In the realm of securities and investments, sometimes the most fascinating narratives aren’t tethered to the giants of Silicon Valley such as Tesla or other household names that routinely make headlinesInstead, the spotlight has recently turned to a 87-year-old financial institution that many on Wall Street had seemingly forgotten: Fannie MaeThe company, which plays a pivotal role in the U.Shousing finance system, is now back in the limelight, largely thanks to the machinations of a prominent financier.

Fannie Mae has seen an astronomical 227% increase in its stock price, a remarkable feat that can be attributed primarily to the speculation and investment strategies put forth by hedge fund manager Bill AckmanThe founder of Pershing Square Capital Management has been vocal in his belief that impending changes in government policy present an unparalleled opportunity to invest in Fannie Mae and its sister company, Freddie Mac, before the government releases its grip on these entities.

Ackman made headlines last December when he took to social media to outline his reasoning for investing heavily in these stocks, positing that they were “extremely attractive” at current prices

The U.Sgovernment had acquired significant stakes in both Fannie Mae and Freddie Mac during the financial crisis, spending approximately $190 billion to do soJust moments after Ackman’s announcement, the shares shot up 45% within the first hour, indicating the level of interest and urgency surrounding his call.

This is not the first time Ackman has ventured into these watersOver a decade ago, his hedge fund made a significant investment in Fannie Mae and Freddie Mac with a similar outlook—that upon restructuring and escaping government conservatorship, the potential for growth was immenseSadly for Ackman and many others, that initial gamble did not yield the expected results as efforts to privatize the firms faced numerous hurdles and complexities.

The government’s stake in Fannie Mae and Freddie Mac is considerable and intricately woven into the fabric of the financial system

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Attempts to transition from government ownership to privatization have proven bumpy and fraught with complicationsThere remains a significant risk of disrupting what could be one of the largest IPOs in history, and simultaneously, this could lead to mortgage rates skyrocketing for homebuyers, an outcome that many in the industry and the general public would find unacceptable.

Yet, Ackman is optimistic, asserting that a renewed commitment to shrink government involvement will reignite the path towards Fannie Mae and Freddie Mac's liberation—a process initiated during a previous administrationHis ambitions are clearly tied to a broader economic outlook that hinges on the successful execution of this strategy.

As for Ackman’s potential windfall? It’s astronomicalHe envisions a price point for Fannie Mae’s shares hitting around $31 by late next year, which dramatically exceeds his average acquisition cost of approximately $2.40. Currently, shares are trading at approximately $4.55 for Fannie Mae and $4.40 for Freddie Mac, creating a favorable position for Ackman’s bets.

In a pointed declaration to his investors, he remarked, “The team will get this done

I like big trades; this is going to be the largest trade in history.”

Ackman’s enthusiasm has drawn skepticism from some quartersOthers, particularly analysts, caution that an IPO by 2026 could be overly ambitiousThe critical question is whether the incoming administration will prioritize this pathThe implications of ending conservatorship are significant—not just for hedge funds like Ackman's but also for the average homebuyer who might face increased costs as a result.

Donald Layton, the former CEO of Freddie Mac, expressed doubts, stating, “I don’t understand why the next administration would prioritize ending conservatorship, which clearly wouldn’t benefit its working-class voter baseThe extreme complexity could distract policymakers from addressing more pressing issues and could, in fact, raise their mortgage costs—directly harming these voters.”

Interestingly, while Fannie Mae and Freddie Mac may not be the quintessential targets of speculative trading trends in the market, they represent a unique case of financial maneuvering.

Established by Congress in 1938, Fannie Mae was designed to enhance home ownership in the nation by providing liquidity to lenders through a mechanism that enabled widespread access to mortgage financing

Although Fannie Mae doesn’t directly lend money, it purchases mortgages from lenders and packages them into securities that can be sold to investors, thereby ensuring that lenders have the capital to continue issuing new loansFreddie Mac, established later in 1970 with a similar mandate, complements its operations.

Following a pivotal restructuring in 1968, Fannie Mae transitioned to a private entity while still receiving implicit government backingPrior to the financial crisis, both companies had extensively expanded their footprint, backing or owning nearly half of the U.Smortgage marketWhen the crisis hit in 2008, they required an enormous government bailout, after which the U.STreasury effectively acquired an 80% stake in both entitiesBy 2010, Fannie Mae and Freddie Mac were delisted from the New York Stock Exchange and traded in over-the-counter markets instead.

