Fannie and Freddie shares dive, debt rallies

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(Agencies)
Updated: 2008-09-08 23:28

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

Secretary of the Treasury Henry Paulson (L) and Jim Lockhart, director of the new independent regulator, the Federal Finance Agency (FHFA), announce that the government is taking control of mortgage finance companies Fannie Mae and Freddie Mac during a news conference at the Office of Management Supervision in Washington, DC, September 7, 2008. [Agencies]

Equity markets around the world surged on the bailout news as hopes rose that the US Treasury's plan to take control over the companies, which together back about half of the country's $12 trillion in mortgages, might put at least a temporary floor under troubled financial markets.

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The Dow Jones industrial average (.DJI) surged over 2 percent, but Fannie Mae's (FNM.N) stock got hammered, swooning more than about 80 percent to $1.30. Freddie Mac (FRE.N) shares fell more than 75 percent to $1.25.

Many on Wall Street 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 (FRE.N) 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. They had plenty of reason to cheer.

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