Buyers flocked to Freddie Mac's $3 billion debt sale Monday, just hours after the U.S. government pledged support for the nation's top mortgage finance agencies, but the steps failed to stem growing alarm on Wall Street.
European and Asian stock markets rallied after the Treasury Department and Federal Reserve stepped in Sunday with offers of richer credit lines, equity purchases and direct access to central bank coffers should Freddie and its sister agency Fannie Mae run into deeper financial trouble.
However, U.S. stocks quickly shed initial gains as investors feared the steps will do little stem the losses spreading through the financial sector in the wake of a deflating housing market and stalling economy.
"This incident (with Fannie and Freddie) is not the last one," billionaire investor George Soros told Reuters in a telephone interview, adding that the year-long global financial market turmoil represented "the most serious financial crisis of our lifetime."
Friday's failure of mortgage lender IndyMac Bancorp, the third-largest bank collapse in U.S. history, served as a painful reminder of the financial strains.
Shares in a host of banks including National City and Washington Mutual fell more than 20 percent.
Fannie and Freddie together finance about half of U.S. homes, and are seen as vital for stabilizing the worst housing slump since the Great Depression some 80 years ago.
But as mortgage defaults rise even among borrowers with seemingly solid credit, concerns have grown that the two agencies may need more money to cover heavier losses.
Their shares were down in afternoon trading, after starting the session sharply higher.
"Ultimately, we do not view these (government) measures, dramatic as they look, as either a turning point for the U.S. housing market or as a sign that the downturn will be much worse than previously believed," Goldman Sachs economist Jan Hatzius wrote in a note to clients.
"They simply reaffirm our long-held -- and widely shared -- view that the government will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind the government-sponsored enterprises," he said.
On Sunday, the Treasury Department agreed to raise Fannie and Freddie's credit lines above the existing $2.25 billion apiece and buy shares to strengthen their finances if needed.
The Federal Reserve offered to let the agencies borrow at the rate it charges banks for direct loans.
Congress must approve some of those measures, and it was not clear whether that could be tacked on to an existing housing rescue bill or would require separate legislation.
The Senate passed a housing bill on Friday that included steps to tighten regulation on Fannie and Freddie, but did not address Sunday's moves.
Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, told CNBC that he expected to get a housing bill to President Bush by the end of next week.
Frank also said Fannie and Freddie were financially sound, and would probably not need to borrow from the Fed.
Debt buyers also seemed confident in the mortgage agencies. Monday's $3 billion debt sale from Freddie drew stronger demand than a similar one on July 7. Fannie announced that it will sell $3 billion worth of debt Wednesday.
While Monday's debt auction was routine, it was viewed as a key test of market appetite following last week's stock sell-off.
Freddie's treasurer said the sale was "business as usual," and he did not perceive a crisis of investor confidence.
The two companies rely on regular debt auctions for funding, and any disruption in the flow of money could push up mortgage rates and deal a fresh blow to a sinking U.S. housing market and fragile economy.
The housing crisis and subsequent credit contraction have prompted banks to tighten lending terms, leaving Fannie and Freddie as the dominant source of mortgage financing.
Fannie and Freddie own or guarantee $5 trillion of debt, close to half the value of all U.S. mortgages.
Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.
The White House said Fannie and Freddie had not tapped any of the lifelines offered by the Treasury and Fed Sunday.
"As far as I know, neither of the companies have gone forward to take advantage of any of the borrowing opportunities," White House spokeswoman Dana Perino told reporters. "Both of their regulators have stated that the companies are well-capitalized."