Markets Hail Fan-Fred Takeover

By PETER A. MCKAY

The government's plan to take mortgage giants Fannie Mae and Freddie Mac under conservatorship spurred the stock market higher on Monday, as investors bet that the effort will remove some of the uncertainty that has haunted Wall Street in the past few months.

The market's gains waned in the afternoon but a late round of buying pushed major indicators back within reach of their daily highs at the closing bell.

The Dow Jones Industrial Average, which was up nearly 350 points at its intraday peak, finished 290.43 points higher, its biggest one-day gain in a month. The blue-chip indicator climbed 2.6% to 11510.74, down 13% on the year. All its financial components posted big gains on Monday, led by Bank of America, up 7.8%, and Citigroup, up 6.6%. Home Depot, which could stand to benefit from any increased housing-sector activity the rescue of Fannie and Freddie stirs, jumped 5.5%.

"The government has stopped an implosion here, just like they did with Bear Stearns," said Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill. He alluded to the March acquisition of the troubled bank by J.P. Morgan Chase, in a deal facilitated by the Federal Reserve for the sake of stabilizing the broader financial system. But Mr. King added: "The question is how often are you going to have to do this? Do you have to keep doing one of these types of things every few months?"

Other market gauges also rose, though the gains were milder. The Standard & Poor's 500 Index gained 2.1%, rising 25.48 points to 1267.79, down 14% on the year. The small-stock Russell 2000 climbed 2% to 732.87, down 4.3% on the year. The technology-focused Nasdaq Composite Index edged up 0.6% to 2269.76, off 14% on the year. It was weighed down Monday by a 1.4% decline for tech bellwether Apple, which is due to unveil improvements to its iPod music players on Tuesday. Research In Motion, another industry heavyweight, was down 4%.

Trader Don Bright, of the proprietary firm Bright Trading in Chicago, said that fears about the broader economy, or activity outside the financial sector, continued to weigh on the market in the wake of several recent downbeat developments, including data last week showing an eighth straight month of job losses in the U.S.

In particular, those concerns have weighed on the most speculative corners of the market, like technology.

"That's a sector that really tends to do well when people are optimistic about the future," said Mr. Bright. "Who feels that way now? The government may be saving Fannie and Freddie, but does that get your neighbor a job or help him make a payment on his mortgage?"

Shares of Fannie Mae and Freddie Mac had been beaten down over the past few months on speculation that bleak credit-market conditions would force the government to step in and take control of the mortgage-finance giants. The plan unveiled by the Treasury Department is likely to lead to steep losses for holders of the companies' common and preferred shares. In recent trading, the common stock of both had tumbled by more than 80% to beneath $1. Fannie and Freddie preferred shares also dropped sharply, falling in line with the common shares.

Companies with large exposure to Fannie and Freddie shares were mixed. Standard & Poor's said American International Group, among other insurers, have large holdings of the preferred shares. AIG rose 1.9%. But Sovereign Bancorp, which owns roughly $900 million in the preferred securities, saw its shares fall 6.6%.

But the bailout protects Fannie and Fannie bondholders, which include many pension funds, foreign central banks and mutual funds. The government's plan is also expected to lower mortgage rates, which have remained stubbornly high despite deep cuts in borrowing costs by the Federal Reserve.

The prospect of a housing-market turnaround lifted shares of homebuilders. Toll Brothers shares soared 9.4% and Lennar shares jumped 10.3%. The shares of buyers of Fannie and Freddie debt also gained. Annaly Capital Management, a real-estate investment trust, jumped 10.2%. But there were losers as well. Mortgage insurers including Radian Group and PMI Group coughed up gains made earlier in the day to end lower.

Other dangers remain for investors. Economic woes in the U.S., including continued job losses and slowing growth, seem to be spreading overseas. Also, prices of homes in the U.S. remain low and inventories of unsold units remain high. That situation is cutting into many average Americans' wealth and could keep prices of mortgage securities depressed in the months ahead even if it becomes easier for those instruments to change hands.

