On Thursday, the United States threw cold water on Bruce Berkowitz’s daring proposal to recapitalize mortgage finance behemoths Fannie Mae and Freddie Mac, saying the only way to revamp the home loan market is through proper housing finance reform.

Berkowitz’s Fairholme Capital Management said it wants to buy the mortgage-backed securities insurance businesses of Fannie and Freddie by bringing in $52 billion in new capital, in a bid to resolve the uncertain future of the mortgage financiers by freeing them from U.S. government control. For its part, the government said the way forward would be to create a new housing finance system in which private capital would play a pivotal role.

Up until a few days ago, the idea that the government would hand Fannie and Freddie back to private investors seemed unlikely. Now, the idea appears all but dead. This appears to be bad news for a number of well-known money managers – the most prominent of which are Fairholme and Bill Ackman’s Pershing Square – which recently scooped up shares in both companies.

“When you talk to anybody in Washington, there is an almost universal view that Fannie and Freddie should be a part of the past, that it is a broken model, and also that private investors in Fannie and Freddie shouldn’t realize any returns from those investments,” said Colin Teiccholtz, the co-head of fixed income trading at $14 billion Pine River Capital Management, in New York this week at the Reuters Global Investment Outlook Summit. He described a bet on a stock that relied on taking Fannie and Freddie private as “extreme optimism.”

On Friday, Ackman told Bloomberg TV that he sees “greater opportunity” in Fannie and Freddie common shares than their preferreds. He also said that his firm does not support Berkowitz’s plan.