Fannie, Freddie shares jump in broad financial rally

NEW YORK (Reuters) - Fannie Mae and Freddie Mac shares had their best day in more than two decades on Wednesday after Wells Fargo's (WFC.N) strong earnings spread relief across Wall Street, even as a plan to prop up the two mortgage finance titans met resistance from congressional Republicans.

The two pillars of the U.S. housing market also benefited from remarks by Federal Reserve Chairman Ben Bernanke that they are "in no danger of failing."

Nevertheless, U.S. Treasury Secretary Henry Paulson was headed for Capitol Hill on Wednesday afternoon as the White House ramped up its push to win over Republican party lawmakers who questioned the scale of the rescue plan for Fannie and Freddie and its potential cost to taxpayers.

Earlier in the day the White House said that Congress should be able to approve legislation aimed at providing back up funding for Fannie and Freddie by next week. Winning fast approval is seen as key to preventing an already-weak housing market from deteriorating further and tipping the U.S. economy into recession.

The U.S. Treasury and Federal Reserve's plan to support the two government-sponsored enterprises includes a pledge to extend more credit or buy equity stakes in Fannie Mae and Freddie Mac if needed.

On Wall Street, meanwhile, shares of both Fannie Mae (FNM.N) and Freddie Mac (FRE.N) jumped by about 30 percent each on Wednesday. It was Freddie's biggest one-day percentage gain since 1988, and Fannie's best day since at least 1981.

The rally had less to do with the rescue plan than with investor relief about quarterly earnings at Wells Fargo. The nation's fifth-largest bank and second-largest mortgage lender posted a profit that topped analysts' expectations and Wells Fargo also raised its dividend.

Other bank stocks also surged as Wells Fargo's results eased concerns about the impact of the credit crisis on the financial sector. The Financial Select Sector SPDR fund (XLF), which tracks the performance of large capitalization financial stocks, was up 12.2 percent.

Yet even as their common shares rose, Fannie and Freddie's preferred shares slid as investors worried that they could cut dividends on these shares to boost capital.

Fannie and Freddie's shares have lost over 60 percent of their value since the beginning of the month on fears the two companies might be insolvent as a slumping U.S. housing market caused defaults on mortgages to rise and the value of mortgage bonds to fall.

OVERSEAS FALLOUT?

Concerns about the international breadth of the fallout from Fannie and Freddie's troubles also eased. South Korea's central bank denied a media report that it had unrealized losses of more than $7 billion in investments in U.S. agency debt including bonds issued by Fannie Mae and Freddie Mac.

Bank of China (3988.HK) (601988.SS), meanwhile, may hold roughly $20 billion worth of bonds issued by Fannie and Freddie, according to a research note by analysts at CLSA.

A Bank of China spokesman could not immediately be reached for comment. Because the U.S. government has taken steps to support Fannie and Freddie, CLSA said in its note that it regards the credit risk for the two as near to that of a sovereign credit rating for the government itself.

Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, said investors also found some comfort in Fannie Mae (FNM.N) chief executive Daniel Mudd's remarks late on Tuesday that the company will not need to take advantage of the government and central bank's lifeline.

Despite some of the positive news, Fannie on Wednesday sold $3 billion in short-term debt at rates higher than last week, suggesting weaker demand. The deal followed a similar sale from Freddie Mac earlier in the week that garnered strong demand.

The U.S. Securities and Exchange Commission's emergency rule to limit certain types of short selling in major financial firms, including Fannie and Freddie, helped lift a major negative drag on the shares, traders said.

"The SEC emergency ruling on limiting certain types of shorting is also helping Fannie and Freddie shares, for sure," said Clearbrook Financial's Sowanick.

(Additional reporting by Jennifer Ablan; Editing by Theodore d'Afflisio)