"The Fannie and Freddie deal could help mortgage rates, but mortgage rates only affect how big of a house people buy, not whether they buy one in the first place," said Kim Caughey, senior investment analyst at Fort Pitt Capital Group in Pittsburgh. "To get people to make big-ticket decisions like that, you'll really need to improve consumer confidence and other things that are still looking pretty bad."

Treasury prices rose and pushed interest rates down on Monday. The two-year note were up 2/32 to yield 2.289%. The benchmark 10-year note was up 16/32 to yield 3.648%. The dollar rose sharply against major foreign rivals. The U.S. Dollar Index was up 1.2%.

Washington Mutual, one of the lenders most affected by the credit crunch, has ousted Kerry Killinger as chief executive. And Lehman Brothers Holdings launched a sweeping shake-up of senior management, including the departure of some of its international operational chiefs. Washington Mutual shares were off 3.5%, while Lehman was down 12.7%.

Oil prices seesawed and finished little changed as traders followed the progress of Hurricane Ike, which may damage offshore facilities in the Gulf of Mexico in the days ahead. Crude futures snapped a six-day losing streak, finishing 11 cents higher at $106.34 a barrel in New York.

Write to Peter A. McKay at peter.mckay@wsj.com.

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U.S. Takeover of Mortgage Giants Lifts Global Markets

By VIKAS BAJAJ , KEITH BRADSHER and DAVID JOLLY

Published: September 8, 2008

Investors around the world breathed a sigh of relief Monday after the U.S. government took over and backed Fannie Mae and Freddie Mac, assuring a continued flow of credit through America’s wounded mortgage system.

Stocks rallied in Europe and Asia, after the U.S. Treasury’s announcement that it would transfer control of Fannie Mae and Freddie Mac to conservatorship. Stocks in Tokyo closed 3.4 percent higher.

In Europe, the FTSE 100 index in London rose 3.7 percent at the opening while the CAC 40 in Paris registered a 4.3 percent gain and the DAX in Frankfurt 3.1 percent.

Futures contracts on the Dow Jones industrial average rose 2.2 percent in early European trading as investors concluded that the Bush administration’s decision over the weekend had strengthened the prospects for American businesses, particularly banks, and for the American economy.

Shares of major Japanese banks soared. Mitsubishi UFJ Financial rose 10 percent, while Sumitomo Mitsui Financial climbed more than 15 percent.

The dollar and yen weakened in orderly trading against the euro and the British pound in European morning trading, as investors halted a recent flight to the safety of the dollar and yen and began to conclude that European economies might not be in as grave danger as they had seemed last week.

German-listed shares of Fannie and Freddie plummeted in early Frankfurt trading, losing more than 50 percent of their value.

Investors said the provision in the bailout plan under which the Treasury will begin buying some of Fannie and Freddie’s securities in the open market would help to restore confidence.

“The fact that they’ll be able to buy mortgage-backed securities from other banks is really important,” William de Vijlder, chief investment officer at Fortis Investment Management in Brussels, said, “because it means the U.S. is serious about fixing the problems in the market.” The “doomsday scenario,” in which write-downs of those securities results in a continuing cycle of bank write-downs and losses, is over, he added.

“I expect a positive reaction in the market in the near term,” he said. “The problems have not gone away, but along with the decline in the oil price, this helps to put the machinery into place by which things will eventually return to normal.”

But the takeover of the companies also reinforced concerns about troubles of the American economy and highlighted its significant reliance on foreign investors, particularly in Asia.

Almost immediately, the move will protect central banks in Asia, which have amassed hundreds of billions of dollars of Fannie Mae and Freddie Mac bonds, from taking big losses. The move should also bode well for American financial institutions and, in the short term, the broader stock market.

Investors said they expected the spread between Treasury securities and comparable Fannie Mae and Freddie Mac debt to shrink drastically, reflecting renewed faith about the safety of the market.

In recent months that spread, or premium, had ballooned significantly, eroding confidence in the health of the companies. Before the housing crisis, Fannie and Freddie could borrow money at a small premium over the federal government’s rates. “If it becomes like U.S. Treasuries, that is a positive for Asia,” said Ifzal Ali, the chief economist of the Asian Development Bank in Manila.

