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Stocks Rebound After Fannie-Freddie Takeover

Published 09/09/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

World stock markets rallied on news of the Treasury Department takeover of mortgage giants Fannie Mae and Freddie Mac, according to The New York Times.

Many traders hoped that government intervention would signal a turning point in the financial crisis, however, the recent rebound in stocks may only be short-lived.

The Dow Jones rose nearly 290 points to finish above 11,500. Nasdaq, which has struggled recently, closed with a 0.62 percent gain. The S&P 500 index closed with a 2.05 percent increase at over 1267 points. Exchanges rallied from Japan to Europe as investors jumped back into the markets, hoping to catch a surge at the beginning and reap the benefits later. The dollar also appreciated during the day, rising to $1.4106 against the euro - its best exchange rate in almost one year.

In spite of these gains, there was sentiment that the takeover was hardly enough for a speedy resolution to the financial crisis, recession or the myriad of other factors plaguing the American economy. James P. Dunigan of PNC Wealth Management said that the Treasury Department’s move “wasn’t a magic wand” and that we should expect to “see some additional bank failures” in the future.

With major institutions like Lehman Brothers and Washington Mutual in serious jeopardy, the takeover of two firms – albeit two gigantic and immensely important firms – is hardly enough to reverse years of poor management and international undermining.

Source The New York Times:

Stock markets around the world rallied Monday after the federal takeover of Fannie Mae and Freddie Mac, but even the most optimistic investors worried that other problems in the economy remain unaddressed.

…

Financial stocks led the surge, propelled by hope that the government’s decision had averted a calamity and marked a possible turning point in the credit crisis that has troubled banks for nearly a year. But investors have led several dizzying rallies this year on hopes that the worst was over, only to find their euphoria was premature.

…

But an important financial indicator showed that investors remain worried. The premium investors demand to hold mortgage securities, rather than Treasury notes and bonds, remains higher than what some analysts had expected after the government gave its own backing to those bonds. Those premiums should come down slowly, analysts say.

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