Officials were concerned mounting losses at the two companies, which own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt, was sapping their vitality and threatening to undermine them at a time other sources of housing finance have largely run dry.

“Our economy and our markets will not recover until the bulk of this housing correction is behind us,” U.S. Treasury Secretary Henry Paulson said at a news conference. “Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

The two companies, publicly traded but also serving a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in any claims.

Their top executives were ousted. Freddie Mac chief executive Richard Syron and Fannie Mae’s CEO, Daniel Mudd, were replaced by David Moffett, a former top official at US Bancorp and Herb Allison, formerly with Merrill Lynch and pension fund TIAA-CREF.

In addition, the U.S. Treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock and if needed could inject up to $100 billion into each firm.

The government’s senior preferreds stock would rank above both existing preferred and common shares and will carry warrants that could give the government an ownership stake of 79.9 percent.

Treasury also set up a program under which it would buy mortgage-backed securities currently held by Fannie Mae and Freddie Mac to pump fresh funds into the mortgage market. It said it would begin buying MBS later this month, and it would have authority to make such purchases through December 31, 2009. 

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Food and energy prices are coming down in part because of a global growth slowdown that could also cool the red hot U.S. export sector - the major bright spot in an economy still struggling with a massive housing bust.

The prices of energy, metals and food have tumbled this summer after a yearlong surge. Crude oil, after racing toward $150 in July, recently fetched less than $110 a barrel, while the price of natural gas has tumbled 41% over three months.

A big commodities trader, Ospraie Management, is shutting its biggest hedge fund after a 38% loss tied to wrong-way bets on natural gas and other materials.

The commodities selloff is welcome news to consumers who have seen the prices of gasoline and milk slip back under $4 a gallon, easing fears that inflation is on the loose.

If prices keep sliding, year-over-year inflation numbers - after hitting a 17-year high last month - could soon look much healthier, reducing fears that the Federal Reserve may have to raise interest rates to stamp out rising inflation expectations.

But if an ebb in inflation fears is welcome, the source of that shift could be more problematic.

"Several major economies are on the brink of recession," economists at Societe Generale wrote Wednesday.

They went on to say that the once popular notion of "decoupling," which held that global growth was so strong that a U.S. slowdown needn’t spread elsewhere, now looks dated. As do the inflationary pressures that accompany rapid growth. If the growth party is over around the world, the U.S. export boom will quickly fizzle.

Certainly it has become clear that the ills afflicting the American economy - a consumer burdened by heavy debt taken on in years of outspending current income - are far from unique to these shores.

The U.K. is seeing house prices tumble at a double-digit pace, prompting Chancellor of the Exchequer Alistair Darling to say the downturn in the British economy will be "more profound and long-lasting" than people expect. South Korea has seen the value of its currency tumble amid rumors the nation could face a capital crisis this month, amid slowing growth that has led to a modest trade deficit.

Even in economies less troubled by outsize levels of household debt, there have been signs of stress. Manufacturing activity has been contracting in China, and Japan appears headed for a recession.

A pullback by some of its overseas customers offers the latest bit of unhappy news for the U.S. economy, which this year has continued to grow - if only tepidly - in large measure thanks to slowing imports and rising exports.

The U.S. government said last week that gross domestic product rose 3.3% in the second quarter, up sharply from an earlier estimate of 1.9% growth. But Merrill Lynch economist David Rosenberg notes that 85% of the revision came from an upward estimate to net exports and a lower estimate for inventory liquidation.

The halo effect from exports could already be wearing off. Rosenberg says the second-quarter GDP data showed U.S. corporate profits from foreign sources dropped 15% from first-quarter levels, due to softer worldwide economic conditions.

He expects to see more of the same in coming quarters, as foreign profits slip under the pressure of a stronger dollar, which increases the price of U.S. goods overseas.

Meanwhile analysts at UBS note some of the recent export gains may be fleeting because the U.S. has been a major exporter of agricultural goods. While the U.S. has benefited from higher prices of corn, wheat and other farm products, a slide in those prices could trim the gains.

