"Free market" Wall St warms up to govt help

By Pedro Nicolaci da Costa - Analysis

NEW YORK (Reuters) - When market forces go terribly awry, not even the free-market champions on Wall Street are too proud to accept a helping hand from the government.

When the Bush administration stepped into the country's mortgage mess, it framed the effort as a plan to help the little guy.

However, analysts say the move's real aim is to revive credit markets, whose paralysis threatens to push the economy into recession.

Home defaults have been rising for some time, they note. But it was only when the staggering scale of investors' bad bets on mortgage-linked bonds became fully apparent -- in the form of massive losses for big banks -- that politicians started paying attention.

"Regardless of what spokespeople are saying there is an inherent interference with the principles of a free market," said Carley Garner, analyst at Alaron Trading in Las Vegas.

Yet far from shunning the heavy hand of government, Wall Street cheered the president's proposal with a huge rally in stocks.

"Paulson and the administration provided important symbolism that this is a problem that's being handled," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. "Finally there's something to combat this problem."

Financial company shares, which had taken a beating in recent months as estimates of possible debt losses for the large banks skyrocketed into the hundreds of billions, recovered smartly.

Still, skepticism has emerged. Many argue it will be difficult to distinguish legitimate need from speculative excess, and that the group that the proposal will help is too small to put a dent in the crisis.

SOCIALIZED HOUSING

Then there are those who are doubtful on purely ideological grounds.

"We're socializing housing finance," said Michael Feroli, economist at J.P. Morgan.

Apart from the newly unveiled measure, there have been massive loans by the government-backed Federal Home Loan Bank that some, including New York Democratic Senator Charles Schumer, have flagged as potentially dangerous.

FHLB loans, which are granted with these mortgage bonds as collateral, skyrocketed to a record $746.2 billion in the third quarter alone, nearly 18 times the yearly average between 2003-2006.

The White House was quick to emphasize that no federal money is at stake in the plan the U.S. Treasury Department helped hammer out to temporarily freeze interest rates on some subprime mortgages facing big payment resets. The government, it argued, was just bringing lenders and borrowers together to reach a suitable compromise.