A U.S government plan to shore up mortgage finance firms Fannie Mae and Freddie Mac helped calm markets on Monday but did little to allay fears about the health of the U.S. financial system.
The U.S. Treasury and Federal Reserve plan, announced on Sunday evening, called for sweeping measures to lend money and buy equity if necessary in Freddie Mac and Fannie Mae, government-sponsored (GSE) enterprises owned by shareholders.
The plan was hatched in an attempt to calm investors after stocks of both plummeted more than 40 percent last week on fears the companies, pillars of the housing market, were under capitalised and the credit crisis toppled a fifth U.S. bank.
Fannie and Freddie own or guarantee $5 trillion (2.5 trillion pounds) of debt, close to half the value of all U.S. mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.
"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets," U.S. Treasury Secretary Henry Paulson said in a statement that he read on the steps of the Treasury building.
"Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," he said.
The dollar jumped and stock futures rallied on the powerful message of support from Washington, which also drew criticism for being a potential bailout that could cost U.S. taxpayers dearly.
Asian stock markets were mixed, with shares in China and Japan higher but lower elsewhere as investors grappled with the implications for the financial sector. Japanese government bond futures fell, tracking a drop in Treasuries.
"Steps to shore them up is a positive but the fact that they are having difficulties in the first place is just symptomatic of a difficult environment out there. And that makes it hard to get too positive," said Greg Goodsell, equity strategist with ABN AMRO in Sydney.
Bill Gross, who manages the $130 billion Pimco Total Return Fund, said while this does not explicitly guarantee the bonds of Fannie Mae and Freddie Mac, "it tells the market that the government will not allow them to fail."
Gross also said that substantial changes in regulation lie ahead for Fannie and Freddie, and if such changes are adopted "agency securities will begin to look more like Treasuries in terms of yield and credit quality, as will the mortgages that bear their name."
Unveiling the emergency measures to calm markets roiled by the country's prolonged housing crisis, the Fed said Fannie and Freddie could have access to its emergency cash, echoing a move to support investment banks after the Fed organised a takeover of ailing investment bank Bear Stearns in March.
The Treasury separately said it would temporarily raise its line of credit to the two mortgage financiers, as well as purchase equity in them, a step never taken before, if needed.
Both companies said they were adequately capitalised, but welcomed the measures and said they would help confidence.
NERVES ON EDGE
