Stocks rallied Monday as investors bet that a Fannie Mae and Freddie Mac bailout could help prompt a recovery in the financial and housing sectors. The Dow Jones industrials gained nearly 300 points.
The announcement Sunday that the Treasury Department was seizing control of the mortgage giants brushed aside investors' long-simmering worries that the companies would be downed by a spike in bad mortgage debt.
Investors were hoping the plan to inject up to $100 billion into 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.
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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.”
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.
Common shares of Fannie Mae and Freddie Mac will be made virtually worthless by the plan, which will dilute the stock. But the 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, about the government's move. “It helps with the balance sheet questions that are out there for financials without a doubt.”
Dunigan remains cautious. “This isn't a magic wand. We're probably going to see another couple bank failures,” he said.