NEW YORK (TheStreet) -- Fairholme Capital's proposal last week to purchase parts of Fannie Mae (FNMA) and Freddie Mac (FMCC) from the U.S. Treasury Dept., already rejected by the White House, received still more criticism Thursday when former Treasury Secretary Larry Summers said the plan was "at the edge of ludicrous."
Despite withdrawing his bid to become Federal Reserve chairman in the face of opposition from some key Democrats, Summers remains enormously influential in Washington, including as an informal adviser to President Obama.
Asked about the Fairholme proposal by Bloomberg, Summers said, "I think the idea that somehow the right thing to do is to privatize these institutions to a coalition of hedge funds who have bought up the stock at a very low price and expect to earn an inordinate return -- the idea that that's the right thing for public policy strikes me as being at the edge of ludicrous and it's not something I would remotely support."
While Fairholme is not a hedge fund, its plan was backed by hedge funds including Perry Capital, Paulson & Co. and Claren Road Asset Management, according to the Financial Times. Another prominent hedge fund that disclosed a large stake in Fannie and Freddie last week is Pershing Square Capital Management -- led by Bill Ackman.
Gene Sperling, Director of the National Economic Council and Assistant to the President for Economic Policy, already made clear during a speech Wednesday that the Obama administration does not support the idea "that you could have reform that would recapitalize these firms in their current corporate form but somehow do so without the implicit government guarantee or without creating a too-big-to-fail duopoly." His remarks came during a speech on Wednesday, excerpts from which were published in The Wall Street Journal.
While Sperling did not mention the Fairholme proposal specifically, his remarks were widely interpreted as a rejection of it.
Sperling and Summers are both members of a tightly knit clique of policymakers who worked under former Treasury Secretary Robert Rubin.
Despite Sperling's and Summers' remarks, common shares of Fannie and Freddie continued their strong performance both Wednesday and Thursday. Fannie Mae shares closed up 5.99% at $2.92 Thursday, while Freddie Mac shares rose 4.37% to $2.63. Preferred shares in those entities, however, which some of the hedge funds favor, were lower Thursday.
Some large shareholders, including Fairholme and Perry, have filed lawsuits against the Treasury Department. Perry's lawsuit, filed by Gibson Dunn partner and former U.S. solicitor general Ted Olson, argues a 2012 amendment to the Treasury's preferred stock purchase agreements for the government sponsored entities "illegally changed the rules," according to a press release regarding the government's investments in Fannie Mae and Freddie Mac.
-- Written by Dan Freed in New York.