Post by 76chevy on Sept 8, 2008 15:38:00 GMT -5
U.S. Takeover of Mortgage Giants Lifts Stock Markets
www.nytimes.com/2008/09/09/business/worldbusiness/09markets.html?_r=1&hp=&oref=slogin&pagewanted=print
U.S. Takeover of Mortgage Giants Lifts Stock Markets
By MICHAEL M. GRYNBAUM and DAVID JOLLY
Investors offered a warm greeting for the government’s plan to take over Fannie Mae and Freddie Mac, sending the Dow Jones industrial average up nearly 300 points on Monday in a daylong stock rally, even as some fretted that other problems in the economy remain unaddressed.
While analysts were divided on where the stock market would go after Monday’s initial relief rally, this weekend’s actions by the Treasury Department marked an end to a period of extended uncertainty about the fate of the giant mortgage buyers, which play a critical role in the American financial structure.
Much of the gains in the Dow came within minutes of the opening bell. The blue-chip index closed up 2.5 percent at 11,510.74. The Standard & Poor’s 500-stock index rose about 2 percent, while the technology-heavy Nasdaq trailed with a 0.6 percent gain.
Financial stocks led the surge as investors hoped that the Treasury Department’s decision to place Fannie and Freddie in a conservatorship could signal a turning point in the credit crisis that has troubled investment banks for nearly a year. Shares of Citigroup, a Dow component, traded 6.6 percent higher and Bank of America shares rose 7.8 percent. Stocks were also helped by a strong move in the dollar, which is rising toward a 12-month high against the euro, and further retrenchment in oil prices, which fell $1 to $105.23 a barrel.
Shares of Fannie Mae and Freddie Mac, each lost more than 80 percent and closed the day under $1 a share. The Treasury’s plan will virtually wipe out shareholders’ value in the companies, although investors who own shares of the company’s debt will be relatively protected.
There were also positive signs that investors were greeting the government’s actions as an effective backstop for the outstanding debt of Fannie and Freddie. Spreads between the company’s debt and equivalent Treasury bills fell sharply on Monday; by midmorning, they were lower than historical averages, meaning that investors now see far less risk to investing in Fannie and Freddie debt than they did last week.
Still, it was unclear how long the rally would last. The American economy is facing myriad hurdles, and the slumping housing market — which underlies many of the current financial problems — has not yet begun to recover from the sharp decline of the last several years. Many analysts were still trying to sort out all the implications of the government’s unprecedented actions over the weekend, which could become one of the most expensive financial bailouts in American history.
The gains on Wall Street followed strong rallies in foreign stocks overnight and on Monday morning. In Europe, the FTSE 100 index in London rose 3.8 percent before trading was halted by a technical glitch, while the DJ Euro Stoxx 50 index, a barometer of euro-zone blue chips, rose 3.09 percent. The Nikkei 225 stock average closed Tokyo trading 3.4 percent higher, and the Hang Seng index in Hong Kong rose 4.3 percent.
In Tokyo, Mitsubishi UFJ Financial rose 10 percent, and Sumitomo Mitsui Financial climbed more than 15 percent. In Europe, UBS gained 12 percent and Deutsche Bank rose 8 percent and HSBC Holdings added 5 percent.
The dollar rose against the yen and euro in New York trading. The yield on 10-year Treasury notes rose 10 points, to 3.802, amid expectations that the American government will need to issue more debt.
Investors said the provision in the bailout plan under which the Treasury would begin buying some of Fannie and Freddie’s securities would help to restore confidence.
“The fact that they’ll be able to buy mortgage-backed securities from other banks is really important,” William de Vijlder, chief investment officer at Fortis Investment Management in Brussels, said, “because it means the U.S. is serious about fixing the problems in the market.” The “doomsday scenario,” in which write-downs of those securities results in a continuing cycle of bank write-downs and losses, is over, he added.
“I expect a positive reaction in the market in the near term,” he said. “The problems have not gone away, but along with the decline in the oil price, this helps to put the machinery into place by which things will eventually return to normal.”
But the takeover of the companies also reinforced concerns about troubles of the American economy and highlighted its significant reliance on foreign investors, particularly in Asia.
Almost immediately, the move will protect central banks in Asia, which have amassed hundreds of billions of dollars of Fannie Mae and Freddie Mac bonds, from taking big losses.
Treasury’s purchase of mortgage securities may help lower interest rates on home loans, which this summer rose to their highest level in a year. That reduction in housing costs should help cushion the decline in home prices, which have already fallen more than 18 percent from their peak in the summer of 2006, said Bill Gross, the co-chief investment officer of Pimco, the large bond investment firm.
“It goes a long way to stopping this housing deflation which I think and Pimco thinks is at the heart of the problem,” he said.
But the plan also raises questions about the fragility of the American economy, which will continue to figure into investor calculations. On Friday, for instance, the Labor Department reported that the unemployment rate climbed to a five-year high of 6.1 percent. And while significant, the rally in global share prices Monday only partly restores the losses suffered in the indexes last week, suggesting investors do not expect an end to the market misfortunes.
