Hedge fund manager Bill Ackman, the CEO of $12 billion Pershing Square Capital Management, saw his investments in Fannie Mae (FNMA) and Freddie Mac (FMCC) jump by more than $200 million in value this week. And according to our calculations, he’s made close to $400 million (on paper) since initiating the positions back in 2013.
Shares of the mortgage giants have been on an absolute tear since Donald J. Trump won the presidential election. The government-sponsored enterprises (GSEs) are up about 172% since election night on the belief that they will be released from the government’s control.
And perhaps it’s no wonder that Ackman, the largest hedge fund shareholder in the GSEs, said he woke up the morning after the election “extremely bullish” on Trump.
Ackman expects the new administration fix the problems at Fannie Mae and Freddie Mac.
“I think Fannie and Freddie are going to get resolved in the first 12 months of this new administration. And, I’m looking forward to having my second meeting with Donald Trump and negotiating a deal,” Ackman said at the Dealbook Conference on November 10. His first time meeting Trump was 20 years ago.
A spokesperson for Ackman declined to comment for this article.
Fannie and Freddie remain one of the legacy issues from the financial crisis. As home prices cratered and mortgage delinquencies and defaults surged, they experienced tremendous losses and needed significant bailouts. They were subsequently taken over by the government.
By 2012, Fannie and Freddie returned to profitability. In August 2012, the Treasury amended the terms of its senior preferred stock agreement, requiring the GSEs to pay dividends equal to 100% of their earnings. This is the so-called “net-worth sweep.”
It’s been eight years and Fannie and Freddie still operate in a state of conservatorship. They make billions in profits all of which goes directly to the Treasury as a way to reduce the deficit. Shareholders, like Ackman, don’t benefit.
Ackman, who’s called this an “illegal act,” has been in the process of suing the government, claiming the net-worth sweep violates the Fifth Amendment by taking private property for public use without just compensation.
Change could be on the horizon though with a new administration.
On Wednesday, Fannie Mae and Freddie Mac’s stock saw a nearly 46% spike after Trump’s pick for Treasury Secretary, Steve Mnuchin, told Fox Business Network’s Maria Bartiromo in an interview that he’d like to see Fannie and Freddie privatized.
“We’ve got to get Fannie and Freddie out of government ownership. It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe; so let me just be clear we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again but we got to get them out of government control,” Mnuchin said.
Mnuchin, a former partner at Goldman Sachs who ran the bank’s mortgage-backed bond trading desk, said this is a top priority for the Trump administration.
“Well, I think with this [Obama] administration it hasn’t been a priority. If it had been a priority it would have. And in our administration it’s right up there in the list of the top 10 things that we’re going to get done and we’ll get it done reasonably fast.”
It’s certainly much-needed good news for Ackman, whose fund suffered a double-digit loss in 2015 and is in negative territory again this year. An activist investor, Ackman is known for making large, concentrated bets in a handful of companies and pushing for changes. In the last two years, the fund’s returns have largely been dragged down by Canadian pharmaceutical company Valeant’s (VRX) massive decline. Since the election, Pershing Square has pared back some of its losses, most likely benefiting from the surge in the GSEs.
What’s more, Fannie and Freddie appears to be a classic Ackman situation.
He first got involved in Fannie and Freddie in 2013. That November, Pershing Square disclosed that it held 115,569,796 shares of Fannie and 63,505,693 shares of Freddie. Pershing Square began building its positions in October 2013 with an average cost of $2.29 for Fannie Mae and $2.14 for Freddie Mac.
He’s previously given the GSEs a price target ranging from $23 to $47. The stocks were last hovering in the mid-$4 range at new 52-week highs. If things go according to plan, the payout could be tremendous.
In May of 2014, Ackman delivered a 110-slide presentation at the Sohn Conference outlining his big bets on Fannie Mae and Freddie Mac. In that presentation, he recommended reforming, not liquidating the GSEs.
Specifically, Ackman believes they should focus on being pure mortgage guarantors and wind down the risky fixed-income arbitrage (FIA) business. He also believes there should be significant increases to the GSEs’ capital requirements, increased regulatory oversight, and appropriate compensation and governance policies.
For now, he’ll have to wait to see if a deal is reached and how it plays out.
“I couldn’t image a better person to negotiate with than someone who knows something about real estate,” Ackman said of Trump at the Dealbook Conference.
Julia La Roche is a finance reporter at Yahoo Finance.