The US government’s plan to rescue Fannie Mae and Freddie Mac passed its first test overnight as big investors supported a $US3 billion short term debt issue from Freddie. But support remains fragile and will depend on reaction from the US Congress this week. That’s why Fed chairman, Ben Bernanke’s scheduled appearances this week on Capitol Hill in Washington will be of great importance and significance. The early rally in the stock market ran out of puff as investors worried about all financial groups, especially US commercial banks.
Wall Street fell after Asia and European markets were firmer.
Our market should open lower to flat according to futures trading overnight, continuing the weaker trend of yesterday when it dropped by just over 1%.
Oil finished over $US145 a barrel, gold rose and the US dollar eased against the euro to more than $US1.59.
But the Aussie dollar bounded to a new 25 year high of 97.36 US cents in New York, before easing a tick to trade around 97.20 US cents in early Australian trading this morning.
US regional bank shares in particular fell sharply as investors sold off amid fears there could be a repeat of Friday’s failure of the Californian-based IndyMac Bancorp which re-opened yesterday under Federal Government ownership.
Fannie Mae and Freddie Mac shares struggled after Friday’s near-meltdown, as investors worried over Sunday’s government lifeline for the US mortgage finance giants.
The Dow lost 0.4%; strength in big consumer names such as Coca-Cola and McDonald’s helped offset weakness in financials.
The broader market was weaker: the Standard & Poor’s 500 index fell 0.9% and Nasdaq 1.2%. The S&P 500 fell to the lowest level since June 2006, extending its drop from an October record to almost 22%.
Shares in Freddie Mac fell 8.3%, to $US7.11 after earlier jumping 26% and Fannie Mae lost 5.1% to $US9.73 after a 32% leap in early trading.
Fears about US financials dominated trading all day (In contrast a troubled UK bank, Alliance and Leicester agreed to a takeover offer from the British subsidiary of the huge Santander banking group of Spain in a deal worth around $US2.1 billion).
By the close US financial shares had endured the biggest drop since 2000.
Washington Mutual, the big savings and loan partly bailed out two months ago by TPG, had its biggest fall ever after a broker estimated tens of billions in possible losses this year.The bank says it has $US40 billion in liquid funds.
Another big regional bank, National City, which was also bailed out by the Corsair private equity group six weeks or so ago, fell to a 24-year low in the wake of the IndyMac failure.
The declines pushed the Standard & Poor’s 500 Financials Index of 89 companies down 6.1%, its steepest plunge since April 2000.
Washington Mutual fell 35%, to $US3.23; National City which is Ohio’s biggest bank, dropped 15% to $US3.77.
Wachovia Corp, the fourth-largest bank in America, had another poor day, dropping 15% to $US9.84, a 17-year low.
Brokers reckon that after last week’s revelation of a $US2.6 billion loss in the second quarter, it will cut dividend again and have to raise a further $US5 billion to remain afloat.
The sale of two billion US dollars in three-month notes and one billion in six month notes by Freddie Mac helped ease early concerns about the US Government support package.
Dealers said the sale drew stronger demand than a similar one a week ago. Fannie Mae will sell $US3 billion worth of debt on Wednesday.