As the housing market recovered, the financial performance of these firms began to improve, with Fannie Mae reporting a net income of $17.2 billion in 2012. However, in the same year, a controversial government policy known as "net worth sweep" was implemented, siphoning almost all profits from Fannie Mae and Freddie Mac directly to the Treasury.

From around 2013 onwards, a multitude of fund managers, including the likes of Pershing Square, Fairholme Capital Management, and Paulson & Co., began amassing shares in these government-sponsored entities, banking on their ability to appeal to the courts over perceived injustices regarding profit appropriations made by the government

Unfortunately, such litigation has faced consistent rejection by the courts.

Some firms that were once highly engaged in this trade, including Blackstone, have since exited their positions entirely, having deemed the risks or potential returns insufficient.

However, others remain heavily vested in Fannie Mae and Freddie Mac, including firms such as Capital Group that manages over $2.7 trillion in assets, which holds both common and preferred shares of these entitiesOwl Creek Asset Management took a calculated risk in purchasing preferred shares at low prices during the crisis, and reports suggest they have been actively trading around that position.

According to an investor familiar with the situation, Discovery Capital Management, with $2.5 billion in assets under management, has held preferred shares of Fannie Mae and Freddie Mac for over a decade, generally purchasing at prices between $0.04 to $0.12. They are prepped to acquire more shares as the markets fluctuate leading up to set dates.

PointState Capital, managed by Zach Schreiber, also holds these preferred shares, as does John Paulson, who has been a significant shareholder since the financial crisis.

A potential wave of “massive dilution” looms over existing shareholders as Ackman estimates a timeline of two years for the government’s exit strategy

His expectation points towards the U.STreasury incorporating its dividends from years of earnings as payments against the senior preferred stock acquired during the bailout, essentially mitigating this debt as those securities become retiredFannie Mae and Freddie Mac, collectively, would need around $30 billion to meet a required 2.5% capital ratio, a tall order that the market generally views as achievable.

Ackman forecasts that once this endeavor concludes, the federal government could potentially realize approximately $300 billion in profits.

Another potential avenue for privatization could involve the Treasury converting senior preferred shares into common equity before a gradual sell-offMichael Gao, who previously served as CEO of Akanthos Capital Management and now operates a family office, warns that this could significantly dilute the interests of current shareholders.

Gao summarized the prevailing sentiment by stating, “The fundamental bull case pivots on the government's willingness to be generous and forgiving with the write-downs of several hundred billion dollars.” Having been a previous large stakeholder in both companies, he now expresses thorough disillusionment with the trajectory of this trade

“Without that, in almost every case, shareholders’ equity will be significantly diluted.”

Brian Velino, an analyst at Wedbush Securities, cautions that Ackman might be underestimating the amount of capital Fannie Mae and Freddie Mac would need to raise through public markets to satisfy the government capital requirements.

He states, “We believe that they will either remain in conservatorship, which would be unfavorable for common shareholders, or exit conservatorship, leading to considerable dilution that could drastically reduce the value of the common shares.” Velino gives a “sell” rating for both entities.

The seismic implications of these potential movements find their resonance not only in the stock prices but within the greater economy, particularly as it relates to the mortgage market valued at $10 trillion

A critical piece of this puzzle is ensuring that investors maintain confidence in the mortgage-backed securities marketSome analysts argue that transitioning Fannie Mae and Freddie Mac into private hands could risk investor reluctance to engage with these securities devoid of the explicit bonds of government backing, possibly inflating financing costs and mortgage rates.

Mark Zandi, chief economist at Moody’s Analytics and a staunch opponent of privatization, remarked, “Given the potentially severe disruptions that might arise, I doubt that this would be a priority for a president who claims to back the little guy.”

No matter the outcome, the discourse around the necessity for government backing is bound to complicate the firms’ ability to go public unencumbered.

Jenna Kulow, a strategist at Bank of America, elaborated on the challenges, “The primary challenge is how to navigate government guarantees related to mortgage bonds