The U.S. government's plan to take the helm at the nation's ailing mortgage giants was welcomed by some banks and market watchers outside the U.S. as a way to dispel the uncertainty plaguing the world's financial institutions and companies.
It remains to be seen whether the effort to contain the trouble at Fannie Mae and Freddie Mac will be dramatic enough to prop up sentiment as policy makers and investors weigh wider economic uncertainty in the U.S. and elsewhere.
In the booming Persian Gulf, where big investors -- including large government-backed investment funds with sizable investments in U.S. assets -- have watched the credit and housing crisis in the U.S. unfold with alarm, the news of the bailout was initially welcomed.
Ala'a Al Yousef, the chief economist of Bahrain investment bank Gulf Finance House, with more than $20 billion in assets under management, said the U.S. rescue was 'way overdue.' He said he expects the action by the Treasury to increase confidence among international investors in U.S. markets.
While the oil-fired economies of the Persian Gulf have escaped the worst fallout from the recent global financial turmoil, lending strains in the U.S. and Europe have also distorted credit market there, too. 'This hopefully will reduce the distortions and this should help price risk more accurately as we move forward,' Mr. Yousef said.
'There will be relief if this marks a turning point in the credit crunch,' said Gerard Minack, a Morgan Stanley economist in Australia. He added, 'The end of the crisis had been called before, and the call's been wrong.'
U.S. Treasury officials on Sunday offered details of the plan, which involves the two mortgage giants' regulator taking at least temporary control of them and a Treasury Department purchase of their senior preferred stock. The plan eliminates dividends on Fannie's and Freddie's common and preferred stock, but their common and preferred shares will remain outstanding. Holders of the two companies' debt are expected to benefit, as the move shows the U.S. government is willing to keep the companies from folding.
Several banks said Sunday they were encouraged. 'Such actions will have a beneficial effect on the markets and will shore up investor confidence a great deal,' said a spokesman for Industrial & Commercial Bank of China Ltd., the world's biggest lender by market capitalization.
A spokesman for Bank of China Ltd. said, 'This kind of explicit guarantee will be good for the financial markets going forward.'
Doubts about the value and health of Fannie and Freddie debt securities held by policy banks and major financial institutions throughout the world have contributed to drops in global markets. Foreign investors held $1.3 trillion, or 21.4%, of long-term debt issued by U.S. government agencies, primarily Fannie and Freddie, as of the middle of last year, according to the U.S. Treasury.
Asian investors make up the largest customers of U.S. agency debt. Mainland China, with $376 billion, was the single largest holder, though its major banks have told investors in recent days they were trimming their positions in Fannie and Freddie debt.
Still, concerns have the potential to spill over into other markets. Amid an overall tightening of European bank credit, BNP Paribas SA said Friday concerns over the cost of U.S. bank and Fannie and Freddie debt were likely to spill into European markets.
Other banks said they would wait to see details. In Japan, Mitsubishi UFJ Financial Group Inc., Japan's largest bank by market capitalization, and Norinchukin Bank, the central bank for agricultural and fishery cooperatives, said they were watching developments. The two banks held 3.14 trillion yen ($29.29 billion) and 5.3 trillion yen of U.S. agency debt respectively at the end of June, though they declined to say whether their holdings have since changed. Japan's $228.2 billion in U.S. agency debt as of June 2007, the second largest among foreign owners, was mostly held by commercial banks.
The move could enhance the standing of various countries' central banks, which have been reassuring lawmakers and the public that the U.S. wouldn't let Fannie and Freddie fall apart, at home. At a hearing before a committee of the South Korea's National Assembly on Thursday, Bank of Korea Governor Lee Seongtae said he believed the risk involved in the investments was low. 'We invested a considerable amount in Fannie Mae and Freddie Mac, but we don't have any problem in retrieving the investment,' he said. About $37 billion of the Bank of Korea's $243 billion in foreign-currency reserves are invested in senior bonds issued by the two firms.
The European Central Bank declined to comment Sunday on the Treasury's plans. The ECB, which doesn't hold any of the companies' debt in its foreign-exchange reserves, has been in regular contact with the U.S. Treasury about its plans. National central banks across the euro zone are likely to have minimal exposure.
It is unclear what effect the move might have on a program set up by the Bank of England in April to boost confidence in the British banking system. It allows banks to swap securities such as triple-A Fannie and Freddie debt for U.K. treasury bills. The program strictly defines what debt would be accepted and it is uncertain whether the U.S. agency paper would still meet the criteria, thought government backing might actually help. A BOE spokeswoman declined to comment.
The move may help overall market sentiment, particularly in Asia, which also is nervous about the overall sluggish U.S. economy and rising inflation. 'The move, though widely expected, should be a positive step toward containing the damage to the mortgage market,' said Irene Cheung, a Singapore-based strategist at ABN Amro NV.
'This action by the U.S. government will have a calming and reassuring effect,' said Joonho Um, a portfolio manager in Seoul who is launching an investment firm, Fidelis Magnus.
While stocks across the globe have sold off heavily this year, Asian indexes have suffered worse than shares in the U.S. The Dow Jones Industrial Average has lost 15.4% so far this year, with Nasdaq also having fallen about 15%.
In Asia, nearly every market has dropped in excess of 20%, with Hong Kong's Hang Seng index down 28%, Korea's Kospi down 26%, and Japan's Nikkei Stock Average of 225 companies down 20.2%.
'We wish this can get resolved quickly so the sentiment doesn't continue to hurt us,' says Khiem Do, portfolio manager at Baring Asset Management in Hong Kong.
Laura Santini / Jason Leow / Yuka Hayashi |
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