Case for Fannie and Freddie
Here Are All 111 Slides Ackman’s Using to Make His Case for Fannie, Freddie
- Bill Ackman at the Sohn Investment Conference Monday.
- Bloomberg News
Hedge-fund manager Bill Ackmanbrought new attention to his bullish bet on housing firms Fannie MaeFNMA +3.17%and Freddie MacFMCC -0.95% at a presentation at the closely watched Sohn Investment Conference in New York Monday.
The two mortgage giants, who both trade over the counter at around $4, are worth $23 on a conservative basis, he said, and could be worth as much as $47. The comments by Mr. Ackman, of Pershing Square Capital Management, marked the first time he specifically laid out his optimistic thesis for Fannie and Freddie.
Here are the slides he brought with him to make his case. All 111 of them. Click the first one to view the whole set.
Fannie Mae and Freddie Mac are looking to be wound down by politicians. “One thing I do believe for sure, if you wind down Fannie and Freddie…then mortgage rates will go up. That will certainly impact affordability in a negative way,”
Ackman has joined a growing who’s-who of distressed-equity investors, including Bruce Berkowitz’s Fairholme Capital Management, Richard Perry’s Perry Capital, and John Paulson’s Paulson & Co., in betting on the revival of Fannie and Freddie.
When the U.S. took over Fannie and Freddie in 2008 through a legal process known as conservatorship, it agreed to inject nearly unlimited sums of aid—ultimately around $187.5 billion—and received in exchange a new class of “senior preferred” shares that initially paid a 10% dividend, along with the warrants for the common stock.
Because the common and preferred stock wasn’t ever wiped out, investors continued to trade them. Some concluded—accurately, it turned out—that Fannie and Freddie had reserved more money for loan losses than they would need, and that they would one day return to profitability.
Several investors, including Messrs. Perry and Berkowitz, have sued the U.S. Treasuryto challenge the government’s 2012 decision to alter its bailout terms of the companies. Starting last year, the companies must send all of their profits to the Treasury as dividends, replacing the initial 10% dividend payments to the government and effectively preventing any recapitalization of the companies.
Hedge funds are betting that courts will rule in their favor, constraining the government’s ability to siphon away the mortgage companies’ profits. If the recent bailout changes are struck down by the courts, shareholders of the preferred stock, and possibly the common stock, stand to recoup money even if Fannie and Freddie are ultimately liquidated.
But the investment is also a bet that Congress and the White House ultimately won’t follow through on pledges to liquidate Fannie and Freddie. Lawmakers, the thinking goes, will conclude that getting rid of the companies could do unnecessary damage to the mortgage market and that any desired market overhaul could be accomplished by restructuring rather than replacing the companies.
Fannie and Freddie have “enabled a very strong housing market apart from the bubble and the bubble bursting,” Ackman says. They are “essential to preserving the housing market.”
- Their “core business is a phenomenal business,” Ackman says, saying they’re diversified geographically and have low liquidity risk. They’re also senior guarantors, so “it’s a very low-risk business.”
- 3:31 am
- New Business
- by Juliet Chung
The new business Fannie and Freddie are writing is stronger and the mortgage-finance giants have few competitors in the market, Ackman says.- 3:35 am
- Effects of New Insurers
- by Nick Timiraos
The counter to Ackman’s point about the lack of investment for any successors to Fannie and Freddie: In an interview with Bloomberg TV last month, Warren Buffett said that he didn’t see any role for Berkshire Hathaway Inc. in Fannie or Freddie as presently constructed, but he did say he might be prepared to invest in any successors. “There could be some [role for Berkshire] in some housing arrangement that gets worked out in the future,” he said.- 3:36 am
- 'Stolen'
- by Juliet Chung
New, private-label Fannies and Freddies that have been proposed by lawmakers would have to raise up to $500 billion to capitalize them, Ackman says, but the history of the government having “stolen” the dividends makes that unlikely.“We don’t think there’s an investor in the world of any consequence that will invest in the new version of Fannie and Freddie,” he says.- 3:38 am
- Gloomy Case
- by David Benoit
Ackman is playing it tough on whether anyone would back a new creation of Fannie and Freddie with the argument that the current versions were “stolen” from investors. He also says private equity and banks can’t step in.It’s a gloomy, gloomy case that he’s making.- 3:42 am
- Mortgage Structures
- by David Benoit
Ackman wants to stick to the core structure of the current mortgage market and says the 30-year mortgage has to stay. What he wants out of the market: the subprime and alt-a loans that imploded in the crisis. Oh and a lot of capital. A lot.- 3:52 am
- 'Time to Get Off Our Fanny'
- by Juliet Chung
Ackman says there’s no comparison between other recent proposals to reform the mortgage market and what he’s come up with.A big reason his proposal is palatable is that taxpayers would see the billions in windfall from Fannie and Freddie, he says, with profits going to infrastructure and other needs. “It’s time to get off our fanny,” Ackman concludes.- 3:53 am
- Big Gains
- by David Benoit
Ackman says his conservative case for Fannie and Freddie calls for them to be $23 stocks, and it things go even better they can be $47 stocks. They are around $4 right now.- 4:02 am
- Break
- by David Benoit
We are in another break, but coming up shortly: Paul Tudor Jones II.And if you want the full experience, crank up your Who. The conference is currently rocking “Baba O’Riley”- 4:06 am
- Now He's On CNBC
- by Erik Holm
And Ackman walks from the podium pretty much straight to a CNBC set nearby to continue making his case.He promises to go to Washington to make his pitch for keeping Fannie and Freddie. Alternatives to the two mortgage giants will take too long to build, he says. “It’s going to take them a century” to get up to their size, he says. “It’s really not a practical solution”- 4:17 am
- 'Wow'
- by Sarah Krouse
And we’re back. Jones, who rarely speaks publicly, is taking the stage at the Sohn Conference for the first time. “Wow,” he opens with.Jones presents his topic of choice: “macro manic-depressive trading in a volatility-compressed world.”- 4:24 am
- Price Movement
- by Sarah Krouse
Jones says life has been tough lately for global macro managers.“I actually find myself daydreaming about winning Dancing With The Stars on some days in the office,” Jones says. “It’s gotten to be very difficult when you depend on price movement to make a living, and there is none.”He says no interest rate volatility also means no volatility in foreign exchange and called for “central bank Viagra.”- 4:30 am
- Greatest Days I Remember
- by Sarah Krouse
Jones talks about coming rate hikes in the U.K., U.S., Europe and Japan. “We’re all patiently waiting on these economies to reach escape velocity and central banks to react,” he says.He says Friday was “one of the greatest days I remember in macro trading” because of the market’s reaction to the strong U.S. jobs report.It was “the strongest economic data we have seen in five or six years,” he says. “You had everything you wanted for fixed-income to get killed…And yet at the end of the day, bonds closed up.”“It just goes to show that what’s obvious in macro is obviously wrong,” he says.
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