Bill Ackman’s Bold Bet on Fannie Mae and Freddie Mac’s Future
Billionaire investor and founder of Pershing Square Holdings, Bill Ackman, is garnering attention on X (formerly Twitter) with his steadfast optimism about Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC). Ackman, often likened to Warren Buffett and dubbed the “Baby Buffett,” believes these government-sponsored enterprises (GSEs) are on the verge of a significant opportunity that could result in significant gains for investors.
His renewed confidence is largely driven by the potential policies of a future Trump administration, which he argues could create a regulatory framework that ends the GSEs’ long-standing conservatorship. Ackman is forecasting remarkable returns, but his outlook also highlights the inherent risks involved.
A Brief History of Conservatorship
In 2008, during the global financial crisis, the U.S. Treasury placed Fannie Mae and Freddie Mac under conservatorship due to their heavy losses tied to subprime mortgages. This government intervention provided a crucial $187 billion bailout, but it came with strict conditions: the GSEs had to remit all profits to the Treasury as part of a “net sweep agreement.” Over the years, these firms have repaid nearly $300 billion, exceeding the initial financial aid.
Fannie Mae and Freddie Mac are vital to the U.S. housing market. They buy mortgages from lenders and bundle them into securities for investors. Fannie Mae primarily collaborates with larger banks, while Freddie Mac mainly works with smaller institutions. Although both organizations have shown financial improvement, they remain under federal oversight, with the Treasury holding warrants equivalent to 80% of their common stock and senior preferred shares totaling $193 billion.
Moving Toward Independence
During the first Trump administration, notable steps were made to reform the GSEs. Treasury Secretary Steven Mnuchin terminated the net sweep agreement, allowing the GSEs to retain earnings and build their capital reserves. The Federal Housing Finance Agency (FHFA) also introduced new capital requirements, paving the way for a possible exit from conservatorship.
Ackman believes that a second Trump administration could continue these reforms. He predicts that a successful exit could generate an additional $300 billion in government profits and eliminate $8 trillion in liabilities from the federal balance sheet. Moreover, Ackman estimates that potential IPOs for the GSEs in late 2026 could set shares at around $31 each, with valuations climbing to $34 by 2028—a stunning increase of 679% for Fannie Mae and 705% for Freddie Mac as of Monday’s market close.
Arguments For and Against the GSEs
Ackman’s optimism relies on several key assumptions. He expects the Treasury to recognize prior profit distributions as credit toward senior preferred stock, smoothing the privatization journey. Additionally, he anticipates that the FHFA will establish a capital requirement of 2.5%, which he argues is feasible due to the GSEs’ capacity to generate earnings and accumulate capital swiftly.
However, the Congressional Budget Office (CBO) has suggested higher capital thresholds, and political obstacles could hinder the resolution process. Ackman admits that raising the necessary $30 billion through equity offerings may dilute current shareholders’ stakes, potentially reducing overall returns.
While Ackman presents a compelling case, these projections are fraught with uncertainty. The future of the GSEs is influenced by myriad factors, including regulatory frameworks, political movements, and market variables. Increased capital requirements or failure to resolve the Treasury’s senior preferred shares might thwart efforts for exiting conservatorship.
Furthermore, the timeline for reforms remains unpredictable, and any delays could jeopardize the investment thesis. Ackman advises investors to only risk what they can afford to lose, a sentiment he expressed in his X post.
The Bottom Line
Ackman’s recent advocacy for Fannie Mae and Freddie Mac underscores his confidence in their long-term potential, especially under a deregulatory administration. With the chance for considerable triple-digit returns, investing in these GSEs presents an appealing opportunity, as Ackman describes it, but only for those who can navigate considerable uncertainties.
For investors ready to embrace the risks, these stocks stand as a high-stakes wager on the future of regulatory reforms, political commitment, and the resilience of the U.S. housing market. As discussions about their future unfold, the coming years could prove to be a pivotal moment for these GSEs and their investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
