Wall Street finally got what it's been angling for: a bailout of Fannie Mae and Freddie Mac that could aid a recovery of the broken U.S. housing market and arrest a slide in stock and credit markets worldwide.
Overall, the move is a positive for banks around the world, including Citigroup Inc., Merrill Lynch & Co. and UBS AG that invested in U.S. mortgages, according to Daniel Alpert, managing director at the investment bank Westwood Capital. And in electronic trading Sunday evening, futures for the major U.S. stock indexes all rose about 2 percent.
"There's no doubt in my mind that this will stabilize the mortgage market," Alpert said.
The government's decision Sunday to take control of the two companies — which own or guarantee about half the nation's mortgage debt — removes a huge cloud that has been hovering over skittish markets.
Still, many investors likely will want to see hard evidence of home prices bottoming before they jump back into stocks wholeheartedly. They're also going to be asking what the government will do next to help distressed homeowners pay their mortgages and get people to start buying houses again.
"Right now, Fannie and Freddie are the mortgage market, and that has been choked. If this helps to clear the way for the housing market to recover, it will filter through to the rest of the market," said Quincy Krosby, chief investment strategist at The Hartford. "Anything that helps bring a bottom to housing prices, helps put in a floor, is going to be a boon for the overall market."
Stock markets around the globe have been extremely volatile and directionless lately. The Dow Jones industrial average is still above its mid-July lows, but remains down more than 20 percent from the record it reached last October.
Companies have struggled as credit has gotten more expensive — or impossible to obtain. Chrysler Financial, for example, was recently only able to renew $24 billion of its $30 billion in credit lines, while the clothing retailer Steve & Barry's LLC blamed its inability to borrow money as it sought bankruptcy court protection in July.
A big reason for the volatility had been the uncertainty over the fate of Fannie Mae and Freddie Mac, which the U.S. Treasury placed into a conservatorship.
"The clarity and certainty it will provide to the status of the two institutions should have a stabilizing effect on the markets, banking system and the mortgage industry," Federal Insurance Deposit Corp. Chairman Sheila C. Bair said in a statement.
The bailout itself does have its negatives — notably, diluting Fannie's and Freddie's common and preferred shares to near-worthless levels.
However, those securities have plummeted so much over the past year that holders have already seen the bulk of their losses. Moreover, the FDIC's Bair pointed out that only a few small institutions have significant exposure to Fannie and Freddie's stock, and that regulators will work closely with those banks to develop capital-restoration plans.
Questions remain about whether financial institutions are valuing their debt-related assets correctly, according to Westwood Capital's Alpert.
But the government's decision to inject more money into the debt market — a multi-trillion-dollar source of funding for the world's businesses — by buying Fannie and Freddie securities should help stanch bank's losses. Soaring mortgage defaults led to a seize-up last summer in the debt market that has only worsened as home prices have continued to fall. The credit crisis has caused the financial industry to write down the value of its assets by more than $300 billion, and lose hundreds of billions of dollars more in actual credit losses.
However, Alpert added, it will take more than a bailout of Fannie and Freddie to fix the housing crisis, caused by several years of loose lending standards that let people put very little money down to buy a home. He said the move might modestly reduce mortgage rates for potential homebuyers, but that "mortgage rates aren't really the issue."
The economy has lost jobs for eight straight months.
"You don't buy houses if you don't have confidence," said Krosby, who said the market will likely view the Treasury's takeover as a positive move but not a cure-all.
"This is an important step, but it has be part of an overall program to get buyers to come in and step into the housing market," he said. "You're going to need other elements, other packages, to get it going again."