IE 11 is not supported. For an optimal experience visit our site on another browser.

Fannie, Freddie shares jump as shorts book profits

By Lynn Adler and Doris Frankel
/ Source: Reuters

By Lynn Adler and Doris Frankel

NEW YORK/CHICAGO (Reuters) - Fannie Mae and Freddie Mac shares jumped almost 50 percent on Thursday as Congress neared an agreement on a $700 billion bailout plan that would help the two mortgage finance companies, forcing some investors to reverse bets the stocks would fall.

The shares are trading at nearly 10 times the lows set after the U.S. government took control of the two companies in early September.

Investors faced with a short-selling ban are reversing bearish bets on Fannie and Freddie now that the two companies stand to benefit in the bailout agreement being hammered out in Congress, analysts and investors said.

"It's speculative in the sense that it's impossible to know at this point what the residual value might be for the shareholders, so people are trading on technical indicators. They are trading on what they suppose the shorts might have to do," said Marshall Front of Front Barnett Associates in Chicago. His firm owns 13,000 shares of Fannie Mae.

The shares of both companies were virtually wiped out earlier this month after the government takeover, trading at 35 cents or less. They are now around $2 per share.

The Securities and Exchange Commission had issued an emergency order to temporarily halt short-selling on more than 900 financial stocks, including Fannie Mae and Freddie Mac, in a move to protect investors and markets.

Under the SEC's emergency order, short selling is prohibited in these shares until October 2.

The practice has been blamed for exacerbating the financial crisis that compelled the government to intervene with an impending system wide bailout.

"Passing the (bailout) legislation presumably will relieve some pressure on the financial area and relieve some pressure on Fannie Mae," Front said.

The company's shares "were sold to a point where investors were saying there's no value in this at all, which is probably not true," he added. "Particularly if you take a time horizon of three or four years where many of the mortgages that they hold will come due at par, and right now people are giving them an enormous price haircut."

New York Stock Exchange figures released late Wednesday showed that Fannie and Freddie were among the five companies with the biggest drop in short positions, but sizable positions still exist.

"Six trading days after conservatorship took share values to minimal levels, large short positions were still being carried on the exchange," FTN Financial analyst Jim Vogel wrote in a client note.

"We knew the shorts hadn't all been covered by the recent price action, but both companies remain at ridiculously high short sale levels, just several percentage points lower than the August 29 peaks," he said. He expects much more short covering through the fall unless the share price moves toward


In the options market, call activity in both Fannie and Freddie was active, reflecting expectations that the shares will continue moving higher.

An equity call allows an investor to buy the company's shares at a given price and time.

"People were buying Fannie Mae calls. This appears to be in reaction to the government bailout plan, which tentatively looks like it will be approved," said Joe Cusick," senior market analyst at online brokerage optionsXpress Holdings Inc in Chicago.

"The $2.50 and $3 October call strikes were the most active as investors speculate on a potential bullish move in Fannie Mae's stock price," he said.

Frederic Ruffy, options strategist at Web information site, said heavy short-covering and hopes that the two companies could eventually move out of conservatorship were among reasons for the steep share rebound.

Some investors are betting that common shareholder rights will be fully restored, perhaps sooner than expected if the early results from the bailout plan prove to be working as policy-makers hope, he said on his website.

(Editing by Leslie Adler)