Government Bails Fannie Mae and Freddie Mac after U.S. Dollar Plummets

Bonds rally on Fannie and Freddie turmoil as jittery investors look for a safe haven for assets after the Fed announced a plan to shore up the mortgage giants Sunday.

Salem-News.com

(NEW YORK) - The dollar climbed back from a near-record low against the euro today after the government announced an emergency plan to restore investor confidence in mortgage finance companies Fannie Mae and Freddie Mac, which are already government backed. Critics say this latest band aid will not have any effect on the nation's economic downturn, in the bigger picture.

In this latest move, the Treasury boosted its direct credit lines to Fannie Mae and Freddie Mac and said that if necessary, they would buy their shares, while the Federal Reserve made its direct lending window to financial firms available to them.

The plan did help calm market concerns about the health of the U.S. financial and housing sectors, at least initially, as the two companies fund half of all U.S. mortgages. But analysts noted the potential expense of the rescue and investors questioned whether the plan went far enough.

"The euphoria about the Fannie and Freddie bailout is fading," said Steven Butler, director of FX trading, at Scotia Capital in Toronto. "There are still a lot of problems in the mortgage market. The fact that stocks are having difficulty holding their gains is disappointing and hurting the dollar."

Dan Piecora, a business owner in Seattle, Washington, says this latest bailout should not happen. "Let Twiddle Dee and Twiddle Dum fail, they deserve it. Incompetence rules the walnut-sized brains of the mortgage giants. Wind them down before US Taxpayers get stuck with their trillion dollar debt."

Piecora says, "If it were not for the Dukes of Moral Hazard buying HALF of all the mortgage junk out there and then securitizing them for the gullible all over the world to buy there would be no mortgage/financial crisis."

He says Hank Paulson and Ben Bernanke need to get a clue: Getting saddled with Fannie Mae and Freddie Mac is beating a pair of dead horses.

It was Treasury Secretary Henry Paulson who announced on Sunday that the Bush administration will ask Congress to pass legislation that would temporarily allow battered Freddie Mac and Fannie Mae to have access to more capital from the government Treasury.

Avalon Partners chief economist Peter Cardillo, said, "The story is an ongoing 'flight to quality' at this time."

Investors tend to put their assets in the safety of government bonds when they are nervous about volatility in other markets.

While the government's bid to help "calms somewhat the fears that are out there," Cardillo told CNN Money Line, he said it is also a "double-edged sword" for investors. That's because the Fed's actions are "sort of an admission of guilt," he said. It's the government saying, "hey, there are serious problems and we have to step in here," he added.

Traders shrugged off Freddie Mac's oversubscribed $3 billion corporate debt sale Monday morning. "The auction went well," said Michael Cheah, senior portfolio manager at AIG SunAmerica. "We should have seen the treasury market selling off and bond prices falling," he said.

Weakness in the financial sector and "broader stock market misery" is overshadowing the strong Freddie auction, said Cheah. When the stock market shows signs of weakness, investors tend to shift assets and seek safety in government bonds, which are often perceived as weathering bad economic times better than other markets.

Government bonds plummeted on Friday, as skyrocketing oil prices renewed investors' inflation fears.