Traders getting their early morning coffee at the commissary of the New York Stock Exchange were more animated than usual this morning, discussing the pros and cons of the government's intervention in Fannie and Freddie. "The government has unlimited checks so they can keep writing them," one trader said. "So much for all the tough talk, so much for letting firms fail."
But that trader was in the minority. Most felt that the feds had no other choice, that these two firms really were too big too fail.
So now Fannie and Freddie can borrow from the Federal Reserve's discount window. Treasury will pursue increasing the credit lines the companies currently have, and will consider an equity investment.
Congress is about to go on recess for August, and we are in an election year, so it's not clear how fast they will pass a bill that will allow Treasury to buy debt and make a capital infusion into both these institutions.
One side issue is what this does to the housing bill--after all, we are asking Fannie and Freddie to take on a significant amount of new business by helping homeowners refinance; will that $300 billion for refinancing stay in the bill? Reform legislation will clearly be strengthened; the Federal Reserve will now have a consultative role by in setting capital requirements.
Fannie and Freddie both trading up nearly 30 percent on heavy volume. Other financials like AIG,Citi and Wachovia Bank are also trading up.
Will any of this matter to the stock market? We will certainly get a modest boost at the open; what we are lacking is any conviction we are near a bottom. Lacking a strong base of buyer enthusiasm, most traders I have spoken with have not become notably more bullish this morning.
1) Positive comments on Lehman. The strengthening of its funding base and its support from the Federal Reserve should enable it to survive any crises of confidence, says Sanford C. Bernstein & Co analyst Brad Hintz. His commentary may carry a little more weight, since he is the former CFO of Lehman. Lehman up 16 percent pre-open, also on heavy trading.
2) Allegheny Technologies up 11 percent, as they raised their Q2 guidance;
3) In light of all this, the abrupt conclusion of the Anheuser-Bush and InBev deal for $70 a share seems a little anticlimactic. The main point is that while global M&A may have slowed dramatically, it hasn't come to a halt. Remember last week's big deals in the chemical business: Dow Chemical-Rohm and Haas, and Ashland buying Hercules. All three of these deals were at substantial premiums.
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