U.S. Stocks Jump On Fannie, Freddie Bail-out
NEW YORK (MarketWatch) - Most U.S. stocks rose on Monday after the government seized mortgage giants Fannie Mae and Freddie Mac to prevent trillions of dollars in mortgage-backed securities from defaulting and bring down mortgage rates nationwide.
Some investors, meanwhile, hope the unprecedented move might finally point to the light at the end of the tunnel for the bad-home loans crisis that has plagued markets for over a year.
"Whether this is the beginning of the end or merely the end of the beginning is yet to be determined," said Paul Nolte, director of investments at Hinsdale Associates.
"However, it is certainly the hope that this move will begin to calm the housing market and allow mortgage money to once again flow," he said.
The Dow Jones Industrial Average gained 145 points, or 1.3%, to 11,366.79, with 26 of its 30 components rising. The market lost a good chunk of its gains at the open, when the Dow first surged 350 points to a high of 11,570.
Blue-chip financial stocks helped lead the way, boosted by a 5.4% jump in shares of Bank of America , one of several major banks in competition with Fannie Mae and Freddie Mac .
Amid hopes for improvement in the slumping housing market, shares of home-improvement retailer Home Depot gained 5%.
Boeing Co. bucked the trend as machinists went on strike for a third day to protest the airplane maker's labor-contract offer.
In the broad market, the shares of homebuilders led the consumer discretionary sector to jump 2.6% on the broad S&P 500 index. Shares of Centex gained, Lennar Corp. , and KB Home , all rose sharply.
The S&P 500 rose 12 points, or 1%, to 1,254.
Meanwhile, the Nasdaq Composite sank 4 points, or 0.2%, to 2,251. Shares of UAL Corp. , which trade on Nasdaq, first sank and were then halted after an erroneous report that the airline was filing for bankruptcy. They remained weak, but off their lows after resuming trade.
Energy stocks slumped 2%, with crude oil futures edging lower as traders tried to gauge Hurricane Ike's potential to disrupt oil production in the Gulf of Mexico and took positions ahead of a decision on production quotas by major oil exporters Tuesday.
The bail-out
"As house prices, earnings and capital have continued to deteriorate, Fannie and Freddie's ability to fulfill their mission has deteriorated," said James Lockhart, head of Federal Housing Finance Agency, which will now oversee Freddie and Fannie.
The companies will be run by the government indefinitely, with their chief executives to be replaced and Washington investing up to $100 billion in each of the two to keep them solvent.
"Putting the GSEs into conservatorship to bring liquidity back into the mortgage market will be viewed positively by investors in our opinion and should result in a rally in financial stocks," said Paul Miller, an analyst at Friedman Billings Ramsey & Co.
But news about the bailout sent the shares of Fannie Mae and Freddie Mac plunging by 84% and 80% respectively, weighing on the broad financial sector. The U.S. Treasury will receive warrants to purchase common stock of each GSE representing 79.9% of the common stock.
"The news [...] is a positive that is unless you owned the common stock of those two companies," said Robert Pavlik, chief investment officer at Oaktree Asset Management.
Preferred stock shareholders will be "second, after the common shareholders, in absorbing losses," Treasury Secretary Hank Paulson said Sunday. The Federal Deposit Insurance Corp. will help small banks with Fannie and Freddie exposure absorb any losses.
In bonds, Treasury prices tumbled as traders showed renewed risk appetite in the wake of the U.S. government's decision
In the currency market, the dollar index , which measures the U.S. unit against a basket of major currencies, gained nearly 1% to 79.59.
With rising riskappetite, the Japanese yen got punished across the board, notably against higher-yielding currencies like the British pound and Australian dollar that have suffered over the last month.
On the New York Stock Exchange, trading volumes showed 335 million shares exchanging hands, while 284 million shares traded on the Nasdaq stock market. Declining issues topped gainers by 5 to 4 on the NYSE and by 4 to 3 on Nasdaq.
No silver bullet
Analysts were quick to caution that the credit crisis wasn't necessarily over because of the move.
"Government actions continue to attempt to maintain the status quo among financial institutions," said Richard Bernstein, chief investment strategist for Merrill Lynch, who advised selling financials into strength.
"There has yet to be a remedy that approaches the credit crisis as a systemic problem. As with the Bear Stearns situation, the GSEs are being treated as a one-off problem."
There was financial news outside of Fannie and Freddie.
Washington Mutual , one of the lender's most affected by the credit crunch, has ousted Kerry Killinger as chief executive. WaMu's shares jumped 8%.
Lehman Bros. Holdings , meanwhile, has launched a sweeping shake-up of senior management, including the departure of some of its international operational chiefs, the Financial Times reported.
On the deals front, Altria Group has agreed to pay $69.50 a share, or more than $10 billion, for smokeless tobacco maker UST Inc. , shares of which gained 25% to $67.55 on Friday on speculation over just such a buyout.
ConocoPhillips will contribute as much as $8 billion for a 50% share of an Australasian natural gas business with Origin Energy, which has been fighting off a takeover bid from BG Group.
International stock markets surged, led by financials including UBS and Japan's Mizuho Financial Group. The Nikkei 225 rose 3.4% in Tokyo and the CAC 40 gained 4.7% in Paris.
By Nick Godt