Three Big Reasons U.S. Won't Accept Berkowitz's Proposal on Fannie (FNMA) and Freddie (FMCC)

One of the big stories on Wall Street today is Bruce Berkowitz's Fairholme Capital Management's proposal to purchase the insurance businesses of Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) from the U.S. government in a $52 billion deal.

Commenting on the potential success of the proposal, Compass Point strategist Isaac Boltansky doesn't believe it will be accepted. He cited:

First, the White House has repeatedly reiterated its belief that the GSEs should be liquidated. For example, during his August 6 housing speech President Obama stated: “one of the key things to make sure it doesn't happen again is to wind down these companies that are not really government, but not really private sector -- they're known as Freddie Mac and Fannie Mae.” Furthermore, just yesterday James Stock reaffirmed the White House’s preference to wind down the GSEs during an event at the Urban Institute. We continue to believe that the White House, and therefore the Treasury Department, has little to no interest in any GSE reform plan that is not predicated on the liquidation of the GSEs.

Second, the Fairholme proposal states that its purchase would "catalyze reform" since the core tenets of the plan are consistent with outstanding reform proposals. While we agree with this point, our view is that Congress is seldom in the business of ceding power – especially when it is undertaking the heavy lifting of reform. GSE reform efforts have taken significant steps forward during this Congress and we doubt that lawmakers will embrace a proposal which would seemingly limit their legislative optionality in the future. The Fairholme proposal goes to great lengths to note that its plan can be consummated without Congressional approval but we believe that lawmakers will openly oppose this concept and that the political pressure from Capitol Hill will continue playing a key role in this conversation.

Third, we believe the prospects for significant recoveries on the GSE junior preferreds is inversely proportional to the amount of lobbying and public pressure fund managers exert. No matter the type of fund – hedge, mutual, or private equity – the bulk of lawmakers will publicly distance themselves from any proposal which could be framed as "enriching" money managers no matter its merits. Simply put: Wall Street is not viewed as a sympathetic constituency in D.C. and that fact will not change as the 2014 midterm election comes into focus

On if the proposal from Fairholme helps or hurts GSE reform prospects, Boltansky's initial reaction is that this proposal is net neutral for the ongoing GSE debate. He believes lawmakers will simply continue down the preset road to GSE reform, which will not come to fruition until 2015 at the earliest with 2017 far more likely.

Boltansky continue to believe that there is a significant disconnect between Washington and Wall Street regarding the value of the junior preferred securities of the GSEs. "Our sense is that the Fairholme proposal, while thoughtful, does not address the underlying political dynamics defining the GSE reform debate and is therefore unlikely to gain traction. We do not believe that this proposal materially changes the prospects for GSE reform on Capitol Hill and view legislative action as unlikely until 2015 at the earliest."

Shares of Fannie Mae are 12.6% up and Freddie Mac is up 13.5% mid-day.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Fannie Mae Announces Scheduled Release of First Quarter 2024 Financial Results
• EU Antitrust Regulators Concerned About Impact of KKR, Telecom Italia Deal on Viability of Wholesale Market - Reuters
• Sage Therapeutics (SAGE) PT Lowered to $18 at Truist Securities