Billionaire Investor Bill Ackman's Election Bet Could Hit Big After Trump's Victory

Billionaire investor Bill Ackman's $277 million bet on the U.S. presidential election could hit big if former President Donald Trump wins. Ackman's fund, Pershing Square Holdings, holds a 10% stake in government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, which have been in conservatorship since the 2008 financial crisis. A Trump victory could accelerate the GSEs' exit from conservatorship, as his administration had previously started this process. Trump's choice of Treasury secretary could significantly impact the recapitalization process. If he picks billionaire hedge fund manager John Paulson, who reportedly has a big position in the junior preferred shares of Fannie and Freddie, it could lead to a more favorable outcome for GSE shareholders. However, even without Paulson as Treasury secretary, his influence as a longtime Trump backer could help shape the terms for the Treasury's senior preferred stock and warrants, benefiting Ackman's position.

A Trump victory would be a major catalyst for the GSEs exiting conservatorship. Trump's administration started the process of exiting the GSEs from conservatorship during Trump's first term, and several reports have suggested Trump would continue these efforts if elected. Trump's administration could speed up the timeline and pick a new Treasury secretary that will make terms for the Treasury's senior preferred stock and warrants more amenable in a recapitalization. Trump has floated the idea of choosing the billionaire hedge fund manager John Paulson as Treasury secretary if he wins the election; that might be hard to pull off because he reportedly has a big position in the junior preferred shares of Fannie and Freddie, a significant potential conflict of interest. Even if not picked, Paulson is likely to have influence, given that the billionaire hedge fund manager has been a longtime backer of Trump.



A Harris victory doesn't necessarily end Fannie and Freddie's prospects of exiting conservatorship, but it would almost certainly slow them. I would expect a Harris administration to kick the can down the road on this issue. Either way, Fannie and Freddie offer an interesting risk-reward proposition for investors with a long runway. I own a small position in the Fannie Mae junior preferred series S stock. Trading at around $5.40, these shares have a fivefold upside if redeemed at $25 par value. The common stocks of Fannie and Freddie could potentially have many multiples of upside if recapitalization is successful.

In conclusion, Bill Ackman's election bet on Fannie Mae and Freddie Mac could see significant gains if Trump wins the election. However, the potential challenges and risks associated with a Trump-led GSEs recapitalization process, such as the substantial capital deficit and the potential conflict of interest with John Paulson, should be carefully considered. A transparent negotiation process, an independent review of the GSEs' financial health, and a clear plan for addressing the capital deficit and the role of the Treasury's senior preferred stock and warrants would help mitigate these risks.