By Joe Light

Hedge fund manager Bill Ackman on Thursday laid out his thesis for why President-elect Donald Trump should free Fannie Mae and Freddie Mac from government control. But political challenges stand in the way of Trump pulling off what Ackman called "the biggest deal he's ever done."

In a presentation on X, Ackman, who runs Pershing Square Capital Management, outlined why he believes Fannie and Freddie could be worth more than $31 per share in an initial public offering a couple of years from now. Ackman's firm is a huge holder of Fannie Mae and Freddie Mac stock, with a value that could be in excess of $900 million, based on public filings and outside estimates.

While the shares have nearly quadrupled since the election, on the hope that Trump will release the companies from government control, both stocks were falling on Thursday. Shares of Fannie were down 12% to $5.45 in late morning, while shares of Freddie fell 12.5% to $4.95.

Both stocks are relatively illiquid and highly volatile. They have a history of moving significantly on little news.

"We have four years with a pro business administration led by the consummate dealmaker," Ackman said in his presentation. "This would be the biggest deal he's ever done."

The government seized control of Fannie and Freddie in 2008, eventually injecting them with $190 billion in bailout money in exchange for senior preferred shares in the companies and warrants to acquire nearly 80% of their common stock. The companies' existing shares kept trading, and the companies returned to profitability.

But the government has yet to find a way to extricate itself from control of the mortgage companies. Investors could get at least some indication of how it might happen later today.

The Senate Finance Committee this morning is holding a confirmation hearing for Scott Bessent, Trump's pick for Treasury secretary. Senators will likely ask him what should be done with Fannie and Freddie. Investors will be listening closely for signals about whether, and how, Bessent plans to move forward with release.

Even if Bessent sounds optimistic, however, that would be only a tiny part of the battle. Before Trump's first term, former Treasury Secretary Steven Mnuchin also vowed to get Fannie and Freddie out of government control quickly, but the effort fell by the wayside amid other priorities.

Bessent, too, has a long to-do list, including extending Trump's 2017 tax cuts and dealing with the ballooning government debt. It is unclear where Fannie and Freddie will fall in his list of priorities.

Ackman's presentation highlighted some of the political and practical difficulties that are sure to follow. Key to the hedge fund manager's pitch is that Fannie and Freddie's capital requirements be set at about 2.5% of adjusted total assets, which Ackman said would have been more than enough to cover Fannie's and Freddie's losses during the 2008 financial crisis. That is well below the level of around 4% set for Fannie and Freddie by a Trump appointee during his first administration.

On the other hand, keeping Fannie's and Freddie's capital requirements where they are would probably force the companies to significantly raise the fees they charge -- and by extension mortgage rates -- if they became fully private companies. That is because their current fees wouldn't get them anywhere close to the returns on equity expected by investors in similar financial institutions, all else being equal.

Ackman also argued that the government should choose to voluntarily wipe out senior preferred shares it owns that entitle it to about $330 billion in the event Fannie and Freddie were liquidated. Mark Calabria, who led Fannie's and Freddie's regulator during the last administration, wrote in his book Shelter from the Storm that Trump's Treasury Department viewed canceling that senior preferred stake as not only a political nonstarter, but also illegal.

If the government decided to convert its senior preferred shares into common shares, private shareholders like Ackman would get severely diluted, which Ackman said in his presentation would lead to fresh rounds of litigation that would last well beyond the end of the Trump administration. On top of the senior preferred shares, the government owns warrants to acquire nearly 80% of Fannie and Freddie's common stock.

Those hurdles are only the tip of the iceberg, but go a long way to explaining why government control of Fannie and Freddie has lasted well beyond 16 years, despite several efforts to end it.

Trump's regulators this time will no doubt try again. But it is a steep mountain to climb.

Write to Joe Light at joe.light@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 16, 2025 11:50 ET (16:50 GMT)

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