SOME €3 billion was wiped off the value of the Irish Stock Exchange yesterday as the Dublin market went into freefall following fresh bad news from the US.
Reports that the US government might have to step in to save two giant mortgage companies that hold or guarantee almost half the mortgages in the US rattled markets around the world.
The Irish market, which is top heavy with bank stocks and is suffering from negative sentiment internationally, lost almost 6 per cent of its value. "Irish banks took an extra hit because of general negative sentiment towards the Irish economy," said one broker.
Financial stocks globally took a hammering on the back of concerns over the capital position of US mortgage giants Fannie Mae and Freddie Mac.
The New York Times reported that the Bush administration is considering moving in to protect the companies from the accelerating collapse of the US mortgage finance market.
The report was denied by the administration but the news spooked markets because of the size of the firms. They own or guarantee more than $5 trillion in mortgages and play an essential role in the US home loan market.
Fannie Mae was created and sponsored by the US government in 1938 to help Americans buy homes during the depression. Freddie Mac was set up in 1970, again to assist would-be homeowners.
Shares in the companies have fallen sharply in recent days after a former president of the St Louis federal reserve said they were technically insolvent.
Treasury secretary Henry Paulson sought to calm nervous investors about the financial state of the two companies, dismissing reports of an imminent government takeover.
"Today our primary focus is supporting Fannie Mae and Freddie Mac . . . We are maintaining a dialogue with regulators and with the companies," he said.
The two firms do not offer home loans to consumers but they buy mortgages, sometimes repackaging them for sale to investors and sometimes retaining them. Although the government does not officially guarantee Freddie Mac and Fannie Mae debt, investors have traditionally believed that Washington would intervene to prevent a default.
This unofficial guarantee has allowed the firms to borrow at low rates, but recent worries over the companies' capitalisation has driven up the rates they must pay to borrow.
If Freddie Mac and Fannie Mae stopped purchasing home loans because its own borrowing costs were too high, the US mortgage market could grind to a halt.
The companies' regulator insisted this week that both were adequately capitalised but the falling value of many home loans could force Freddie Mac and Fannie Mae to raise billions of dollars in fresh capital.
Under a 1992 law, if either firm is seen as being severely undercapitalised, it may be placed into government conservatorship.
Senate banking committee chairman Chris Dodd said after talks yesterday with US federal reserve chairman Ben Bernanke and Mr Paulson that he believed the market had overreacted.
"There is a sort of a panic going on . . . Fannie Mae and Freddie Mac were never bottom feeders in the residential mortgage markets. People ought to feel confident about them," he said.
Shares of Freddie Mac moved briefly higher yesterday afternoon following a report from Reuters that noted Mr Bernanke had told Freddie Mac chief executive Richard Syron that both companies would be eligible to borrow money directly from the central bank through the discount window, traditionally only available to commercial banks but recently extended to investment banks.