"Food and beverage exports now account for 18% of the growth in exports from the U.S.," analysts at UBS wrote last week, "up from an average of little more than 2% of export growth at the start of the decade."

One last factor complicating the prospects for a U.S. economic recovery is the outlook for stocks. Blue-chip stocks indexed in the S&P 500 recently traded at nearly 26 times their reported profits over the past year, according to Bloomberg data. That’s their highest valuation in five years, even as the recent surge in Treasury prices - 10-year yields have dropped half a percentage point in six weeks, to a recent 3.7% - suggests the fear trade is alive and well.

William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Mass., notes that the move into Treasury securities comes just ahead of the start of third-quarter earnings season for financial firms such as Lehman Brothers (LEH, Fortune 500). Any selloff in stocks, beyond the effects transmitted to other financial markets, could further depress consumer spending stateside.

"There’s a real disconnect out there," says Larkin. "Equity markets could be in flux for a while."  

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The agency said it is postponing until Jan. 5, 2009 deadlines for taxpayers who reside in or have a business in the disaster area.

The postponement applies to return filings and payments due between Sept. 1, 2008, and Jan. 5, 2009. They include estimated tax payments due Sept. 15, corporate extended 1120 tax returns due Sept. 15 and individual extended 1040 tax returns due Oct. 15.

Parishes qualifying for the relief are: Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Cameron, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, Rapides, Sabine, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Landry, St. Martin, St. Mary, Terrebonne, Vermilion, Vernon, West Baton Rouge and West Feliciana.

Those living outside these areas must call the IRS disaster hot line, 1-866-562-5227, to request tax relief. 

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I reached him by phone in Marble Falls, Tex., near Austin, the day after Gustav blew through his nearly deserted hometown of Lafayette, La. "The thing that happened with Katrina and Rita made us realize what we all had to do," Keller said. "We’d never seen that in our lifetime."

Keller is VP for sales for Knight Oil Tools, a global tools and services rental company with headquarters on Highway 90 in Lafayette, where the eye of Gustav passed yesterday around 2:15 p.m.. He says his company will lose about a week’s worth of revenues from the storm - as much as $3 million.

Katrina was much worse, he says, making Knight’s experience typical of early estimates that Gustav will prove far less costly - by an order of magnitude - than Katrina. Less than 24 hours after Gustav’s arrival, Keller had yet to receive reliable reports about the extent of damage to rigs in the Gulf of Mexico, or inland, but broader estimates of Gustav’s economic impact suggest the final bill will be but a small fraction of Katrina’s more than $40 billion in insured damages.

One thing Keller’s not expecting this time around is a post-hurricane bump. After Katrina struck three years ago, business boomed as drillers throughout the region rushed to restore operations. That won’t happen now because business is already strong and Knight has neither labor nor machinery for further expansion.

"I’m not sure how much of a bump we can handle," said Keller, "because we’re all working full force, 100% capacity."

Doug put his son-in-law on the line, Parrish Cline. Cline owns Body Masters Sports Industries, an exercise equipment manufacturer with about $10 million in revenues that was founded 30 years ago by his father. Body Masters’ 80 employees work mostly in Rayne, La., just west of Lafayette. They worked a partial shift on Friday and will start returning tomorrow. Cline expects to lose only about $150,000 to $250,000 to Gustav, mainly due to interruptions in deliveries and supplies.

In Lafayette, the morning after Gustav revealed downed power lines, fallen trees, collapsed awnings and tattered billboards. A 27-year-old man was killed here when a tree fell on his house; at least two others died the same way in Baton Rouge.

About 100 miles south and east of Lafayette in Thibodaux, where I drove Tuesday morning, there were no reported fatalities, but the visible damage to land and property was much more dramatic. The roads were mainly empty, save for caravans of utility workers working to restore power, and ambulance trucks searching for storm victims who, happily, may not exist.

As I headed back to Lafayette, a hard rain was still falling and Louisiana Governor Bobby Jindal and Homeland Security Secretary Michael Chertoff were on the radio. Their message: We got lucky, but only because when the storm hit, most coastal residents had heeded orders to evacuate.

