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Government Bailout Sparks Rally In Stocks

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By TIM PARADIS

The Associated Press

Published: September 9, 2008

NEW YORK - Wall Street surged Monday as investors placed bets that a recovery in the financial and housing sectors is likely to follow the U.S. government's move to bail out mortgage giants Fannie Mae and Freddie Mac.

The Dow Jones industrials gained nearly 300 points.

The announcement Sunday that the Treasury Department had seized control of the companies, which own or back about half the nation's mortgage debt, brushed aside investors' simmering worries that the pair would be felled by a spike in bad mortgage debt.
Wall Street investors bet Monday that the plan to inject up to $100 billion in each of the government-chartered mortgage financiers could not only help lower mortgage rates but perhaps help buoy the overall economy.

"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 in Philadelphia.

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.

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said that the plan boosts confidence in such sectors as financials and homebuilding, but it doesn't 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 of trading Monday, 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 companies' shares had already suffered huge declines in the past year, so many shareholders have 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.

Shares in other big financial institutions rallied Monday on the weekend's bailout news. Bank of America Corp. jumped $2.50, or 7.7 percent, to $34.73, while Wachovia Corp. rose $2.24, or 13.4 percent, to $18.99. Citigroup rose $1.25, or 6.6 percent, to $20.32.

Among financials, Lehman Brothers Holdings was one of the few decliners, falling $2.05, or 12.7 percent, to $14.15 as investors worried that the No. 4 U.S. investment bank was having trouble finding an investor to help shore up its balance sheet.

Homebuilders also gained ground alongside most financials. Lennar Corp. rose $1.39, or 10.3 percent, to $14.95, and KB Home advanced $2.93, or 14.2 percent, to $23.50.

The U.S. government's plan also touched off a global stock rally Monday. Japan's Nikkei stock average jumped 3.4 percent and Hong Kong's Hang Seng index surged 4.3 percent. Britain's FTSE 100 jumped 3.92 percent, Germany's DAX index rose 2.22 percent, and France's CAC-40 surged 3.42 percent.

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