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Why Was Wall Street Blindsided by Fannie, Freddie Wind-Down?

Stocks in this article: FNMA FMCC GM

NEW YORK (TheStreet) -- For years Wall Street and Republicans in Congress have pounded the table, in unison.

Wind down Fannie Mae (FNMA) and Freddie Mac (FMCC)!

Stop interfering in the private mortgage market! It's Fannie and Freddie who are to blame for the Great Recession -- all those cut-rate mortgages Democrats insisted upon starting in the 1990s. All those liar loans. The economic damage could have been contained but for those pesky government types and their Democratic friends in Congress.

Close them down!

OK, then. Senate Banking Committee Chairman Tim Johnson (D., S.D.) and Republican counterpart Mike Crapo (Idaho) have agreed, along with the Obama administration, on a plan to wind down Fannie and Freddie.

The bill would transfer control of the market to a new Federal Mortgage Insurance Corp. modeled on the Federal Deposit Insurance Corp., which protects consumer bank deposits. It would create a new mortgage insurance fund, 10% of which would come from private capital in the form of a user fee.

The plan is good for taxpayers, even though a White House analysis estimated that, left on their own, the two government-sponsored enterprises could return more than $179 billion to the taxpayers over the next 10 years. That enormous government bailout of $187 billion? It will be repaid.

The proposal is also good for Wall Street. The mortgage market will be freed from federal control. All that estimated $179 billion in profit over the next 10 years, and probably much more, will be flowing into private hands.

You would think the reaction on Wall Street would be cheers. The market is getting a millstone off its neck. Washington is finally doing what Wall Street wants. Right?

Because now Fannie Mae and Freddie Mac are making money, you see. A lot of money. A ton of money. Big hedge funds, such as Bill Ackman's Pershing Square, figured this out and piled into the stocks. Martin McGuire, managing director of TJM Institutional Services, recently predicted a bright future in his charts, with both companies rising by 250%.

Instead, Fannie Mae shares fell almost 31% and Freddie Mac fell almost 27% in one day. Ackman must have lost a fortune.

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