MarketView for September 8

Summary

Washington’s bailout of Fannie and Freddie energized Wall Street on Monday as Wall Street bet that Washington's bailout of the two mortgage finance giants would stabilize the housing markets and calm jittery world financial markets. As a result, the Street could not get enough of stocks in general and bank shares in particular after the Treasury Department on Sunday prior to the opening of the Asian markets that it had seized control of Fannie and Freddie in what could become one of the largest bailouts ever put on the shoulders of taxpayers.

Nonetheless, Bank of America and Citigroup both rose more than 6 percent and were among the leaders on the Dow Jones industrial average and the S&P 500 indexes. Home builders also advanced, with the Dow Jones home construction index rising more than 10 percent.

Any recovery in home prices will be largely dependent on the health of Fannie and Freddie, which own or guarantee about half of all outstanding mortgages and are the biggest providers of home financing in the country. The health of the housing market is considered key to restoring luster to the U.S. economy.

The idea is that the bailout, which carries an explicit government backing for debt issued by the two companies, will shore up confidence in the mortgage market and stem a wave of bank write-downs tied to mortgage investments gone bad.

Lehman Brothers, however, failed to follow the trend among financials, falling 12.7 percent to $14.15 on reports that the investment bank was meeting with potential buyers for its Neuberger Berman asset management unit. It was a reminder that there are still severe credit constraints facing Wall Street and the economy.

Keep in mind that the Fannie and Freddie bailout would not necessarily solve all the housing market's problems. The bailout could eliminate the companies' common and preferred shareholders. Fannie and Freddie common stocks were each trading at less than $1 a share, off more than 80 percent from Friday's close. Shares of commercial bank Sovereign Bancorp, which has a significant position in Fannie and Freddie preferred shares, were down nearly 7 percent at $9.02.

Concern about the economy's health caused the NASDAQ to gyrate throughout the session, at one point falling into negative territory before a late afternoon surge. Nasdaq was held back by losses in the shares of bellwethers, including Google and Apple, which fell 5.5 percent and 1.4 percent respectively.

But shares of Cisco Systems Inc rose 5 percent after Goldman Sachs added the network equipment maker to its list of favorite tech names, making it the biggest boost on the NASDAQ.

Also UAL Corp, the parent of United Airlines, managed to reduce massive losses in its shares. The stock had initially plunged after a Chicago Tribune story about UAL possibly filing for bankruptcy. UAL said the story was "untrue."

Washington Bails Out Fannie and Freddie

Well they finally found themselves at the end of the pier facing the devil and the deep blue ocean. Left with no other choice, Washington took control of Fannie Mae and Freddie Mac in a move that sent mortgage rates dramatically, while at the same time raising hopes that the move will provide some aid to the  troubled in housing and credit markets. The feeling around the world is that the

federal backing could stem some of the pain that has crippled the financial system for over a year.

However, the bailout of the country's two biggest mortgage finance companies, which may prove the costliest ever, is a symptom of the dismal state of capital markets more than a year into the crisis. The immediate reaction to the U.S. government's commitment of up to $200 billion to support the two giant mortgage lenders, which together back about half the country's $12 trillion in mortgages, was positive.

Thirty-year mortgage rates fell about a half percentage point from Friday to 6.0 percent, according to Bankrate.com, helped in part by the Treasury's decision to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac.

The stocks of Fannie Mae and Freddie Mac themselves plunged over 85 percent though, since the Treasury's plan explicitly ruled out any protection for existing shareholders. After losing most of their value in the past year, the stocks were around 70 cents per share on Monday.

With the two companies' bondholders likely to be long-term beneficiaries of the takeover, the yield premium on the agencies' debt against Treasury bonds narrowed by as much as 40 basis points, traders said.

Government bonds initially suffered as investors bet the bailout would vastly increase Treasury borrowing. Yields on two-year U.S. Treasury notes jumped almost a half percentage point. Treasuries eventually made a come back, however, as mortgage investors adjusted their portfolios to the new, government-backed reality by buying long-dated debt.

U.S. President George W. Bush said the action had been necessary because troubles at Fannie Mae and Freddie Mac, which have $1.6 trillion in debt outstanding, posed "an unacceptable risk to the broader financial system and our economy."

However, Treasury Secretary Henry Paulson, in a number of television appearances Monday, said he could not estimate how big a burden the government's support for the two companies would be on the taxpayer until the extent of declines in the mortgage market were fully known.

The plan tries to protect taxpayers by ranking the government new equity stake in the firms above existing shareholders and installing new management. Even with all these provisions, analysts said the potential pitfalls were numerous.

The takeover of Fannie and Freddie came amid heightened worries about shrinking capital at the congressionally chartered companies, which had combined losses of nearly $14 billion the last four quarters.

Large holders of the two companies’ debt, including overseas central banks, had shown increasing nervousness recently, dumping more than $27 billion in agency securities in just the last two months. China and Japan, the biggest buyers of the two companies' bonds, welcomed the bailout.

Lehman Looks To Sell Neuberger Berman

Lehman Brothers is talking with potential buyers of its Neuberger Berman asset management unit, with the result that Lehman’s shares were down as much as 19.6 percent on concern that it is desperate for cash.

According to CNBC television, Lehman executives have been holding the meetings, and have brought Neuberger management into the sales process. Neuberger is said to be worth $7 to $8 billion.

Lehman on Monday announced plans to report third-quarter results on Sept 18 and at that time update investors on "strategic initiatives." The Street is looking for Lehman to lose $2.83 per share as a result of multi-billion dollar write-down of its mortgage holdings. Lehman lost $2.8 billion, or $5.14 per share, in the second quarter.

Lehman has also been in talks with investors such as state-owned Korea Development Bank on possible capital infusions.

Is Wall Street Losing Faith In Apple

Saw its share price fall sharply during the day on Monday, ahead of a highly anticipated event on Tuesday when Apple is expected to roll out a new iPod Nano and perhaps give an update on iPhone sales. However, Apple’s shares often sell down ahead of its major product announcements due to the “unknown” factor.

Apple e-mailed reporters and analysts last week with an invitation to a San Francisco event entitled "Let's Rock," which bore an image of an iPod- wearing man jumping in the air, with the words "playing soon."