Fannie,Freddie shares tumble,debt rallies on bailout

Fannie Mae's and Freddie Mac's stocks took a dive while their debt soared on Monday, as investors bet the U.S. government's takeover of the mortgage finance firms would wipe out shareholders but fully guarantee their bonds.
Equity markets around the world surged on the bailout news as hopes rose that the U.S. Treasury's plan to take control over the companies, which together back about half of the country's $12 trillion in mortgages, might put at least a temporary floor under troubled financial markets.
U.S. S&P futures were up over 3%.
However, there also was a heavy dose of skepticism, with many on Wall Street said the takeover of the institutions was merely a symptom of the dismal state of credit markets.
"This euphoria might fade, because Fannie and Freddie are not the problem," said Christopher Low, chief economist at FTN Financial. "Their woes are a symptom of a worldwide contraction in credit that may not be cured by the decision."
Treasury Secretary Henry Paulson, who made a number of television appearances on Monday, said he could not estimate exactly how much of a burden the bailout would be for taxpayers. Speaking to CNBC, he said this would be impossible to tally until the extent of declines in the mortgage market were fully known.
The takeover came as welcome news to officials in Asia, where central banks are some of the biggest holders of the agencies' bonds. They had plenty of reason to cheer. The risk premium on agencies against Treasury bonds narrowed by at least 20 basis points, traders said.
"This is the biggest event in my 21 years in the business," said Arthur Frank, director and head of mortgage-backed securities research at Deutsche Bank.
Freddie Mac shares tumbled more than 50% in Frankfurt <FRE.F> when trading began on Monday. Freddie and Fannie, which serve a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.
The government bond market, meanwhile, suffered as investors reasoned the bailout would vastly increase the amount of debt needed to fund the government's obligations over the medium term. Yields on two-year Treasury notes jumped nearly a half%age point on the news.
The Treasury took $1 billion in preferred senior stock in each company, but its equity stake could reach as much as $100 billion in each.
Paulson had hatched a plan in early July to shore up the struggling firms with a promise of fresh loans and a government injection of capital if either company was pushed to the brink of collapse.
But talks on an aid package ended abruptly in the past few days and policy-makers decided to seize the firms, industry sources with knowledge of the events said.