Billionaire Financier Bill Ackman's Political Wager May Gain Significantly Following Trump's Triumph
Many investors adjusted their portfolios based on their predictions about the US presidential election winner. Billionaire investor Bill Ackman and his firm, Pershing Square Capital Management, had substantial holdings in two specific stocks, anticipating that former President Donald Trump would triumph.
Upon Trump's victory, the entire market experienced a significant boost. These two stocks, trading on over-the-counter exchanges, have witnessed unprecedented growth among few other stocks. With Trumps win, Ackman might be in for substantial profits, given that he seems to have made a profitable bet. Let's delve into the details.
Strike it Lucky for Fannie and Freddie
For around 15 years, a handful of investors have wagered on the Federal National Mortgage Association (FNMA 5.88%), commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FMCC 5.98%), often referred to as Freddie Mac, eventually breaking free from government conservatorship through a recapitalization process. Fannie and Freddie play a crucial role in the mortgage market, facilitating the securitization of mortgages and selling them to investors. This allows banks and lenders to offload mortgage loans from their balance sheets, meeting demand.
The government took over Fannie and Freddie during the 2008 financial crisis, providing approximately $190 billion in funds to both companies following their entanglement in the subprime mortgage crisis. Between 2012 and 2019, these two government-sponsored entities (GSEs) transferred approximately $292 billion in profits to the treasury. The treasury also holds around $200 billion of senior preferred stock in both agencies as well as warrants equal to 79.9% of the total outstanding shares, expiring in September 2028.
In 2019, the treasury adjusted its agreement with Fannie and Freddie, enabling both organizations to build capital. The Federal Housing Finance Agency (FHFA) also enacted regulatory capital requirements for the GSEs to fulfill, signifying a potential escape plan from conservatorship. This could result in an extensive capital raise for Fannie and Freddie.
Much of these events transpired during Trump's first term as president, and he frequently voiced his aspirations to release the GSEs from conservatorship. Investors presumed a Trump victory would continue these efforts during the presidential campaign.
Ackman, a vocal Trump supporter, and Pershing have harbored the belief in a "economic and political rationale" for independent GSEs for over a decade. In Pershing's 2023 annual report, the company emphasized the significance of a Trump victory:
The U.S. Presidential election in November 2024 may provide an opportunity to alter the status quo. Both companies' stock price growth in 2023 and throughout the year reflects optimism around a potential privatization, given former President Trump is reelected. The Trump administration had commenced the process of releasing Fannie and Freddie from conservatorship, a process that may likely be completed during a future Trump administration.
The government could potentially reap substantial profits from the GSEs' exit from conservatorship, given they hold so much senior preferred stock and warrants. These funds could be allocated to housing-related initiatives.
Following Trump's victory, these were the developments for Fannie Mae and Freddie Mac shares. The junior preferred shares have performed remarkably well, surging by nearly 88% since Trump's triumph (prior to the market opening on Nov. 11).
Ackman's move
In 2013, Pershing acquired a nearly 10% stake in both Fannie and Freddie. Based on trade data provided in these filings, Pershing and Ackman bought over 115 million shares of Fannie at an average price of $2.29. They also purchased around 63.5 million shares for an average cost of $2.14.
Beyond 2014, Ackman and Pershing ceased filing their ownership stakes due to their belief that common shares were non-voting shares. Consequently, we have no information about their exact positions after this period. Fannie's and Freddie's 2024 annual reports indicate that Ackman and Pershing acquired additional economic exposure through notional shares and swap transactions. However, these transactions appear to involve more derivatives for hedging or adding exposure rather than actual shares ownership.
Assuming that Ackman and Pershing still maintained their 2014 shares, they would still be in the red, even with this market surge. Given their purchase costs, Ackman's Fannie Mae position would have a loss of approximately 5.7%, while Freddie Mac would be down close to 11%.
However, this still puts Ackman and Pershing in an advantageous position to capitalize, especially if the Trump administration fulfills its promises. Fannie and Freddie are actively seeking to meet their regulatory capital objectives, and a capital raise could hasten their exit from conservatorship. But, as mentioned earlier, complications may arise for investors interested in this opportunity.
The treasury still holds approximately $190 billion of senior preferred stock and warrants. Managing these investments would be essential for any potential investors as shares could face considerable dilution. Fannie and Freddie might struggle to raise sufficient capital, leaving shareholders wondering about their returns. Some shareholders may not be completely compensated, indicating high levels of risk associated with recapitalization. Yet, a successful recapitalization without eliminating common shares could drive Fannie and Freddie's share prices to unparalleled levels.
Those with an interest may find appeal in the junior preferred shares, which hold precedence over standard shares within the financial hierarchy. Posting an impressive 88% increase following Trump's victory, these shares continue to trade at under 50% of their original (monetary) worth. Although the investment comes with risk, Ackman has a significant opportunity for profit if the circumstances turn favorable.
Given the potential for Fannie Mae and Freddie Mac to exit conservatorship under a second Trump term, Ackman and Pershing Square Capital Management's significant holdings in junior preferred shares of both entities could yield substantial profits. This scenario, as outlined in Pershing's 2023 annual report, aligns with Ackman's long-held belief in the economic and political rationale for independent government-sponsored enterprises.
In the context of finance and investing, billions of dollars in senior preferred stock and warrants held by the US treasury could further increase the potential gains for the GSEs' exit from conservatorship. This profit could then be allocated to housing-related initiatives, potentially benefiting the overall market and investors.
