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Hedge Funds Left Dizzy by Mnuchin’s Fannie-Freddie Musings

Elizabeth Dexheimer

(Bloomberg) -- Hedge funds and other investors in Fannie Mae and Freddie Mac got more mixed messages from the Trump administration Tuesday, adding to the whipsaw trading sessions that have dazed shareholders in recent days.

Treasury Secretary Steven Mnuchin, laying out next his steps on Fannie and Freddie, made clear that he plans to end a controversial policy that requires the mortgage giants to send virtually all their earnings to the government.

That was the good news for investors.

But Mnuchin also said he opposes any “simple” recap and release -- a move hedge funds have long lobbied for that would consist of building up Fannie and Freddie’s capital buffers and then freeing them from federal control. The comments, made in testimony before the Senate Banking Committee, indicate the administration’s timeline for ending the companies’ conservatorships might be longer than shareholders would like.

Shares Slide

Earlier Tuesday, Mnuchin also told CNBC that Treasury would consider appealing a Sept. 6 court decision that marked a major victory for investors. Fannie slid 13% to $3.38 in New York trading. Freddie also fell 13% to $3.21. It was their biggest one-day dips since January.

The slumps marked a dramatic shift from Monday when both Fannie and Freddie surged more than 40%, their biggest gains in almost three years. That followed declines to close out trading last week. Even for stocks that are notoriously volatile, the past few days have been dizzying.

Read More: Fannie-Freddie Fall as Trump Plan Shows Quick Windfall Unlikely

Setting it in all in motion was the Sept. 5 release of the Trump administration’s long-awaited plan for fixing Fannie and Freddie, followed a day later by a court ruling that declared it was illegal for the government to hoard the mortgage giants’ profits.

Fannie and Freddie don’t make loans. Instead, they buy mortgages from banks and other lenders and package them into bonds with guarantees. The companies were taken over amid the 2008 housing crash, eventually receiving $191 billion in taxpayer funds to keep them afloat. They’ve since become profitable again, paying more than $300 billion in dividends to the Treasury.

Ending Conservatorship

Mnuchin trekked to Capitol Hill Tuesday, along with Federal Housing Finance Agency Chairman Mark Calabria and Housing and Urban Development Secretary Ben Carson, to defend the administration’s proposal for ending the decade-long conservatorships.

Read More: Trump Fannie-Freddie Plan Urges Ending Decade of U.S. Rule

The Treasury secretary said it’s essential that Fannie and Freddie have enough capital to weather another housing crash. He added that he and Calabria, the companies’ regulator, are negotiating an end to the profit sweep so they can start retaining earnings.

Fannie and Freddie are currently limited to capital buffers of $3 billion apiece, far less than what they’d need outside of government control, Mnuchin said. While he declined to offer a specific number, he told lawmakers it should be “more like $100 billion than $6 billion.”

Getting to the appropriate level will require raising “third-party” capital, Mnuchin said.

Congressional Sniping

Apparent during Tuesday’s hearing is how tricky it will be for the Trump administration to navigate the politics of housing-finance reform. Ohio Senator Sherrod Brown, the banking committee’s top Democrat, said Treasury’s plan is a non-starter.

Read More: Trump’s Fannie-Freddie Plan Gets GOP Favor and Democrats Scorn

While Mnuchin and Calabria said they are willing to take steps on their own, they would like to see Congress take the lead on major changes.

There are some policy changes Treasury is calling for, like an explicit federal guarantee of the mortgage bonds that Fannie and Freddie issue, that would require congressional action. Lawmakers would also have to approve the chartering of other companies to compete with Fannie and Freddie, a top priority for Treasury.

(Adds closing share prices in fourth paragraph.)

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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