Bove sees much uncertainty, riskA week after Bove's first newsletter, Bruce Berkowitz-led Fairholme Capital Management sent a letter to the Treasury outlining its plan to take the lead in a buyout of both companies, infusing $52 billion into them and taking them private. Almost immediately, hedge fund manager Bill Ackman filed 13-Ds showing that he had taken a 10% stake in each companies' common stocks. Now Bove has released another newsletter analyzing the investment argument, but the risks are as high as they ever were. Bove doesn't take a strong position for or against government intervention in the housing market, but it's clear that he doesn't think everyone understands the implications of simply liquidating Fannie Mae / Federal National Mortgage Association OTCBB:FNMA and Freddie Mac / Federal Home Loan Mortgage Corp OTCBB:FMCC. "The current option will increase the cost of owning a home; reduce housing values; shrink the available funding for homeownership; and reduce the size of the housing market impacting economic growth. It will return housing to being a highly cyclical industry; and it will return the United States to a policy of supporting semi-public housing or the creation of instant ghettos," writes Bove, referring to the political options currently in play in Washington.
Fannie and Freddie have made housing availableDelving into the history of the US housing market, Bove argues that Fannie Mae / Federal National Mortgage Association OTCBB:FNMA has effectively made housing available to many Americans, and that the company's structure is tried and true; there was a breakdown in the company's management in the run-up to the housing crisis, but that can be, and arguably has been, fixed.
If Fannie Mae / Federal National Mortgage Association OTCBB:FNMA and Freddie Mac / Federal Home Loan Mortgage Corp OTCBB:FMCC were private companies, you'd expect their stocks to be soaring, but the government has laid claim to all of their profits. Fairholme has previously sued the government for some sort of compensation but "Congress has given Fannie Mae's conservator the right to ignore any court decisions that interfere with the rights listed above," explains Bove, referring to its sweep of profits. "This is important. The government is using its sovereign authority as a right to ignore the law - despite the separation of powers."