President Barack Obama would reject proposals by hedge funds to recapitalize Fannie Mae and Freddie Mac, National Economic Council Director Gene Sperling said.
“I want to make clear, the Obama administration believes the risks are too great that this model would recreate the problems of the past,” Sperling said in a Washington speech.
Sperling’s comments follow steps by investors Bill Ackman and Bruce Berkowitz to loosen the U.S. government’s grip on Fannie Mae and Freddie Mac, the mortgage-finance giants taken into conservatorship amid losses during the 2008 credit crisis. The two companies should be wound down and replaced with an entirely new housing-finance system, Sperling told an audience at a conference hosted by the Urban Institute and CoreLogic Inc.
The U.S. government controls a nearly 80 percent stake in the two companies and any plans to recapitalize them would require White House approval.
Ackman’s $12 billion hedge-fund firm, Pershing Square Capital Management LP, said on Nov. 15 that it had bought a 9.98 percent stake in the common shares of Fannie Mae that aren’t owned by the government, as well as a 9.77 percent stake in the Freddie Mac shares available to the public. That announcement was prompted by a proposal two days earlier from Berkowitz’s $10.5 billion mutual-fund firm, Fairholme Capital Management LLC, that it and other owners of the preferred shares buy the mortgage insurance business of the companies.
If allowed to continue operating, Fannie Mae and Freddie Mac could enjoy advantages of size and infrastructure that would keep new entrants out of the securitization market, Sperling said.
“All of us should fear that we could re-create a duopoly that the market would perceive as too-big-to-fail market entities with an implicit government guarantee, the core of the failed GSE business model we are trying to replace,” he said.
The White House supports bipartisan efforts in the U.S. Senate to wind down Fannie Mae and Freddie Mac and replace them with a system in which the government serves as a catastrophic reinsurer of mortgage-backed securities behind private capital, he said.
–Editors: Gregory Mott, Anthony Gnoffo