Stock Market Locks In Mortgage-Bailout Gains

Updated from 3:37 p.m. EDT

Stocks on Wall Street rallied sharply into the close Monday to lock in sizable gains prompted by a U.S. government takeover of mortgage giants Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote).

The Dow Jones Industrial Average gained 289.78 points, or 2.6%, to 11,510.74, and the S&P 500 climbed 25.48 points, or 2.1%, at 1267.79. The Nasdaq added 13.88 points, or 0.6%, to 2269.76.

On Sunday, the Treasury Department and Federal Housing Finance Agency said they would temporarily seize Fannie Mae and Freddie Mac, replacing the mortgage giants' CEOs, buying preferred shares of the companies and offering additional capital support as Fannie and Freddie wade through increasing home-buyer defaults.

The two government-sponsored entities -- which have issued more than $5 trillion in mortgage-backed securities and credit -- are central to the health of the U.S. home-lending market and are lynchpins of the financial sector. Investment bank Morgan Stanley (MS Quote) aided the government in its takeover of the firms.

Although news of their takeover was buoying the blue-chip indices, shares of the GSEs were getting destroyed. Fannie plummeted 90% to 73 cents, and Freddie got an 83% haircut to 88 cents. Citigroup downgraded the stocks to sell from buy, and Lehman revised its rating on the pair to equal weight from overweight.

"I don't think it's a sucker's rally," said Marc Pado, U.S. market strategist at Cantor Fitzgerald. The takeover was necessary, he said. "Yeah, it's not going to end the crisis, but it's a step in the direction of ending it," he said. Although Pado believes the government should have acted sooner, he said the takeover has restored confidence to the market.