STOCK MARKETS rallied and mortgage bonds surged yesterday as investors welcomed the US government's historic decision to take over home loan giants Fannie Mae and Freddie Mac.
Financial stocks led the charge as markets broadly welcomed the news, although uncertainty as to how big an impact the move would have on the US housing market and economy trimmed gains later in the day.
Irish financial shares were among the best performers globally, with the four main banks adding just over €2 billion in value as their share prices rose by between 10 and 12 per cent, helping the main Irish market gain 6.7 per cent on the day. However, London lost out as a technical glitch halted trading for most of the session.
"It's hard to tell whether it's just a bounce or a permanent lift," said analyst Anna Lalor at Goodbody Stockbrokers, adding that the market had been unsure as to how far the US government would go to support the two companies.
European and Asian stocks climbed as investors bet that the bailout of the companies would help stabilise the US housing market and ease the 13-month-old global financial crisis.
The dollar rose to its highest level against the euro since October as the takeover of Fannie Mae and Freddie Mac boosted investors' confidence that the move would stabilise the world financial system rocked by loan losses and asset writedowns of more than $500 billion.
The US government said over the weekend that it was taking control of Fannie Mae and Freddie Mac, which own or guarantee $5.4 trillion (€3.8 trillion) worth of home loans - almost half of all mortgages in the US - in a bid to avert a global financial meltdown.
The US government has promised to pump up to $200 billion into the two companies to ensure they can meet any future losses. The companies have recorded losses of almost $14 billion over the past year and have shed almost 90 per cent of their value as their shares have plummeted due to growing fears about the US mortgage market.
US treasury secretary Hank Paulson defended the government's decision. "Government intervention is not something that I came here wanting to espouse, but it sure is better than the alternative."
The US government's decision ends months of speculation about the companies and mounting concerns that have sparked massive volatility for banking stocks around the globe.
"It is not the cure-all, but this is a major step along the road to recovery," said Stuart Draper, director of stockbroking at Dolmen Stockbrokers.
He said the US government's decision to buy $5 billion worth of mortgage-backed securities - packages of mortgages sold on to investors - would help kick-start the money markets and should mean that Irish banks can fund more mortgage lending as the wholesale cost of money is likely to fall. "It will take a few months before it comes through but Irish banks should be willing to do a little bit more lending."
He said the US bailout has already reduced the cost of home loans in the US, cutting the cost of a 30-year mortgage to 5.5 per cent from 6.35 per cent last week.
However, the US government's rescue of the two mortgage finance agencies will come at a price for taxpayers and shareholders. That includes AIB, which could lose an estimated €19 million if MT, the US bank in which it holds a 25 per cent stake, has to write down its investment in Fannie Mae and Freddie Mac under the bailout.
US regional banks, together with US insurers, hold the majority of Fannie and Freddie's $36 billion (€25 billion) of outstanding preferred stock.
While both the common and preferred stock will continue to trade, investors will lose their dividends and will be exposed to the companies' losses ahead of the government taking a stake in new senior preferred stock. The preferred shares, which last week had lost more than half their value since June 30th, yesterday fell a further 60 per cent.
