Markets rally on US mortgage bailout

Markets rally on US mortgage bailout

The FTSE 100 roared back almost 200 points today as markets around the world were cheered by the US government's bailout of mortgage companies Freddie Mac and Fannie Mae.

The bounce in the blue-chip index was widely predicted by market analysts after the two firms were taken into temporary public ownership, but this morning's gains surpassed general forecasts of a 170-point uplift. Shortly after London markets opened, the FTSE 100 was trading at 5440.2, up 199.5 points or 3.8% on Friday night's close of 5240.7.

However it soon became impossible to judge the true scale of the rally, as the London Stock Exchange was hit by "connectivity issues" - leaving share prices and the wider market stuck for at least five hours. Analysts predicted that the FTSE could be up by as much as 260 points.

Last week the index of London's top 100 companies fell nearly 400 points as investors lost confidence in the UK's economic prospects.

The biggest gainers this morning - at least before the LSE's systems gummed up - were the banks: HBOS shares soared by 18%, Lloyds TSB rose 15% and RBS was up 14%.

The positive reaction in London was matched by a 2.8% lift in the Dax in Frankfurt while the CAC, the French bourse, jumped 4%.

The bounce recorded on the European exchanges followed earlier gains in Asian markets. Japan's Nikkei 225 stock index was up more than 400 points, or 3.4%, in afternoon trading, while Hong Kong's Hang Seng index rose 3.9%. Markets.....continued below

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in Seoul, Singapore, Taiwan and Australia also recorded gains.

Wall Street is also expected to open strongly later today.

The bailout of Freddie Mac and Fannie Mae - which account for half of all mortgages in the US - followed months of speculation about their future. They have struggled to remain solvent over the past year, after bearing the brunt of the sub-prime crisis.

The US treasury secretary, Henry Paulson, announced yesterday that the Federal Housing Finance Agency, formerly the regulator of the two companies, would run both businesses. Their current management has been replaced and further funds would be made available, he said.

'Vortex of recession'

The plan outlined by Paulson yesterday has three key strands:

• The US government will inject $100bn (£55bn) into both companies to allow them to honour their existing debts and keep trading

• It will buy mortgage bonds issued by the pair, starting with a $5bn deal

• There will be an unlimited "backstop liquidity support facility" - essentially giving Fannie and Freddie whatever credit they need to remain afloat.

David Buik, of BGC Partners said: "The action taken by the [US] treasury should be seen as positive, but it does beggar belief what might have happened ... had Freddie and Fannie not fallen into conservatorship.

"Had Freddie and Fannie defaulted without the assistance of the treasury and the Fed, the US economy would have fallen into the vortex of recession for at least five years and the ramifications for the rest of the world would have been horrifying. This action is a confidence booster."

Together, Fannie and Freddie guarantee $5.4 trillion of American home loans. Speaking on US radio this morning, Paulson said that the rescue plan had been structured to protect US taxpayers rather than investors- who he insisted were not being bailed out.