Stocks surge on plan for mortgage giants

By: rf
By: rf

NEW YORK (AP) -- Stocks surged Monday as investors rushed to lay bets on a broad economic recovery following the weekend announcement that the U.S. government will bail out mortgage giants Fannie Mae and Freddie Mac. The major indexes jumped, with the Dow Jones industrials gaining more than 250 points.

Meanwhile, bond prices fell sharply as emboldened investors looked for riskier but higher-yielding bets.

The announcement Sunday that the Treasury Department was seizing control of the companies, which own or back about half the nation's mortgage debt, brushed aside investors' long-simmering worries that the companies would be felled by a spike in bad mortgage debt.

The plan to inject up to $100 billion in each of the government-chartered mortgage companies could not only help lower mortgage rates but, some investors are hoping, buoy the overall economy. The plan 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 still might not alleviate troubles of some homeowners who have fallen behind on their mortgages.

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said while the plan boosts confidence in sectors like financials and home builders, it doesn't immediately 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. Tech took a huge hit last week. Does this really affect tech? I don't think so."

In midmorning trading, the Dow Jones industrial average rose 252.57, or 2.25 percent, to 11,473.53.

Broader stock indicators also surged. The Standard & Poor's 500 index jumped 24.32, or 1.96 percent, to 1,266.63, and the Nasdaq composite index rose 20.10, or 0.89 percent, to 2,275.98.

The gains lifted the major indexes out of bear-market territory - a 20 percent decline from the market's peak in October.

Bond prices pulled back sharply Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.76 percent from 3.69 percent late Friday. The dollar was higher against other major currencies, while gold prices rose.

Common shareholders of the stock of Fannie Man and Freddie Mac will be virtually wiped out by the plan, which would balloon the shares of companies to give a nearly 80 percent stake to the government. But the companies' shares had already suffered huge declines in the last year so many shareholders have already endured the majority of their losses.

Fannie Mae shares plunged $5.76, or 82 percent, to $1.28, while Freddie Mac fell $3.80, or 75 percent, to $1.30.

Other financial names rallied, particularly those seen as having big exposure to mortgages. Bank of America Corp. jumped $2.30, or 7.1 percent, to $34.53, while Wachovia Corp. rose $1.95, or 12 percent, to $18.70. Citigroup Inc. rose $1.21, or 6.4 percent, to $20.28.

Among financials, Lehman Brothers Holdings Inc. was one of the few decliners, falling 35 cents, or 2.2 percent, to $15.85 as investors worried that the No. 4 U.S. investment bank was having trouble finding an investor to help shore up its balance sheet.

Home builders also jumped alongside most financials. Lennar Corp. rose $1.36, or 10 percent, to $14.92, and KB Home advanced $1.45, or 7 percent, to $22.06.

The U.S. government's plan also touched off a global stock rally Monday. Foreign investors holding debt of the companies were relieved as were investors simply looking for stronger growth from the U.S. economy, particularly as many economies abroad give off signs they are slowing. Japan's Nikkei stock average jumped 3.4 percent and Hong Kong's Hang Seng index surged 4.3 percent. In afternoon trading, Britain's FTSE 100 jumped 3.81 percent, Germany's DAX index rose 3.06 percent, and France's CAC-40 surged 4.20 percent.

Investors appeared to look past a rise in oil, which logged steep declines last week as investors worried that a slowing global economy would hurt demand. Light, sweet crude rose 53 cents to $106.67 on the New York Mercantile Exchange as Hurricane Ike churned across Cuba and fanned unease about the well-being of Gulf of Mexico oil infrastructure that could be in its path.

In corporate news, Washington Mutual Inc. rose 12 cents, or 2.6 percent, to $4.39 after removing Kerry Killinger from the chief executive spot. The savings and loan is working to overhaul its business, which has been hurt by bad mortgage debt. Alan H. Fishman is replacing Killinger.

Altria Group Inc. announced it will buy UST, the maker of Skoal and Copenhagen smokeless tobacco, for nearly $10 billion. The maker of Marlboro cigarettes said it will pay $69.50 per share. UST shares jumped Friday to finish at $67.55 following a report of the deal and gained 72 cents, or 1 percent, to $68.27 Monday. Altria rose 69 cents, or 3.3 percent, to $21.64.

Advancing issues outnumbered decliners by about 5 to 1 on the New York Stock Exchange, where volume came to 380.3 million shares.

The Russell 2000 index of smaller companies rose 14.62, or 2.03 percent, to 733.47.


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