Remember that when Hannah hits the East Coast later this week, with Ike and Josephine lined up right behind and gathering strength. 

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U.S. crude futures for October delivery dropped $5.75 a barrel to settle $109.71. It was the lowest oil has settled since April 8, according to the U.S. Energy Information Administration.

Oil prices hit their lows for the day early Tuesday. Prices tumbled nearly $10 from Friday’s settlement of $115.46 a barrel, according to NYMEX, as traders bet that damage to Gulf oil infrastructure from Hurricane Gustav was less than had been anticipated.

However, damage reports from the government and companies operating in the Gulf have not been released. "We’re still in assessment mode, but so far, things are looking good," said Cathy Landry, a spokeswoman for the American Petroleum Institute.

Adding further pressure was the U.S. dollar, which climbed against most major currencies early Tuesday. Because crude is traded in dollars around the world, a stronger greenback puts downward pressure on oil prices. When the dollar gains, it costs foreign investors more to purchase the same amount of energy, explained Neal Dingmann, senior energy analyst at Dahlman Rose & Co.

Oil prices have plummeted nearly $38 from a record high of $147.27 a barrel, set on July 11, as demand for pricey energy slackened in a struggling economy. Now that Gustav has passed, "at least for the next 3 or 4 days, the health of the economy has come to the forefront," said Dingmann.

Another analyst also said now that the market perceives that the storm passed without great disruption, it has very quickly returned its focus on slumping global demand. "You look at the overall fundamentals," of the oil market, "and they are bearish really," said Andrew Lebow, an energy analyst at MF Global. "Gustav was just a stopping point - a brake for the time being," until prices continue their long slide.

Assess damage: While it appears that Gustav did not do major damage to the energy infrastructure in the Gulf - home to 26% of U.S. oil production and 56% of imports - the complete story of the aftermath is not yet known.

Oil prices have come off sharply on reports that Gustav was not as bad as expected because "people were sort of bracing for the worst," said Dingmann. "Early assessment that I have heard this morning is that some [production equipment] could be back on line as early as this evening."

Other analysts were more skeptical. "Though I sure hope that the production region dodged a bullet - as many market players have been saying - I think this mindset may be a bit premature," said Jim Rouiller, senior energy meteorologist at Planalytics, a firm that predicts how weather will impact businesses.

"It will take some time for all the oil and gas companies to send people out for damage assessment," said Rouiller. "Many times before, this was the initial mindset only to be followed by bad news, discovery of damage."

Gustav was a Category 2 hurricane when it touched land on Monday and has since been downgraded to tropical depression status. Its heavy rain and strong winds threatened oil refineries, according to Rouiller.

"What was really key was that we had a major portion of US refinery capacity shuttered," said Lebow, because the it can take a long time for refineries to restart. "Gas stocks are already on the low side so if we lose some refinery capacity for any length of time, that would be problematic."

Production suspended: Oil production, natural gas production and refineries were suspended as Gustav approached the Gulf Region. According to a U.S. Department of Energy report issued Tuesday, 100% of crude oil production was shut down in the Gulf of Mexico.

In addition, 23 refineries in the Gulf region had been shut down or were operating at reduced capacity by Tuesday, according to the report. In advance of Gustav’s movement into the Gulf Coast region, 95.4% of natural gas facilities had been shut down.

Even as fears of Gustav settled, Tropical Storm Hanna was brewing, moving over the Turks and Caicos Islands. The National Hurricane Center predicts Hanna could make landfall as a major hurricane somewhere on the southeastern U.S. coast by Friday evening.

"The US remains under a heightened threat from storm impacts unlike the past few years - it is a whole different ball game this year," said Rouiller. "Gustav and Fay were just a beginning." 

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Risk modeling firm Eqecat Inc. estimated that Gustav, which steadily moved across the Gulf of Mexico before finally making landfall Monday morning in Louisiana, could cost the insurance industry anywhere between $6 billion and $10 billion - easily among the top ten costliest storms the country has ever experienced.

