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Investors breathe life into Freddie, Fannie

Shares of Freddie Mac and Fannie Mae surge as investors begin to bet that the futures for the two companies aren't as dire as first thought.

By Aaron Smith, CNNMoney.com staff writer
Last Updated: July 17, 2008: 4:50 PM EDT

NEW YORK (CNNMoney.com) -- Reports of the deaths of Freddie Mac and Fannie Mae may have been greatly exaggerated. Shares of the battered mortgage giants soared Thursday. Freddie Mac (FRE, Fortune 500) surged 22% and Fannie Mae (FNM, Fortune 500) jumped 18%. Also on Thursday, Fitch Ratings affirmed 'AAA' long-term issuer default ratings for Fannie and Freddie. But Fitch also chopped Fannie's preferred stock rating and put Freddie on watch for possible downgrade.

The stock surge follows comments from Federal Reserve Chairman Ben Bernanke on Wednesday, who told the House Financial Services Committee that the mortgage companies are "in no danger in failing" because they are "adequately capitalized." Also on Wednesday, the Securities and Exchange Commission took action to limit short-selling of the two firms and 17 other firms unless traders could prove that they had actually borrowed the stocks.

Fannie and Freddie stocks went into a tailspin last week. Shares continued to decline earlier this week even after Treasury Secretary Henry Paulson requested Sunday that Congress remove the credit limits on the amount that Fannie and Freddie can borrow from the Treasury Department. Without counting today's gains, Fannie's stock has plunged 77% so far this year, and Freddie has fallen 80%. Together, these firms back or own some $5 trillion worth of housing debt, or about the half the national market.

Beyond Fannie and Freddie, the battered banking industry also did well on Thursday. JPMorgan (JPM, Fortune 500) jumped 13.5% after reporting a plunge in profit that nonetheless beat analysts' expectations. Shares of regional bank PNC (PNC, Fortune 500) also reported a better-than-expected profit and its stock rose 13.5%. This news followed a more upbeat earnings report from Wells Fargo (WFC, Fortune 500) on Wednesday. The stocks of Citigroup (C, Fortune 500), Merrill Lynch (MER, Fortune 500) and Bank of America (BAC, Fortune 500) also climbed Thursday. Merrill shares then traded lower after the market closing when it reported a nearly $5 billion quarterly loss that surpassed even the worst estimates.

"What has happened is that hysteria has blanked out all rational thought concerning the banking industry," said Richard Bove, analyst for Ladenburg Thalmann, explaining why the stocks have so dramatically in earlier sessions. "The pendulum is never in the middle," added Bove. "It's always at one or the other extreme." Bove does not own banking stocks and his firm does not conduct investment banking business with them.

http://money.cnn.com/2008/07/17/news/economy/fannie_freddie/index.htm?postversion=2008071716