Snatching Defeat from Victory at Frannie

The Wall Street Journal

Don't get too excited by the fact William Ackman has joined the legion of fund managers suing the government over terms of its support for Fannie Mae and Freddie Mac.

Even if the well-known activist manager of Pershing Square Capital Management scores a courtroom victory, the mortgage giants aren't likely to generate the returns shareholders see as theirs. That is because such expectations turn on an improbable notion: that a legal decision would pave the way for Fannie and Freddie to pay down preferred stock held by the government.

At the heart of Mr. Ackman's lawsuit is the claim the government overstepped its authority when it amended the bailout of the companies in 2012. This required Fannie and Freddie to turn over nearly all their earnings to the Treasury Department rather than pay a quarterly dividend equal to 10% of the government's holding of senior preferred stock as well as a commitment fee on the government's backstop. The latter, though, had been repeatedly waived.

Assume Mr. Ackman or other managers prevail. Even then, under the bailout agreements, Fannie and Freddie can't force redemption of the government's preferred shares as long as it is committed to backstopping the companies.

This means the companies' obligation to pay the 10% dividend would remain outstanding. And both would need to pay the commitment fee. At a level of, say, between half a percentage point and one, either company would struggle to make both those payments.

That means they would have an even tougher time building a capital buffer. And until they do so—a process that could take years—little to none of the companies' earnings power could accrue to the benefit of private holders of their preferred or common stock. Legal arguments won't change that.

Write to John Carney at john.carney@wsj.com



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