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Bailout sparks rally: Dow closes up about 290

Wall Street surged Monday as investors rushed to lay bets on a broad economic recovery following a U.S. government takeover of Fannie Mae and Freddie Mac.
Image: Tommy Kalikas
Tommy Kalikas of UBS Securities monitors trading in Freddie Mac as its shares fell on the floor of the New York Stock Exchange.Henny Ray Abrams / AP
/ Source: The Associated Press

Stocks rallied Monday as investors placed bets that a recovery in the financial and housing sectors is more likely to occur following the U.S. government’s move to bail out mortgage giants Fannie Mae and Freddie Mac. The Dow Jones industrials gained nearly 300 points.

The announcement Sunday that the Treasury Department was seizing control of the companies, which own or back about half the nation’s mortgage debt, brushed aside investors’ long-simmering worries that the pair would be felled by a spike in bad mortgage debt.

Investors were hoping that the plan to inject up to $100 billion in each of the government-chartered mortgage financiers could not only help lower mortgage rates but perhaps help buoy the overall economy. The move could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments.

But the government’s steadying hand for two institutions that many Wall Street observers had said were simply too big to let fail isn’t likely to alleviate troubles for homeowners who have fallen far behind on their mortgages.

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said that while the plan boosts confidence in sectors like financials and home builders, it doesn’t immediately alleviate worries about other areas of the economy. Still, he said the move was far more welcome than a collapse of Fannie Mae or Freddie Mac.

“It saves Armageddon from happening,” he said. “If you think about it, this helps the financials, this helps the housing market. Tech took a huge hit last week. Does this really affect tech? I don’t think so.”

At the close, the Dow Jones industrial average rose 289.78, or 2.58 percent, to 11,510.74 after being up nearly 350 points in the early going.

Broader stock indicators were also higher. The Standard & Poor’s 500 index advanced 25.48, or 2.05 percent, to 1,267.79, and the Nasdaq composite index added 13.88, or 0.62 percent, to 2,269.76.

Bond prices pulled back Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.71 percent from 3.69 percent late Friday. The dollar was higher against other major currencies, while gold prices rose.

Common shares of Fannie Mae and Freddie Mac will be made virtually worthless by the plan, which will dilute the stock. But the companies’ shares had already suffered huge declines in the last year so many shareholders have already endured the majority of their losses.

Fannie Mae shares plunged $6.34, or 90.1 percent, to 70 cents, while Freddie Mac fell $4.21, or 83 percent, to 89 cents.

“This was another needed piece of the puzzle with regard to eliminating fear and stress in the market,” said Jim Dunigan, chief investment officer for PNC Wealth Management in Philadelphia, referring to the government’s move. “It helps with the balance sheet questions that are out there for financials without a doubt.”

Still, Dunigan remains cautious.

“This isn’t a magic wand. We’re probably going to see another couple bank failures,” he said.

The government’s action may raise protests from upset shareholders. While Fannie was able to raise $7.4 billion in capital earlier this year, Freddie Mac was unable to fulfill its promise to raise $5.5 billion in capital.

“The Fannie shareholders have a lot of questions that need to be answered from their board of directors,” said Doug Daschille, chief executive of investment firm First Principles Capital Management.

Other financial names rallied, particularly those seen as having big exposure to mortgages. Bank of America Corp. jumped $2.50, or 7.7 percent, to $34.73, while Wachovia Corp. rose $2.24, or 13.4 percent, to $18.99. Citigroup Inc. rose $1.25, or 6.6 percent, to $20.32.

Among financials, Lehman Brothers Holdings Inc. was one of the few decliners, falling $2.05, or 12.7 percent, to $14.15 as investors worried that the No. 4 U.S. investment bank was having trouble finding an investor to help shore up its balance sheet.

Home builders also gained ground alongside most financials. Lennar Corp. rose $1.39, or 10.3 percent, to $14.95, and KB Home advanced $2.93, or 14.2 percent, to $23.5.

In the tech space, SanDisk Corp. fell $1.04, or 5.9 percent, to $16.60, while Apple Inc. fell $2.26 to $157.92. Investors are worried the slowing economies overseas will damp demand.

The U.S. government’s plan also touched off a global stock rally Monday. Japan’s Nikkei stock average jumped 3.4 percent and Hong Kong’s Hang Seng index surged 4.3 percent. Britain’s FTSE 100 jumped 3.92 percent, Germany’s DAX index rose 2.22 percent, and France’s CAC-40 surged 3.42 percent.

Light, sweet crude for October delivery rose 11 cents to settle at $106.34 a barrel on the New York Mercantile Exchange. Hurricane Ike fanned unease about the well-being of Gulf of Mexico oil infrastructure that could be in its path.

In corporate news, Washington Mutual Inc. fell 15 cents, or 3.5 percent, to $4.12 after removing Kerry Killinger from the chief executive spot.

United Airlines parent UAL Corp. fell $1.38, or 11 percent, to $10.92 but came well off its lows of the session after the company said an old news report about the company’s 2002 bankruptcy filing appeared on a newspaper Web site Monday, stirring fears that the company was filing again. United, which emerged from bankruptcy in February 2006, said reports that it filed for bankruptcy were “completely untrue.”

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 1.5 billion shares.

The Russell 2000 index of smaller companies rose 14.01, or 1.95 percent, to 732.86.