Why did Ackman heavily invest in the subprime "toxic" assets: the two housing agencies?
The "two houses" in the United States—Freddie Mac and Fannie Mae—surged significantly against the backdrop of a general decline in the U.S. stock market, with the former rising over 36% and the latter over 33%. This increase was driven by investor Bill Ackman's tweet, suggesting that the two companies might undergo reforms with support from the Trump administration, with a potential relisting around 2026. Ackman has accurately predicted several market crises and pointed out in 2014 that the two houses were significantly undervalued; the current resurgence of confidence may influence market trends
US "Two Houses" Rare Surge
On the second-to-last trading day of 2024, the three major US stock indices collectively fell. However, against this market backdrop, the US "Two Houses"—Fannie Mae and Freddie Mac—experienced a miraculous surge, with the former rising over 36% and the latter over 33%.
This surge was sparked by a tweet from Wall Street legend investor Bill Ackman:
“The two companies may implement reforms with the support of a Trump 2.0 administration, ultimately expected to exit federal government oversight and likely to go public again around 2026.”
Ackman's legendary investment history is well-known; he accurately bet on the US subprime mortgage crisis in 2007, the stock market crash in 2020, and the Federal Reserve's aggressive rate hikes in 2022, earning him the nickname "Baby Buffett" on Wall Street. His recent comments on the Two Houses have reignited investor confidence.
In fact, as early as 2014, Ackman pointed out that the Two Houses were "significantly undervalued," and his managed Pershing Square hedge fund already held shares in the Two Houses, with 115.6 million shares of Fannie Mae and 63.5 million shares of Freddie Mac.
However, for nearly the past decade, the stock prices of the two companies have been fluctuating at low levels, without any significant "bull market." Why is that?
Now, what logic underpins his strong belief that the Two Houses are about to complete privatization and go public?
What impact will privatization have on the market?
"Two Houses," An Old Narrative on Wall Street
The "big house" among the "Two Houses"—Fannie Mae—was established in 1938, funded by the US government, with the aim of providing liquidity support through central credit to stabilize residents' balance sheets.
In terms of operation, Fannie Mae purchases loans from private lending institutions, repackages them into mortgage-backed securities, and backs them with national credit, alleviating market concerns about credit risk and preventing the economy from falling into a downward spiral. Once national credit began to provide support, the US economy gradually started to recover from its low point.
In 1970, to avoid the dominance of Fannie Mae, the federal government established "Freddie Mac."
Subsequently, Fannie Mae and Freddie Mac were transformed into joint-stock companies and were listed on the New York Stock Exchange in 1970 and 1989, respectively. Apart from preferred shares, the common shares of Fannie Mae and Freddie Mac in circulation in the market were approximately 1.14 billion shares and 650 million shares, respectively. In the 10 years leading up to the 2007 U.S. subprime mortgage crisis, the stock prices of the "two GSEs" remained stable at $50-70 and paid regular dividends, attracting active interest from investors.
However, when the subprime mortgage crisis fully erupted in 2008, 20% of homeowners in the U.S. had loans exceeding the value of their properties. The value of the large amounts of subprime assets held by the two GSEs rapidly diminished, leading to operational losses. The stock prices of the two GSEs began to plummet, dropping 90% within a year.
Image: Stock prices of Fannie Mae and Freddie Mac (July 2007 - December 2008)
Considering the market position of the two GSEs and to avoid catastrophic impacts on the U.S. economy and real estate market, the U.S. government officially took over the two GSEs in the fall of 2008, providing $200 billion in financial support to ensure their continued operation.
However, after the takeover, all of the former management of the two GSEs were dismissed, the companies ceased any political donations, their stocks were delisted from the New York Stock Exchange and traded only on the OTC market, and employee salaries were reduced to government employee levels.
At the same time, the capital of the two GSEs was essentially wiped out. Thereafter, if there were losses each year, the U.S. Treasury would inject funds to cover them, and if there were profits, they would all be turned over to the U.S. Treasury.
The Cost of Becoming a GSE is Long-term Undervaluation of Stock Prices
After the takeover of the two GSEs, the U.S. Treasury held 79.9% of the common stock and preferred stock warrants (3.234 billion shares) of the two GSEs, theoretically holding nearly 80% of the latter's shares, while the total market value of the remaining shareholders' stocks was less than $1 billion.
Although nominally a GSE and aimed at profitability, the two GSEs were no longer operating under a typical commercial model