The Dow Jones industrial average jumped more than 325 points in the first minutes of trading.
Bond prices are falling sharply Monday as emboldened investors looked for riskier but higher-yielding bets.
The announcement Sunday that the Treasury Department was seizing control of the companies, which own or back about half the nation's mortgage debt, brushed aside investors' persistent worries that the companies would be felled by a spike in bad mortgage debt.
The plan to inject up to $100 billion in each of the government-chartered mortgage giants could not only help lower mortgage rates but, some investors are hoping, buoy the overall economy. The plan could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments.
On CBS' The Early Show Treasury Secretary Henry Paulson told anchor Harry Smith that the government had no choice but to act.
"A failure by either one of these companies would cause great havoc in the economic system," Paulson said. "It would be a big blow to the average American, affect their budget, their ability to get a consumer loan, a car loan."
Peter Wallison, a Treasury Department general counsel during the Reagan Administration, told CBS Radio he sees it as a stabilizing step but thinks it's far from the end of the story:
"I think inevitably these companies have to be dealt with in some ways. They can’t be continued as government-sponsored enterprise," he said.
CBS News correspondent Peter Maer said financial experts are approving of the government's bailout and say it's good news for home buyers and those seeking a second mortgage.
Greg McBride, a senior financial analyst with Bankrate.com, told CBS Radio, "The Government's takeover of Fannie Mae and Freddie Mac assures the continued availability of mortgage credit, and potentially at better terms than borrowers have been quoted recently."
But, Maer adds, the takeover offers no hope for homeowners already behind in their payments.
The gains in big Japanese, Chinese and Australian banks that hold debt in the two U.S. companies was driven by optimism that Washington is acting aggressively to keep the mortgage giants from failing - and the U.S. housing crisis from spiraling out of control.
Japan and China are among the top foreign holders of U.S. securities, including Treasuries and U.S. agency debt, according to the U.S. Treasury.
Preventing "Armaggedon"
The government's steadying hand for two institutions that many Wall Street observers had said were simply too big to let fail still might not alleviate troubles of some homeowners who have fallen behind on their mortgages.
Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said while the plan boosts confidence in sectors like financials and home builders, it doesn't immediately alleviate worries about other areas of the economy. Still, he said the move was far preferable to a collapse of Fannie Mae or Freddie Mac.
"It saves from Armageddon from happening," he said. "If you think about it this helps the financials, this helps the housing market. Tech took a huge hit last week. Does this really affect tech? I don't think so."
Dow Jones industrial average futures surged 263, or 2.34 percent, to 11,490. Standard & Poor's 500 index futures rose 39.30, or 3.17 percent, to 1,280.40. And Nasdaq composite index futures rose 39.25, or 2.22 percent, to 1,809.25. Stocks finished last week with steep losses amid worries about the overall economy and the financial sector.
Bond prices pulled back sharply Monday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.78 percent from 3.69 percent late Friday. The dollar was higher against other major currencies, while gold prices rose.
The U.S. government's plan touched off a global stock rally Monday even though common shareholders of the stock of Fannie Man and Freddie Mac will be virtually wiped out by the plan, which would balloon the shares of companies to give a nearly 80 percent stake to the government. The companies' shares had already logged huge declines in the last year so many shareholders have already endured the majority of their losses.
But foreign investors holding debt of the companies were relieved as were investors simply looking for stronger growth from the U.S. economy, particularly as many economies abroad give off signs they are slowing. Japan's Nikkei stock average jumped 3.4 percent and Hong Kong's Hang Seng index surged 4.3 percent. In afternoon trading, Britain's FTSE 100 jumped 3.81 percent, Germany's DAX index rose 3.50 percent, and France's CAC-40 surged 4.44 percent.
Investors appeared to look past a rise in oil, which logged steep declines last week as investors worried that a slowing global economy would hurt demand. Light, sweet crude rose $2.67 to $108.90 in premarket electronic trading on the New York Mercantile Exchange.
In corporate news, Washington Mutual Inc. said it has removed Kerry Killinger from the chief executive spot. The savings and loan is working to overhaul its business, which has been hurt by bad mortgage debt. Alan H. Fishman is replacing Killinger.
Altria Group Inc. announced it will buy UST, the maker of Skoal and Copenhagen smokeless tobacco, for nearly $10 billion. The maker of Marlboro cigarettes said it will pay $69.50 per share. UST shares jumped Friday to finish at $67.55 following a report of the deal.
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