It’s a happy day for ‘short sellers’ of Fannie and Freddie

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Today is a huge payday for short sellers who never gave up believing that shares of Fannie Mae and Freddie Mac would end up worthless.

The terms of the government’s rescue plan for the mortgage giants, announced on Sunday, make it highly likely that common shareholders will be wiped out. Although the shares will keep trading, investors may not know for years whether they have any real value; that will depend on how much taxpayer money Fannie Mae and Freddie Mac suck up to stay solvent.

Investors aren’t waiting to find out: Both of the stocks have collapsed today. Fannie was trading at 90 cents at about 10:45 a.m. PDT, a drop of 87% from its Friday closing price of $7.04. Freddie was trading at 88 cents, down 83% from $5.10 on Friday.

Short sellers -- traders who borrow stock and sell it, betting that the price will drop -- have been all over Fannie and Freddie this year as their financial outlooks have worsened. The number of shorted shares of Fannie mushroomed from 35 million at the start of the year to 141.4 million by mid-August, the latest data available. Freddie’s shorted-shares total rocketed from 19 million to 118.6 million in the same period.

Some short selling is done as a hedge rather than as an outright bet on a lower stock price. For example, investors may go short on one stock in an industry while being long another, hoping that one position makes more money than the other loses.

In any case, being short Fannie and Freddie was the right call -- despite Securities and Exchange Commission Chairman Christopher Cox’s attempt in mid-July to rein in short sellers. Remember that move? Refresh your memory here.

Meanwhile, because many Wall Street analysts are supposed to have ‘target’ prices for the stocks they cover, some have felt compelled to put new price targets on Fannie and Freddie -- laughable as that may sound.

Here’s a sampling: Merrill Lynch & Co.’s Ken Bruce now has a price target of 50 cents for Fannie and 25 cents for Freddie. Citigroup’s Brad Ball puts a 32-cent target on Fannie and a 31-cent target on Freddie.

And in case there was any doubt, they both advise selling the stocks.