Fannie and Freddie Continue Bizarre Surge - TheStreet

NEW YORK (TheStreet) -- Fannie Mae (FRE) and Freddie Mac (FRE) shares soared to their highest prices since October on Monday after the U.S. Treasury dramatically stepped up its commitment to the giant mortgage lenders, which are widely thought to be insolvent.

Freddie Mac shares were up 25% to $1.58 on volumes of 54 million shares in mid-afternoon trading. That compares to a trailing three-month average daily volume of 23 million shares. Fannie Mae shares were up 19% to $1.25 on volumes of 106 million shares, vs. a 38 million share daily average over the past three months. With nearly two hours of trading left on Monday, the Fannie Mae volumes were already the highest they had been since late October.

In a press release issued on Christmas Eve, the Treasury lifted a $200 billion cap on its commitment to each company, essentially indicating it would do whatever it takes to maintain their solvency.

David Kotok, chairman and CIO of Cumberland Advisors, believes the move "paves the way for the recognition of losses in the hundreds of billions," he wrote in a market commentary published Christmas Day. Kotok also wrote that the action "moves things one step closer to full nationalization of

Fannie and Freddie and a full specific guarantee of

their debt by the U.S. Treasury."

Fannie and Freddie shares were mostly left for dead following their rescue by the government in September 2008 and are widely thought to be worthless. The lenders owe the government $111 billion between them. Still, the stock prices of both companies rallied inexplicably in August and September on surges in volumes, as did shares of other seriously troubled companies like

Citigroup

(C) - Get Report

,

AIG

(AIG) - Get Report

and

MBIA

(MBI) - Get Report

. Even shares of bankrupt companies like

Lehman Brothers

and

Washington Mutual

came to life during that period.

Freddie and Fannie bulls range from fast money traders, such as

optionsMONSTER co-founder Jon Najarian

to Bronte Capital chief investment officer John Hempton, who

contributed a thoughtful series on Fannie and Freddie in August

arguing the outlook for the mortgage lenders is not nearly as hopeless as many people reflexively assume.

Though he is more optimistic than most, Hempton told

TheStreet.com

in a Dec. 20 email he sees "no reason" to own the common shares of Fannie and Freddie.

"The common is diluted 5-1 by the government 80% stake -- so $10 is the equivalent of a pre-crisis $50. This seems unlikely," he wrote.

Instead, Hempton owns preferred shares of both companies, as he believes they have greater potential for upside.

--

Written by Dan Freed in New York

.

Read More:

optionsMONSTER co-founder Jon Najarian shares his trading strategy on Fannie and Freddie

Bronte Capital chief investment officer John Hempton on Fannie and Freddie