By Kristina Cooke
NEW YORK (Reuters) - Fannie Mae and Freddie Mac shares hadtheir best day in more than two decades on Wednesday afterWells Fargo's strong earnings spread relief across Wall Street,even as a plan to prop up the two mortgage finance titans metresistance from congressional Republicans.
The two pillars of the U.S. housing market also benefitedfrom remarks by Federal Reserve Chairman Ben Bernanke that theyare "in no danger of failing."
Nevertheless, the Bush administration scrambled to winsupport for the measures to bolster Fannie and Freddie as someRepublican lawmakers objected to attaching the plan to a majorhousing market rescue bill.
Treasury Secretary Henry Paulson met on Wednesday eveningwith lawmakers from both parties and emerged sounding upbeatabout his prospects. "I feel very confident and optimistic thatthere is broad-based support for moving quickly in getting GSEreform done ... some time next week," he told reporters.
Winning fast approval is seen as key to preventing analready-weak housing market from deteriorating further andtipping the U.S. economy into recession.
The U.S. Treasury and Federal Reserve's plan to support thetwo government-sponsored enterprises includes a pledge toextend more credit or buy equity stakes in Fannie Mae andFreddie Mac if needed.
On Wall Street, meanwhile, shares of both Fannie Mae andFreddie Mac jumped by about 30 percent each on Wednesday. Itwas Freddie's biggest one-day percentage gain since 1988, andFannie's best day since at least 1981.
The rally had less to do with the rescue plan than withinvestor relief about quarterly earnings at Wells Fargo. Thenation's fifth-largest bank and second-largest mortgage lenderposted a profit that topped analysts' expectations and WellsFargo also raised its dividend.
Other bank stocks also surged as Wells Fargo results easedconcerns about the impact of the credit crisis on the sector.The Financial Select Sector SPDR fund, which tracks theperformance of large capitalization financial stocks, was up12.2 percent.
Yet even as their common shares rose, preferred shares inFannie and Freddie slid as investors worried that they couldcut dividends on these shares to boost capital.
Shares of Fannie and Freddie have lost more than 60 percentof their value since the beginning of the month on fears thetwo companies might be insolvent as a slumping U.S. housingmarket caused defaults on mortgages to rise and the value ofmortgage bonds to fall.
OVERSEAS FALLOUT?
Concerns about the international breadth of the falloutfrom Fannie and Freddie's troubles also eased. South Korea'scentral bank denied a media report that it had unrealizedlosses of more than $7 billion (3.5 billion pounds) ininvestments in U.S. agency debt, including bonds issued byFannie Mae and Freddie Mac.
Bank of China, meanwhile, may hold roughly $20 billionworth of bonds issued by Fannie and Freddie, according to aresearch note by analysts at CLSA.
A Bank of China spokesman could not immediately be reachedfor comment. Because the U.S. government has taken steps tosupport Fannie and Freddie, CLSA said in its note that itregards the credit risk for the two as near to that of asovereign credit rating for the government itself.
Tom Sowanick, chief investment officer at ClearbrookFinancial LLC in Princeton, New Jersey, said investors alsofound some comfort in Fannie Mae Chief Executive Daniel Mudd'sremarks late on Tuesday that the company would not need to takeadvantage of the government and central bank's lifeline.
Despite some of the positive news, Fannie on Wednesday sold$3 billion in short-term debt at rates higher than last week,suggesting weaker demand. The deal followed a similar sale fromFreddie Mac earlier in the week that garnered strong demand.
The U.S. Securities and Exchange Commission's emergencyrule to limit certain types of short selling in major financialfirms, including Fannie and Freddie, helped lift a majornegative drag on the shares, investors said.
"The SEC emergency ruling on limiting certain types ofshorting is also helping Fannie and Freddie shares, for sure,"Sowanick said.
(Additional reporting by Jennifer Ablan; Editing byTheodore d'Afflisio and Braden Reddall)
