The rescue plan for Fannie Mae and Freddie Mac looked as though it would ignite the stock market on Monday – but by midday, any hopes for a sustained rally fizzled.

The Dow Jones industrial average, up more than 135 points just one minute into trading, slumped as the morning progressed. By noon, the index was down 55 points, to 11,046. The broader S&P 500 was down 3 points, to 1237.

Financials, which had been the leaders at the start of the day, were the biggest source of the ensuing slump. Citigroup Inc. fell 3.9 per cent, JPMorgan Chase & Co. fell 2.4 per cent and Washington Mutual Inc. plunged 24.4 per cent.

Even Fannie Mae and Freddie Mac, the troubled mortgage finance companies at the centre of the rescue plan from the U.S. Treasury and the Federal Reserve, fell 2.8 per cent and 6.6 per cent, respectively. In premarket activity, the shares had been up about 30 per cent as investors celebrated the removal of one of the biggest sources of anxiety in the market today.

In Canada, the S&P/TSX composite index took investors on a similar ride. It fell 22 points, to 13,687, after being up as much as 170 points at the start of trading. Energy stocks were up 1.4 per cent, thanks to the takeover of Duvernay Oil Corp. by Shell Canada Ltd., at a hefty premium. But financials, which were in the lead at the start of the day, fell 1.9 per cent.

So what happened? As Douglas McIntyre, who writes for the 24/7 Wall Street blog, said: “The walk to the end of the rainbow was interrupted by two things.”

First, investors have begun to realized that the money that could flow into Fannie Mae and Freddie Mac is not free, since it will dilute the value of existing shares. By his calculation, if the U.S. government sends $5-billion (U.S.) worth of rescue cash to Freddie Mac, the dilution would cut the company's share price in half.

But Mr. McIntyre believes that the bigger problem is that investors are seeing the credit crisis as a systemic issue, involving far more than just Fannie Mae and Freddie Mac.

“Shoring up trouble in one spot does not solve the problems in another,” he said. “Even if Fannie Mae and Freddie Mac make it out of the crisis with their skins intact, firms like Lehman and Washington Mutual may not. Even overseas, banks including UBS are in substantial danger of being dismantled or partially taken over by the government.”