Shares in companies bailed out by the U.S. government during the financial crisis have surged, bolstered by speculation that once-distressed assets were becoming more valuable.
Citigroup stock rose as much as 8.4 percent Tuesday after a prominent fund manager said the bank's shares were underpriced. Citi shares closed 7.3 percent higher .
Insurer American International Group rose as much as 19.6 percent before closing 12.6 percent higher at $32.77 .
And government-owned mortgage companies Freddie Mac and Fannie Mae were up as much as 18.5 percent and 15 percent, respectively. Freddie Mac closed 7.6 percent higher at $1.28 while Fannie Mae ended 5.9 percent higher at $1.07 .
"Some of the heavily government-owned equities like Citigroup, AIG, Fannie Mae and Freddie Mac are all rallying," said Jon Najarian, a co-founder of Web information site optionMonster.com, contrasting them with Goldman Sachs , JPMorgan Chase and Morgan Stanley .
Those three, financial companies in which the government does not own shares, all closed lower.
Jud Pyle, chief investment strategist at Options News Network, a division of option market making firm PEAK6 Investments, said the Citi rally is causing investors to wonder if AIG might see increased proceeds from its remaining assets and that a government stake could be working to the companies' advantage.
"If there is speculation that the stocks have been held down too much by that potential overhang, then that could be another reason for the rally," Pyle said.
AIG option volume was three times greater than normal with about 157,000 calls and 69,000 puts traded by late afternoon, according to option analytics firm Trade Alert.
AIG front month March call options were also active. Cantor Fitzgerald & Co's director of institutional derivatives sales and trading, Mike Khouw, said such activity could be a signal that investors are buying AIG calls to hedge a short position or make a bullish speculative play.
"There is a lot of chatter now that AIG is going to have a more asset sales coming up relatively shortly," Khouw said. AIG said its policy is not to comment on unusual market activity.
In an interview with Fortune, Fairholme fund manager Bruce Berkowitz argued that Citigroup's balance sheet is improving, the bank is well capitalized, and the stock is trading at a lower valuation than many of its peers.
"The price is right," Berkowitz told Fortune. "It's just a question of when it becomes obvious to everyone that the worst is over."
Berkowitz, who calculated that even Citigroup's bad assets now return more than 5 percent, manages $11 billion at Fairholme, Fortune said. Morningstar recently named Fairholme a top fund manager over the last decade, the magazine reported.
Separately, the U.S. government is considering shedding its 7.7 billion Citigroup shares over the next few months, according to Fox Business Network.
Previously, investors thought the United States would look to sell over the course of the year.
Jon Diat, a spokesman for Citigroup, declined to comment, as did a U.S. Treasury spokeswoman.
The U.S. government is eligible to start selling its stake of about 27 percent in the bank later this month. Citigroup shares rose 26 cents to close at $3.82 after trading as high as $3.86. Those prices are well above the $3.25 level at which the U.S. government bought the shares.
Citigroup options traded actively as well, with overall volume of about 1.28 million contracts four times greater than usual at mid-afternoon, according to option analytics firm Trade Alert.
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