Asian Stocks Soar on Fannie, Freddie News

The U.S. bailout of Fannie Mae and Freddie Mac sent indexes higher in Japan, Hong Kong, Korea, and Taiwan. But Chinese markets defied the trend

by Bruce Einhorn, Moon Ihlwan and Hiroko Tashiro

Traders on the Hong Kong exchange. MIKE CLARKE/AFP/Getty Images

It's been a long time since markets in Asia had such a good start to their week. After waking up to news of the U.S. bailout of Fannie Mae (FNM) and Freddie Mac (FRE) announced by Treasury Secretary Henry Paulson on Sunday, investors in the region sent most Asian markets soaring on Sept. 8. Japan's Nikkei index rose 3.3% and Hong Kong's Hang Seng jumped 4.3%. Smaller markets showed even more dramatic gains: Korea's benchmark Kospi index was up 5.15% and Taiwan's Taiex 5.6%. Investors "gained a sense of security," says Tsuyoshi Segawa, equity strategist at Shinko Securities in Tokyo. After Paulson's move, "people expect that the financial crisis in the U.S. will be eased."

Markets found reassurance in the plan Paulson unveiled on Sunday that will effectively nationalize the two companies (BusinessWeek.com, 9/7/08), which have $5 trillion in outstanding debt and mortgage-backed securities. The U.S. government is also replacing the chief executives of Fannie and Freddie and, if need be, will invest as much as $100 million in each company.

Paulson Admired in Asia

The move is winning approval from investors worried about the impact of the U.S. subprime crisis on banks in Asia. Paulson's leadership has also won him admirers in Japan, where some observers compare his relatively speedy action with the half-hearted measures taken by Japanese policymakers during the country's "lost decade," the years after the collapse of the 1980s-era Japanese property bubble. "He's responded much more quickly than the market expected," says Yoshikio Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo. "I really envy [Americans] to have a man with such leadership. We didn't have anyone like that here."

In the ranks of Asia's central bankers, perhaps the biggest Paulson fan club is now to be found in Seoul. Korean banking officials have had to contend with rumors that the country faces a liquidity shortage in the face of a steadily weakening won and its banks' ongoing exposure to the U.S. crisis. The South Korean currency has dropped 13% so far this year amid speculation that the Bank of Korea was short on cash to defend it. The central bank has not confirmed the size of the exposure to the subprime meltdown, although the local media has estimated it to be about $30 billion. That's relatively small compared with Korea's foreign exchange holdings of $243 billion, but that didn't stop speculation from dampening market sentiment. Paulson's move "will help reduce the market concern about the [Bank of Korea's] FX reserves" wrote Young Sun Kwon, an economist at Lehman Brothers (LEH), in a Sept. 8 research note.

Did concern in Seoul and other Asian capitals about the U.S. crisis help force Paulson's hand? An economist at the Bank of Korea who asked not to be identified doubts there was any concerted lobbying or other pressure from the region's central bankers. Still, the economist adds, the cost of letting Fannie and Freddie fail would have been "disastrous." Such a move "would have led to the total collapse of the U.S. housing market and been a huge blow to the global economy."