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Financial Winners & Losers: Lehman

Benign economic data and a report that banks are sufficiently reserving for losses helped lift the sector.

Financial stocks rose Wednesday, on signals that the economy may be slowly improving and indications that banks and other firms are setting aside enough capital to cope with housing-related losses.

The NYSE Financial Sector Index added almost 75 points, or 1.2%, as the

Dow Jones Industrial Average

gained more than 50 points, or 0.9%.

A better-than-expected increase in durable-goods orders last month indicated that businesses and consumers are still purchasing large manufactured items, from aircraft and machinery to cars and refrigerators. And while a federal agency said that thrifts lost $5.4 billion in the second quarter, they also set aside a record amount to cover losses from bad loans.

John Reich, director of the Office of Thrift Supervision, said nearly all of those banks, or 98%, have sufficient capital and that managers have been "responding appropriately to the challenges they face."

Still, Federal Deposit Insurance Corp. Chairwoman Sheila Bair told the

Wall Street Journal

on Tuesday that the agency may have to tap into Treasury funds to cover payouts to customers of failed banks. Since the FDIC has rescued only nine banks this year, Bair's words indicate that more of those on the "troubled" list may be headed for insolvency. The FDIC may also raise the rates that banks pay into its own reimbursement fund, further hurting the cash-strapped banking sector.

Despite recent concerns,

Fannie Mae



Freddie Mac


sailed higher for the fourth straight session, as investors became more confident that the government-supported mortgage buyers will have enough capital to weather the housing storm.

Fannie was recently up 12.3% at $6.31, while Freddie gained nearly 14.1% at $4.53. Both stocks eased from earlier gains of as much as 13% and 21%, respectively.

A report from the Mortgage Bankers Association on Wednesday that mortgage applications rose last week likely helped to support the shares, as did research from several analysts calling the hype surrounding a potential government bailout overblown. Both Fannie and Freddie also said on Tuesday that their portfolios expanded at slower paces, indicating a move to conserve capital as they lure investors with higher yields.

Merrill Lynch analyst Kenneth Bruce became the latest to assert that it is "premature" to assume that the Treasury will recapitalize Fannie and Freddie, since "capital depletion would not likely occur for several quarters." Citigroup's Bradley Ball also said on Tuesday that both companies have enough cash to absorb "fairly significant credit costs," but said they may have to raise capital if credit costs increase further or investors shy away from buying mortgage debt.

Fannie elected affordable-housing expert and former investment banker Frederick "Bart" Harvey to fill the last empty seat on its board of directors on Tuesday. CEO Daniel Mudd called him "a perfect addition" to the board due to his experience in "harnessing private enterprise to expand affordable, sustainable housing opportunities."

The confidence tide also seemed to be turning for

Lehman Brothers


, which gained 7.5% at $15.08 on Wednesday, its second consecutive trading session of gains as well.



(SCA) - Get Free Report

fell more than 7.4% to $1.76 as investors continued to punish the company for bad bets on mortgage-backed collateralized debt obligations and a costly termination of credit-default swaps with

Merrill Lynch


. The bond insurer's stock is down more than 57% so far this year and down more than 90% since the 52-week high of $24.06 reached in September.

Thornburg Mortgage


was also suffering, recently down 23.1% at 38 cents. An FBR analyst cut his price target on the firm as the jumbo-mortgage provider's viability remained in question. Investors have shied away from buying Thornburg's giant loans due to implicit risks. As a result, credit-rating agencies recently downgraded the firm, which is undergoing a restructuring process to stay afloat.