Treasury’s purchase of mortgage securities may help lower interest rates on home loans, which this summer rose to their highest level in a year. That reduction in housing costs should help cushion the decline in home prices, which have already fallen more than 18 percent from their peak in the summer of 2006, said Bill Gross, the co-chief investment officer of Pimco, the large bond investment firm.

“It goes a long way to stopping this housing deflation which, I think and Pimco thinks, is at the heart of the problem,” he said.

But the plan also raises a host of questions about the fragility of the American economy, which will continue to figure into investor calculations. On Friday, for instance, the Labor Department reported that the unemployment rate climbed to a five-year high of 6.1 percent.

Perhaps most important, despite the government support for Fannie Mae and Freddie Mac, any stabilization in home prices is still a way off, and the waves of foreclosures battering the housing market are not likely to reverse right away. What is more, the plan will do little to stem losses in risky home loans, commercial mortgages and debt used by private equity firms to acquire companies. Financial institutions have already taken write-downs of $500 billion and the International Monetary Fund projects that losses could reach $1 trillion.

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Boeing workers put strike on hold for 48 hours

By Julie Johnsson |Tribune staff reporter

7:22 AM CDT, September 4, 2008

For the second time in three years, members of Boeing Co.'s largest union have voted to support a strike that would halt work on its airplane production lines.

However, the union agreed to extend its contract for 48 hours and continue negotiating at the request of Washington Gov. Chris Gregoire and a federal mediator. Jim Proulx, a Boeing spokesman, said company and union negotiators would meet together with a federal mediator at an undisclosed time and location Thursday.

Members of the International Association of Machinists and Aerospace Workers were originally set to walk out at 12:01 a.m. today to man picket lines at several Boeing facilities, including the giant plant in Everett, Wash., where Boeing workers assemble planes ranging from the 737 to the delay-plagued 787 Dreamliner.

The union's chief negotiator Mark Blondin said it was worth one more try to reach agreement at the bargaining table without a strike.

"We have told you all along that our job as negotiators is to negotiate a contract that is acceptable to you, not to negotiate a strike," Blondin told 100 shop stewards and others who had been chanting "strike, strike, strike" after the extension was announced.

"If we can't do it in 48 hours, brother, it's on," Blondin said.

If Boeing's 27,000 machinist union workers do strike, the greater financial blow to Chicago-based Boeing increases the longer they are off the job. Boeing was already struggling to keep pace with orders lodged during the recent record-breaking boom in aircraft sales, analysts said.

In 2005, a dispute over retirement benefits prompted Boeing's machinists to stop work for nearly a month. A strike of similar length this year would heighten the risk of additional costly delays to three aircraft in development at Boeing: the 787 Dreamliner, which is already 18 months late; a revamp of the decades-old 747 jumbo jet; and a new 777 freighter, which began test flights earlier this summer.

"In our opinion, a short strike would not be a serious problem because the lost revenues and profits could be recouped next year," wrote Michael Derchin, aerospace analyst with FTN Midwest Securities Corp., in a Sept. 3 research report. "A longer one could have serious consequences for Boeing and the industry."

Boeing officials had sought to avoid a strike, even launching an advertising and public relations blitz in an effort to dissuade workers from voting for the walk out.

While Boeing met many of the union's demands, it refused to compromise on the issue of outsourcing. The union had sought to revoke language from the 2002 contract that enabled Boeing to shift much of the design and construction work traditionally done in-house to supply partners.

The move enabled Boeing to cut its construction costs sharply on the 787, but resulted in costly delays when suppliers struggled to keep pace with an aggressive production schedule or meet Boeing's quality standards for the ground-breaking new plane.

Boeing's unions are concerned they will lose thousands of jobs over the next decade as Boeing creates successors to two aircraft largely built by its employees now: the 737, its popular narrow-body jet, and the larger 777.

"This has been a long-standing concern," said aviation consultant Scott Hamilton. "Clearly, they're looking at the prospects for the next airplane . . . and are concerned even more jobs will be outsourced."

jjohnsson@tribune.com

The Associated Press contributed to this report.

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