As expected, Fannie Mae (FNM) and Freddie Mac (FRE) rallied in pre-market as Treasury bailed them out.
At 8:30am, Fannie was up 31%, Freddie is up 23%. Financials in general are also rallying, with Wachovia (WB) up 5%, JP Morgan (JPM) up 3%, Bank of America (BAC) up 3%, and Lehman (LEH) up 13%.
The rally makes sense, as the bailout makes it far less likely that the companies will suddenly go bankrupt. Over the course of the next few months, however, shareholders could still get screwed: If losses on the GSEs’ mortgage portfolios force them to raise billions in additional capital (to maintain required ratios), current shareholders will likely be violently diluted.
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