Billionaire hedge fund manager Bill Ackman has recently expressed optimism regarding the common shares of government-sponsored enterprises (GSEs) $Fannie Mae(FNMFO)$ and $Freddie Mac(FMCCS)$ , suggesting they present a significant investment opportunity with "large asymmetric upside" at their current prices.
Ackman has held shares in both companies for over a decade through his fund, Pershing Square, and believes that there is a credible path for these entities to exit conservatorship within the next two years, particularly if Donald Trump is re-elected as President
Key Points from Ackman's Analysis
Investment Potential: Ackman argues that Fannie Mae and Freddie Mac could generate over $300 billion in profits for the Federal government if they successfully emerge from conservatorship. This would be in addition to the $301 billion already distributed to the Treasury3.
Capital Requirements: He noted that if these GSEs were to return to public markets, they would need to raise approximately $30 billion to meet capital standards, with Freddie Mac requiring more than Fannie Mae3.
Future Valuation: Ackman estimates that by 2026, each company's stock could be valued at about $34 per share, with initial public offerings priced around $31, reflecting a roughly 10% discount to their intrinsic values3.
Context of Conservatorship
Fannie Mae and Freddie Mac have been under federal conservatorship since September 2008, following the financial crisis. The conservatorship was intended as a temporary measure to stabilize these institutions and the broader housing market. However, it has now lasted over 15 years, leading to debates about their future and the potential for privatization57.
Mark Calabria, former head of the Federal Housing Finance Agency (FHFA), has indicated that while there is hope for privatization under a Trump administration, the process could take several years due to necessary legislative and regulatory actions12. Some analysts predict it may take up to 15 years for Fannie Mae and Freddie Mac to build sufficient capital to exit conservatorship fully2.
Investment Considerations
While Ackman views common shares as a strong investment opportunity, he also mentioned that junior preferred shares are less attractive in terms of upside potential compared to common shares. This distinction highlights the varying risk-reward profiles associated with different types of investments in these GSEs3.
In summary, Ackman's bullish stance on Fannie Mae and Freddie Mac reflects a broader belief in their potential recovery and profitability if they can navigate their way out of conservatorship in the near future.
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