In a move that is long overdue, JPMorgan Chase is floating the possibility of an IPO for Fannie Mae and Freddie Mac, Fox Business reports.
Both Fannie Mae and Freddie Mac collapsed during the financial crisis as quasi-government entities responsible for insuring millions of mortgages that went bad.
Both Fannie Mae and Freddie Mac were bailed out by the government, which placed them in a conservatorship. The most draconian element of this arrangement was that all net worth of the entities would be constantly swept away and deposited in government coffers.
Over the past 10 years, however, Fannie Mae and Freddie Mac have become profitable again and maintained solid balance sheets. Numerous shareholders and hedge fund managers have said the government’s repeated sweeps are equivalent to robbery.
Outspoken legendary hedge fund manager Bill Ackman, who runs Pershing Square Capital, said as far back as 2015:
“The most illegal act of scale [the government has ever done]…if the US government can step in and take 100% of profits of a corporation forever, then we are in a Stalinist state and no private property is safe — and take your money out of every financial institution, put it into gold or bitcoin and just get the hell out because we’re done, maybe the clothes on your back, but other than that nothing is safe.”
Ackman has long advocated for Fannie Mae and Freddie Mac to be spun back out. He is long both stocks.
He also says now is the perfect time for it to happen.
“Completing one of the largest private capital raises in history necessitates favorable economic and financial market conditions like the current environment, with GDP growth at robust levels, unemployment at record lows, and national home prices and stock market indices at or near all-time highs. We believe that 2019 is the optimal time for action, ahead of the next presidential election in 2020, and that Treasury has a unique opportunity to exercise its warrants in Fannie and Freddie and utilize over $150 billion of these profits to fund key government priorities.”
The Treasury Department is apparently on board with this plan, which would be consistent with President Donald Trump’s pro-business agenda. Fannie Mae and Freddie Mac are a cornerstone of the nation’s mortgage market. Without them to secure mortgages below a certain amount, banks will not lend to prospective buyers.
There are numerous political obstacles toward spinning Fannie Mae and Freddie Mac back into independent entities. Congress may or may not need to approve the program but in any event, it has little incentive to act. Despite Republican philosophy to let a company keep the profits it generates, sweeping all that revenue into the Treasury means more money for Congress to allocate to other programs.
Democrats certainly have no incentive to vote for the plan for the same reasons.
Existing shareholders might also be diluted, turning them off to the deal as well.
Last modified: May 20, 2020 12:45 PM UTC