Fannie, Freddie bailout offers bank stocks reprieve
September 8th, 2008 | by admin |By Elinor Comlay
NEW YORK (Reuters) - Financial stocks may rise on Monday after the U.S. government took over troubled mortgage companies Fannie Mae and Freddie Mac, but this may be only a temporary reprieve given the long list of woes banks are currently battling.
Financial firms have posted over $500 billion in credit losses and write-downs since credit markets seized up a year ago and their holdings of complex debt instruments tied to mortgages plummeted in value.
Although the immediate concern that Fannie and Freddie might fail and trigger a wider financial market collapse has been eliminated, the government’s rescue of the companies may take a long time to help stop house prices from falling or the economy from slowing.
“This is a stop-gap measure,” said Peter Kenny, managing director of Knight Equity Markets in Jersey City. “It’s not going to address the credit crisis.”
In the short term, the U.S. government’s action should buoy financial stocks by lifting concerns that Fannie and Freddie could be left insolvent, analysts said.
The government action also reassures banks that trade with the companies that their trading agreements and debt will be honored.
In the longer term, however, many banks that are preferred shareholders in Fannie Mae and Freddie Mac could lose out under the terms of the takeover.
The significance of the takeover on preferred shareholders in Fannie and Freddie was not immediately clear on Sunday but banks holding these shares have already warned of potential credit losses.
