Advisers think the government’s move to bail out mortgage giants Fannie Mae of Washington and Freddie Mac of McLean, Va., was a positive one — but not without its negative fallout.
"As the market is indicating, this is a step in the right direction and a positive one for now," said David A. Massart, president of Next Generation Wealth Management Inc. in Milwaukee, which manages $65 million in assets.
Trading surged in the first few minutes today following the Sunday announcement by Secretary Henry Paulson that the Department of the Treasury and the Federal Housing Finance Agency are taking over and will provide up to $200 billion in capital to the government-sponsored enterprises, which make up nearly half of the U.S. loan market
"I think Paulson did the right thing. He had no choice but to do this. The housing market is the crux of all the problems, and if they can get some stabilization there, everything will begin to improve," Mr. Massart said.
At midday, The Dow Jones Industrial Average had risen 201.27 points to 11422.23, the Standard & Poor’s 500 stock index was up 7.08 points to 2262.96 and the Nasdaq Composite Index gained 17.33 points, rising to 1259.64.
“I don’t think they had a choice,” said Cal Brown, vice president of planning for The Monitor Group Inc. of McLean, Va., which manages $500 million in assets.
“That said, I don’t particularly like the federal government taking over institutions.”
The move should help clients, Mr. Brown said.
“Interest rates for people buying homes with good credit are going to go down,” he said. “More houses will start moving because more home buyers can get loans now.”
But the move could sock it to taxpayers, some advisers say.
“This means taxpayers will be paying for the whole bailout and I don’t like that because it means that the average, faithful taxpayer will take the hit,” said Mark Kenison, owner of Turning Point Financial of Charlotte, N.C., which manages $30 million in assets.
“I’m sure it’ll work out and be good for the economy and good for the market. But it does make me nervous to think about what will happen to taxes.”
Jeff Kostis, president of K Financial Planning Inc. of Vernon Hills, Ill., which does not manage assets, agrees.
“I’m concerned about the mechanism they’re using to do it,” Mr. Kostis said. “It seems like it’s very market-friendly, but very unfriendly to taxpayers.”
Some advisers are worry where such government intervention will end.
“What about the auto industry?” asked Doug Flynn, co-founder of Flynn Zito Capital Management of Garden City, N.Y., which is affiliated with LPL Financial of Boston. “Do we bail them out next?”
And one adviser thinks the move will render an important debate moot.
“The larger question as to whether or not [Fannie Mae and Freddie Mac] should have been government agencies or entirely private organizations will not get looked at now, and that’s a shame,” said Tom Curtis, managing director of FSP Associates LLC in Gaithersburg, Md., which manages more than $25 million in assets.
Global markets also responded positively to the takeover, resulting in a rise in trading on the speculation that the bailout would shore up the mortgage market.