Receivership as a Loophole for Fannie and Freddie

The Trump administration has set its sights on addressing some long-standing issues surrounding Fannie Mae and Freddie Mac. Three primary goals have become apparent.

First, there’s a desire to, well, reintroduce the companies effectively.

Next, there’s an emphasis on securing strong deals for taxpayers.

Lastly, there’s an indication that oversight might continue at least during the transitional phase. This is crucial because the administration seems genuinely invested in making housing more affordable for young families and the broader middle class. A swift exit from federal control that leads to rising mortgage costs is likely off the table.

In essence, the Trump administration is taking steps that don’t align with previous methods or suggestions, showcasing a much wider range of potential outcomes than many analysts had anticipated.

So, what could a plan look like that satisfies all of President Trump’s aims?

One idea that hasn’t been formally introduced yet, but fits within the legal framework put forth by Congress, could involve exiting receivership. This would include dissolving the outdated capital structures, restarting the companies under new ownership via the U.S. Treasury, and eventually planning for a public stock sale.

This strategy would respect market principles while protecting taxpayer interests, steering clear of many of the challenges that have hindered previous reform attempts.

Key Numbers in the Debate

A recent analysis by Bloomberg’s Matt Levine provides an insightful look at Fannie and Freddie’s current capital structure:

• Total assets: $7.8 trillion
• Total debt: $7.6 trillion
• Combined book value: $160.7 billion
• Treasury’s senior preferred stock: $34.84 billion
• Other preferred stock: $33.2 billion
• The Treasury holds 79.9% of the common stock

If the companies were to be liquidated today, the Treasury would claim the remaining value, leaving other shareholders empty-handed. With government claims on profits rising each year, private shareholders are unlikely to see returns anytime soon.

Even with an annual income of $30 billion, it would take over a decade to repay the Treasury’s claims. Current conditions mean that while net worth is growing, it doesn’t really decrease the priority balance.

This creates a situation where exits or fair returns aren’t really possible.

“Grand Deals” Are Unlikely

Several proposals envision massive capital raises to settle the Treasury’s debts and recapitalize the government-sponsored enterprises (GSEs) all at once. But, as Levine points out, the math simply doesn’t add up.

To repay the Treasury’s $348 billion and meet the capital requirements set by the federal housing finance agency (approximately $194 billion), Fannie and Freddie would have to raise over $540 billion. This amount is far higher than any combined initial public offerings (IPOs) in the last decade.

That scale seems unrealistic. Even if it were feasible, it would require significant dilution of current shareholders, including the companies themselves. In short, there isn’t a straightforward path to privatization through a single massive deal.

An alternative would involve the Treasury merely considering the repayment of senior preferred stock, which would effectively cancel taxpayer assets of $348 billion. In this scenario, the Treasury would wipe out book value for senior preferred stock and maintain its 79.9% common stock interest. They would still require around $30 billion in preferred stock, but that might take about a year of retained earnings to accumulate.

This would make legacy stockholders quite happy, as they’d see a transfer of about 20% of the cancelled taxpayer preferred stock. Such a move could significantly increase the stock’s book value, with Levine estimating it could rise to about $14 or $15, potentially doubling market value.

However, whether this is legally permissible remains a question. Can the U.S. Treasury unilaterally waive taxpayer assets of that magnitude without congressional approval? It seems unlikely. The Prevention Act prohibits such actions without Congress’s go-ahead.

Moreover, the Constitution gives Congress the exclusive authority to manage federal assets, including the advanced preferred stocks.

The political optics of such a move are troubling as well. The biggest beneficiaries would be billionaire hedge fund managers—some of whom may back Trump—but this isn’t a particularly popular narrative in the administration. Remember, one of the largest owners of Fannie’s common stock, Bill Ackman, backed Trump only when his preferred Democratic candidate dropped out.

Additionally, distributing large amounts of taxpayer value contradicts Trump’s image as a staunch advocate for American interests, making it hard to square handing out perks to wealthy financiers in New York City.

The Legal Framework Supports Receivership

The Housing Economic Recovery Act of 2008 (HERA) gives the Federal Housing Finance Agency (FHFA) tools to manage the struggling GSEs effectively. It allows for parents aimed at temporary stabilization and resolution.

If the GSEs aren’t sufficiently capitalized and there’s no credible prospect of rehabilitation, receivership can be initiated. This certainly applies now, as Fannie and Freddie are billions short, and revenue sweeps hinder their capital accumulation.

While HERA doesn’t offer a direct route for exiting receivership without resolution, it does permit the FHFA to address capital shortages by dissolving legacy structures and creating new entities. Indeed, this transition is legally supported, reflecting the government’s approach to resolving failing financial entities.

It offers a legal mechanism for rebooting, focusing on maintaining ownership rather than wiping taxpayer assets.

A Functional Solution

Here’s a way this proposed approach could proceed:

• End receivership through the host
• Transfer functions, infrastructure, and operations to a new entity, Newco Fannie and Freddie
• The Treasury would hold 100% capital in the new company
• The GSE would gradually go public, with the Treasury selling shares over time
• Funds generated from the stock sales would reflect the full value of the Treasury’s investments

This would sort out the company’s position, establish a clean capital structure, and provide the market the chance to invest without legal entanglements or previous shareholder claims hanging over it.

Significantly, this approach allows the Trump administration to maintain GSE oversight during the transition, aligning with recent comments from FHFA Director William Prute.

Instead of a single IPO, this would evolve into a multi-year exit strategy, with the Treasury monitoring its holdings based on market conditions and company performance.

It’s Not Just a Handout, But a True American Opportunity

This kind of reset would clearly have advantages over simply wiping out advanced preferred stock:

• No loss of taxpayer value
• Avoidance of rewards for legacy investors
• Continuing operations without legal disruptions
• Allowing capital markets to engage in clear and orderly ways
• A perfect alignment with HERA, which underpins the entire structure
• This isn’t the only approach, but it may be the best way to balance current conflicting priorities

If the aim is to expose the GSEs, uphold federal oversight during the transition, and genuinely deliver value to taxpayers, a receiver-led reset followed by a gradual public offering may indeed offer the most consistent pathway.

It relies on legality. It makes market sense. And it could allow the Trump administration to declare, with validity, that it has moved beyond mere bailouts of a privileged few financially wealthy individuals.