Perhaps most important, despite the government support for Fannie Mae and Freddie Mac, any stabilization in home prices is still a way off, and the waves of foreclosures battering the housing market are not likely to reverse right away. What is more, the plan will do little to stem losses in risky home loans, commercial mortgages and debt used by private equity firms to acquire companies. Financial institutions have already taken write-downs of $500 billion and the International Monetary Fund projects that losses could reach $1 trillion.
“It’s a good half a plan, but its still just half a plan,” said Joseph Mason, a finance professor at Louisiana State University, who cautioned that the government needed to outline its longer-range plan for the two companies and the credit markets to restore greater confidence to markets.
For foreign investors, particularly in Asia, the takeover will do little to assuage mounting fears that the economic problems in the United States are not only far from over but could also hurt growth in China, India and other emerging economies.
“People don’t know about the depth of the problem,” said Ifzal Ali, the chief economist of the Asian Development Bank in Manila.
Asian central banks, particularly the People’s Bank of China, have emerged over the last several years as important buyers of bonds from Fannie Mae and Freddie Mac, the two American government-sponsored enterprises.
Standard & Poor’s estimates that the People’s Bank of China held $340 billion of these agency securities at the end of June, but has been unable to estimate Asian holdings over all because the data is too unclear.
The Treasury plan met Monday with a positive response from Asian monetary authorities.
“I think it will have a positive impact on the world economy as it eases worries over the U.S. economy through more stable financial markets in the United States,” the Japanese finance minister, Bunmei Ibuki, said in Tokyo. “Japan welcomes the steps as it removes one unstable factor in the United States, especially because the dollar is a key international currency.”
The Treasury secretary, Henry M. Paulson Jr., was to explain the details of the rescue to his Group of 7 counterparts Monday evening, he said.
“Different people may have different responses,” Zhou Xiaochuan, governor of the Chinese central bank, said in Basel, Switzerland. “From my point of view this is positive.”
While central banks around the world have historically accounted for a quarter of purchases of Freddie Mac debt, their share rose to 37 percent for debt issued since 2006, according to an analysis of the latest available data by CreditSights that was released on Wednesday. The bulk of those purchases appear to have been by Asian central banks, which have been buying dollar-denominated securities at a record pace to slow their currencies’ rise against the dollar and thus preserve the competitiveness of their exports.
Keith Bradsher contributed reporting from Hong Kong, and Vikas Bajaj from New York.
www.nytimes.com/2008/09/09/business/worldbusiness/09markets.html?_r=1&hp=&oref=slogin&pagewanted=print
U.S. Takeover of Mortgage Giants Lifts Stock Markets
By MICHAEL M. GRYNBAUM and DAVID JOLLY
Investors offered a warm greeting for the government’s plan to take over Fannie Mae and Freddie Mac, sending the Dow Jones industrial average up nearly 300 points on Monday in a daylong stock rally, even as some fretted that other problems in the economy remain unaddressed.
While analysts were divided on where the stock market would go after Monday’s initial relief rally, this weekend’s actions by the Treasury Department marked an end to a period of extended uncertainty about the fate of the giant mortgage buyers, which play a critical role in the American financial structure.
Much of the gains in the Dow came within minutes of the opening bell. The blue-chip index closed up 2.5 percent at 11,510.74. The Standard & Poor’s 500-stock index rose about 2 percent, while the technology-heavy Nasdaq trailed with a 0.6 percent gain.
Financial stocks led the surge as investors hoped that the Treasury Department’s decision to place Fannie and Freddie in a conservatorship could signal a turning point in the credit crisis that has troubled investment banks for nearly a year. Shares of Citigroup, a Dow component, traded 6.6 percent higher and Bank of America shares rose 7.8 percent. Stocks were also helped by a strong move in the dollar, which is rising toward a 12-month high against the euro, and further retrenchment in oil prices, which fell $1 to $105.23 a barrel.
Shares of Fannie Mae and Freddie Mac, each lost more than 80 percent and closed the day under $1 a share. The Treasury’s plan will virtually wipe out shareholders’ value in the companies, although investors who own shares of the company’s debt will be relatively protected.
There were also positive signs that investors were greeting the government’s actions as an effective backstop for the outstanding debt of Fannie and Freddie. Spreads between the company’s debt and equivalent Treasury bills fell sharply on Monday; by midmorning, they were lower than historical averages, meaning that investors now see far less risk to investing in Fannie and Freddie debt than they did last week.
Still, it was unclear how long the rally would last. The American economy is facing myriad hurdles, and the slumping housing market — which underlies many of the current financial problems — has not yet begun to recover from the sharp decline of the last several years. Many analysts were still trying to sort out all the implications of the government’s unprecedented actions over the weekend, which could become one of the most expensive financial bailouts in American history.
