(Recasts with midday 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) - Fears about the worsening
health of the two largest U.S. mortgage finance companies
slammed global stocks and the dollar on Friday spurred by a
report of a possible government takeover that could trim or
eliminate the value of its common stock.
The effort to bolster the housing finance giants Fannie Mae
and Freddie Mac, publicly traded and government sponsored
entities formed years ago to promote home ownership, is the
latest chapter in a U.S. housing finance crisis that began more
than a year ago as mortgage failures soared.
Wall Street opened weak and extended its losses after U.S.
Treasury Secretary Henry Paulson said his department's chief
aim is to back Fannie Mae <FNM.N> and Freddie Mac <FRE.N> in
their "current form" -- comments investors said failed to
soothe their concerns.
Paulson's comments suggested the government has not been
able to stem a yearlong credit crisis that has sapped global
markets and economic growth.
The benchmark 10-year U.S. Treasury note <US10YT=RR> fell
25/32 to yield 3.89 percent. The 30-year U.S. Treasury
bond<US30YT=RR> fell 36/32 to yield at 4.48 percent.
The blue-chip Dow marked its first fall below 11,000 for
the first time since July 2006, and the leading index for the
top 300 European shares closed at three-year lows as fears of
massive capital infusions for Fannie and Freddie rattled
investors.
"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.
A bailout would likely wipe out some or all of the common
stock of the two government-sponsored entities, which hold more
than $5 trillion in mortgage assets and were set up to finance
home ownership.
Shares of the two companies -- pillars of the U.S. property
market and economy -- have tumbled to a fraction of their value
just weeks ago, but their bonds soared as investors bet the
government would back their debt. They fell to 50 percent of
their day-earlier level early Friday then cut their losses in
half after Paulson downplayed the likelihood of any near-term
bailout.
Investors fear the impact of a protracted financial crisis
on the already weak U.S. economy and markets, in particular,
for U.S. debt, which relies on the faith of foreign investors.
The U.S. stock market, bonds and the dollar all fell, with
equities hit the hardest.
Paulson's statement that the mortgage companies would stay
"in current form" was key to understanding his message, Bill
Sullivan, chief economist at JVB Financial Group in Boca Raton,
Florida. Paulson was responding to speculation that either one
or both of the companies might 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.
At 1 p.m., the Dow Jones industrial average <> was down237.34 points, or 2.11 percent, at 10,991.68. The Standard &
Poor's 500 Index <.SPX> was down 26.79 points, or 2.14 percent,
at 1,226.60. The Nasdaq Composite Index <> was down 52.96
points, or 2.35 percent, at 2,204.89.
The FTSEurofirst 300 index <> closed down 2.6 percent
at 1,126.39 points -- its lowest close since June 9, 2005,
according to Reuters data.
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.
In Europe, the slide in equity markets more than offset
modest gains for heavyweight energy shares on the back of
record oil prices.
"The market has been beaten to its knees and the downturn
will probably continue," said Christian Schmidt, analyst at
German bank Helaba.
News that Zurich Financial Services <ZURN.VX> had pulled
out of the auction for Royal Bank of Scotland's <RBS.L>
insurance business pushed banking stocks lower.
France's Credit Agricole <CAGR.PA> fell almost 10 percent
and domestic rival Societe Generale <SOGN.PA> lost 7 percent,
while RBS lost 8.6 percent.
Zurich Financial shares jumped 4.2 percent.
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
25/32 to yield 3.89 percent. The 30-year U.S. Treasury
bond<US30YT=RR> fell 36/32 to yield at 4.48 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> off 0.65 percent at 72.02. Against the yen,
the dollar <JPY=> fell 0.92 percent at 106.08.
The euro <EUR=> was up 0.68 percent at $1.5891.
U.S. light sweet crude oil <CLc1> rose $2.69 percent to
$144.34 per barrel.
Spot gold prices <XAU=> rose $11.80 to $957.95 an ounce.
Overnight in Asia, stocks rose and government bond prices
fell as investors initially believed efforts to bolster Fannie
and Freddie would stem further fallout from the global credit
crisis.
Japan's Nikkei share average <> closed down 0.2
percent and shares elsewhere in the Asia-Pacific region
<.MIAPJ0000PUS> rose 1.3 percent, heading for the first weekly
gain since mid-May.
Fannie and Freddie 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.
If they failed it 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)
