Government’s Bailout Plan Fails to Buoy Financials

Posted by Patrick O'Connor on 7/14/08 1:16 pm

The Bush administration asked Congress on Sunday to approve its plan to rescue Fannie Mae and Freddie Mac by offering the two institutions substantially increased lines of credit from the Treasury, temporary authority for the Treasury to purchase equity stakes in the troubled mortgage companies, and short-term access to the Federal Reserve’s discount window. 

Watch Treasury Secretary Paulsen’s announcement.

See Full WSJ Coverage.
GOP slow to accept.  Listen NPR

Investors initially celebrated the plan by bidding up Fannie Mae and Freddie Mac shares after the market’s opening bell, but the enthusiasm diminished rapidly after pundits suggested the plan does little to help the overall economy. Famous investor Jim Rogers said the government’s proposal was an “unmitigated disaster” in an interview on Bloomberg TV.

Essentially, the plan could prevent Fannie and Freddie’s stocks from going to zero, but it will not stop the flood of foreclosures in the real estate market, as Fannie and Freddie represent most of the higher quality loans.  Neither mortgage company has been allowed to lend for second homes, or multiple properties, which is where a lot of the foreclosures are coming from.

A lot of the riskier lending, like to inexperienced speculators and high-risk borrowers, occurred at many of the regional banks, and many of them are now in grave danger, but the government isn’t likely going to help them.  In fact, there are reports that the Fed has a private list of 90 banks most likely to fail. As such, investors are expecting bank failures in the weeks, if not days, ahead.  That’s why the financial sector didn’t do so well today.

Late Friday, the government seized IndyMac Bancorp.  It was the second largest financial institution to fail in U.S. history.  Listen NPR

Today, Cleveland-based National City Corp had its shares halted on the New York Stock Exchange after investors got skittish about its solvency.  The stock hit a 24-year low.

Washington Mutual’s stock cratered 35% today, its largest one-day drop ever.

More bank stocks weakened after a research report from Goldman Sachs said that several regional banks may cut their dividends to shore up capital.

The S&P 500 Financials Index of 89 companies slid 6.1% for the day, its steepest descent since April 2000.

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