One of the big investors in the bailed-out government-sponsored mortgage enterprises Fannie Mae and Freddie Mac envisions the companies remaining in business, contrary to the intentions of the president and Congress, who are attempting to shutter them.
William Ackman, the head of the hedge fund Pershing Square Capital Management, said in an address and 110-slide presentation at the Ira Sohn Investment Conference Tuesday that the leading legislative effort to wind down Fannie and Freddie is unworkable, and instead proposed keeping the two in business.
Pershing owns about 10 percent of the firms’ common stock. After entering government conservatorship in 2008 during the financial crisis, Fannie and Freddie were delisted from stock exchanges, but remain traded over the counter at a price of roughly $4 a share for each.
They ultimately received $187.5 billion from the Treasury, before returning to positive cash flow. In 2012, however, the Treasury changed the terms of their conservatorship, requiring that all the companies' income above a minimum capital buffer, rather than the 10-percent dividend that had previously been mandated, be sent directly to the Treasury. Since then, the two government-sponsored enterprises have paid the Treasury more than they have received in bailout funds.
Ackman and other investors have issued a legal challenge to the Treasury's decision to amend the terms of the bailout. While a federal court is determining whether to hear the case, several advocacy groups have sprung up to press the shareholders' arguments, including groups represented by former Republican Ohio Secretary of State Ken Blackwell and former Democratic Nebraska Sen. Bob Kerrey.
The GSEs have returned to profitability as Congress, with little input from the White House, has only slowly addressed their fate.
Republicans on the House Financial Services Committee last year approved a bill to close Fannie and Freddie and replace them with a system with no government guarantee for mortgages, but the bill hasn’t advanced since then. Fannie and Freddie package mortgages into securities and insure them against loss, but do not issue home loans.
A separate bipartisan effort in the Senate Banking Committee has taken longer to develop. The Senate measure, backed by Banking Chairman Tim Johnson of South Dakota and his GOP counterpart Mike Crapo of Idaho, would replace the two GSEs with a government guarantee for mortgage-backed securities through the Federal Mortgage Insurance Corp., but would require private capital to take the first 10 percent of losses on any securities.
On Monday, Ackman panned the Senate bill, which has received tepid encouragement from President Obama, as unrealistic.
Ackman said the plan's private capital requirements are unrealistic. Given that Fannie and Freddie currently back more than $5 trillion in mortgage-backed securities, the 10-percent capital requirement would entail that private companies would have to raise roughly $500 billion. That would be more than the total proceeds in roughly 1,500 IPOs in the U.S. over the last decade, which were about $386 billion, Ackman noted.
It would be uneconomic for private companies to take over the GSEs’ business of insuring mortgage-backed securities, given the costs of imposed by the capital requirements, according to Ackman. Furthermore, he added, new private-sector replacements for Fannie and Freddie would be lower quality, riskier and harder to regulate.
Instead, Ackman proposed simply reforming Fannie and Freddie, which he said would preserve the 30-year fixed-rate mortgage and prevent future bailouts — while also respecting the rule of law, insofar as that meant GSE shareholders seeing a return on their investment.
That plan would simply be to keep Fannie and Freddie in place guaranteeing mortgage-backed securities, eliminate their investment portfolios, and tighten oversight.
Ackman’s slides declared that the two have an “80-year history, a proven track record, and global market acceptance for their" mortgage-backed securities.
Taxpayers would benefit through the value of the Treasury’s stake in the GSEs and from future taxes paid by the companies if they returned to profitability. And shareholders would, too — GSE shares could climb to $47 in Ackman’s scenario.
Ackman's is not the only hedge fund that has proposed a resolution to the uncertain status of Fannie and Freddie. Fairholme Capital Management has proposed that the Treasury sell investors the GSEs' securitization business.
Neither plan is likely to win favor among lawmakers. Most senators working on the issue have said that they will not allow a return to the Fannie-Freddie model, in which the companies reaped private profits but enjoyed a public backstop.
Nevertheless, investors’ rising interest in preventing the GSEs from being brought to an end could prompt more timely action from lawmakers.