Fannie shares rise with new SEC short-sale order

The Securities and Exchange Commission announced the emergency order last Tuesday after shares of Fannie and Freddie slid to historic lows in a crisis of confidence that spurred the Bush administration and the Federal Reserve to put together a rescue plan for the companies.

The two government-sponsored companies together hold or guarantee more than $5 trillion in mortgages, nearly half the nation's total.

On Monday, Fannie shares rose 73 cents, or 5.4 percent, to $14.13. Freddie's stock declined, however, losing 43 cents, or nearly 4.7 percent, to $8.75. Analysts polled by Thomson Financial widened the forecast for Freddie's second-quarter loss to an average 53 cents a share from 50 cents a share.

Among other companies covered by the SEC order, Bank of America Corp., which reported better-than-expected quarterly earnings Monday, rose $1.07, or nearly 4 percent, to $28.56, and Citigroup Inc. gained 34 cents to $19.69.

Analysts and government regulators blamed aggressive short selling for exacerbating the recent plunge in Fannie and Freddie's stock, as well as that of big investment house Lehman Brothers Holdings Inc.

The SEC order, in effect for 30 days, prohibits so-called "naked" short selling of shares of Fannie, Freddie and 17 other large financial companies. The companies' shares generally have gained since the agency's announcement of the order.

Short sellers make a bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

"Naked" short selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale. The SEC order requires short sellers to actually borrow shares before selling them.

Edward Yardeni, president and chief investment strategist of Yardeni Research in Great Neck, N.Y., and others wondered why the SEC action didn't apply to all financial stocks, "and for that matter, why not all publicly traded stocks?"