* U.S. stocks sag; rescue plans highlights bank weakness
* Dollar pares gains on concerns rescue plan isn't enough
* Government debt prices rally on flight-to-safety buying
* U.S. banks plunge to multiyear lows on no end to crisis
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, July 14 (Reuters) - Fear about fallout from the
credit crisis, especially among banks, overshadowed initial
enthusiasm over a rescue plan for the top two U.S. mortgage
finance companies on Monday, dragging down stocks and
increasing a safe-haven bid for government bonds and gold.
Shares of Fannie Mae and Freddie Mac soared at first after
the U.S. government and the Federal Reserve said on Sunday they
would lend the two companies money and buy their stock if
needed to shore up the two pillars of the U.S. housing market.
But the gains soon fizzled as analysts and investors noted
any direct government investment in Fannie Mae <FNM.N> and
Freddie Mac <FRE.N> would further dilute shares that lost more
than 40 percent of their value last week alone.
The seizure of mortgage lender IndyMac Bancorp Inc <IMB.N>,
late on Friday, the third largest bank failure in U.S. history,
added to investor unease about bank stability and the future of
the mortgage market.
The dollar clambered back from a near-record low against
the euro, and U.S. and euro-zone government debt rose amid
widespread concerns about global financial markets.
Of the 24 companies that make up the KBW Banks index
<.BKX>, 19 traded at multiyear lows, and two others at more
than 52-week lows. The index plummeted 8.5 percent.
The Dow Jones industrial average <> closed down 45.35
points, or 0.41 percent, at 11,055.19. The Standard & Poor's
500 Index <.SPX> fell 11.20 points, or 0.90 percent, at
1,228.29. The Nasdaq Composite Index <> shed 26.21 points,
or 1.17 percent, at 2,212.87.
Freddie Mac passed its first test of investor confidence as
buyers flocked to its $3 billion sale of debt. Although the
routine auction went off without a hitch, investors remained
wary and shares in both companies swung wildly.
"Markets are in effect agreeing that the debt is money good
but the value of the equity is still in question," said Bret
Barker, a portfolio manager at Metropolitan West Asset
Management in Los Angeles.
Freddie shares closed down 8.3 percent to $7.11 and Fannie
shares fell 5.1 percent to $9.73 in a day of whipsaw trade.
Freddie fell as much as 32 percent and rose as much as 26.5
percent; Fannie gained almost 32 percent fell as much as 9.4
percent.
Regional banks tumbled. Shares of Washington Mutual <WM.N>
plummeted 34.8 percent and National City Corp <NCC.N> plunged
14.7 percent amid fears about bank stability and the future of
the mortgage market.
RBC Capital Markets analyst Gerard Cassidy said more than
300 banks could fail in the wake of IndyMac's collapse, double
an estimate he made in February.
"The fear factor is in play right now," said Michael Nix, a
portfolio manager at Greenwood Capital Associates.
With IndyMac failing, the cockroach theory was in full
swing, said James Ellman, president of hedge fund Seacliff
Capital, who is short some financial stocks.
"You don't just have one bank failure -- when you have a
big bank go under, there's always more than one," Ellman said.
RELIEF RALLY IN EUROPE
The U.S. plan for Fannie and Freddie triggered a relief
rally in Europe, with the pan-European FTSEurofirst 300
climbing as much as 1.8 percent before paring gains as
investors focused anew on the wider credit crisis.
European shares rose in a session dominated by merger
activity in banking and beermakers.
The FTSEurofirst 300 index <> closed 0.7 percent
higher at 1,133.95 points.
"There is a realization that there are still some
fundamental factors which are creating negative sentiment in
the global markets right now," said Barclays Stockbrokers
strategist Henk Potts.
Banks were the top gainers, helped in part by the rescue
plan and by Spain's Santander <SAN.MC>, which said it would buy
British bank Alliance & Leicester <ALLL.L> for 1.3 billion
pounds ($2.6 billion) in a cash and stock deal.
A&L surged 53 percent, while Santander rose less than 0.1
percent.
In the latest mega deal in the fast-consolidating beer
industry, U.S. brewer Anheuser-Busch Cos Inc <BUD.N> accepted a
sweetened $52 billion takeover bid from Belgium-based InBev NV
<INTB.BR> to create the world's largest beermaker.
Anheuser shares rose 0.6 percent at $66.87. InBev was off
3.4 percent at 43 euros.
Safe-haven bonds initially fell as financial sector worries
eased somewhat after the U.S. rescue plan was unveiled.
"For the moment, the market is still looking to see whether
the U.S. rescue plan will be sufficient for Fannie Mae and
Freddie Mac, but the jury is still out on that," said Bob Maes,
fixed income strategist at KBC in Brussels.
Investors are waiting for testimony on Tuesday from Federal
Reserve Chairman Ben Bernanke and the release of U.S. data,
including retail sales, business inventory and producer prices,
he said.
"So it's difficult to forecast how things will develop in
the coming days," Maes said.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
26/32 to yield 3.87 percent. The 30-year U.S. Treasury bond
<US30YT=RR> added 44/32 to yield 4.46 percent.
"The (financial sector) crisis has not been resolved: there
are clearly more shoes to drop," said John Canavan, market
analyst at Stone & McCarthy in Princeton, New Jersey. "That
means a significant, continued safe-haven bid for Treasuries."
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.20 percent at 71.94. Against the yen,
the dollar <JPY=> fell 0.08 percent at 106.12.
The euro <EUR=> fell 0.20 percent at $1.5908.
Gold futures closed sharply higher, near $975 an ounce, as
jittery investors poured into the market and as a record high
in gold-backed exchange-traded funds boosted sentiment.
Bullion held by SPDR Gold Trust <GLD.P><GLD.A>, the world's
largest gold-backed ETF, soared to a record 705.90 tonnes on
Friday, up 7 percent from the previous day, its website
showed.
August futures <GCQ8> for gold settled up $13.10 at $973.70
an ounce in New York.
Oil rose slightly as supply concerns in Brazil in the midst
of an energy workers strike outweighed ongoing worries that
high fuel costs are dragging down consumer demand.
U.S. crude <CLc1> settled up 10 cents to $145.18 a barrel,
after hitting a record above $147 in intraday activity on
Friday. London Brent crude <LCOc1> settled 57 cents lower at
$144.93 a barrel.
Overnight, the U.S. dollar rose after the U.S. rescue plan
was unveiled, but Asian shares dropped on the view that the
global credit crisis is worse than previously thought.
Japan's Nikkei share average <> closed 0.2 percent
lower and Hong Kong's Hang Seng index <> fell 1.3 percent.
Shares in Asia-Pacific companies outside of Japan fell 1.1
percent, according to an MSCI index <.MIAPJ0000PUS>.
(Reporting by Ellis Mnyandu, Nick Olivari, Gertrude
Chavez-Dreyfuss, Ellen Freilich and Frank Tang in New York, and
Amanda Cooper, Ian Chua and Santosh Menonin London; Writing by
Herbert Lash; Editing by Leslie Adler)
