* Stocks slide on fear government to bail out finance cos
* US Treasury debt falls on fear of rising government debt
* Dollar falls as worry mounts on Fannie, Freddie outlook
* Oil at new record high on Mideast, Brazil strike jitters
(Adds Fed comment on discount window, paragraph 18)
By Herbert Lash
NEW YORK, July 11 (Reuters) - Fear the two largest U.S.
mortgage finance companies are in such poor health that they
need a government bailout pushed financial markets lower on
Friday, although stocks pared losses as officials began to talk
of safety-net moves for the ailing sector.
In a wild trading day fueled by speculation of whether the
U.S. government will rescue troubled housing finance giants
Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, equity markets
sagged, slumped and staged a short-lived rally on hopes a
resolution was near.
But the weight of a credit crisis that has slowed world
growth and threatened to push the U.S. economy into recession
since a housing slump began more than a year ago reminded
investors more pain than relief in the short term lay ahead.
Contributing to the pessimism was a $5 jump in oil prices
to a new record above $147 a barrel on lingering worries over
Iran's nuclear aspirations and a potential strike by Brazilian
oil workers next week.
In fact, oil's rally could run further if Fannie and
Freddie's troubles feed into the commodities boom by reducing
the chances of a U.S. interest rate hike by the Federal
Reserve.
Investors fear a protracted financial crisis would hit the
already weak U.S. economy and markets. The U.S. stock market,
bonds and the dollar all fell, with equities hit the hardest.
The blue-chip Dow at one point fell below 11,000 for the
first time since July 2006. The Dow and broad market S&P 500
both closed down more than 1 percent.
Fears that Fannie and Freddie could require massive capital
infusions also rattled investors in Europe where an index for
the top 300 European shares closed at three-year lows and is
now down 25 percent so far this year.
Gnawing at investor unease was a New York Times report that
said the U.S. government was considering a takeover of Fannie
and Freddie that could trim or eliminate the value of the
mortgage companies' stock.
"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.
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 and Freddie in their "current form" --
comments that failed to soothe investor concerns.
The two government-sponsored entities, which hold more than
$5 trillion in mortgage assets and were established to finance
home ownership, are pillars of the U.S. economy.
U.S. Treasury prices slipped on fears a bailout would
require a massive capital infusion and flood markets with more
government debt. Yet the bonds of the two finance companies
soared as investors bet the government would back their debt.
Sen. Chris Dodd, chairman of the Senate Banking Committee,
said the Fed and the Treasury Department are considering
opening the discount window to the two companies. "Both the Fed
and the Treasury are looking at various options ... like the
discount window," the Connecticut Democrat said.
The stock of the two companies fell to 50 percent of their
day-earlier levels, but then cut their losses in half after
Paulson played down the likelihood of a near-term bailout.
Fannie closed down 22 percent and Freddie just 3 percent
after a source told Reuters that Fed Chairman Ben Bernanke told
Freddie's chairman and chief executive his company and Fannie
could obtain emergency funding.
The Fed later said it had not discussed access to its
discount window with either Fannie or Freddie.
Some investors held out hope that the weekend would bring
relief to Fannie and Freddie.
"People are cognizant that some plan could develop over the
weekend. They don't want to be too short," said Nick Kalivas,
equity market analyst at MF Global Research in Chicago.
The Nasdaq and S&P 500 racked up their sixth weekly
decline; for the Dow it was the fourth straight decline.
The Dow Jones industrial average <> closed down 128.48
points, or 1.14 percent, at 11,100.54. The Standard & Poor's
500 Index <.SPX> was down 13.90 points, or 1.11 percent, at
1,239.49. The Nasdaq Composite Index <> was down 18.77
points, or 0.83 percent, at 2,239.08.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> off 0.73 percent at 71.965. Against the
yen, the dollar <JPY=> fell 0.66 percent to 106.36.
The euro <EUR=> rose 0.89 percent to $1.5924.
Spot gold prices <XAU=> rose $17.05 to $963.20 an ounce.
Among other big declining shares, Lehman Brothers shares
<LEH.N> slid 16.6 percent to $14.43, a day after dropping more
than 12 percent on unsubstantiated rumors of clients pulling
back their exposure to the investment bank.
There were some bright spots. Shares of Anheuser-Busch Cos
Inc <BUD.N> soared 8.6 percent to $66.50 after a source said
the maker of Budweiser beer and Belgian-Brazilian rival InBev
NV <INTB.BR> have begun negotiations for a friendly merger.
Financial stocks led losses in Europe, with Credit Agricole
<CAGR.PA> down nearly 10 percent after newspaper Le Monde
reported the French bank's chief executive and chairman could
resign over losses tied to the credit crunch.
Royal Bank of Scotland <RBS.L> fell 8.6 percent after
Zurich Financial <ZURN.VX> pulled out of the bidding for RBS's
insurance unit. The Swiss company's stock rose 4.2 percent.
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
after Paulson's statement gave no hints of a bailout for Fannie
and Freddie, whose shares by then had plunged more than 40
percent each.
Those shares began to tumble in pre-market trade after The
New York Times reported that 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.
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
41/32 to yield 3.96 percent. The 30-year U.S. Treasury bond
<US30YT=RR> fell 58/32 to yield 4.53 percent.
Oil rose. U.S. crude <CLc1> settled at $145.08 a barrel,
up $3.43, after climbing as high as $147.27 earlier in the day,
adding to gains of $5.60 from Thursday. London Brent crude
<LCOc1> settled at $144.49 a barrel, up $2.46.
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 Jonathan Oatis)
