ETF Investors Wonder: Is Bailout A Band-Aid Or A Real Solution?

Financial exchange traded funds (ETFs) received an early-morning jump from the plan for the U.S. government to bail out mortgage giants Fannie Mae and Freddie Mac.

In fact, this intraday chart showing the Financial Select Sector SPDR (XLF), KBW Regional Banks (KRE) and the Nasdaq tells some of the story:

The initial bump came from excitement over the plan for the Treasury to seize the companies and inject up to $100 billion into them. The plan could help lower mortgage rates and lift the overall economy, reports Tim Paradis for the Associated Press.

Martin D. Weiss, Ph.D., for Money and Markets, gives a few reasons on why the bailout is going to fail. Wall Street pundits might declare the bailout “manna from heaven,” he says. But didn’t we hear the same pitch in August when  the world’s central banks teamed up to inject the credit markets with cash?

Some mutual funds could be ravaged by the takeover, too, reports Joe Morris for Ignites. Top holders of Fannie and Freddie in the second quarter were Fidelity, Wellington and Dodge & Cox. All three raised their stakes the most between April and June, and could get hit now that their stocks are practically worthless.

Washington Mutual (WM) shares took a big hit in trading this morning after its CEO was ousted. The nation’s largest savings and loan has been ravaged by losses in sour mortgages, says the Associated Press. In July, they reported a $3 billion second-quarter loss, the largest in its history.

This morning’s big jump followed by a step back seems to indicate that investors are wondering whether this fix is just a Band-Aid on what’s really a larger problem that isn’t going to disappear quite so easily.

It’s all just a warning to hold your horses: the plan for a bailout of Fannie and Freddie by no means indicates that financials are back.

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