Bail-out Of US Banks Boosts Markets
The announcement by the US Government that it is to effectively nationalise Fannie Mae and Freddie Mac has boosted stock markets around the world. Asian markets and London’s FTSE 100 have all seen more than 3% rises so far.
The bail-out of US mortgage giants Fannie Mae and Freddie Mac by the US Government seems to have brought much relief to markets. London’s FTSE 100 soared on Monday morning, following the news.
The two banks have more than $5 trillion of mortgages between them, but have suffered losses over greater than $24bn in the last 14 months after the US housing market slumped dramatically. The knock-on effect has been felt around the world, as bonds in the two companies are held by many financial institutions around the world, so recovery should be reflected in the same way.
Overnight Asian stock markets bounced back with indices in both Japan and Hong Kong up by over 3%.
Mortgage industry watchers in the UK believe the nationalisation of the two US banks will bring a boost of confidence to the UK mortgage market, and home loans may start to increase in availability. However, optimism was accompanied by caution as experts warned that there was unlikely to be a dramatic overnight recovery in home loan markets. The US bail-out was compared to the UK Government’s intervention at Northern Rock – but the difference is that the two US banks are 25 times bigger than the UK bank.
Announcing the US measures, treasury secretary Henry Paulson said the banking pair had posed a ‘systemic risk’ to financial stability in the country, and to save them from bankruptcy was to avoid another financial hit like those created by sub-prime problems and the credit crunch. The failure of either bank, said Paulson, would create financial turmoil at home and around the world.
New management teams will be put in place at the two banks, and shareholders are likely to lose most of their investment. New funds will be available, giving the banks room to offer loans at lower rates.
President George Bush said that it had been determined the two banks could no longer operate safely and conduct their public mission, and that they posed a risk to the financial system and the US economy. The companies must be reformed, he said, so that the same situation could not happen again.
