Shares of AIG Soar

Shares of battered financial companies including insurer American International Group Inc. and lender CIT Group soared on Wednesday, as investors rushed to buy shares to cover short positions in the companies.

AIG shares closed up 62.7 percent on the New York Stock Exchange, ahead of its quarterly earnings report due on Friday and as a new chief executive prepares to take up his position on Monday.

CIT shares climbed as much as 55 percent to an Intraday high of $1.56 from a close of $1.01 on Tuesday. The lender to small and medium-sized companies has been battling losses and recently secured a $3 billion loan facility from bondholders. The stock closed at $1.39.

"It seems like the short sellers were hoping that these financial institutions would show some signs of insolvency," said Joseph Cusick, senior market analyst at online brokerage optionsXpress in Chicago.

"Over the last couple of days we have seen money flow into these stocks because of the perception of their cheap valuation ... now we are seeing shorts being squeezed and potentially covering their positions," he said.

Shares in mortgage finance companies Fannie Mae and Freddie Mac also climbed on Wednesday, Cusick noted. Fannie shares closed up 29.8 percent at 74 cents, while Freddie shares were up 31 percent at 80 cents.

Shares in Ambac Financial, another company that has been hurt by losses, soared to close up 34 percent at $1.22.

Dick Bove, a bank analyst with Rochdale Securities, said AIG and CIT Group were also benefiting from a growing appetite for risk.

"Money is now pouring into the junk bonds, the high grades, commercial paper and everything financial," Bove said.

The broader KBW Banks index rose 3.54 percent.

EYEING AIG

Shares in AIG rose as analysts forecast operating earnings could stabilize after five-straight quarterly losses. Analysts have predicted it could benefit from unrealized investment gains, partly reversing write-downs in earlier quarters.

There was also optimism surrounding appointment of new CEO Robert Benmosche, who next Monday will become the fourth person in the last 14 months to assume the insurer's leadership.

"With the potential of good news looming in AIG, investors who are short AIG are being forced to cover their positions today. That has created a short-covering rally," said William Lefkowitz, options strategist at brokerage firm vFinance Investments.

In all, option traders had exchanged about 380,000 contracts in AIG, five times the average daily volume, according to option analytics firm Trade Alert. The turnover was dominated by 228,000 calls, which grant investors the right to buy AIG shares at a fixed price and time.

AIG is seen on average reporting second-quarter operating earnings of $1.31 a share, according to a Reuters poll of analysts.