Many investors tried to position their portfolios based on which candidate they thought might win the U.S. presidential election. Billionaire investor Bill Ackman and his fund, Pershing Square Capital Management, held a large position in two stocks they predicted would win if former President Donald Trump triumphed.
Following Trump’s victory, the entire market soared. Few, if any, stocks have performed better than these two, which trade on over-the-counter exchanges. Ackman has seemingly done it again and could be poised to cash in big on his election bet now that Trump has won. Let’s take a look.
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For the last 15 or so years, a small group of shareholders has bet on the Federal National Mortgage Association(OTC: FNMA), also known as Fannie Mae, and the Federal Home Loan Mortgage (OTC: FMCC), also known as Freddie Mac, one day exiting government conservatorship through a recapitalization. Fannie and Freddie both serve as a vital source of liquidity in the mortgage market, securitizing mortgages and selling them to investors. This allows banks and other lenders to get mortgages off of their balance sheets so they can meet demand.
The government took Fannie and Freddie into conservatorship during the Great Recession and injected about $190 billion into the two companies after they got caught up in the subprime mortgage crisis. Between 2012 and 2019, the two government-sponsored entities (GSEs) have passed along $292 billion in profits to the Treasury. The Treasury also holds roughly $200 billion of senior preferred stock in both agencies and warrants equal to 79.9% of total outstanding shares expiring in September 2028.
In 2019, the Treasury Department amended its agreement with Fannie and Freddie, allowing them to build capital. The Federal Housing Finance Agency (FHFA) also established regulatory capital requirements that the GSEs would need to reach to exit conservatorship. The moves marked a potential exit plan for Fannie and Freddie that could culminate in a massive capital raise.
Many of these events took place during Trump’s first term, and Trump made it clear that he wanted to exit the GSEs from conservatorship. During the recent presidential campaign, investors assumed a Trump victory would resume these efforts.
Ackman, a vocal supporter of Trump, and Pershing have been believers for more than a decade that there is an “economic and political rationale” to independence for the GSEs, and in Pershing’s 2023 annual report, they all but said the key lies in a Trump victory:
The U.S. Presidential election in November 2024 may present the opportunity for a change in the status quo. Both companies’ stock price increases in 2023 and year to date reflect optimism around a potential reprivatization in the event former President Trump is reelected. The Trump administration had begun the process of releasing Fannie and Freddie from conservatorship, a process which would likely be completed in a future Trump administration.
The government would also likely profit handsomely from the GSEs exiting conservatorship, given they own so much senior preferred stock and warrants. They could put these potential profits toward housing initiatives.
Right after Trump won, here’s what happened to the shares of Fannie Mae and Freddie Mac. The junior preferred shares have done even better, up nearly 88% since Trump won (before the market opened on Nov. 11).
In 2013, Pershing purchased a nearly 10% stake in both Fannie and Freddie. Based on trade data in the filings, Pershing and Ackman purchased more than 115 million shares of Fannie for an average price of $2.29. He also purchased about 63.5 million shares for an average cost of $2.14.
After 2014, Ackman and Pershing were able to stop filing their ownership stakes due to the belief that the common shares were not voting shares, so we don’t know their exact positions since then. Fannie’s and Freddie’s 2024 annual reports show that Ackman and Pershing acquired additional economic exposure through notional shares and swap transactions, but I’m guessing this has to do more with derivatives to either hedge or add exposure, as opposed to actually owning shares.
If we assume Ackman and Pershing still own the same amount of common shares as they did in 2014, their investments would be in the red, even after this big run. Assuming the same cost per share, Ackman’s Fannie Mae position is down about 5.7%, while Freddie Mac is down close to 11% (before the market opened on Nov. 11).
However, this still puts Ackman and Pershing in a great position to capitalize, especially if the Trump administration follows through on promises. Fannie and Freddie are quickly raising capital to hit their regulatory capital goals. A capital raise could accelerate this path, but this is where things get murky.
Remember, the Treasury still has roughly $190 billion of senior preferred stock and warrants. Those would likely have to be dealt with, not to mention claims from existing junior preferred and common shareholders. Potential investors would need to understand what kind of dilution could be in the cards from the potential redemption of the senior preferred stock or exercise of the warrants. Fannie and Freddie may not be able to raise enough capital, and all shareholders may not be made whole, so there is still a lot of risk involved.
That said, a successful recapitalization without wiping out the common shares, which is still far from a guarantee, would lead to Fannie and Freddie’s stocks trading at many multiples of their current price.
Interested investors may also want to look at the junior preferred shares, which have priority over common shares in the capital stack. After an 88% run following Trump’s win, the junior preferred shares still trade at less than half of their par (book) value. The trade remains risky, but Ackman stands to make a killing if things work out.
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Bram Berkowitz has positions in Federal National Mortgage Association. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
