US mortgage move could prove turning point

"Monday has seen world markets rally as the US Government announced moves to bail out Freddie Mac and Fannie Mae - the quasi-private institutions responsible for financing the US mortgage market. Together Freddie Mac and Fannie Mae finance or guarantee nearly half of all outstanding US mortgage debt.

The move is the third US Government intervention in the ongoing credit crisis following the collapse of Bear Sterns in March and then initial efforts to sort Freddie Mac and Fannie Mae in July of this year. The latest move however, is by far the most significant and could, in my view, signal a real turning point - much like the bail-out of the failing Long-Term Capital Management hedge fund did in 1998.

While the first two moves saw markets bounce in a knee-jerk reaction only to fall back again, this time I believe the change is more fundamental.

To put the deal into some sort of context it is over 25 times the size of the UK government's rescue of Northern Rock and probably the largest financial bail-out since 1945. It also means that the US Government now ‘owns' around 50% of US mortgages - an amazing statistic in the land of free enterprise. The scale of the rescue means it removes a huge amount of systemic risk from the global financial system. It also provides support to the ailing US housing market by ensuring mortgages will still be available, albeit at more expensive levels than in the past.

Whilst the move is undoubtedly good news, the US economy looks set to remain fragile in the foreseeable future and companies will continue to find the environment a challenging one.

From here on attention and pressure is also likely to focus on other countries whose housing markets are behind the US, including the UK. Indeed, at the weekend HBOS's CEO said that he saw little prospect of any recovery until 2010, and indicated that the UK housing market could get worse from here. Irrespective of any potential moves by governments in the UK, Spain, Ireland or elsewhere we believe that, on balance, the US government intervention will prove to be a real turning point. Our view is supported by the fact that last week UK blue chips were yielding more than 10 year gilts, something which over the last 50 years this has proven to be a good buying signal."