Those numbers, which took into account damage done to homes, offices, factories as well as interrupted business activity, were roughly in line with other projections.

The Newark, Calif.-based firm Risk Management Solutions said it expected both onshore and offshore losses to range between $4 billion and $10 billion dollars. AIR Worldwide Corp., another risk modeling agency, offered a much more hopeful assessment, predicting that onshore losses would only climb as high as $4.5 billion.

Those projections, which did not incorporate the impact of flooding, were made as late as Monday evening. However it often takes days or weeks after a major storm hits to assess the full extent of the damage.

While staggering, the estimates for Gustav fall far short Hurricane Katrina, which ravaged the Gulf Coast region in 2005, resulting in $41.1 billion in property damage alone, according to the Insurance Information Institute. Adjusted for inflation, Katrina resulted in more than $43 billion in insured damage.

Nor do the estimates for Gustav come anywhere close to Hurricane Andrew, which caused $22.9 billion in damage on an inflation-adjusted basis when it struck Florida and Louisiana in 1992.

Still, those numbers are roughly in line with federally supported computer projections. Gustav could produce $8 billion in property damage, according to a software program used by the Federal Emergency Management Agency and the National Institute of Building Sciences that calculates potential losses from natural disasters such as hurricanes and earthquakes.

By Tuesday morning, forecasters had downgraded Gustav to a tropical depression. Still, the storm is expected to drench parts of Louisiana, Texas, Mississippi and Arkansas through Thursday.

Gustav is just the second hurricane to make landfall so far this year. Hurricane Dolly swept through Southwest Texas in July, causing as much as $600 million in damage according to preliminary estimates provided by Insurance Information Institute.

Now, all eyes turn to Hurricane Hanna, which is currently located in the Bahamas. The Category 1 storm is expected to make landfall along the Southeastern coast sometime Friday evening. 

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The world’s biggest provider of fixed-line telecoms networks has seen its market value drop more than 60 percent in the 21 months since Alcatel and Lucent merged and the appointment of Verwaayen as chief executive and Camus as non-executive chairman come a month after the dismissal of their predecessors following a series of profit and sales warnings.

The company said Camus, 60, a senior partner at French media group Lagardere, would replace Serge Tchuruk as of October 1, while Verwaayen, 56, would take over as chief executive replacing Patricia Russo.

Camus will keep his position at Lagardere, the company said.

Investors have been pushing hard for many months to get rid of Russo and Tchuruk and the stock has regained 30 percent since their ousting but remains 60 percent below its December 2006 level.

“The appointment comes quicker than what the market had expected. The stock has recently been rising on hopes of a new management team capable of a turnaround. Now that the announcement has been made, there is no more (price) catalyst” one trader said.

By 0834 GMT the shares were down 1.4 percent at 4.245 euros, off an earlier low of 4.06 euros and giving the company a market capitalization of around 10 billion euros, as investors pocketed their profits.

“The board reacted swiftly. They found a CEO who has a good international experience and in the telecoms sector. Camus will be a truly non-executive chairman, so conflicts seen in the past are more unlikely to repeat themselves,” said Exane BNP Paribas analyst Alexander Peterc. 

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Buyers are in the driver’s seat and they know it. They’re using that leverage to pry more concessions out of desperate sellers than they ever dreamed of during the bubble.

"’Now it’s my turn,’ is the attitude," said Mike Byrd, a real estate agent with SLO Home Store in San Luis Obispo, Calif. "Some buyers are really putting the screws on."

In New England, buyers are demanding that sellers pay to fill up a home’s heating oil tank. In California, sellers are forking over closing costs. Nearly everywhere, buyers are insisting that sellers purchase a home service contract providing a one year warranty on all of a home’s appliances.

New central air-conditioning systems, a year of condo association fees and even two weeks in Hawaii are just a few of the incentives that sellers are having to employ these days, according to Byrd.

And buyers are getting it all in writing.

