Mortgage Takeover Boosts Wall Street

Stocks mostly advanced Monday as investors rushed to lay bets on a recovery in the financial and housing sectors following the weekend announcement that the U.S. government plans to bail out mortgage lenders Fannie Mae and Freddie Mac. The Dow Jones industrials gained more than 100 points but the technology-heavy Nasdaq composite index declined.

The announcement Sunday that the Treasury Department was seizing control of the companies, which own or back about half the nation's mortgage debt, brushed aside investors' long-simmering worries that the pair would be felled by a spike in bad mortgage debt.

The plan to inject up to $100 billion in each of the government-chartered mortgage financiers could not only help lower mortgage rates but, some investors are hoping, buoy the overall economy.

The plan could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments.

But the government's steadying hand for two institutions that many Wall Street observers had said were simply too big to let fail still might not alleviate troubles of some homeowners who have fallen behind on their mortgages.

On CBS' The Early Show Treasury Secretary Henry Paulson told anchor Harry Smith that the government had no choice but to act.

"A failure by either one of these companies would cause great havoc in the economic system," Paulson said. "It would be a big blow to the average American, affect their budget, their ability to get a consumer loan, a car loan."

Peter Wallison, a Treasury Department general counsel during the Reagan Administration, told CBS Radio he sees it as a stabilizing step but thinks it's far from the end of the story:

"I think inevitably these companies have to be dealt with in some ways. They can't be continued as government-sponsored enterprise," he said.

CBS News correspondent Peter Maer said financial experts are approving of the government's bailout and say it's good news for home buyers and those seeking a second mortgage.

Greg McBride, a senior financial analyst with Bankrate.com, told CBS Radio, "The Government's takeover of Fannie Mae and Freddie Mac assures the continued availability of mortgage credit, and potentially at better terms than borrowers have been quoted recently."

But, Maer adds, the takeover offers no hope for homeowners already behind in their payments.

The weekend decision by the U.S. to bail out Fannie Mae and Freddie Mac delivered ripples of relief throughout Asia on Monday, lifting stocks of several major banks in the region.

The gains in big Japanese, Chinese and Australian banks that hold debt in the two U.S. companies was driven by optimism that Washington is acting aggressively to keep the mortgage giants from failing - and the U.S. housing crisis from spiraling out of control.

Japan and China are among the top foreign holders of U.S. securities, including Treasuries and U.S. agency debt, according to the U.S. Treasury.

Preventing "Armaggedon"

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said while the plan boosts confidence in sectors like financials and home builders, it doesn't immediately alleviate worries about other areas of the economy. Still, he said the move was far more welcome than a collapse of Fannie Mae or Freddie Mac.

"It saves Armageddon from happening," he said. "If you think about it this helps the financials, this helps the housing market. Tech took a huge hit last week. Does this really affect tech? I don't think so."

In midday trading, the Dow Jones industrial average rose 112.85, or 1.01 percent, to 11,333.81 after being up nearly 350 points in the early going.

Broader stock indicators were mixed. The Standard & Poor's 500 index jumped 6.80, or 0.55 percent, to 1,249.11, and the Nasdaq composite index fell 7.61, or 0.34 percent, to 2,248.27.

Bond prices pulled back Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.71 percent from 3.69 percent late Friday. The dollar was higher against other major currencies, while gold prices rose.

Common shareholders of the stock of Fannie Mae and Freddie Mac will be virtually wiped out by the plan, which would balloon the shares of companies to give a nearly 80 percent stake to the government. But the companies' shares had already suffered huge declines in the last year so many shareholders have already endured the majority of their losses.

Fannie Mae shares plunged $6.02, or 86 percent, to $1.02, while Freddie Mac fell $4.15, or 81 percent, to 95 cents.

Other financial names rallied, particularly those seen as having big exposure to mortgages. Bank of America Corp. jumped $1.33, or 4.1 percent, to $33.56, while Wachovia Corp. rose 84 cents, or 5 percent, to $17.59. Citigroup Inc. rose 76 cents, or 4 percent, to $19.83.

Among financials, Lehman Brothers Holdings Inc. was one of the few decliners, falling $2.86, or 18 percent, to $13.39 as investors worried that the No. 4 U.S. investment bank was having trouble finding an investor to help shore up its balance sheet.

Home builders also jumped alongside most financials. Lennar Corp. rose 52 cents, or 3.8 percent, to $14.08, and KB Home advanced $1.55, or 7.5 percent, to $22.16.

The U.S. government's plan also touched off a global stock rally Monday. Foreign investors holding debt of the companies were relieved as were investors simply looking for stronger growth from the U.S. economy, particularly as many economies abroad give off signs they are slowing. Japan's Nikkei stock average jumped 3.4 percent and Hong Kong's Hang Seng index surged 4.3 percent. Britain's FTSE 100 jumped 3.81 percent, Germany's DAX index rose 3.06 percent, and France's CAC-40 surged 3.42 percent.

Oil fell again after logging steep declines last week as investors worried that a slowing global economy would hurt demand. Light, sweet crude declined $1.18 to $105.05 on the New York Mercantile Exchange. Oil rose early Monday as Hurricane Ike fanned unease about the well-being of Gulf of Mexico oil infrastructure that could be in its path.

In corporate news, Washington Mutual Inc. fell 73 cents, or 17 percent, to $3.54 after removing Kerry Killinger from the chief executive spot. The savings and loan is working to overhaul its business, which has been hurt by bad mortgage debt. Alan H. Fishman is replacing Killinger.

Altria Group Inc. announced it will buy UST, the maker of Skoal and Copenhagen smokeless tobacco, for about $10.3 billion. The maker of Marlboro cigarettes said it will pay $69.50 per share. UST shares jumped Friday to finish at $67.55 following a report of the deal and gained 98 cents to $68.53 Monday. Altria rose 28 cents to $21.23.