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Fannie, Freddie Hedge Funds Could Claim Victory, Go Home

NEW YORK ( TheStreet) -- Fannie Mae (FNMA) and Freddie Mac (FMCC) reform seems so far off its hard to comprehend, so you have to wonder when the monster rally in preferred and common shares of the mortgage giants will take a breather.

Investors who have been buying up the shares have different reasons for doing so. Some base their wager on a legal victory. A series of investor lawsuits, some of them backed by high profile attorneys like Boies, Schiller & Flexner's David Boies and Gibson Dunn's Ted Olson, making different claims about how investors were ripped off by the government, have been filed this year. Others (and some of the same ones from the earlier group) believe eventual privatization of the housing giants is inevitable, and have been touting various plans to that effect.

The privatizers were high-fiving each other Wednesday following a Financial Times report that the usual group of hedge funds, including Carlyle Group's Claren Road Asset Management, Paulson & Co., and Perry Capital are touting a new version of their long-standing privatization plan for the mortgage giants. The report also cited Fairholme Funds -- not a hedge fund but a frequent proponent of privatization -- and a plaintiff in one of the law suits, and a few new names, such as Blackstone Group (BX)'s GSO Capital Partners, KKR and Carlyle's private equity arm.

The FT report appeared to be the reason for unusually high trading volumes in the common shares Wednesday. Fannie and Freddie shares were each up about 5% Wednesday morning on volumes that prior to 11 a.m. had already exceeded their average daily volumes of the past three months.

But the fact is that nothing is going to happen with Fannie and Freddie reform for a very long time, and the idea of allowing a group of hedge funds and private equity firms to profit from taking these entities private would ignite such populist outrage that it seems absurd on its face.

Asked about the future of the government-sponsored entities on Tuesday at a conference in New York hosted by SIFMA, Wall Street's main trade group, Blackrock (BLK) said wisely that we first have to decide whether home ownership is a priority for the country before we get into the mechanics of reform. Fannie and Freddie are founded on the principle that homeownership is a good thing for society--a view other governments (Canada, for example) don't hold so dearly.

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