The United States Government seizure under "conservatorship" of troubled mortgage finance giants Freddie Mac and Fannie Mae during the weekend - offering immediate cash injections of more than $US2 billion ($NZ2.93 billion) - may calm the markets in the short term but many problems are looming.
On opening yesterday, the news was greeted with the New Zealand dollar gaining some strength, the Australian stock exchange increasing more than 3% and Asian bourses adding 3%-5%.
The New Zealand stock exchange SE50 ended the day up 1.1% at 3374.40.
The continued operation of Freddie and Fannie, which have booked combined losses of almost $US14 billion during the past 12 months, is considered crucial to maintaining market and consumer confidence.
US Treasury secretary Henry Paulson said a failure by either Fannie or Freddie "would cause great turmoil in our financial markets here at home and around the globe".
Shudders have been going through the US markets for months now as Fannie and Freddie, which hold more than 50% of US mortgage debt with exposure of more than $5 trillion ($NZ7.3 trillion), has seen share prices slashed around 90% during the past year from accumulated mortgage losses in a sector facing record mortgagee sales, worrying foreign banks.
In early July, the US Treasury and Federal Reserve offered emergency cash to the pair to calm flustered markets which extended their line of credit at the time to $2.5 billion each.
Days earlier, US bank regulators had seized Indy-Mac Bank after panicked customers withdrew $US1.3 billion - the third largest bank failure and the fifth for the year.
BNZ chief economist Craig Ebert said yesterday the level of assistance from US authorities was "a testament to the level of distress in the credit markets", noting it would eventually cost the US taxpayers heavily.
"The bigger picture is that the US housing market still has plenty of problems," Mr Ebert said.
The US Treasury will immediately take a $US1 billion equity stake in each company using senior preferred stock and, if needed, could inject up to $US100 billion ($NZ146.60 billion) into each firm.
Treasury also set up a programme under which it would buy mortgage-backed securities currently held by Fannie and Freddie to pump fresh funds into the mortgage market, Reuters reported.
ABN Amro Craigs broker Peter McIntyre said investor confidence had been "severely knocked" following the run of bad news from the US during the past two years, from the subprime mortgage debacle, global credit crunch, general downturn in equity and housing markets and US banking sector woes.
He said because of the level of debt involved in the takeover, the US dollar could weaken and the strength of the kiwi rebound.
The confidence instilled in the global marketplace could also see more liquidity in the market place and prompt interest rate falls in New Zealand, considering 35%-50% of the major banks' funding was from overseas, Mr McIntyre said.
ASB chief economist Nick Tuffley said the US authorities' intervention might have "unwound some excesses and nervousness", but that was still to a backdrop of major problems within the US bank sector.
"There's still a lot of dust to settle. Also, what form will this have [on Freddie and Fannie], being 80% government-owned?" Mr Tuffley asked.
Had the Federal Reserve and Treasury not stepped in, then both mortgage companies faced paying more in interest to issue their respective loans which would have fed through into higher US interest rates, he said.
Reuters reported two new chief executives were named for Fannie Mae and Freddie Mac on Sunday, under the federal takeover plan to keep the mortgage finance companies from going under.
US Senate Banking Committee chairman Christopher Dodd said he planned to hold hearings to examine the Government's decision to take control of Fannie Mae and Freddie Mac, saying many questions were still unanswered.
"They [new chief executives] have got enormous issues to deal with. They have capital problems to address. They have funding issues that are serious. They have personnel issues," Eugene Ludwig, former US comptroller of currency in the Clinton administration said.
