World stocks surge on US mortgage plan

September 9, 2008
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, NEW YORK, September  9 – Global stocks soared Monday in a massive relief rally after the US government took over ailing mortgage giants Fannie Mae and Freddie Mac, easing fears of a global financial meltdown.

Dealers said investors around the world drove markets higher as they bet the US move would end months of turmoil sparked by the US subprime home loan crisis.

In New York, the Dow Jones Industrial Average leapt 2.58 percent to 11,510.74 and the tech-heavy Nasdaq composite rose a more modest 0.62 percent to 2,269.76.

The broad-market Standard & Poor\’s 500 index advanced 2.05 percent to 1,267.79.

US Treasury Secretary Henry Paulson said Sunday the government stepped in because the potential damage to the economy and financial system from their failure was too serious to safely ignore.

Fannie Mae and Freddie Mac together back nearly half of all US mortgages and had been in danger of going bust under the weight of billions of dollars of losses as subprime or higher-risk borrowers defaulted on their loans.

Shares in the firms lost most of their value, as expected — Fannie Mae plunged 90 percent and Freddie Mac 83 percent — but the rest of the market celebrated the news.

 "Although Fannie and Freddie shareholders will lose, and the move will cost US taxpayers tens of billions of dollars, the housing market will receive an important boost via lower mortgage rates and more available mortgage credit," said chief economist Mark Zandi at Economy.com.

Rod Smyth at Riverfront Investment Group said the rescue "makes a severe recession driven by a house price-credit spiral highly unlikely."

Still, he said it "probably does not prevent home prices from continuing to fall or the economy experiencing close to zero growth for several more quarters."

In London, the FTSE 100 blue-chip index jumped 3.92 percent to 5,446.30 despite technical problems that prevented trade for much of the day.

In Paris, the CAC 40 index vaulted 3.42 percent at 4,340.18 and in Frankfurt the DAX jumped 2.22 percent to 6,263.74 points.

Some analysts said the rescue plan effectively means the US government becomes the ultimate guarantor for more than five trillion dollars of loans, effectively doubling the US national debt to 10 trillion dollars in one go.

Robert Eisenbeis, economist at Cumberland Advisors, said "there are many good things" about the plan and that it should help ease tight credit for mortgages.
"But when one delves more deeply into the plan there are many problems and questions," he added.

"What Treasury clearly has done is punted the actual dirty details of handling these two hot potatoes to the next administration, with no clear exit strategy nor any practical solutions to the fundamentally flawed business model that Secretary Paulson referred to on several occasions."

Fred Dickson at DA Davidson & Co. said, "We don\’t see this action as being a classic event that triggers the start of a long-term, sustainable rally" although it helps steady the market.

"There is still a lot of heavy lifting needed for the economy to get back on track and other elements of the financial complex to be put back together that would result in the banks beginning to extend credit needed to stimulate long-term economic growth," he said.

In other markets, Brazil\’s Bovespa rallied 2.35 percent and Toronto\’s S&P/TSX advanced 1.27 percent.

Asian markets, the first to trade on the takeover announcement, posted sharp gains to set up Europe and then the US markets for a strong day.

Japanese share prices soared 3.38 percent.

"The US bailout announcement came just when Japanese bank stocks had been heavily sold," Credit Suisse analyst Shinichi Ina said in Tokyo.

Hiroichi Nishi, general manager at Nikko Cordial Securities, likened the US government action to Japan\’s bailout of faltering Japanese banks in the late 1990s in a bad-loans crisis.

Hong Kong shares jumped 4.3 percent and Sydney closed up 3.9 percent.

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