One caveat: “All of these can be accomplished before the end of the year, despite the government shutdown having delayed the administration and, as importantly, no dilution to the government’s stake in both enterprises in order to achieve these values,” he added.
Ackman has a particular interest in the topic, as his firm owns 210 million shares across the two GSEs — 10% of them preferred shares. Pershing Square remains the largest common shareholder of both companies.
Recently, other investors have voluntarily reported their stakes, including Capital Group, Morgan Stanley, Aegon, Brighthouse Financial and Banco Santander, while many retail investors have also purchased shares.
Skepticism of Trump’s plans
The Trump administration has reportedly aimed to conduct a stock offering for the GSEs later this year. Government officials, including FHFA Director Bill Pulte, indicated the possibility of selling 5% of the government’s shares. But analysts have questioned whether an offering can realistically be completed this year, which Ackman agrees with.
“We do not believe that a sale of a piece of Fannie and Freddie to the public is either feasible or really desirable at this moment in time,” Ackman said. “We think that there are a number of things that need to happen in order for those [companies] to have a successful public offering, let alone an offering which will maximize value for the two companies.”
According to Ackman, the administration would need to revisit the rule requiring the GSEs to hold 4.5% in capital relative to their guarantees outstanding — a level he characterized as “well beyond a fortress balance sheet” given current guarantee fees. Pershing Square advocates for a capital level of roughly 2.5%.
Other steps would include modifying the senior preferred stock purchase agreements (PSPAs) so they function as an ongoing, paid-for government backstop; clarifying FHFA’s powers as regulator; and recruiting and incentivizing leadership and board members. All of these would take time, making a 2025 offering unlikely.
Ackman’s alternative
Ackman’s plan begins with the government forgiving $193 billion drawn by the GSEs, arguing that the amount is smaller than the $301 billion in dividends the companies have paid since entering conservatorship in 2008.
That would address “the biggest overhang today over the trading price of Fannie and Freddie,” which Ackman said is the fear that the administration could unilaterally convert its senior preferred stock into common stock, massively diluting shareholders. A Deutsche Bank report assigned a 20% probability to such a move.
“In our view, this is not a likely outcome. In fact, President Trump has made some important statements to that effect. It also would be contrary to how conservatorships are supposed to operate,” Ackman said. “The senior preferred stock has been repaid with the contractual 10% interest plus an extra $25 billion that came out of the company.”
Ackman added that if the government exercises its warrants, it will own 7.2 million common shares in the combined companies “at effectively no economic cost to the Treasury.”
“The conservatorship will be maintained, with really no change to the operations, no risk of disruption to the mortgage markets, and no reduction in the government’s control. In fact, the government will go from being a 79.9% warrant holder to being a 79.9% voting common stockholder,” Ackman said.
“The administration still has three years. I expect they can do it much more quickly than that — take the next necessary steps to move the two entities out of conservatorship.”
Ackman noted that the companies are already public and trade in the OTC (aka pink sheet) market. But he said “recent conversations with the exchange” indicate it would take only a few weeks for them to complete the process of being relisted.
Under this plan, according to Ackman, Fannie Mae’s share price could reach $42.47 (currently at $9.97) and Freddie Mac’s could rise to $44.13 (currently at $8.79).
In a report, Wells Fargo analysts said Ackman’s plan “prioritizes political wins and market stability over structural changes, deferring major policy decisions to a future date.”
They said Ackman’s January plan called for broad structural changes, exiting conservatorship via a new capital framework, limits on GSE charters and another initial public offering. But the new proposal “favors Agency MBS investors by preserving the implicit guarantee through continued conservatorship.”
“Any full release would hinge on midterm outcomes as a Democratic-controlled House of Representatives would likely block it,” the analysts said. “Ultimately, this plan may defer structural questions to a future administration while allowing GSEs to build capital and move incrementally toward eventual release under the 2021 framework.”