the economic research firm Graham Fisher & Co.

"It was generally the right thing to do but that is different from it being positive for capital markets," he said. "The markets are rallying aggressively. Many banks who will take losses . . . are rallying as well. Perhaps there is an assumption that the government will not allow anyone to fail."

Both presidential campaigns welcomed the weekend action as necessary, but the chairman of the Senate Banking Committee, Sen. Christopher Dodd, D-Conn., had only a lukewarm response and said in a statement late Sunday that he'd hold hearings on the rescue effort soon.

"There are still many unanswered questions about the administration's plan, and Americans deserve to know if this unprecedented (takeover) will help keep mortgages affordable, stabilize the markets and protect taxpayer interests," he said. "Furthermore, we need to understand the circumstances which led the administration to change course. Just weeks ago, Secretary Paulson testified that he thought he would never use this authority, a message he reiterated until very recently."

Paulson on Sunday cited inaccurate accounting at Fannie and Freddie and growing volatility in world financial markets as the reasons for taking what he described as a preventive move to stabilize the global markets.

Fannie and Freddie buy mortgages from commercial banks and other lenders, then package them into bonds — called mortgage-backed securities — that are sold to investors ranging from mutual funds to retirement plans and foreign central banks. This allows U.S. banks to pass on the loans, leaving their own balance sheets open for more lending.

Brian Bethune, the chief U.S. economist for forecaster Global Insight in Lexington, Mass., said the federal action wouldn't provoke an immediate bump in the slumping U.S. housing market but that it could help by next year.

"With substantial pending declines in mortgage rates in the pipeline by the end of 2008, there may be a glimmer of upside hope to the U.S. housing outlook for the second half of 2009," he said.

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