Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac. News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed. The proposal, according to Fairholme,
- Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
- Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
- Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
- Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
- Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
- Ends the unsustainable Federal conservatorship. (Press Release, 1)
Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)
Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.
