Wall Street soars on Fannie, Freddie bailout

By Steven C. Johnson

NEW YORK (Reuters) - Stocks rose on Monday as investors bet Washington's bailout of mortgage finance giants Fannie Mae and Freddie Mac would stabilize the U.S. housing sector and calm jittery world financial markets.

Investors poured into stocks worldwide, especially bank shares, after the U.S. Treasury on Sunday seized control of the two companies in what could become one of Washington's biggest bailouts ever.

The Dow industrials jumped nearly 300 points. Bank of America and Citigroup both rose more than 6 percent and were among the biggest drivers of gains on the Dow and the S&P. 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.

Investors hope 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.

"We've had a major uncertainty removed form the market - both in the U.S. and globally," said Al Goldman, chief market strategist at Wachovia Securities in St. Louis. "It was critical for the government to step in. Does it solve all our problems? No. But it's a strong step in the right direction."

The Dow Jones industrial average closed up 290.18 points, or 2.59 percent, at 11,510.49. The Standard & Poor's 500 Index finished up 25.48 points, or 2.05 percent, at 1,267.79. The Nasdaq Composite Index was up 13.88 points, or 0.62 percent, at 2,269.76.

Shares of luxury home builder Toll Brothers jumped 9.4 percent to $26.47 on the New York Stock Exchange.

In the financial sector, Bank of America shares added 7.8 percent to $34.76 while Citigroup rose 6.6 percent to $20.32.

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.

Some traders said the news was a reminder of the still severe credit constraints facing Wall Street and the economy.

"If they raise the cash, that tells you two things: They are desperate for the cash. Secondly, if they sell at a bargain basement price that's not good," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Traders also said the Fannie and Freddie bailout would not necessarily solve all the housing market's problems.

"There are a lot of bad loans out there and there will be a lot of overstretched consumers who will be cutting back," said Benjamin Halliburton, managing director at Tradition Capital Management in Summit, New Jersey

The bailout could also wipe out 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 on the Nasdaq, shares of UAL Corp, the parent of United Airlines, pared massive losses to trade down 11.2 percent at $10.92. The shares had initially plunged after a Chicago Tribune story about UAL possibly filing for bankruptcy. UAL said the story was "untrue."

Trading volume was light on the New York Stock Exchange, with about 1.66 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion. But on Nasdaq, about 2.57 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by almost 2 to 1 while on the Nasdaq, advancers beat decliners by about 1.5 to 1.

(Additional reporting by Richard Leong and Ellis Mnynadu; Editing by Leslie Adler)