The gains on Wall Street followed strong rallies in foreign stocks overnight and on Monday morning. In Europe, the FTSE 100 index in London rose 3.8 percent before trading was halted by a technical glitch, while the DJ Euro Stoxx 50 index, a barometer of euro-zone blue chips, rose 3.09 percent. The Nikkei 225 stock average closed Tokyo trading 3.4 percent higher, and the Hang Seng index in Hong Kong rose 4.3 percent.
In Tokyo, Mitsubishi UFJ Financial rose 10 percent, and Sumitomo Mitsui Financial climbed more than 15 percent. In Europe, UBS gained 12 percent and Deutsche Bank rose 8 percent and HSBC Holdings added 5 percent.
The dollar rose against the yen and euro in New York trading. The yield on 10-year Treasury notes rose 10 points, to 3.802, amid expectations that the American government will need to issue more debt.
Investors said the provision in the bailout plan under which the Treasury would begin buying some of Fannie and Freddie’s securities would help to restore confidence.
“The fact that they’ll be able to buy mortgage-backed securities from other banks is really important,” William de Vijlder, chief investment officer at Fortis Investment Management in Brussels, said, “because it means the U.S. is serious about fixing the problems in the market.” The “doomsday scenario,” in which write-downs of those securities results in a continuing cycle of bank write-downs and losses, is over, he added.
“I expect a positive reaction in the market in the near term,” he said. “The problems have not gone away, but along with the decline in the oil price, this helps to put the machinery into place by which things will eventually return to normal.”
But the takeover of the companies also reinforced concerns about troubles of the American economy and highlighted its significant reliance on foreign investors, particularly in Asia.
Almost immediately, the move will protect central banks in Asia, which have amassed hundreds of billions of dollars of Fannie Mae and Freddie Mac bonds, from taking big losses.
Treasury’s purchase of mortgage securities may help lower interest rates on home loans, which this summer rose to their highest level in a year. That reduction in housing costs should help cushion the decline in home prices, which have already fallen more than 18 percent from their peak in the summer of 2006, said Bill Gross, the co-chief investment officer of Pimco, the large bond investment firm.
“It goes a long way to stopping this housing deflation which I think and Pimco thinks is at the heart of the problem,” he said.
But the plan also raises questions about the fragility of the American economy, which will continue to figure into investor calculations. On Friday, for instance, the Labor Department reported that the unemployment rate climbed to a five-year high of 6.1 percent. And while significant, the rally in global share prices Monday only partly restores the losses suffered in the indexes last week, suggesting investors do not expect an end to the market misfortunes.
Perhaps most important, despite the government support for Fannie Mae and Freddie Mac, any stabilization in home prices is still a way off, and the waves of foreclosures battering the housing market are not likely to reverse right away. What is more, the plan will do little to stem losses in risky home loans, commercial mortgages and debt used by private equity firms to acquire companies. Financial institutions have already taken write-downs of $500 billion and the International Monetary Fund projects that losses could reach $1 trillion.
“It’s a good half a plan, but its still just half a plan,” said Joseph Mason, a finance professor at Louisiana State University, who cautioned that the government needed to outline its longer-range plan for the two companies and the credit markets to restore greater confidence to markets.
For foreign investors, particularly in Asia, the takeover will do little to assuage mounting fears that the economic problems in the United States are not only far from over but could also hurt growth in China, India and other emerging economies.
“People don’t know about the depth of the problem,” said Ifzal Ali, the chief economist of the Asian Development Bank in Manila.
Asian central banks, particularly the People’s Bank of China, have emerged over the last several years as important buyers of bonds from Fannie Mae and Freddie Mac, the two American government-sponsored enterprises.
Standard & Poor’s estimates that the People’s Bank of China held $340 billion of these agency securities at the end of June, but has been unable to estimate Asian holdings over all because the data is too unclear.
The Treasury plan met Monday with a positive response from Asian monetary authorities.
“I think it will have a positive impact on the world economy as it eases worries over the U.S. economy through more stable financial markets in the United States,” the Japanese finance minister, Bunmei Ibuki, said in Tokyo. “Japan welcomes the steps as it removes one unstable factor in the United States, especially because the dollar is a key international currency.”
The Treasury secretary, Henry M. Paulson Jr., was to explain the details of the rescue to his Group of 7 counterparts Monday evening, he said.
“Different people may have different responses,” Zhou Xiaochuan, governor of the Chinese central bank, said in Basel, Switzerland. “From my point of view this is positive.”
While central banks around the world have historically accounted for a quarter of purchases of Freddie Mac debt, their share rose to 37 percent for debt issued since 2006, according to an analysis of the latest available data by CreditSights that was released on Wednesday. The bulk of those purchases appear to have been by Asian central banks, which have been buying dollar-denominated securities at a record pace to slow their currencies’ rise against the dollar and thus preserve the competitiveness of their exports.
Keith Bradsher contributed reporting from Hong Kong, and Vikas Bajaj from New York.
