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Fannie, Freddie Shares Soar, Puzzling Analysts

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, August 25, 2009

The beauty of the stock market, according to a prevailing theory, is that the price of a company's shares should reflect all known information about the firm.

So maybe the investors who sharply bid up the shares of Fannie Mae and Freddie Mac on Monday have studied the companies, which owe the government nearly $100 billion and must pay massive dividends each year to the U.S. Treasury, and concluded that they are a smart long-term investment.

Much more likely, analysts said, is that investors are using the companies' stocks as a way to gamble on overall market trends.

On Monday, Fannie Mae jumped 41.7 percent, to $1.70 per share, with nearly 824 million shares bought or sold during regular trading hours. Freddie Mac rose 18.5 percent, to $2.05 per share, with almost 384 million shares trading hands. Activity in the two companies' stocks accounted for nearly a fifth of trading on the New York Stock Exchange on Monday, when 6.3 billion shares were bought and sold.

There was no news involving either company that could have explained the moves.

District-based Fannie Mae and McLean-based Freddie Mac, the nation's largest mortgage finance companies, were seized by the government in September in an effort to stabilize the firms and avert a global financial meltdown.

The government took a nearly 80 percent stake in each company, but left the stock outstanding. The shares of each settled below $1, and the New York Stock Exchange warned the firms that they'd be removed from the exchange if their stock did not rise above that threshold.

In recent months the firms' shares have risen steadily with the overall market. There have been occasional pieces of good news. For instance, Freddie Mac said earlier this month that it does not need more government aid for now, after receiving $50 billion since November.

Still, most analysts say that because the companies owe the government far more than they are able to generate in profits, the real value of the shares is zero. Analysts said much of the trading volume has come from retail investors and day traders.

"It's very hard to come up with scenarios where they're worth any money," Bose George, an analyst at Keefe, Bruyette & Woods, said of Fannie and Freddie. "There's a tremendous amount of sentiment trading in general."

Paul Miller, an analyst at FBR Capital Markets, speculated that investors may see a way to amass a lot of shares in a very cheap stock. While the upside is unlimited, Fannie Mae and Freddie Mac can only fall to zero.

"This is a bullish market mode, and people are scouring big-time stocks that are trading at very low levels," he said.

The trading in Fannie Mae and Freddie Mac was reminiscent of unusual shifts in the stocks of other companies that have received government bailouts. American International Group jumped 63 percent on one day this month despite the fact that it is being sold in pieces to pay back the government. Shares of the old General Motors continue to be heavily traded since the automaker's bankruptcy filing in June, even though the stock represents the debt and old factories left after GM's restructuring and not the reorganized company, which has yet to issue new stock.

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