Asia and Europe banks surge on U.S. housing bailout

By Lincoln Feast and Steve Slater

SINGAPORE/LONDON (Reuters) - Asian and European bank shares soared on Monday after the U.S. government took control of mortgage finance firms Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) in a bid to revive confidence in banks and the housing market.

The plan makes it more explicit that debt issued by Fannie and Freddie will be backed by the U.S. government. It curbed worries that banks and other financial firms around the world face more big losses on their exposure to their bonds and other risky assets, analysts said.

It also sent a broader message that the housing market will be supported, lifting confidence across the sector.

"This is as clear a signal as anything that the U.S. government intends to stand behind the U.S. housing market and government money is being made available to support the housing market," said Simon Maughan, analyst at MF Global in London.

"It doesn't change the immediate outlook for jobs or any of the macroeconomic fears that people have, but it's a potentially significant cash injection directly into the housing market, which is the number one source of the credit crunch."

The DJ Stox European bank index soared 7.7 percent to 304 points by 0800 GMT, led by rallies of over 10 percent by UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz), Barclays (BARC.L: Quote, Profile, Research, Stock Buzz) and Credit Agricole (CAGR.PA: Quote, Profile, Research, Stock Buzz).

Asian banks had set the rally in motion. Japan's largest banks rose more than 10 percent and MSCI's index of Asia-Pacific banks outside of Japan jumped 5 percent, its biggest one day move since March.

The U.S. bailout plan is set to leave shareholders in Fannie and Freddie last in line for any claims, but that is of little concern to investors in Asian and European banks.

"There is hardly any equity exposure of Asian bank ex-Japan in Freddie and Fannie," said Todd Dunivant, head of regional banks research with HSBC in Hong Kong.

"But investors were concerned about the mark-to-market losses in debt and MBS (mortgage-backed securities)."

Financial firms have posted over $500 billion in credit losses and write-downs since credit markets seized up a year ago and their holdings of complex debt instruments tied to mortgages plummeted in value.

Japan's industry leader Mitsubishi UFJ Financial (8306.T: Quote, Profile, Research, Stock Buzz) rose 12 percent while No. 2 lender, Mizuho Financial (8411.T: Quote, Profile, Research, Stock Buzz), and third-ranked Sumitomo Mitsui Financial (8316.T: Quote, Profile, Research, Stock Buzz) both climbed 11 percent.

The European rally was across the board. Dexia (DEXI.BR: Quote, Profile, Research, Stock Buzz) was the strongest European stock with a 14 percent surge, and big names HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz), Santander (SAN.MC: Quote, Profile, Research, Stock Buzz), Unicredit CRDI.MC and BNP Paribas (BNPP.PA: Quote, Profile, Research, Stock Buzz) all rose over 5 percent.

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The U.S. government's action, prompted by worries over the mortgage firms' shrinking capital, was the latest in a series of emergency steps taken by U.S. officials to prop up the wobbly housing sector and quell what is now a year-long crisis in credit markets that has helped push many economies toward recession.   Continued...