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Stock Markets Soar After Freddie, Fannie Bailouts

The Bush administration, acting to avert the potential for major financial turmoil, says the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac. (Sept. 7) Video by AP

"If and when we put money in, the taxpayers will be protected and the government will be repaid before the shareholders get a penny," he said.

Despite the short term boost for equity markets, officials and analysts were split on the long-term implications of the takeover.

In a CNBC interview, James B. Lockhart III, head of the federal agency that oversees the two companies, said the takeover should bring down U.S. mortgage rates and help the housing market recover -- a potentially important step in reviving the economy more broadly. The current economic slowdown has pushed unemployment above 6 percent; wages have stagnated even as prices continue to rise; and declining home values have undercut household wealth.

"If these companies had been allowed to spin out of control, it could have been a lot worse," Lockhart said. "Hopefully this action we took will help the housing market recover and we might start to see some stabilization."

Geng Qun, head of global research for Bank of China, said that the Treasury plan is good news for Fannie and Freddie but that it's still too early to say anything about how this will affect the U.S. economy as a whole.

"Delinquencies and foreclosures are still going up. Even though the U.S. government is intervening, the economy is worsening," Geng said. But Geng said he did believe the intervention by the Treasury Department will stop Chinese banks from further reducing their holdings in Fannie and Freddie.

"By looking at it from the credit risk point of view, they won't need to sell anymore. In general, it's a good thing," she said.

Samuel Chen, vice president for banks and financial services for J.P. Morgan Hong Kong, said the Treasury takeover was expected so the market rally in Asia might only be temporary. Under the current plan, it's still possible "shareholders will still lose a lot. Their shares will be significantly diluted."

Cha reported from Shanghai.

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