The
plan
starts
by
cleaning
up
the
capital
structure,
assuming
the


U.S.
Department
of
the
Treasury’s
preferred
share
positions
in
these
companies
have
already
been
repaid.
That’s
based
on
the
fact
that
the

government-sponsored
enterprises
(GSEs)
have
paid
$310
billion
in
dividends
but
drew
only
$193
billion
from
the
Treasury
after
being
placed
in
conservatorship
in
2008.

The
senior
preferred
position
in
these
companies
“has
been
economically
repaid,
delivering
an
internal
rate
of
return
of
11.6%,”
Ackman
said
during
a
webinar
hosted
by
investment
bank


Keefe,
Bruyette
&
Woods
(KBW)
earlier
this
week.

New
IPOs
on
the
horizon

In
a
report
following
the
webinar,
KBW
analysts
said
that
Ackman
believes
the
government
—
which
effectively
owns
80%
of
the
GSEs
—
would
only
be
recognizing
20%
of
the
forgiveness
value
as
a
loss,
since
it
would
also
amount
to
a
write-down
of
existing
liabilities.

“We
do
see
merit
in
this
argument,
but
we
continue
to
see
a
conversion
of
the
senior
shares
to
common
as
the
most
likely
outcome,
since
the
government
would
still
likely
be
leaving
~$50
billion
on
the
table
if
looking
at
the
situation
through
the
liability
write-down
lens
suggested
by
Mr.
Ackman,”
the
analysts
wrote. 

The
plan
maintains
the
Preferred
Stock
Purchase
Agreements
(PSPAs),
which
provides
incremental
credit
support
to
the
GSEs.
In
exchange,
the
companies
would
pay
a
25-basis-point
commitment
fee.
Ackman
said
this
would
amount
to
“explicit
government
support
for
an
economic
return.”

According
to
the
plan,
the
U.S.
Treasury
would
retain
the
warrants
for
79.9%
of
common
stock,
while
junior
preferred
shares
would
either
remain
outstanding
or
be
converted
to
common
stock
on
a
negotiated
basis
—
possibly
in
connection
with
relaunched
initial
public
offerings
(IPOs).

Fannie
Mae
would
conduct
an
IPO
in
2026
to
raise
$5
billion,
while
Freddie
Mac
would
follow
in
2027
with
a
$15
billion
offering.

“The
government
put
a
lot
of
pressure
on
the
GSEs
to
raise
preferred
equity
capital
months
before
they
declared
the
entities
effectively
in
need
of
conservatorship,”
Ackman
said.
“The
BlackRocks
and
every
major
fixed-income
buyer
of
these
securities
has
a
long
memory
of
how
they
were
treated.

“So
that
makes
the
IPO
itself
somewhat
controversial,
which
is
why
we
think
it’s
important
not
to
rush
both
out
at
the
same
time.” 

Ackman
owns
210
million
shares
across
the
two
companies
—
10%
of
them
preferred
shares.
He
believes
the
shares
could
reach
$30,
far
above
their
current
range
of
$5
to
$6,
which
reflects
uncertainty
about
the
future
of
the
companies.

Lower
capital
requirements

Another
key
assumption
in
Ackman’s
plan
is
that
the
GSEs
should
maintain
a
2.5%
capital
requirement
—
significantly
lower
than
the
current
level
of
4.25%,
which
he
calls
overly
“conservative”
and
impractical.
This
level
of
capital
would
tie
up
$100
billion
or
more
in
“wasted
capital”
that
could
be
better
deployed
elsewhere,
he
argued.

“We
think
this
is
a
very
low-risk
business,
as
long
as
they
stay
within
the
guardrails,”Ackman
said.
“We
think
these
entities,

properly
capitalized,
will
have
fortress
balance
sheets,
and
on
top
of
that,
they’ll
have
the
benefit
of
hundreds
of
billions
in
government
backstop.”

KBW
analysts
agreed
with
the
need
to
lower
capital
levels.
The
2.5%
proposal
is
still
significantly
above
the
pre-financial
crisis
level
of
0.45%,
and
it
would
be
six
times
higher
than
what
was
required
to
cover
cumulative
losses
from
2007
to
2011.

“Further,
if
the
~4.25%
minimum
capital
remains
in
place,

G-Fees
would
have
to
increase
by
15-25
bp
(from
~65
bp)
in
order
to
generate
an
acceptable
return
on
capital.
This
would
ultimately
raise
mortgage
rates,
which
would
be
politically
challenging,”
the
KBW
analysts
wrote.

Ackman’s
plan
maintains
guarantee
fees
at
65
basis
points.

When
asked
whether
privatizing
the
GSEs
would
raise
mortgage
rates,
Ackman
said,
“What
could
cause
mortgage
rates
to
go
up
is
if
the
market
believed
that
Fannie
or
Freddie
MBS
[mortgage-backed
securities]
were
more
risky
once
they
were
released
from
conservatorship.”

“Every
sophisticated
fixed-income
investor
will
conclude
that
these
are
incredible
—
the
guarantee
is
rock
solid.
Effectively,
there
will
be
an
explicit
government
backstop
of
hundreds
of
billions
on
top
of
the
2.5%
capital.”

Ackman
also
said
there
will
always
be
an
implicit
government
guarantee
for
Fannie
and
Freddie
because
they
are
“critical
assets
for
the
country,
and
therefore
we
can
never
let
them
fail.”

Both
KBW
and
Ackman
support
creating
a

sovereign
wealth
fund
(SWF)
structure
—
as
suggested
by
Treasury
Secretary
Scott
Bessent
—
to
help
monetize
the
Treasury’s
holdings
in
Fannie
and
Freddie.

As
for
the
urgency
of
the
matter,
Ackman
said,
“I
don’t
think
it’s
No.
1
right
now
—

tariffs
are
the
No.
1
thing
that
obviously
needs
to
be
resolved.
I
would
say
tax
policy
is
No.
2.
But
this
could
very
well
be
No.
3.
And
it’s
a
nice
thing
to
get
done.”