Hot day for wards of the state as Fannie, Freddie, AIG soar

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Trading has turned wild today in shares of the three financial giants majority-owned by Uncle Sam.

Shares of Fannie Mae and Freddie Mac have jumped more than 30% after rumors hit the market that the companies’ chief regulator, James Lockhart, is expected to resign.

American International Group has soared more than 50% after Radian Group Inc., which competes with AIG in the mortgage-insurance business, reported a surprising second-quarter profit.

Fannie Mae was up 18 cents, or 31%, to 75 cents at about 12:20 p.m. PDT; Freddie Mac was up 19 cents, or 31%, to 80 cents.

As with all penny stocks, Fannie Mae and Freddie Mac now are the realm of rank speculators, who may be betting that Lockhart’s departure will move the government closer to deciding on the long-term fate of the businesses. The U.S. owns about 80% of both companies after declaring them insolvent last September.

The jump in AIG -- up $7.62, or 56%, to $21.14 -- may at least reflect more optimism about a fundamental part of the insurance titan’s business, after Radian’s report. AIG will report its second-quarter results Friday.

But AIG, too, is 80% owned by the government. The company is selling off pieces of itself to repay federal bailout loans, but outgoing CEO Edward Liddy told shareholders at the annual meeting June 30 that he could offer ‘no assurances’ on how soon the government’s stake in the firm would be reduced.

A Citigroup analyst early last month said there was a 70% probability that AIG’s remaining public shareholders would be wiped out.

AIG has been a favorite target of ‘short sellers’ who have been betting that the stock would continue to slide. The surge in the price today suggests that some of the shorts are scrambling to buy shares to close out their bets -- a classic ‘short squeeze.’

-- Tom Petruno