On Friday, shares of Fannie Mae ended the day just under $10, a significant increase compared to the $1.39 price on the day President Trump was elected. This comes as the White House plans to sell partial stakes in the mortgage finance giant. Freddie Mac, Fannie’s counterpart, has also experienced a similar rise.
It’s quite surprising, considering these companies have been under government control for 17 years. Now, investors seem to believe that privatization, coupled with beneficial payout options for shareholders, might actually happen.
Bill Ackman, a prominent hedge fund manager with past ties to Fannie and Freddie, has been vocal in urging shareholders to fully invest in these companies.
He suggests that, despite the government holding 71% of Fannie Mae, shares could reach $35, giving a potential 25x return for those who bought in on November 5th. Investors in Freddie Mac may see even greater gains.
Yet, some argue that shareholders shouldn’t expect such huge profits. There’s a pressing concern about the risk of reigniting a financial crisis.
Under bankruptcy laws, owners and shareholders are ultimately accountable for a company’s performance. If a business fails, shareholders are at the forefront of losses, which tends to drive careful management. But Fannie Mae and Freddie Mac’s management has historically failed, leading to diminished value for both companies. Therefore, enriching shareholders now might signal a troubling message.
This situation could encourage risky behavior, with Fannie, Freddie, and other “too big to fail” institutions believing they can take chances, knowing taxpayers will cover losses while they benefit from profits.
This phenomenon, referred to by economists as “moral hazard,” could lead to another financial crisis.
Looking back, it’s evident that Fannie and Freddie were not just facing temporary setbacks when the government stepped in during 2008.
Their pre-crisis market cap was $102 billion, but they ultimately received around $191 billion from the Relief Fund, nearly double what they were worth before the bailout.
While it’s accurate that Fannie and Freddie have repaid the relief fund with interest, this has been largely possible due to robust revenues since 2012, facilitated by new management and government oversight. Their prudent management in recent years doesn’t justify rewarding shareholders for past recklessness.
In summary, after all the turmoil involving Fannie and Freddie, the companies, which the government took over in 2008, are fundamentally devoid of value, leaving nothing for shareholders.
