The Federal Reserve's decision on Sunday to lend to troubled government-sponsored lenders Fannie Mae and Freddie Mac—using the same terms it extended to ailing investment banks suffering through the credit crisis—should be good news for stocks this morning.
The plan, which needs congressional approval, shows the government is fully committed to propping up the backbone of the U.S. lending market.
Shares of the two giant lenders—which hold or back some $5.2 trillion worth of American mortgages—fell nearly 50 percent last week on fears that rising mortgage defaults could force the pair to raise massive amounts of capital.
Reaction from economists was cautiously optimistic:
While these measures may ultimately need to be supplemented with others, we continue to believe that the U.S. government will do whatever is needed to stabilize the ability of Fannie Mae and Freddie Mac to maintain their current role in the mortgage market.
Goldman reiterated it's warning that the key factor in the future of Fannie and Freddie is continued expansion of their lending, given ongoing tightness in most other corners of the credit markets where problems still remain.
Ultimately, we do not view these 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.
Essentially, government support is simply a stopgap rather than a solution to ongoing uncertainty in the credit market.
So, what about stocks?
High Frequency Economics says:
The immediate implications of this will likely be positive for stocks and negative for treasuries, given the risks now assumed by the taxpayer, but we think the state of the economic cycle makes a compelling case for owning treasuries, and we do not expect any sell-off to last.
The announcement, released ahead of the opening bell in Asian markets, sent shares there rallying.
Link to the Fed's brief statement is here.
Treasury Secretary Paulson's statement is here.