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Shares of bailed out companies surge

Tue, 03/09/2010 - 1:30pm

Shares of four companies that have received huge infusions of taxpayer cash soared Tuesday after a report that the government would sell its stake in Citigroup Inc. raised hopes that other bailed-out companies would follow.

Shares of Citi rose 26 cents, or 7.3 percent, to close at $3.82. Earlier in the day, Fox Business News said the government has met with investment bankers to discussing plans to sell its 27 percent stake in Citi as early as this spring.

The network did not cite its sources, and a Treasury spokeswoman declined to comment to The Associated Press, as did a Citigroup spokesman.

"These things kind of feed on themselves," said Barry Ritholtz, CEO of the financial research firm FusionIQ "The typical trader, they don't care if it's true or not. They care about: Can I get in and out of this for a profit."

Shares of insurer American International Group Inc. also rose after the company said Monday that it will sell its American Life Insurance Co. division for $15.5 billion to MetLife Inc. The government-approved deal, AIG's second big asset sale in two weeks, will give the insurer more cash to repay the billions of bailout dollars it still owes the government.

As of Dec. 31, the company owed the Treasury and the Federal Reserve Bank of New York nearly $130 billion. AIG's bailout package was originally worth up to $182.5 billion. Shares of AIG rose $3.67, or 12.6 percent, to close at $32.77.

Following the lead of AIG, shares of mortgage finance companies Fannie Mae and Freddie Mac also surged, as traders speculated that the government might someday be able to make a similar exit. However, most analysts say that is unlikely. The two companies have needed a combined $126 billion in taxpayer aid to date, and that number is expected to keep growing.

Banking analyst Bert Ely, a longtime critic of Fannie and Freddie, said he doesn't see an end to either company's losses.

"The hole is just going to get deeper," Ely said. "I don't think they can ever earn their way back to solvency."

Nevertheless, shares of Fannie Mae rose 6 cents, or 6 percent, to close at $1.07. Shares of Freddie Mac rose 9 cents, or 7.6 percent, to close at $1.28.

The potential sale of the government's stake in each of the companies would release more shares onto the market, diluting the value of existing shares in the bailed-out firms. But the companies' stock prices are so depressed that rumors of a possible government exit are seen as good news about their respective conditions, and that cheers investors.

Citi's stock began rising in morning trading after Fairholme Fund manager Bruce Berkowitz was quoted in an interview with Fortune magazine about his $11 billion fund's recent purchase of more than $700 million worth of Citi shares. Berkowitz, recently named U.S. stock fund manager of the decade by fund tracker Morningstar Inc., cited improvement in Citi's balance sheet.

"People are so focused on the liabilities that they've potentially forgotten about some of the assets," Berkowitz told Fortune.

"The price is right" for Citi's stock, Berkowitz said. "It's just a question of when it becomes obvious to everyone that the worst is over."

Ely said the prospect of the government selling its stake in Citi soon is mostly a matter of timing. The goal should be to maximize the return to taxpayers without disrupting markets.

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Jewell reported from Boston.

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