While global investors cheered news of the U.S. Treasury’s bailout of Fannie Mae and Freddie Mac over the weekend, analysts are split on the impact of the move.

“The objective of the Treasury’s bold move is to provide stability to financial markets and support the availability of mortgages at a lower cost by ensuring the solvency of the agencies and by committing to buy [residential mortgage-backed securities] in the open market,” notes National Bank Financial.

“In our opinion, this action sets the table for a sustainable risk premium decline on MBS, lower mortgage rates and more affordable housing. By our estimate, a 50 basis [point] reduction in mortgage rates would have as much impact as a 5% drop in home prices on the national affordability index. This weekend’s action is directly aimed at addressing the problem on main street which was not the case with the Bear Stearns bailout last March,” NBF says.

Despite the possible positive impact on mortgage markets, Merrill Lynch cautions that it’s still too early to overweight financials as a result of the Treasury action. “We still believe that rallies in financials should be used as opportunities to sell into strength,” it counsels.

“We reiterate that the catalyst for the sustained outperformance of financials is likely to be when the government forms an entity specifically designed to facilitate the consolidation of the financial sector,” it says. “There has yet to be a remedy that approaches the credit crisis as a systemic problem. As with the Bear Stearns situation, the GSEs are being treated as a one-off problem.”

Indeed, it warns that these actions could actually increase the risk premiums associated with other financial institutions. “If anything, these actions show that holders of financial institutions’ equity may be underestimating risk. The stocks of some larger capitalization U.S. financials may have carried valuation premiums based on the “too big to fail” notion that might not be appropriate any more,” it suggests.

Economic research firm Global Insight Inc. also points out that, while that U.S. households will benefit from lower mortgage rates due to the move, it leaves the firms’ shareholders “out in the cold”.

“By eliminating the dividends on existing common and preferred stock, and raising unanswered questions about the long-term future of these two entities, however, the shareholders are being left out in the cold — the common and preferred shares will take a big negative hit today. Moreover, the Treasury’s move does not answer the question of what ultimately happens to the GSEs — management control goes to the regulator, but the next Congress will ultimately have to decide on their long-term role in the mortgage markets,” Global Insight says.

“The takeover move instantly creates further mark-to-market losses for holders of GSE common and preferred stock, and will shoot another hole in the severely battered hull of financial system capital. This impact has to be weighed against expected mark-to-market gains on $5 trillion in outstanding GSE debt and guarantees — which could well be substantial. How these competing effects will play out in the markets and the economy is difficult to say, but the net impact on financial sector shares is expected to be positive in the short-term,” it concludes.

However, Merrill remains negative on the financials. In addition to suggesting that large financials may face higher risk premiums as a result of this move, Merrill also says that it continues to view smaller capitalization financials as being very unattractive. “These companies’ sources of funding continue to either dry up or get considerably more expensive,” it says.

“Investors should not view the Treasury’s actions as a panacea for the global credit crisis,” Merrill concludes. “The volatility in the global financial markets continues to suggest to us that a change in leadership is underway. Capital intensive stories that had easy access to capital (such as China, Emerging Markets, commodities, energy, real estate, hedge funds, small cap stocks, etc.) are unlikely to outperform as credit conditions continue to tighten.”

TD economists also say the markets early positive reaction may not be long lasting. “From a psychological perspective, we note that previous government interventions proved to be only stop-gap measures, and did not ultimately engineer a permanent reversal away from stock market losses, nor did they succeed in bringing credit spreads permanently inward,” it says. “In fact, we find it instructive to think of the credit crunch as having hosted a serious of very bad developments (Bear Stearns failure, Freddie and Fannie troubles, etc), each of which has been addressed by a good offset (govt bailouts, mainly). But through this tit-for-tat, good-for-bad sequence, LIBOR has remained wide, bank lending has remained tight, and the basic essence of the credit crunch has remained.”

@page_break@“We expect more of the same in the future – more bad developments, more ad hoc solutions, and – importantly – more generally negative credit conditions simmering beneath the surface,” TD says.

“From an economic perspective, it is undeniable that avoiding failure for Freddie and Fannie is a hugely positive development for the economy. But we think the market hasn’t thought about this properly. There was never even the remotest risk that Freddie and Fannie would be allowed to fail. As such, what’s new?” TD says. “We knew all along that they would continue to exist. It isn’t truly good news if it was inevitable.”

Morgan Stanley points out that the GSE turmoil has global implications, because of the large agency holdings by foreign central banks. “Our view is that most foreign central banks will likely avoid investing more in US agencies in the months ahead, but will increase their buying of US Treasuries instead,” it says. “This uncomfortable substitution is only possible because the US still commands the most liquid and deep financial markets in the world and, in times of global turmoil, the dollar is still the currency to hold, especially for emerging market central banks. Also, the fact that the world is still experiencing aggregate excess savings should help fill US financing needs. However, over the long run, we believe that the US – both the public and private sectors – will need to fundamentally reform and restructure in order to continue to attract foreign capital.”

From a Canadian bond market perspective, TD says that “it strikes us that some sympathy selloff is probably appropriate for Canadian government bonds insofar as the two economies are linked, and thus the avoidance of a U.S. disaster is good news for Canada, too. However, we believe that the Canadian selloff has been somewhat overdone relative to the U.S. – after all, this is clearly a made-in-the-USA story.”