Ackman's Pershing Square takes big stakes in Freddie, Fannie

Reuters

By Jennifer Ablan

Nov 15 (Reuters) - Activist investor Bill Ackman's PershingSquare hedge fund has invested half a billion dollars to acquirestakes of nearly 10 percent each in Freddie Mac andFannie Mae, the latest big investor this week to buyinto the mortgage finance companies.

Shares of both companies surged on Friday, when Pershingsaid in regulatory filings it has a 9.77 percent stake in commonshares of mortgage insurer Freddie Mac and a 9.98 percent stakein Fannie Mae.

Bruce Berkowitz of Fairholme Capital Management announcedthis week that he and other investors were willing to buy andrecapitalize government-controlled Freddie Mac and its sistercompany, Fannie Mae.

In light of the proposed Fairholme transaction, Pershingsaid in the filings that "they may engage in discussions withmanagement, the board, other stockholders of the issuer,representatives of the federal government, and other relevantparties" involved with Freddie Mac and Fannie Mae.

Pershing, which has more than $11.45 billion in assets undermanagement, said the shares of Freddie Mac and Fannie Mae are"undervalued" and represent an "attractive investment."

Shares of Freddie Mac closed 6.21 percent higher to $3.08 ashare, while Fannie Mae shares rose 7.84 percent to $3.30 onFriday. Both companies trade on the OTC equity markets.

The Federal Housing Finance Agency, which oversees Fannieand Freddie, declined to comment Friday on the Pershing Squareinvestments. In a statement Friday, a Treasury official said,"The administration remains committed to reforming thehousing-finance sector by responsibly winding down (Fannie andFreddie) and ensuring that any new system preserves broad accessto credit for responsible borrowers, strengthens the economy andpromotes financial stability."

Any effort to recapitalize Fannie Mae and Freddie Mac, whichwere seized by the U.S. government during the 2008 housingcrisis, would require congressional approval. The White Houseand Congress have shown no interest so far in plans proposed byprivate investors.

In the summer of 2008, Ackman proposed a restructuring planfor Freddie Mac and Fannie Mae and said the mortgage companiesshould be moved to New York from Washington. At the same time,Ackman was betting against the shares of Freddie Mac and FannieMae. If the government had adopted Ackman's plan, it would havewiped out the common shares and preferred and would have givenhis short position a big return.

Fannie Mae and Freddie Mac are "something that I neverthought should exist," said Margaret Patel, senior portfoliomanager at Wells Capital Management. "It's awfully hard, havingseen them both go under, to change that opinion," she added.

Patel said she would rather invest in the securities ofbanks with more proven track records than Fannie and Freddie.

Berkowitz's Fairholme Funds scooped up preferred shares ofFannie Mae and Freddie Mac with a face value of $3.5 billion ata massive discount, as well as some common shares.

Berkowitz's plan consists of contributing those shares aspart of his proposed buyout of the insurance businesses ofFannie Mae and Freddie Mac. In the proposal obtained by Reuters,the businesses would be acquired in exchange for preferredshares at their full par value, or $34.6 billion. Berkowitz andinvestors including hedge fund-firms Paulson & Co. and PerryCapital LLC bought the preferred shares on bets of arecapitalization.

Fairholme's proposal would raise at least $17.3 billion inadditional funds from preferred holders and through a rightsoffering.

A portfolio manager that specializes in mortgage credit, andwho spoke on the condition of anonymity, questioned Ackman'sdecision to make such a large bet on Fannie and Freddie, callingthe common shares and preferred shares "worthless." He said aplan to privatize the two companies "will never fly inCongress." He added that the government's credit guarantee hasbeen the reason "for the profits as it was for the losses."

Fannie Mae and Freddie Mac have been operating undergovernment conservatorship since the fall of 2008 and the 2012changes of the bailout terms mean the two pay nearly all oftheir profits to the federal government in the form ofdividends.

The two mortgage giants are close to paying back much of the$187 billion they received in a taxpayer-funded bailout andstill play a dominant role in the U.S. mortgage market bybacking the vast majority of newly issued home loans.

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