US rescue fires up markets

The Australian sharemarket gained 3.9% yesterday, achieving its best one-day performance in almost six months. Hong Kong's Hang Seng added 4%, Japan's Nikkei jumped 3.4% and European markets were climbing last night.

"Everything that was being shunned last week is being bought today," said Alex Moffat, a director of stockbroking business Joseph Palmer & Sons.

Through the dramatic intervention - which could become one of the most expensive financial bail-outs in American history - the US Government has reassured investors that the country's biggest mortgage finance companies will not be permitted to fail.

Instead, it has taken responsibility for Fannie Mae and Freddie Mac, ousting the companies' chief executives and placing the publicly listed government-sponsored enterprises under the "conservatorship" of the Federal Housing Finance Board.

The US Treasury will also buy up $US2 billion ($A2.5 billion) worth of senior preferred stock in the two companies, with the ability to buy up to $US200 billion worth of stock in total.

Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac were critical to turning the corner on housing.

"I have long said that the housing correction poses the biggest risk to our economy," he said. "It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us."

Speaking to a parliamentary committee yesterday, Reserve Bank governor Glenn Stevens said the bail-out was necessary because of the "emergency" the US Government faced.

But he acknowledged the public purse had taken on "quite a risk".

RBA assistant governor Phil Lowe said uncertainty had been hanging over global markets for the past few months.

But the decisive action would "reinforce the sense that this problem will be dealt with". "In the medium term, that will be good for market confidence and ultimately the funding environment," he said.

Reflecting that, banking stocks shot up yesterday as the benchmark S&P/ASX 200 Index again pushed above 5000 points.

Macquarie Group gained more than 15% to $48.31, ANZ shares closed 8.2% higher at $17.60 and Commonwealth Bank rose 7.9% to $44.87.

China and Japan, which were among the biggest investors in Fannie Mae and Freddie Mac bonds, welcomed the US Government's intervention. Asian financials soared.

However, some doubt the longevity of the market's newfound positivity.

Mr Moffatt said the US Government bail-out would provide a psychological boost for Australian investors - but only until the next disaster in financial markets.

In Australia to meet with clients, Citi head of global equity strategy Robert Buckland said company earnings still had farther to fall. And investors would remain risk averse while earnings recovered.

"There's a lot of money under the mattress at the moment," he said.

Others said that, while the decision to guarantee Fannie Mae and Freddie Mac would keep the US mortgage market operating, it did little to improve the state of the US economy.

Data released on Friday showed US unemployment had risen from 5.7% to 6.1% - a five-year high.

The US dollar gave up some of its gains, allowing the Australian dollar to trade above US83 after falling to a one-year low of US80.29.

But ABN Amro FX strategy director Greg Gibbs said the news did not necessarily signal the end of US dollar strength. "The recent resurgence in the US dollar may well reassert on the view that economic growth outside the US will continue to struggle," he said.

All about the F-Words

? Fannie Mae and Freddie Mac are publicly listed, government-sponsored US mortgage finance companies. Between them they own or back more than $US5 trillion ($A6.13trillion) in mortgages.

? Because of their parlous financial state, the US Government has placed both companies in a conservatorship. The US Federal Housing Finance Agency (FHFA) has been appointed conservator, with power to control both companies.

? The FHFA says its goals are to preserve and conserve each company's assets and put them in a sound and solvent condition.

? The US Treasury will buy $US1billion worth of senior preferred stock in both Fannie and Freddie immediately, with the ability to buy up to $100 billion worth of stock in each company. It will also get warrants that will give it the right to purchase 79.9% of both companies. Existing shareholders will bear losses ahead of the Government.

? The US Treasury will buy mortgage-backed securities from Fannie and Freddie, starting with $US5 billion.

? A Government-sponsored enterprise credit facility will lend money to Fannie and Freddie and Federal Home Loan Banks. Short-term loans will be available until the end of 2009.

BACKPAGE

? Lesson to be learnt from hurricane Hank's sweep of US housing landscape.

LINK

? To see the US Treasury announcements, visit www.treasury.gov

BUSINESSDAY 2

? Freddie, Fannie CEOs could take home millions

? 3% a magic number in the RBA's estimations