Dramatic U.S. mortgage bail out for Fannie Mae and Freddie Mac sends shares surging world wide

Stocks surged around the world after the U.S. government took over troubled lenders Freddie Mac and Fannie Mae in an effective nationalisation - a move some said averted 'Armageddon'.

The action, which boosted some banking shares by 15 per cent, was welcomed as a crucial shot in the arm for the U.S. housing market.

Traders wait nervously for the New York Stock Exchange to open earlier today

It had been feared that the 'subprime' crisis had left it in such dire straits it could have triggered an international economic collapse.

The announcement of the plan to inject up to $100billion into mortgage lenders Fannie Mae and Freddie Mac was even seen by some as the 'beginning of the end' of the global credit crunch.

U.S. President George Bush said he was delighted at the response to the government's action.

However, he took issue with the description of the U.S. Treasury move - which protects the £3,000billion potential liability of the two companies - as a 'bailout'.

'I wouldn't call it a bailout,' he said. 'I'd call it a stabilisation.'

The euphoria sent the Dow Jones industrial average leaping by 340 points - around 3 per cent - within two minutes of the opening bell. It closed up 290.42.

U.S. Secretary of the Treasury Henry Paulson announcing the bailout in Washinton

The rally followed a day of soaring markets in Asia and across Europe, including Britain - despite the technical problems in London.

The stock exchanges in Japan, Hong Kong, Germany and France all recorded gains.

Now the markets will be watched to see if these are a one-off, or the start of a consistent improvement.

Between them, Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the U.S., and have lost about £8billion during the housing crash.

The rescue plan reassured investors who feared that a collapse of the government-sponsored enterprises could have had a knock-on effect on financial markets.

Many were worried that further losses by major banks would lead to more cuts in credit and lending.

But last night the 'nationalisation' appeared to be working. 'It saves Armageddon from happening,' said Dave Rovelli, of the New York equity trading company Canaccord Adams. 'This really will help the housing market.'

Mark Zandi, of the financial research and risk analyst Moody's, predicted that U.S. mortgage rates would drop as market confidence rose.

'Effectively, the federal government has now become the nation's mortgage lender,' he said.

Giant: The Fannie Mae building in Washington

Freddie Mac's Corporate Office in McLean, Virginia

'This takes a major financial threat off the table.'

The bailout package wasckagew as announced on Sunday by Treasury Secretary Henry Paulson, who said the two companies posed a 'systemic risk' to the faltering economy.

The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as cash-strapped borrowers default on their home loans.

Barack Obama: 'This was necessary'

Mr Paulson said seizing control of the firms was 'not something I wanted to do' but was unavoidable.

The cost to taxpayers is not known, he added, but the U.S. Treasury could even make money by directly buying mortgage-backed securities.

'We did not sit down and figure this out with a calculator,' Mr Paulson said, adding that market stability seemed more important.

And he insisted that taxpayers, who will bear the brunt of the bailout costs, would be paid back first.

'We structured this facility to protect the taxpayer,' he said. 'The government will be repaid before the shareholders of these companies get a penny.'

That inevitably led to a collapse in the share price of each firm, with both falling by about 80 per cent to about 60p.

But Wall Street believes the bailout will help confidence, especially in Asia - where banks which had invested heavily in the companies had started withdrawing funds.

Graham Neale, of private stockbrokers Killik & Co, said: 'The markets are certainly going to rally because investors are going to say, "Maybe we can see the light at the end of the tunnel in terms of the credit crunch".'

While there was generally good reaction to the bailout, the Wall Street Journal criticised the government for not acting sooner.

Calling Fannie Mae and Freddie Mac 'financial zombies', the influential newspaper said: 'Paulson wants to prop up the walking dead.

'The tragedy is that he and Congress didn't act 18 months ago - when the cost would have been far less - and that he still isn't killing the Fannie and Freddie business model that has done so much damage.'