Many investors tried to position their portfolios based on the candidate they thought could win the US presidential election. Billionaire investor Bill Ackman and his fund, Pershing Square Capital Management, had large positions in two stocks that they predicted would gain if former President Donald Trump were victorious.
After Trump’s victory, the entire market rose. Few, if any, stocks have outperformed these two, which trade on over-the-counter exchanges. Ackman has seemingly done it again and could be ready to cash in on his election bet big time now that Trump has won. Let’s see.
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Over the past fifteen years, a small group of shareholders in 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 left government conservatorship through a recapitalization. Fannie and Freddie both serve as a vital source of liquidity in the mortgage market, securitizing and selling mortgages to investors. This allows banks and other lenders to take mortgages off their balance sheets so they can meet demand.
The government took Fannie and Freddie into receivership during the Great Recession and injected about $190 billion into the two companies after they became embroiled in the subprime mortgage crisis. Between 2012 and 2019, the two government-sponsored entities (GSEs) passed on $292 billion in profits to the Treasury. The Treasury also owns approximately $200 billion of senior preferred stock in both agencies and warrants, equal to 79.9% of the total outstanding shares maturing in September 2028.
In 2019, the Treasury Department amended the agreement with Fannie and Freddie, allowing them to build capital. The Federal Housing Finance Agency (FHFA) has also established regulatory capital requirements that GSEs would have to meet 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 occurred during Trump’s first term, and Trump made it clear that he wanted to take the GSEs out of conservatorship. During the recent presidential campaign, investors assumed that a Trump victory would resume these efforts.
Ackman, an outspoken Trump supporter, and Pershing have been convinced for more than a decade that there is an “economic and political rationale” for the GSEs’ independence, and in Pershing’s 2023 annual report, virtually all of them said the key lies in a Trump victory:
The US presidential election in November 2024 could provide the opportunity for a change in the status quo. Both companies’ stock price gains in 2023 and year to date reflect optimism about a possible reprivatization should former President Trump be re-elected. The Trump administration had begun the process of releasing Fannie and Freddie from conservatorship, a process that would likely be completed in a future Trump administration.
The government would also likely benefit handsomely from the GSEs leaving conservatorship, since they own so much senior preferred stock and warrants. They could spend these potential profits on housing initiatives.
Right after Trump won, this is what happened to Fannie Mae and Freddie Mac stock. Junior preferred stocks have done even better, up almost 88% since Trump won (before the market opened on November 11).
FNMA data by YCharts
In 2013, Pershing purchased a nearly 10% stake in both Fannie and Freddie. Based on the trading data in the documents, Pershing and Ackman purchased more than 115 million shares of Fannie at an average price of $2.29. He also purchased approximately 63.5 million shares at an average cost of $2.14.
After 2014, Ackman and Pershing were able to stop filing their ownership stakes because they believed the common stock was not voting stock, so we don’t know their exact positions since then. Fannie and Freddie’s 2024 annual reports show that Ackman and Pershing gained additional economic exposure through fictitious stock and swap transactions, but I suspect this has more to do with derivatives to hedge or increase exposure than with actually owning shares.
Assuming Ackman and Pershing still own the same amount of common stock 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 position in Fannie Mae is down about 5.7%, while Freddie Mac is down almost 11% (before the market opens on November 11).
However, this still puts Ackman and Pershing in a prime position to capitalize, especially if the Trump administration delivers on promises. Fannie and Freddie are rapidly raising capital to achieve their regulatory capital goals. A capital raise could accelerate this path, but this is where things get murky.
Remember, the Treasury still has about $190 billion in senior preferred stock and warrants. These would likely have to be settled, not to mention the claims of existing junior preferred and common shareholders. Potential investors should understand what type of dilution could occur as a result of the potential redemption of the senior preferred stock or the exercise of the warrants. Fannie and Freddie may not be able to raise sufficient capital and all shareholders may not be united, so there is still a lot of risk involved.
That said, a successful recapitalization without wiping out the common stock, which is still far from a guarantee, would result in Fannie and Freddie’s shares trading at many multiples of their current price.
Interested investors may also want to look at junior preferred shares, which take priority over common shares in the capital stack. After an 88% run following Trump’s victory, junior preferred shares are still trading at less than half their nominal (book) value. The trade remains risky, but Ackman could make a killing if all goes well.
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Bram Berkowitz holds positions at the Federal National Mortgage Association. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Billionaire investor Bill Ackman’s election bet could go big after Trump’s victory, originally published by The Motley Fool
