Fannie, Freddie shares sink on U.S. rescue

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Stock prices are delayed 15 minutes. Source: Globe and Mail.

Shares of Fannie Mae and Freddie Mac took a dive while their debt soared Monday, as investors bet the U.S. government's takeover of the mortgage finance firms would wipe out shareholders but fully guarantee their bonds.

Equity markets around the world surged on the bailout news as hopes rose that the U.S. Treasury's plan to take control over the companies, which together back about half of the country's $12 trillion US in mortgages, might put at least a temporary floor under troubled financial markets.
   
The Dow Jones industrial average surged over two percent, but Fannie Mae's stock got hammered, swooning more than about 80 percent to $1.30. Freddie Mac shares fell more than 75 percent to $1.25.

One Wall Street analyst said the takeover of the institutions was merely a symptom of the dismal state of credit markets.
   
"This euphoria might fade, because Fannie and Freddie are not the problem," said Christopher Low, chief economist at FTN Financial. "Their woes are a symptom of a worldwide contraction in credit that may not be cured by the decision."
   
Treasury Secretary Henry Paulson, who made a number of television appearances Monday, said he could not estimate exactly how much of a burden the bailout would be for taxpayers. Speaking to CNBC, he said this would be impossible to tally until the extent of declines in the mortgage market were fully known.
   
The takeover came as welcome news to officials in Asia, where central banks are some of the biggest holders of the agencies' bonds. 

The yield premium on agencies' debt against Treasury bonds narrowed by at least 20 basis points, traders said. Bond prices move in inverse relation to yields.
   
"This is the biggest event in my 21 years in the business," said Arthur Frank, director and head of mortgage-backed securities research at Deutsche Bank.
   
The bailout will trigger one of the largest ever payments in the credit default swap market, analysts said on Monday.
   
It is the first time a company in the benchmark investment-grade credit derivative index has had a credit event, JPMorgan analyst Eric Beinstein said in a report on
Monday.
   
Freddie and Fannie, which serve a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.
   
The government bond market, meanwhile, suffered as investors reasoned the bailout would vastly increase the amount of debt needed to fund the government's obligations over the medium term. Yields on two-year Treasury notes jumped nearly a half percentage point on the news.
   
Under the government takeover plan announced Sunday, the Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each.
   
Paulson had hatched a plan in early July to shore up the struggling firms with a promise of fresh loans and a government injection of capital if either company was pushed to the brink of collapse.
   
But talks on an aid package ended abruptly in the past few days and policy-makers decided to seize the firms, industry sources with knowledge of the events said.

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