Market Welcomes Takeover

By Zachary A. Goldfarb and Neil Irwin
Washington Post Staff Writers
Tuesday, September 9, 2008

Financial markets soared and mortgage rates fell yesterday after Sunday's government takeover of housing finance giants Fannie Mae and Freddie Mac, but shares in the two companies lost almost all their value.

The action stabilized a wide range of debt markets, whose frazzled state endangered the U.S. and world economies. But analysts cautioned that there can be no certainty that the spiraling financial crisis is nearing an end.

The move drew praise from Wall Street and banks around the world. Dissenting voices, however, questioned whether the rescue was necessary and whether it exposed taxpayers to vast potential costs.

Even as the debate over the takeover began, the new chief executives arrived at the campuses of Fannie Mae in the District and Freddie Mac in McLean and set about the challenging task of expanding their funding of mortgages in the near term and protecting taxpayers from losses in the long term.

The government's plan, engineered by Treasury Secretary Henry M. Paulson Jr., put Fannie Mae and Freddie Mac under control of their direct federal regulator. It also involved replacing the chief executives, extending a line of credit to each company and buying $5 billion in securities backed by mortgage loans to drive down mortgage rates. The companies, battered by the mortgage meltdown, had been suffering billions of dollars of losses, putting their survival at risk.

Once among the biggest companies in the country, Fannie Mae and Freddie Mac are now penny stocks: Fannie Mae closed at 73 cents a share, down 90 percent yesterday, and Freddie Mac shares went for 88 cents, down 83 percent.

The government's action appeared to encourage buyers of mortgage bonds issued by Fannie Mae and Freddie Mac, which in turn should lower the rates Americans pay for home loans.

Stocks rallied in response to the plan. The Dow Jones industrial average jumped 2.6 percent, to 11,510.74. The broader Standard & Poor's 500-stock index rose more than 2 percent, to 1267.79. Leading the rally were home builders, banks and other companies whose fortunes are closely linked to the general health of the housing market.

But portfolio managers warned that unresolved concerns about the state of the economy could undercut the rally.

"The market is always looking for silver linings," said Harry Clark, who runs Philadelphia-based Clark Capital Management. "I think they'll wind up giving [the gains] back a couple of days from now."

On Capitol Hill, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said he will summon Paulson to appear this week before his panel to explain why he decided to seize the companies less than two months after assuring lawmakers that no such action would be necessary. Dodd complained that just months ago, Paulson was saying he wouldn't need to use the authority Congress granted him to inject capital into the companies.

"We certainly accepted him at his word that that was all that was going to be necessary," Dodd told reporters, adding that he planned to be "more cautious" about granting Paulson's future requests. "Fool me once, your fault. Fool me twice, my fault. Is this action going to produce the desired results, or are there other actions being contemplated?"

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