Recently, Miami-based equity fund manager Fairholme Capital
Management LLC's plan to recapitalize
) was rejected by the White House. The National Economic Council
Director Gene Sperling stated that recapitalization would create
two new 'too big to fail' financial institutions.
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Last week, Fairholme had announced its intention to acquire the
insurance businesses of these two Government Sponsored
Enterprises (GSEs) - Freddie Mac and Fannie Mae - through
exchange of equities worth $52 billion. Fairholme is the largest
stakeholder of preferred shares in these two GSEs.
This recapitalization plan would have resolved the uncertainty
related to the future of Freddie Mac and Fannie Mae and freed
them from government control. However, any proposal to
recapitalize these GSEs requires government approval.
Freddie Mac and Fannie Mae, that own or guarantee nearly 67% of
all the U.S. residential loans, were on the brink of collapse in
2008. The U.S. government bailed out the companies by taking
approximately 80% stakes in both. Though an aggregate of $188
billion of capital was infused in these GSEs, the major part of
it has been returned to the government in the form of dividends.
Additionally, if Freddie Mac and Fannie Mae were recapitalized,
they would have likely dominated the mortgage market and
possessed economies of scale. All these would restrict the entry
of new firms in the market.
The government is against such a duopoly and wants to build a
stronger mortgage market with scope for healthy competition among
firms. Further, the government intends to restructure the entire
housing mortgage market through housing finance reforms.
At present, both Freddie Mac and Fannie Mae have a Zacks Rank #3
(Hold). Some better-ranked finance stocks include
). Both these carry a Zacks Rank #2 (Buy).