White House Rejects Fairholme But Fannie, Freddie Gain Anyway

NEW YORK (THESTREET) -- Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) continued to advance Wednesday even as the White House rejected the bailed-out housing lenders' latest proposal to privatize parts of their businesses.

White House Economic Adviser Gene Sperling at a conference in Washington D.C. said the Obama Administration won't support Fairholme Fund's proposal to spin off the insurance arm of the government-sponsored enterprises, or GSEs, to two privately-owned state-regulated insurance companies.

Under the proposal, the two new entities would be capitalized through the conversion of $34.6 billion of GSE junior preferred stock into common shares, with an additional $17 billion raised through a rights offer.

Fairholme's Bruce Berkowitz said the proposal was an answer to the broad bipartisan call for more private capital in the industry. He added that the companies could operate without federal support.

But the White House believes the proposal would only create two too-big-to-fail companies.

"I want to make clear, the Obama administration believes the risks are too great that this model would recreate the risks of the past," Sperling said, according to <I>Bloomberg News</I>.

Any entities created from Fannie and Freddie would likely dominate the market. The White House was focused on building a stronger mortgage market where there was plenty of competition among private capital, he said.

His comments confirmed what many housing policy analysts believed -- that Congress will continue to examine proposals to wind down the government-sponsored enterprises or GSEs.

"The Sperling comments bolster our view that a plan floated by Fairholme Capital has little chance of being accepted by the Administration," KBW analyst Brian Gardner wrote in a note. "It is possible the plan's backers think they can wait out Congress and step in should Congress and the White House abandon efforts to replace the GSEs with a new mortgage finance system. However, in our view, this would be a very long-term play. "

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