The debate over what to do with mortgage finance giants Fannie Mae and Freddie Mac erupted in another round of fireworks this week when Fairholme Fund’s Bruce Berkowitz revealed a plan to recapitalize the government-sponsored enterprises in what he describes as a $52 billion buyout.
Friday morning, Bill Ackman’s Pershing Square Capital revealed it has acquired a nearly 10% stake in the common shares of both Fannie Mae and Freddie Mac, and thinks the potentially-worthless common stock of the two firms is severely undervalued.
Ackman began purchasing the GSEs Oct. 7 and continued buying through Thursday, according to Friday morning’s filing. He bought Fannie shares between $1.53 and $2.94 apiece and Freddie between $1.50 and $2.74. At Thursday’s closing levels Ackman’s 115.6 million shares of Fannie were worth $354 million; his 63.5 million shares of Freddie were worth $184 million.
Fannie and Freddie, which dominate the housing finance market, were placed under conservatorship in 2008 as the financial crisis was approaching its height. Later, the government decreed that all profits achieved in any housing recovery would go to repaying taxpayers for the rescue rather than paying dividends on preferred stock.
These days, with the two having nearly repaid the $187 billion outlay made by the government, investors in the preferred have been agitating to get their share. Fairholme and hedge fund Perry Capital have sued the government to reclaim their shareholder rights, and the former’s new plan this week is a fresh tack with the same ends in mind.
Berkowitz, who has pledged a five-year lockup to ease concerns that investors are only looking for a quick score with the GSEs, told CNBC Thursday, “We are not Wall Street, we are not Washington, and we are not greedy.”
While Berkowitz, Perry and Ackman get the biggest headlines, there are many other investors with a stake in the game.
Michael Kao, founder of $120 million (AUM) hedge fund Akanthos Capital Management, has been playing the GSE trade since at least 2011 and calls Berkowitz’s proposal a “credible road map” toward reestablishing the companies as an attractive place to invest capital.
The proposals out of Washington, Kao says, chiefly the proposed restructuring under a bill from Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.), “trample the rights of old shareholders and require a huge transition,” says Kao.
The Berkowitz plan, he says, leverages the existing book of business, infrastructure and personnel that exist at Fannie and Freddie rather than trying to attract capital to a completely new business from an investment community that has already been soured by the government’s handling of the old business.
Kao acknowledges there is a fundamental stumbling block to the proposal – that the government has already decided that the rights of preferred shareholders are a secondary matter – but he thinks having Fairholme leading the charge is beneficial.
“They’re not a big, bad hedge fund,” says Kao. “They represent the retail investor and are willing to have skin in the game.”
Berkowitz certainly has some credibility in that regard, after making a sizable investment in American International Group when the government was struggling to save the giant insurer. The vote of confidence was a boost that paid off richly for Berkowitz when the company recovered.
Common shares of Fannie Mae were up 7% pre-market Friday morning to $3.27 and Freddie rose 6% to $3.08. The most commonly traded preferred issues of each were up about 5%.