One such witness will be Mario Ugoletti, who has the unique distinction of having served as the U.S. Treasury's director of the Office of Financial Institutions Policy, participating in the drawing up of the government's agreement to bail out Fannie and Freddie, while later serving as a special adviser to former acting Federal Housing Finance Agency Director Edward Demarco and helping draw up the subsequent agreement through which nearly all of the government sponsored enterprises' profits are being swept to the government. Ugoletti now serves as a special adviser to FHFA Director Mel Watt, who assumed his post in January.

It is most unlikely that the Senate will be able to pass any bill on GSE reform this year. Meanwhile, the battle over Fannie and Freddie is likely to drag on in the courts for years. 

Bove  in a client note on Wednesday wrote that "Congress cannot proceed without a clear statement from the courts as to what is legal and what is not in the actions taken by the Treasury to date."  But he is still alarmed by the attitude of so many senators, writing in a separate note: "Since Fannie and Freddie are the only entities in the country willing to purchase 20 and 30 year fixed rate mortgages, their elimination would have meaningful impacts on the mortgage markets. The monthly cost of owning a home would rise and the size of the market itself would shrink."

Bove sees a long-term strategic concern for Wells Fargo (WFC), the nation's leading mortgage lender.  If Fannie and Freddie were to be completed wound-down, and if 20-year and 30-year fixed-rate mortgage loans were no longer being offered by mortgage lenders, would not only hurt the bank's lending and mortgage servicing business, it would through its investment strategy into disarray, because "residential mortgage backed securities are estimated to be just under 50% of the bank's securities portfolio."

Tuesday was a painful day for GSE shareholders; however, this chart showing the common stocks' amazing run over the past year puts that drop into perspective:

FNMA Chart data by YCharts

Banks' Excess Capital Is 'Absolutely a Reality'

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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