"[During the boom] buyers usually accepted the property as-is, and we even occasionally offered to pay the seller’s state and county transfer taxes," said Washington D.C. based agent John Sullivan, who is also president elect of the National Association of Exclusive Buyer’s Agents. "No more."

It used to be that sales contracts had clauses that made a purchase contingent upon whether a home passed inspection, if a buyer was able to get a mortgage, or even if they could sell their own house.

Those safeguards fell by the wayside during the bubble; if a buyer balked, the seller just moved on to the next highest bidder. Buyers who signed deals without these protections and had to back out often lost their deposits.

But lately, buyers have expanded the number of clauses they put into contracts, according to Benjamin Clark, an agent in Salt Lake City with Homebuyer Representation.

"Some of these items include availability of high speed Internet, cost and availability of homeowners insurance," he said. "They cover environmental aspects of the home and neighborhood, as well as local services and amenities."

Instead of a single inspector, the home inspection now includes specialists in radon, lead-based paint, roofs and masonry, as well as fireplaces. Sellers must fix any flaw or pay for the buyer to correct it.

"Sellers are much more flexible on issues that come up on the home inspection - and I mean big ticket items like roofs and furnaces," said Ed Bartlett of Spokane Home Buyers in Washington State. "And this is after they have already been flexible on the price."

A detailed inspection was a lifesaver for clients of Clark’s, who were buying a six-bedroom, four-bath rambling ranch in Bountiful, Utah, that was listed $344,900.

After the buyers got the price down several thousand dollars and signed a contract, the home inspectors went to work. They turned up some minor issues, which the sellers agreed to fix, including $875 for some electric work, $150 for plumbing, $242 for a new kitchen faucet and $735 for chimney pointing and repair.

But bigger problems emerged. "There were termites," said Clark, "and masonry issues. The deck needed to be demolished." Based on these findings, he got the price down to $324,000.

For some buyers, the negotiations don’t stop right up until the closing.

Don Plourde, a Coldwell Banker broker in Waterville, Maine, recently had a client squeeze a last minute concession out of a seller on a three bedroom starter home that needed some work. The asking price was very low - just $75,000 - but even so, the buyer was able to negotiate that down to $72,500.

But just before the closing, the buyer demanded that the seller leave behind three quarters of a tank of heating oil - 200 gallons worth $800 - for free. The seller caved.

"He just wanted to move on," said Plourde.

These days, sellers almost always pay the closing costs instead of the buyers, according to John Rygiol, an Exclusive Home Buyer Brokerage agent in Orange County, Calif.

"It’s hard to ask for that after already getting a price reduction," said the agent, who recently got a seller to pony up $10,000 for closing. "But it’s a buyer’s market and sellers are attuned to that."

Even local taxes are on the table these days, according to Adele Hrovat, the owner of The Buyer’s Realty of Las Vegas. She got the bank that was selling a four-bedroom, three-bath, house to pay an $11,000 tax assessment on top of $6,000 in closing costs. And that was after the price was slashed from $489,900 to $399,000.

With the housing market bad as it is - slow sales, dropping prices and inventories rising - sellers are going to have to stay flexible.

"We’re finding that buyers make an offer and if it’s not accepted, they just go on to the next seller," said Don Plourde. 

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Employers probably cut 75,000 jobs this month, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report Sept. 5. A private poll in two days may show factory activity stagnated for a second month.

Mounting job losses, sliding home values, reduced access to credit and rising prices have given Americans reason to pull back. Gripped by this vicious circle of firings and spending cuts, the economy may weaken again in coming months.

“The deterioration will be quite noticeable,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “We'll see job cuts continuing as businesses are under a lot of pressure. The manufacturing sector is getting support from exports, but being held back by weak domestic activity.''

The employment report may also show the jobless rate was unchanged this month at a four-year high of 5.7 percent, according to the Bloomberg survey median. Factory payrolls probably fell by 35,000.

Soaring costs and slowing sales are pushing carmakers and airlines to cut staff. UAL Corp.'s United Airlines, the world's second-largest carrier, last week said it'll eliminate 1,550 flight-attendant jobs to help stem losses.

