The Government Takes Control of Fannie & Freddie
Monday, September 08, 2008SUSIE GHARIB: Stocks markets around the world today applauded the U.S. government bail out of Fannie Mae and Freddie Mac. Investors hope the bold action to rescue the two mortgage finance giants will help stabilize the housing and financial markets. The Dow surged 289 points, the NASDAQ rose 13. And major markets in Europe and Asia jumped by 3.5 percent or more. Financial stocks led the rally, but shares of Fannie plummeted 90 percent, and Freddie plunged 83 percent. Both now trade under a dollar a share. Also moving today, mortgage rates. The average rate of a 30-year fixed mortgage dropped today to 6 percent, down from 6.5 percent. We have two reports tonight looking at the impact of the government's dramatic move on the ailing housing market and the struggling stock market. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The bailout of Fannie Mae and Freddie Mac lifts at least temporarily a dark cloud that has been hovering over Wall Street for months. While many stocks gained ground today, the beaten-down financial sector was a big beneficiary of the government's decision to rescue the mortgage giants. Experts say investors were reassured that major U.S. financial institutions will not be allowed to fail. UBS floor trader Art Cashin viewed today's market activity as a relief rally.
ARTHUR CASHIN, DIRECTOR, NYSE FLOOR OPERATIONS, UBS: This looks like Bear Stearns on steroids. I'm not sure it's going to have a very long shelf life, and I'm not even sure that it's going to improve the mortgage picture around the nation.
PRATT: Market pros like Cashin almost universally view the bailout as a positive for stocks, but many are the doubtful the euphoria will last. They point to a list of worries that investors are likely to focus on. Not only is the housing market in the midst of its worst recession in decades, but U.S. economic problems are spreading around the globe. Lehman Brothers European economist Michael Hume thinks the U.S. plan will help economies across the pond.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROTHERS: This should help to liquefy the markets slightly. It should provide, certainly, confidence through the impact on bank shares directly, but also just providing confidence across a whole range of financial markets.
PRATT: And while the bailout is likely to stabilize credit markets, it's questionable how quickly consumers here in the U.S. will feel more secure about their spending. Against that backdrop, portfolio manager Jim Awad says today's news does not alter his guarded opinion of stocks.
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: I think the outlook for the market in the short term is uncertain. We have work to do. I think we are in the sorting out process. I would not expect any major progress for the markets in the next few months.
PRATT: Other experts, however, view the bailout as the beginning of a sea change in investor sentiment. Wachovia Securities strategist Scott Wren encourages equity investors to capitalize on that change by buying industrial and consumer discretionary stocks.
SCOTT WREN, SENIOR EQUITY STRATEGIST, WACHOVIA SECURITIES: The economy and the stock market are at important inflection points, and if you have been playing defense for the last couple of years, that has been good. But now is time to start to change your portfolio orientation. We've taken the initial steps, and I think over that multi-year period you're going to be very happy owning stocks.
PRATT: Many market pros were particularly encouraged that today's rally accelerated toward the close of trading. But it's also important to note that the major averages are still down about 13 and 14 percent for the year. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue in Washington. Fannie Mae and Freddie Mac hold or guarantee nearly $5.5 trillion in mortgages. Now, that's the U.S. government's responsibility. Treasury's deputy assistant secretary, Jeremiah Norton says the explicit government backing should provide stability to the mortgage market.
JEREMIAH NORTON, DEPUTY ASSISTANT SECRETARY, TREASURY DEPARTMENT: This announcement will help show the world that invests in the U.S. mortgage market that the U.S. government stands with the mortgage market with these entities. And so the reception from investors around the world will flow into the home buyer and his or her ability to purchase a home.
DHUE: Mortgage rates fell today on the Treasury move, with 30-year fixed rate loans dropping from 6.5 near 6 percent, and could fall further. Analyst Jaret Seiberg says that trend, coupled with the new housing bill aimed at preventing foreclosures and boosting home sales and the takeover of Fannie and Freddie, could revive the housing market.
JARET SEIBERG, POLICY ANALYST, STANFORD GROUP: So we're certainly looking for signs that a turnaround could be in effect by early next year, whether that's sustainable once all this stimulus expires is the real question.
DHUE: While the government's action may continue to bring down mortgage rates, it probably won't ease the broader consumer credit crunch that has struck everything from home equity lines of credit to auto loans. ISI analyst Andy LaPerriere says it's unlikely to change the fundamental problems.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The primary driver of what has been happening is higher down payment requirements, higher credit scores required, documenting your income, real appraisals. This is the big shift that has taken place in the mortgage market. This plan does not fundamentally alter that, and so it's only going to have a limited impact.
DHUE: And it will have limited impact on consumers facing foreclosure or who are trying to sell a house in a saturated market. For them, the Treasury plan offers little relief. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
