(Recasts with U.S. markets, changes dateline; previous
LONDON)
* Global shares extend losses after Paulson statement
* U.S. Treasury debt prices pare losses after statement
* Dollar loses more ground versus the euro and yen
* Oil hits new record high on Mideast tensions
By Herbert Lash
NEW YORK, July 11 (Reuters) - Global stocks fell sharply
and the dollar slid on Friday, weighed down by growing credit
fears as the two largest U.S. mortgage finance companies
plunged on concerns over a report that the government is
considering taking them over.
Stocks extended losses after U.S. Treasury Secretary Henry
Paulson said at mid-morning that his department's chief aim is
to back Fannie Mae <FNM.N> and Freddie Mac <FRE.N> in their
"current form."
"The bottom line is that we're in the middle of a financial
Tsunami. This is a storm the likes of which this country hasn't
seen," said Peter Kenny, managing director at Knight Equity
Markets in Jersey City, New Jersey.
Investors' initial reaction was to view Paulson's statement
as an indication that a bailout of the two companies -- pillars
of the U.S. property market and economy -- was not imminent but
still possible.
Wall Street investors reacted as if the bailout would
effectively wipe out much of the common stock of the private
companies set up to finance home ownership and holding over $5
trillion in montage assets. The shares of the two tumbled to a
fraction of their value just weeks ago.
Moreover investors feared the impact of a protracted
financial crisis on the economy, the markets and on demand for
U.S. debt globally. The U.S. stock market, bonds and the dollar
all fell, with equities hit the hardest.
Bill Sullivan, chief economist at JVB Financial Group in
Boca Raton, Florida, said Paulson's statement that the mortgage
companies would stay "in current form" was key to his message
given in response to speculation that either one or both of the
government-sponsored entities would enter conservatorship.
"That suggests that they want to avoid a conservator entity
for these GSEs. That suggests avoiding a bailout, at least
initially," Sullivan said. "There is not an imminent bailout on
horizon," he said.
In late morning trade, the Dow Jones industrial average
<> was down 171.06 points, or 1.52 percent, at 11,057.96.
The Standard & Poor's 500 Index <.SPX> was down 17.97 points,
or 1.43 percent, at 1,235.42. The Nasdaq Composite Index
<> was down 30.37 points, or 1.35 percent, at 2,227.48.
The pan-European FTSEurofirst 300 index <> was down
1.8 percent at 1,135.94 points, having slipped to 1,132.04
points -- its lowest since early July 2005.
Euro zone and U.S. government bonds briefly pared losses
Paulson's statement gave no hints of a bailout for Fannie and
Freddie, whose shares plunged more than 40 percent each.
Those shares began to tumble in pre-market trade after The
New York Times reported the U.S. government was considering a
takeover -- a move that would guarantee the mortgages the two
lenders hold, but that could leave shareholders with nothing.
European shares initially rose on the report, with
investors relieved that Washington looked ready to step in to
save the two massive lenders. But shares later fell sharply to
three-year lows after Wall Street opened lower.
U.S. Treasury debt prices slipped on fears the government
would need to sell more debt to back a potential takeover, and
sparked a rally in Fannie and Freddie debt.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
10/32 to yield 3.84 percent. The 30-year U.S. Treasury
bond<US30YT=RR> fell 16/32 to yield 4.44 percent.
The dollar lost more ground versus the euro and yen after
Paulson gave no indication of an imminent bailout. Investors
fretted about the impact of the credit crisis.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.78 percent at 71.93. Against the
yen, the dollar <JPY=> fell 0.76 percent at 105.94.
The euro <EUR=> gained 1.11 percent at $1.5916.
U.S. light sweet crude oil <CLc1> rose $4.71 to $146.36 per
barrel.
Spot gold prices <XAU=> rose $37.85 to $965.60 an ounce.
Gold rose to a three-month high, but in reaction to record
oil prices as investors sought a hedge against inflation.
Oil jumped $5 to a new record high near $147 a barrel,
spurred by growing worries of threats to supplies from Iran and
Nigeria and the possibility of a strike by Brazilian oil
workers next week.
Fannie and Freddie own or guarantee $5 trillion of debt,
close to half of all U.S. mortgages. They have been hit hard by
the U.S. housing crisis, seeing borrowing costs rise and
suffering billions of dollars of losses as many investors lose
confidence they can raise sufficient capital to stay afloat.
Were Fannie and Freddie unable to borrow, or find it too
costly to borrow, they would not be able to buy mortgages from
lenders. This would make it far more difficult and perhaps
impossible for people to obtain home loans, which could cause
the already hard hit housing market to grind to a halt.
"The credit crisis is getting more intense, the run-up in
oil is getting more intense, and of course the potential for
military conflict (with Iran) is intensifying," said Marc Pado,
U.S. market strategist at Cantor Fitzgerald & Co in San
Francisco
"There isn't anything out there that's good. Nobody wants
to be a long holder of stocks over the weekend. For the most
part people are at their most defensive levels."
(Reporting by Herbert Lash. Editing by Richard Satran)