Job Cuts

General Motors Corp., the largest U.S. automaker, is offering early-retirement incentives to about 9,000 U.S. salaried workers, people familiar with the plan said on Aug. 29. Earlier this month, GM Chief Executive Officer Rick Wagoner said he's not yet seeing signs of a recovery in the economy or vehicle sales.

Other industries are also hurting. Marvell Technology Group Ltd., the maker of chips for phones such as the BlackBerry, last week provided sales projections that missed analysts' estimates for this quarter.

“If you look at the housing situation, the debt situation and gas prices, it adds up to something unfavorable,'' Clyde Hosein, chief financial officer of Marvel, which is based in Hamilton, Bermuda, and is run from Santa Clara, California, said in an interview on Aug. 28.

The projected drop in payrolls this month would bring the total decline in employment so far this year to more than half a million. The economy created 1.1 million jobs in 2007.

Employment is among the indicators tracked by the National Bureau of Economic Research, the official arbiter of U.S. economic cycles, in making the recession call. The others are sales, incomes, production and gross domestic product.

Recession Definition

The group defines downturns as a “significant'' decrease in activity over a sustained period of time, and usually takes six to 18 months to make a determination.

Consumer spending, which accounts for more than two-thirds of the economy, fell in each of the past two months after adjusting for inflation, reflecting the weakening job market.

Companies are focusing on getting more out of remaining employees to cut expenses as sales slow. Productivity, a measure of worker efficiency, probably grew at a 3.4 percent annual pace in the second quarter, a Sept. 4 report from the Labor Department is forecast to show.

Declining demand is also prompting manufacturers to cut back. The Institute for Supply Management's factory index was probably unchanged at 50 in August for a second month, the survey median shows. A reading of 50 is the dividing line between expansion and contraction. The report is due on Sept. 2.

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But this time around, if Gustav intensifies and heads into the Gulf as expected, experts say reinforcements have made production far less vulnerable than it was three years ago.

Drilling rigs and production platforms moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines.

New rigs were built higher above the water, and old rigs were strengthened, according to Andy Radford, a policy advisor at the American Petroleum Institute.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now have to be buried deeper beneath the sea floor, said Barbara Shook, a Houston-based analyst with the Energy Intelligence Group.

"The industry is probably in the best shape it’s ever been in because of what they’ve learned over the last few years," said Shook.

Anyone who buys gasoline better hope so.

At 1.3 million barrels a day, the Gulf is home to over a quarter of the oil produced in the United States, according to the Energy Information Administration. Plus, it accounts for over 10% of the country’s natural gas production.

When Hurricane Katrina roared through as a Category 5 storm in late August 2005, it ripped up pipelines and battered production platforms through out most of the Gulf.

But more than offshore oil platforms are at risk.

Upon making landfall, even as a Category 3, Katrina caused considerable damage to the many refineries in the region. It also disrupted crude imports - the Gulf of Mexico houses the country’s only deep water port for imported oil.

As a result of all the disruptions, gasoline prices surged.

Gas went from a national average of $2.62 a gallon at the end of August to over $3.08 a gallon week later, a nearly 18% jump.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks as traders talked of falling demand and a slowing economy.

Fortunately for motorists, traders don’t think that will happen this time around.

"There’s been a a lot of work on the rigs, and the outlook is that it won’t be that bad, even if it is a terrible storm," Ray Carbone, a broker and trader at Paramount Options, told CNNMoney.com from the New York Mercantile Exchange.

As of midday Thursday, with Gustav still well south of the Gulf off the coast of Jamaica, oil prices were down sharply, trading around $115 a barrel. The storm isn’t expected to make landfall in the United States until early next week.

Even if it is a worst-case scenario storm, Carbone said he thinks oil would have a hard time passing its previous record of $147.27 a barrel.

But as Shook points out, there’s only so much companies can do to prepare for a Category 5 storm, and at some point all production is vulnerable no matter how many reinforcements have been made.

"It’s a bit like preparing for a tornado," she said.

CNNMoney.com staff writer David Goldman contributed to this report. 

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