Bill Ackman's Trump Connection Boosts Fannie Mae, Freddie Mac Stocks

Billionaire hedge fund manager Bill Ackman has sent shockwaves through the financial markets with his recent comments on Twitter, suggesting that U.S. President-elect Donald Trump will steer Fannie Mae (FNMA) and Freddie Mac (FMCC) out of their long-standing conservatorship. This insight has triggered a significant market response, with shares of Fannie Mae surging by 36% and those of Freddie Mac by 34%.



Ackman, the founder of Pershing Square Capital Management, has been a vocal advocate for the privatization of these government-sponsored enterprises (GSEs), which have been under federal conservatorship since the 2008 financial crisis. In his annual letter, Ackman expressed his belief that it is simply a matter of when, not if, that Fannie and Freddie will be released from conservatorship. He also predicted that these GSEs could regain their independence within the next two years, with a potential public listing by 2026.

The potential privatization of Fannie Mae and Freddie Mac could have significant implications for their capital structure and governance. As of 2024, both entities have built up a substantial amount of capital through retained earnings, with a combined capital of $97 billion, approaching a "fortress-level of capital" (Pershing Square 2022 annual letter). This significant capital base could be used to strengthen their balance sheets and provide a solid foundation for their operations as independent, privately-held companies.

However, the government would need to address the existing senior preferred stock held by the U.S. Treasury. This stock, which was issued during the conservatorship, would need to be managed or converted as part of the privatization process. The capital structure of these firms post-conservatorship would depend on how this stock is handled. For instance, if the preferred stock is converted into common shares, it could dilute the ownership of existing shareholders, including those who have been waiting for a potential payout since the 2008 financial crisis.

In terms of governance, privatization would likely lead to a shift in decision-making power. Currently, the Federal Housing Finance Agency (FHFA) oversees the operations of Fannie Mae and Freddie Mac, ensuring they align with the government's housing policy objectives. As private companies, they would be governed by their own boards of directors, which would have more autonomy in making strategic decisions. This could potentially lead to a more market-driven approach to mortgage financing, with less stringent governmental oversight.

The potential privatization of Fannie Mae and Freddie Mac could also have implications for the broader economy, including mortgage rates and housing market stability. Privatization could lead to changes in how mortgage financing is handled, potentially affecting mortgage rates, housing affordability, and the stability of the housing market. Ackman's prediction suggests a timeline where these GSEs could regain their independence within the next two years, with a potential public listing by 2026. This move would imply a significant policy shift towards privatization, allowing these companies to once again operate with private shareholders, possibly under less stringent governmental oversight.

However, the transition from conservatorship involves complex considerations. Critics argue that privatizing these entities might lead to a return of the risky practices that contributed to the 2008 crisis, while proponents see it as a step toward market efficiency and innovation in mortgage financing. The government would also need to address how to manage the existing senior preferred stock held by the U.S. Treasury, which could influence the capital structure and governance of these firms post-conservatorship.

Moreover, any decision to privatize would need to navigate through political and regulatory landscapes, considering the significant role these institutions play in national housing policy. The Trump administration's approach to this issue could set a precedent for how future governments manage government-sponsored enterprises in distress or transition.

In conclusion, Bill Ackman's comments on Twitter have reignited discussions on the future of housing finance in the U.S., balancing the scales between government oversight and private sector dynamism. As this scenario unfolds, stakeholders from investors to homeowners will closely watch how these entities evolve from their current state into potentially independent companies, influencing not just their own fortunes but that of the American housing market at large.