Shares of battered financial companies including insurer American International Group Inc and lender CIT Group soared on Wednesday, as investors apparently rushed to buy shares to cover short positions in the companies.

AIG shares surged about 63 percent in afternoon trading on the New York Stock Exchange, ahead of its next quarterly earnings report on Friday and as a new CEO prepares to take up the company's reins on Monday.

CIT shares meanwhile climbed as much as 55 percent to a high of $1.56 from a close of $1.01 on Tuesday, on no particular news. The lender to small and medium-sized companies has been battling losses and recently secured a $3 loan facility from bondholders.

It seems like the short sellers were hoping that these financial institutions would show some signs of insolvency, said Joseph Cusick, senior market analyst at online brokerage optionsXpress in Chicago. Over the last couple of days we have seen money flow into these stocks because of the perception of their cheap valuation ... now we are seeing shorts being squeezed and potentially covering their positions, he added.

Shares in mortgage finance companies Fannie Mae and Freddie Mac also climbed on Wednesday, Cusick noted. Fannie shares were up 28 percent at 73 cents, while Freddie shares were up 26 percent at 77 cents.

Shares in Ambac Financial , another company that has been hurt by rising losses amid the two-year-old financial crisis, soared 30 percent to $1.19 in afternoon trading on the New York Stock Exchange.

Dick Bove, a bank analyst with Rochdale Securities, said AIG and CIT Group also are benefiting from a growing appetite for risk.

Money is now pouring into the junk bonds, the high grades, commercial paper and everything financial, Bove said.

The broader KBW Banks index <.BKX> was up 3.12 percent.


Shares in AIG jumped as analysts forecast operating earnings could stabilize after five-straight quarterly losses. Analysts have predicted it could benefit from unrealized investment gains, partly reversing write-downs in earlier quarters.

There was also optimism surrounding the appointment of a new Chief Executive, Robert Benmosche, who next Monday will become the fourth person in the last 14 months to assume the insurer's leadership.

With the potential of good news looming in AIG, investors who are short AIG are being forced to cover their positions today. That has created a short-covering rally, he said.

In late afternoon trade, option traders had exchanged about 298,000 contracts in AIG, four times the average daily volume, according to option analytics firm Trade Alert. The turnover was dominated by 184,000 calls, which grant investors the right to buy AIG shares at a fixed price and time.

American International Group Inc is seen on average reporting second-quarter operating earnings of $1.31 a share, according to a Reuters poll of analysts.

(Reporting by Lilla Zuill; Additional reporting by Doris Frankel in Chicago, Elinor Comlay and Steve Eder in New York; editing by Andre Grenon and Gerald E. McCormick)