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Hedgeweek Comment: Here come the short sellers

As the shares of US mortgage giants Fannie Mae and Freddie Mac went into freefall on Friday, plummeting to their lowest levels in more than 17 years, short sellers were counting their winnings. The slump was prompted by concern that a government bailout would be necessary for the largest providers of financing for US home loans.

Fannie Mae's shares were down 49 per cent to USD6.68 at one point on Friday morning before rebounding to USD10.25 by the close of trading - still a decline of more than 22 per cent.

Most short sellers are hedge funds. Many managers that have shorted Fannie Mae and Freddie Mac in the past say they would do so again.

According to former US Treasury Secretary John Snow, Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund. Snow, now chairman of New York-based private equity firm Cerberus Capital Management, told Bloomberg that when in office, he suggested that 'the business model they were using was really that of a hedge fund'. Fannie and Freddie are dependent on continuous access to short-term credit markets in order to support their mountain of debt.

While shareholders are bemoaning the falling value of their investments in the mortgage giants, short sellers are probably sizing up new victims.

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