What they are, what they do, and what their takeover by the US government means.
Large bank shares underperformed the rest of the market while currencies traditionally associated with safety and stability, such as the yen and the Swiss franc, strengthened.
Analysts said the slide indicated that investors viewed Sunday’s bail-out as having addressed some risks stemming from the US financial crisis, but was still far from solving it.
Monday’s rally in New York saw the Dow Jones industrial average end the day up 2.59 per cent, the Standard & Poor’s 500 Index jump 2.05 per cent, while the Nasdaq Composite closed up 0.62 per cent.
“It was a knee-jerk reaction yesterday, but the long-term outcome is that you are not going to expect the US economy to improve if the housing market does not fix itself,” Lucinda Chan, a division director with Macquarie Equities in Sydney, told Reuters on Tuesday.
Washington’s bailout of Fannie Mae and Freddie Mac, which could be the most expensive ever, won acclaim from policymakers around the world, eager for positive news after more than a year of turmoil from the credit crisis.
The takeover by federal authorities was an attempt to bolster confidence in the US financial system, with the two companies rumoured to be unable to pay their way after sustaining losses of $14bn in the sub-prime housing crisis.
Had the government not acted, analysts said, the entire US financial system could have been at risk of seizing up.
The move to place Fannie and Freddie under ‘conservatorship’ – similar to bankruptcy – also had an immediate effect on US mortgage rates, which fell half a percentage point.
But it is unclear whether US housing prices will stop falling.
“The bottom line is that buyers are still not interested in buying depreciating assets and in any case have less money to do so whilst lending conditions remain tight and the inventory overhang is still huge,” analysts from French investment bank Calyon said in a note to clients.
“For now, the taxpayer is becoming increasingly embroiled in the housing market crisis and things will get worse before there is any sign of a turnaround.”