Fannie, Freddie Bull Ackman Steers Clear of D.C. Fight

NEW YORK (TheStreet) -- Bill Ackman demonstrated with his short bet against Herbalife (HLF_) that he isn't afraid to enlist politicians to his cause, but the Pershing Square Capital Management boss had been keeping pretty quiet about his stake in government sponsored enterprises Fannie Mae (FNMA_)and Freddie Mac (FMCC_).

Ackman broke his relative silence May 5, with a 110 slide presentation at the Ira Sohn investor conference, but don't expect the hedge fund manager to begin the kind of vocal campaign he has pursued with Herbalife, says a person familiar with Ackman's thinking. 

Ackman took a bit of a bruising in the press in March, when The New York Times depicted the hedge fund manager as the puppetmaster behind government investigations of Herbalife. Since Ackman unveiled his short position on Dec. 20, 2012, he has faced considerable pushback from the company, as well as from investors who have taken the other side of his bet, most notably Carl Icahn.

When it comes to Fannie and Freddie, however, the obvious role for Ackman to play would be to make policy proposals, as Fairholme Funds has done publicly and The Blackstone Group (BX_) said it has done privately.

Ackman plans to let discussions over the future of Fannie and Freddie to play out on their own, however, as his camp believes Washington has absolutely zero interest in hearing policy recommendations from hedge funds.

And Ackman isn't good at hiding. Though he has had far less to say about Fannie and Freddie than Fairholme Funds chief Bruce Berkowitz, the May 5 slide show was enough to win him top billing in the "plot to use Fannie Mae and Freddie Mac to steal billions from the taxpayer," as the website Vox put it on Monday.
The slide show may have been modest by comparison with Berkowitz's proposal that the government sell him Fannie and Freddie's mortgage backed securities insurance businesses, but that is only in comparison. Its 110 pages and $23-47 per share target price (compared to Tuesday afternoon's trading levels of $4.31 per share) are characteristically audacious. For comparison, Rafferty Capital Markets' Dick Bove has a $9 price target on Fannie and KBW analyst Bose George sees shares of both GSEs as worth $2.

Ackman assumes Fannie and Freddie will eventually trade at 14 to 16 times earnings, an assumption Rafferty's Bove calls "aggressive." Bove assumes a multiple of 10 to 12 times earnings based on where the largest U.S. banks currently trade, though he says "you could argue me down to eight to 10 and I wouldn't have a good defense."

Ackman also implies the fees charged by Fannie and Freddie to guarantee mortgages could continue to rise as they did under Fannie and Freddie's previous regulator, Federal Housing Finance Authority Director Ed DeMarco.

But the current director, Mel Watt, suspended those increases shortly after being sworn in at the start of the year while the FHFA studies the issue. Rising fees means fewer mortgages, and many policymakers would like to see mortgages become more affordable, not less.

Still, the biggest assumption in Ackman's model is that the government, or the courts, fully restore the rights of shareholders. While plaintiffs such as Perry Capital and Fairholme Funds have the best legal team money can buy, their victory is by no means assured.

That is why Maglan Capital, a hedge fund which, like Ackman, is invested in Fannie and Freddie common shares, is unlikely to wait to see their rights fully restored before selling shares, according to Maglan President David Tawil.

"When we play into these legal and regulatory driven investments, we know that the downside really could be zero," says Tawil, who is a former bankruptcy and restructuring attorney.

Ackman has had enough success with certain investments that he can throw out big numbers at investor conferences without being laughed off the stage. There is General Growth Properties (GGP_), for example, shares of increased about 10 fold between the time recommended them at the Ira Sohn conference in June 2009 and the first quarter of the year, when Ackman existed the position.

On the other hand, Ackman argued in May 2012 that J.C. Penney  (JCP_) could hit between $191-$315 per share. Instead, the retailer's shares have fallen by more than 50% and closed Monday at about $9.36.