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Markets Rally on US Government Help to Ailing Lenders


Shares of the ailing mortgage lenders, the Federal National Mortgage Association - Fannie Mae and the Federal Home Loan Mortgage Corporation - Freddie Mac swung widely Monday following the Bush administration's decision Sunday to step in to shore up investor confidence. VOA's Barry Wood has more on the measures.

The shares of Fannie Mae and Freddie Mac recovered somewhat Monday morning and then closed the day five percent lower. Both shares are down over 80 percent from their 2007 peak.

Barney Frank, the chairman of the House Financial Services Committee, is supportive of Treasury Secretary Henry Paulson's plan to assure the viability of both institutions, which purchase or finance about $6 trillion of US home mortgages.

"I think what the secretary of the treasury has proposed is reasonable," said Barney Frank. "It's a kind of reassurance to people that help will be there, even though we don't think it will be needed."

The Treasury and Federal Reserve announced Sunday that the government is prepared to buy some of Fannie and Freddie's stock and that both institutions can borrow from the central bank.

Many financial analysts praised the government's action. But others, including legendary investor Jim Rogers, who decades ago co-founded with financier George Soros one of the world's most successful mutual funds, strongly oppose the rescue of Fannie and Freddie. Rogers spoke to Bloomberg Television from Singapore.

"People who bought debt in Fannie Mae and Freddie Mac can read a prospectus [a summary of a firm's financial position]," said Jim Rogers. "They can read it; it says it is not guaranteed by the government. Anybody who can read a balance sheet knew that those companies were a sham and had problems. Now we've got to bailout the Japanese [investors in Fannie]. The Japanese own hundreds of millions of dollars in this stuff, so we're going to bail out the Japanese and the Chinese and everybody else in the world? What is this! And it ruins the balance sheet of the Federal Reserve, and it makes the dollar more vulnerable."

The financial strength of Fannie and Freddie plummeted along with the value of US real estate, which overall is down about 10 percent over the past year. Before the housing slump began, US home prices generally doubled between 2000 and 2005. During the boom years interest rates were low and lending standards were relaxed.

Housing legislation now before the Congress is intended to stem the rising tide of home foreclosures and return stability to the housing market. That legislation, initiated by Congressman Frank, would give an expanded role to Fannie Mae.

"If we get the bill passed, that I believe will be signed by the president by the end of next week, I think we are at the point where much of the bad stuff is over," he said. "That is, we will be reducing the number of foreclosures and while there will still be some problems trying to work out from the system the bad loans that have been made, we will by two weeks from now have made it much less likely that these kinds of bad loans will be made in the future."

The financial sector of the US stock market has been greatly weakened by the housing slump and credit squeeze that began one year ago. The stock price of many financial institutions are down by over 50 percent and that price decline continued on Monday. The dollar was weaker as analysts remained unsure about the implications of the rescue of Fannie and Freddie.

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